Table of
Contents
As filed
with the Securities and Exchange Commission on October 7, 2009
1933 Act
Registration No. 333-148082
1940 Act
Registration No. 811-22154
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM N-1A
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
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x
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Pre-Effective
Amendment No.
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o
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Post-Effective
Amendment No. 4
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x
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REGISTRATION
STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
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x
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Amendment
No. 4
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x
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(Check appropriate
box or boxes.)
Grail
Advisors ETF Trust
(Exact name of
registrant as specified in charter)
One Ferry
Building
Suite 255
San
Francisco, CA 94111
(Address of
principal executive offices)
Registrants
telephone number, including area code:
(415) 677-5870
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With
a copy to:
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William
M. Thomas
One
Ferry Building
Suite 255
San
Francisco, CA 94111
(Name and
address of agent for service)
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Stacy L. Fuller
K&L Gates LLP
1601 K Street, NW
Washington, DC 20006
Telephone: (202) 778-9475
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Approximate Date of Proposed Public Offering:
It is proposed that the filing will become
effective:
o
immediately upon filing pursuant to
paragraph (b)
o
on
pursuant to paragraph (b)
o
60 days after filing pursuant to
paragraph (a)(1)
o
on
pursuant to paragraph (a)(1)
x
75 days after filing pursuant to
paragraph (a)(2)
o
on
pursuant to paragraph (a)(2) of Rule 485
Table of
Contents
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Prospectus
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December [XX], 2009
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Subject to Completion
Preliminary Prospectus dated October 7, 2009
Grail Advisors Actively Managed ETFs
RP
Short Duration ETF
The information in this Prospectus is
not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any
jurisdiction in which the offer or sale is not permitted.
This Prospectus provides
important information about the ETF that you should know before investing. Please read it carefully and keep it for
future reference.
These securities have not
been approved or disapproved by the Securities and Exchange Commission nor has
the Securities and Exchange Commission passed upon the accuracy or adequacy of
this Prospectus. Any representation to
the contrary is a criminal offense.
www.grailadvisors.com 1-415-677-5870
Table of Contents
TABLE OF CONTENTS
No person has been
authorized to give any information or to make any representations other than
those contained in this Prospectus and the Statement of Additional Information
dated December [XX], 2009 (which is incorporated by reference into this
Prospectus and is legally a part of this Prospectus) and, if given or made,
such information or representations may not be relied upon as having been
authorized by us.
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GRAIL ADVISORS ACTIVELY MANAGED ETFS
RP
SHORT DURATION ETF
This Prospectus describes
the RP Short Duration ETF (ETF), a series of Grail Advisors ETF Trust (Trust). Grail Advisors, LLC is the ETFs investment
manager (Manager). RiverPark Advisors,
LLC (RP) serves as the primary sub-adviser and Cohanzick Management, LLC (Cohanzick)
serves as sub-adviser to the ETF.
The Manager oversees the
business affairs of the ETF, provides or oversees the provision of all
administrative and investment advisory services to the ETF and coordinates the
investment activities of the ETFs sub-advisers: RP and Cohanzick. RP, in conjunction with the Manager, oversees
the day-to-day portfolio management services provided by Cohanzick to the
ETF. Information regarding the Manager,
RP and Cohanzick is included under the section entitled ETF Management in
this Prospectus.
The ETF is an exchange
traded fund.
The ETF is
an actively managed ETF.
T
he ETF is not an index
fund and thus does not seek to replicate the performance of a specified index.
Shares
of the ETF (Shares) [will be] listed and traded on NYSE Arca, Inc. (Exchange). Market prices for the Shares may be different
from their net asset value (NAV).
Unlike mutual funds, Shares are not individually redeemable
securities. Rather, the ETF issues and
redeems Shares on a continuous basis at NAV only in large blocks of Shares,
typically [ ] Shares, called Creation
Units.
Creation Units are issued
and redeemed [principally in-kind for securities included in a specified
universe]. Once created, Shares
generally trade in amounts less than a Creation Unit in the secondary market at
market prices that change throughout the day.
Investors purchasing Shares in the secondary
market through a brokerage account or with the assistance of a broker may be
subject to brokerage commissions and charges.
Except when aggregated in
Creation Units, Shares are not redeemable securities.
An investment in the ETF is
not a deposit in a bank and it is not guaranteed by the Federal Deposit
Insurance Corporation (FDIC) or any other governmental agency.
This Prospectus provides
information about investing in the ETF.
Please read this Prospectus carefully before making any investment
decision.
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Note to
Retail Investors
Shares can be purchased
directly from the ETF only in exchange for a basket of securities [and/or cash]
that is expected to be worth more than a million dollars. Most individual investors, therefore, will
not be able to purchase Shares directly from the ETF. Instead, these investors will purchase Shares
on the Exchange or otherwise in the secondary market with the assistance of a
broker. Thus, certain information in this Prospectus is not relevant to most
retail investors. For example,
information about buying and redeeming Shares directly with the ETF and about
transaction fees imposed on purchases and redemptions of Creation Units is not
relevant to most retail investors.
How Is The
ETF Different From Index ETFs?
Whereas
index-based ETFs seek to replicate the holdings of a specified index, the ETF
uses an actively managed investment strategy to meet its investment objective.
Thus, the ETFs sub-adviser has the
discretion on a daily basis to choose securities for the ETFs portfolio
consistent with the ETFs investment objective.
The ETF is designed for
investors who seek exposure to a relatively low-cost actively managed portfolio
of short duration fixed income securities.
The ETF may be suitable for long-term investment and may also be used as
an asset allocation tool or as a trading instrument.
How Is The
ETF Different From Mutual Funds?
Redeemability
. Mutual fund shares may be bought from, and
redeemed with, the issuing fund for cash at NAV typically calculated once at
the end of the day. Shares of the ETF,
by contrast, cannot be purchased from or redeemed with the ETF except by or
through Authorized Participants (defined below), and then only for an in-kind
basket of securities (and/or cash) expected to be worth more than a million
dollars.
Exchange Listing
. Unlike mutual fund shares, Shares [will be]
listed for trading on the Exchange. An
organized trading market is expected to exist for the Shares. Investors can purchase and sell Shares on the
secondary market through a broker.
Secondary-market transactions occur not at NAV, but at market prices
that change throughout the day, based on the supply of, and demand for, Shares
and on changes in the prices of the ETFs portfolio holdings. The market price of Shares may differ from
the NAV of the ETF. The difference
between market price of Shares and the NAV of the ETF is expected to be small
most of the time, though it may be significant, especially in times of extreme
market volatility.
Tax Treatment
. [The ETF intends to effect redemptions for
Treasury securities and/or for cash. The
ETF may recognize a capital gain (including a short-term capital gain) on sales
of portfolio securities that might not have been incurred if the ETF had made a
redemption entirely in-kind for its portfolio securities. As a result, investments in Shares may be
less tax efficient than investments in ETFs that effect redemptions primarily
in-kind for their portfolio securities.
In addition, because the ETFs are actively managed, they may generate
more taxable gains for shareholders than an index-based ETF. However, to the extent redemptions are made
in-kind for securities in the ETFs portfolio, the ETFs tax efficiency would
increase.]
Transparency of Portfolio
.
The ETFs portfolio
holdings as of the time the ETF calculated its NAV will be disclosed daily on
the ETFs website after the close of trading on the Exchange and prior to the
opening of trading on the Exchange on the following day.
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A description of the ETFs
policies and procedures with respect to the disclosure of the ETFs portfolio
holdings is available in the ETFs Statement of Additional Information.
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Contents
INTRODUCTION TO THE ETF
The ETF described in this
Prospectus is listed below, along with its investment objective. More information about the ETF appears later
in this Prospectus, as noted below.
ETF
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Investment
Objective(s)
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For
more information about the
ETF, please see page:
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RP Short Duration ETF
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Current income with potential capital appreciation
consistent with the preservation of capital
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[ ]
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The Board of Trustees of the
Trust (Board) may change the ETFs investment objective(s) and principal
investment strategies without shareholder approval.
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RP SHORT DURATION ETF
INVESTMENT OBJECTIVE
Current income with
potential capital appreciation consistent with the preservation of capital.
PRINCIPAL
INVESTMENT STRATEGIES
The
ETF invests, under normal circumstances, at least 80% of its net assets (plus
the amount of any borrowings for investment purposes) in debt securities. These securities include short- and
intermediate-term securities issued by the U.S. Government, its agencies and
instrumentalities, or corporate bonds or notes that Cohanzick, the ETFs
sub-adviser, believes are consistent with the ETFs investment objective. Under normal circumstances, the ETF invests
at least 65% of its assets in investment grade obligations, including
securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Investment-grade
securities are securities rated BBB or BAA (or higher) by Standard &
Poors or Moodys, respectively, or the equivalent by a nationally recognized
statistical rating organization rating that security (a rating agency). The ETF may invest up to 25% of its net
assets in high yield securities or below investment-grade securities, commonly
known as junk bonds, rated BB or BA (or lower) by Standard & Poors
or Moodys, respectively, or the equivalent by a rating agency or, if unrated,
determined by Cohanzick to be of comparable quality.
The
ETF expects to maintain an average-weighted effective maturity of three years
or less. Due to the nature of securities
in which the ETF invests, Cohanzick may make frequent changes to the portfolio
and the ETFs portfolio turnover may be relatively higher than comparable fixed
income funds.
Effective
maturity differs from actual maturity, which may be longer. In calculating the effective maturity,
Cohanzick estimates the effect of expected principal payments and call
provisions on securities held in the portfolio.
This gives the portfolio managers additional flexibility in the
securities they purchase, but could also result in more volatility than if the
ETF were to calculate and make investments based on an actual maturity target.
In
selecting portfolio securities for the ETF, in addition to considering economic
factors such as the effect of interest rates and term structure on the ETFs
investments, Cohanzick applies a bottom-up credit analysis. This means that Cohanzick looks at
income-producing securities one at a time to determine if a security is a
reasonable or an attractive investment opportunity, and if it is consistent
with the ETFs investment objective. The
credit analysis may include, but is not limited to, considering the current
yield and yield-to-maturity of a potential investment relative to similar
securities of a similar rating, positive and/or negative credit events that
have occurred recently or may occur in the future, and fundamental analysis in
determining value versus perceived credit rating or market pricing.
The
ETF may not invest more than 20% of its net assets in bank loans. The ETF expects to invest only in U.S. dollar
denominated securities.
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Unless
otherwise noted, all percentage limitations on ETF investments apply at the
time of investment. If the ETF effects
redemptions in Treasury securities, it may need to borrow the Treasury
securities to effect the redemption. Under
adverse market conditions, the ETF may, for temporary defensive purposes, invest
up to 100% of its assets in cash or cash equivalents, including investment
grade short-term obligations. To the
extent the ETF invokes this strategy, its ability to achieve its investment
objective may be affected adversely.
PRINCIPAL
RISKS
The
ETF is subject to a number of risks that may affect the value of its shares,
including:
Credit
Risk
ETF
Risk
Foreign
Investing Risk
Interest
Rate Risk
Leverage
Risk
Liquidity
Risk
Management
Risk
Market
Risk
Mortgage-Related
and Other Asset-Backed Securities Risk
Non-Investment
Grade Securities Risk
Prepayment
Risk
Temporary
Defensive Position Risk
Trading
Risk
See Description of
Principal Risks on pages [ ]
for a discussion of each of these risks.
ETF PERFORMANCE
Because the ETF has only
recently begun operations, performance information is not yet available.
FEES AND EXPENSES
This table describes the
fees and expenses that you may pay if you buy and hold Shares of the ETF. Transaction costs incurred by the ETF for
buying and selling securities are not reflected in the table. An investor buying or selling Shares of the
ETF in the secondary market will not pay the transaction fees described in note
1, but would pay a commission to his or her broker in an amount established by
the broker.
Operating Expenses are
expressed as a percentage of average daily net assets and are based upon
estimated amounts for the current fiscal year.
Shareholder
Fees
(fees paid
directly by Authorized Participants)
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Sales Charge (load)
Imposed on Purchases:
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None
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Transaction Fee on
Purchases and Redemptions:
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Varies
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(1)
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Annual
Fund Operating Expenses
(expenses that are deducted from ETF assets)
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Management Fee:
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[ ]
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%
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Distribution and/or
service (12b-1) fees: (2)
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0.00
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%
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Other Expenses: (3)
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[ ]
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%
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Total Annual Fund
Operating Expenses:
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[ ]
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%
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Less: Expense
Reduction/Reimbursement: (4)
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[ ]
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%
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Net Annual Operating
Expenses: (4)
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[ ]
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%
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Example
The following example is
intended to help retail investors compare the cost of investing in the ETF with
the cost of investing in other funds.
The ETF sells and redeems Shares only in Creation Units and [principally
in-kind for securities included in a specified universe]. The example illustrates the hypothetical
expenses that such investors would incur over various periods if they invest
$10,000 in the ETF. The example assumes
that the ETF provides a return of 5% a year and that operating expenses remain
the same. This example does not include
the brokerage commissions that retail investors will pay to buy and sell
Shares. It also does not include the
transaction fees on purchases and redemptions of Creation Units, because these
fees will not be imposed on retail investors.
One Year:
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Three
Years:
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$
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[ ]
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$
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[ ]
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This example should not be
considered to represent actual expenses or performance from the past or for the
future.
(1)
An investor purchasing or redeeming Creation Units of
the ETF will pay the ETF a transaction fee of $[ ], or a fee of up to $[ ] if the investor does not create or redeem
through the NSCC (as defined on page [
]). An investor buying or selling
Shares of the ETF in the secondary market will pay a commission to his or her
broker in an amount established by the broker.
All investors will pay the Net Annual Operating Expenses in the table
above.
(2) The ETF has adopted a Distribution and
Service (12b-1) Plan pursuant to which the ETF may bear a 12b-1 fee not to
exceed 0.25% per annum of the ETFs average daily net assets. However, no such fee is currently paid by the
ETF, and the Board has not approved any payments for the current fiscal year.
(3) Other Expenses are based on estimated
amounts for the current fiscal year.
(4) The Manager has contractually agreed to
reduce its fees and/or reimburse ETF expenses (excluding interest, taxes,
brokerage commissions, Acquired Fund Fees and Expenses, and extraordinary
expenses) in order to limit Net Annual Operating Expenses for shares of the ETF
to [ ]% of the ETFs average net
assets (Expense Cap). The Expense Cap
will remain in effect until at least [December XX, 2010]. The Manager may recoup fees reduced or
expenses reimbursed at any time within three years from the year such expenses
were incurred, so long as the repayment does not cause the Expense Cap to be
exceeded.
Creation
Unit Transaction Fees and Redemption Transaction Fees
The ETF issues and redeems
Shares at NAV only in Creation Unit blocks of [ ].
Shares in less than Creation Units are not
redeemable
. As a practical
matter, only institutions or large investors purchase or redeem Creation
Units. A standard Creation Unit
transaction fee of $[ ] is charged for
each purchase of Creation Units, regardless of the number of Creation Units
acquired. An investor redeeming Creation
Units will be charged a standard redemption
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transaction fee of $[ ], regardless of the number of Creation
Units redeemed. A charge of up to four (4) times
these fixed transaction fees may be imposed on purchases outside the enhanced
clearing process of the National Securities Clearing Corporation (NSCC), and
would typically be imposed for transactions in Treasury securities or for
cash. The Creation Unit transaction and
redemption fees (and variable fees) are not expenses of the ETF and do not
impact the ETFs expense ratio.
The value of a Creation Unit
of the ETF, as of the date of this Prospectus, was approximately $[ ]. Investors holding Creation Units will also
pay the Net Annual Operating Expenses described in the table above. Assuming an investment in a Creation Unit of
$[ ], a 5% return, and assuming that
the ETFs operating expenses remain the same and the Creation Units are
redeemed at the end of each period, a purchaser of Creation Units will incur
the following costs:
One Year:
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Three
Years:
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$
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[ ]
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$
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[ ]
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DESCRIPTION OF PRINCIPAL RISKS
An investment in the ETF
entails risks. The ETF could lose money,
or its performance could trail that of other investment alternatives. The Manager, RP or Cohanzick cannot guarantee
that the ETF will achieve its objective.
It is important that investors closely review and understand these risks
before making an investment in the ETF.
The table below provides the principal risks of investing in the
ETF. Following the table, each risk is
explained.
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RP Short Duration ETF
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Credit Risk
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X
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ETF Risk
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X
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Foreign Investing Risk
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X
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Interest Rate Risk
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X
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Leverage Risk
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X
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Liquidity Risk
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X
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Management Risk
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X
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Market Risk
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X
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Mortgage-Related and Other Asset-Backed Securities
Risk
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X
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Non-Investment Grade Securities Risk
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X
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Prepayment Risk
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X
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Temporary Defensive Position Risk
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X
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Trading Risk
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X
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Credit Risk.
Credit risk is the risk that
the inability or perceived inability of the issuer to make interest and
principal payments will cause the value of its securities to decrease, and
cause the ETF a loss. If an issuers financial
health deteriorates, it may result in a reduction of the credit rating of the
issuers securities and may lead to the issuers inability to honor its
obligations, including making timely payment of interest and principal. Although a downgrade of a bonds credit
ratings may not affect its price, a decline in credit quality may make bonds
less attractive, thereby increasing the yield on the bond and driving down the
price. Declines in credit quality can
result in bankruptcy for the issuer and permanent loss of investment.
The fixed income securities
held by the ETF are subject to the risk that the issuer will be unwilling or
unable to satisfy its obligations to the ETF, including the periodic payment of
interest or the payment of principal upon maturity.
Rating agencies are private
services that provide ratings of the credit quality of fixed income
securities. Ratings assigned by a rating
agency are not absolute standards of credit quality and do not evaluate market
risks. Rating agencies may fail to make
timely changes in credit ratings and an issuers current financial condition
may be better or worse than a rating indicates.
Further, rating agencies may also lose credibility or end coverage of a
previously-rated security.
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The ETF will not necessarily
sell a security if its rating is reduced.
The ETFs sub-adviser does not rely solely on credit ratings, and
develops its own analysis of issuer credit quality. The ETF may purchase unrated securities
(which are not rated by a rating agency) if the sub-adviser determines that the
security is of comparable quality to a rated security that the ETF may purchase. Unrated securities may be less liquid than
comparable rated securities and involve the risk that the sub-adviser may not
accurately evaluate the securitys comparative credit rating.
ETF Risk
. The Shares may trade above or below their
NAV. The NAV of the ETF will generally
fluctuate with changes in the market value of the ETFs holdings. The market prices of Shares, however, will
generally fluctuate in accordance with changes in NAV as well as the relative
supply of, and demand for, Shares on the Exchange. The trading price of Shares may deviate
significantly from NAV during periods of market volatility. The Manager cannot predict whether Shares
will trade below, at or above their NAV.
Price differences may be due to the fact that supply and demand forces
at work in the secondary trading market for Shares are closely related to, but
not identical to, the same forces influencing the prices of the securities held
by the ETF. In addition, to the extent
the ETF holds portfolio securities that are less liquid or more difficult to
value, such as lower-rated bonds, the market price of the ETFs Shares may
deviate further from NAV. However, given
that Shares can be purchased and redeemed in Creation Units (unlike shares of
closed-end funds, which frequently trade at appreciable discounts from, and
sometimes at premiums to, their NAV), and the ETFs portfolio holdings are
disclosed on a daily basis, large discounts or premiums to the NAV of Shares
should not be sustained.
Foreign Investing Risk
. Foreign investing, including investments in
U.S. registered and U.S. dollar denominated notes (i.e., Yankees), carries
potential risks not associated with domestic investments. Such risks include, but are not limited to: (1) currency
exchange rate fluctuations, (2) social, political and financial
instability, (3) less liquidity, (4) lack of uniform accounting,
auditing and financial reporting standards, (5) less government regulation
and supervision of foreign stock exchanges, brokers and listed companies, (6) increased
price volatility, and (7) less availability of information for an
investment sub-adviser to determine a companys financial condition.
Interest Rate Risk.
Interest rate risk is the
risk that fixed income securities will decline in value because of changes in
interest rates. Generally, the value of
debt securities falls as interest rates rise.
Specific fixed income securities differ in their sensitivities to
changes in interest rates depending on their particular characteristics. Fixed income securities with longer durations
tend to be more sensitive to changes in interest rates, usually making them
more volatile than securities with shorter durations. Duration is determined by a number of factors
including coupon rate, whether the coupon is fixed or floating, time to
maturity, call or put features, and various repayment features.
Leverage Risk
. The ETF may engage in transactions, including
short sales, that may give rise to a form of leverage. For example, the ETF may borrow Treasury
securities in order to effect redemptions in Treasury securities. To mitigate the risk from leverage, the ETF
will, as required, segregate or earmark liquid assets or otherwise cover
transactions that may give rise to such risk.
Engaging in short sales may require the ETF to liquidate portfolio
positions to satisfy its obligations or to meet segregation requirements when
it may not be advantageous to do so.
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Leverage embedded in a short
sale may cause the ETF to be more volatile because it can exaggerate the effect
of any increase or decrease in the value of securities held by the ETF.
Liquidity Risk
. Liquidity risk exists when particular
investments are difficult to purchase or sell.
During periods of market turbulence or low trading activity, in order to
meet redemptions it may be necessary for the ETF to sell securities at prices
or times that are disadvantageous to the ETF.
Additionally, the market for certain investments may be or become
illiquid independent of any specific adverse changes in the conditions of a
particular issuer. To the extent the ETF
invests in lower-rated securities, it will tend to have increased exposure to
liquidity risk. If an investment becomes
illiquid or becomes more difficult to sell, it will be more difficult to value,
which could result in an increase in the variance between the trading price of
the ETFs Shares and the ETFs NAV.
Further, transaction costs may be higher for less liquid investments.
The ETF may invest in
unregistered securities, including Rule 144A securities, that are
purchased directly from the issuer or in the secondary market and are subject
to limitations on resale. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and the ETF might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices.
The absence of a trading market can make it difficult to ascertain a
market value for illiquid investments.
Management Risk
. Securities selected by the sub-adviser for
the ETF may not perform to expectations.
This could result in the ETFs underperformance compared to other funds
with similar investment objectives.
Market Risk
. Market risk involves the possibility that the
value of the ETFs investments will decline, sometimes unpredictably or
rapidly, due to drops in the securities markets generally or particular
industries represented in the securities markets. The prices of and the income generated by
securities held by the ETF may decline in response to certain events, including
those directly involving the companies and governments whose securities are
owned by the ETF, general economic and market conditions, regional or global
instability, and interest rate fluctuations.
Market turbulence in financial markets occurs from time to time at
various levels, and can be extreme, resulting in reduced liquidity in credit
and fixed income markets, which would likely have a negatively affect on many
issuers worldwide and an adverse effect on the ETF.
Mortgage-Related and Other
Asset-Backed Securities Risk
. Generally, rising interest rates tend to
extend the duration of fixed rate mortgage-related securities, making them more
sensitive to changes in interest rates.
As a result, in a period of rising interest rates, if the ETF holds
mortgage-related securities, it may exhibit additional volatility. In addition, adjustable and fixed rate mortgage-related
securities are subject to prepayment risk.
When interest rates decline, borrowers may repay their mortgages sooner
than expected. This can reduce the ETFs
returns because the ETF may have to reinvest that money at the lower prevailing
interest rates. Conversely, when
interest rates rise, prepayments may happen more slowly, causing the underlying
loans to be outstanding for a longer time, which can cause the market value of
the security to fall because the market may view the interest rate as too low
for a longer-term investment. An ETFs
investments in other asset-backed securities are subject to risks similar to
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those associated with
mortgage-related securities, as well as additional risks associated with the
nature of the assets and the servicing of those assets.
Non-Investment Grade Securities
Risk
. Below investment-grade
securities, or junk bonds, are more likely to pose a credit risk, as the
issuers of these securities are more likely to have problems making interest
and principal payments than issuers of higher-rated securities. Generally, lower-rated securities have more
leverage and less cushion to cover fixed charges, which may cause lower-rated
securities to be more susceptible to real or perceived adverse economic and
competitive industry conditions than higher-grade securities, and prices of
these securities may be more sensitive to adverse economic downturns or
individual corporate developments. If
the issuer of the securities defaults, the ETF may incur additional expenses to
seek recovery. The secondary market in
which below investment-grade securities are traded may be less liquid than the
market for higher grade securities. Less
liquidity in the secondary trading markets could adversely affect the price at
which the ETF could sell a particular security, and could cause large fluctuations
in the ETFs NAV. Adverse publicity and
investor perceptions may decrease the value and liquidity of lower-rated
securities.
Prepayment Risk
. If interest rates fall, it is possible that
issuers of certain bonds will call, or prepay, their bonds before their
maturity date. If a call were exercised
by the issuer during a period of declining interest rates, the ETF is likely to
have to replace the called security with a lower yielding security. If that were to happen, it would decrease the
ETFs net investment income.
Temporary Defensive Position
Risk.
Under adverse market
conditions, the ETF may, for temporary defensive purposes, invest up to 100% of
its assets in cash or cash equivalents, including investment grade short-term
obligations. A larger percentage of such
investments could moderate an ETFs investment results. An ETF may not achieve its investment
objective using this type of investing.
Trading Risk
. Although the Shares will be listed on the
Exchange, there can be no assurance that an active or liquid trading market for
them will develop or be maintained. In
addition, trading in Shares on the Exchange may be halted due to market
conditions or for reasons that, in the view of the Exchange, make trading in
Shares inadvisable. Further, trading in
Shares on the Exchange is subject to trading halts caused by extraordinary
market volatility pursuant to the Exchange circuit breaker rules. There can be no assurance that the
requirements of the Exchange necessary to maintain the listing of the ETF will
continue to be met or will remain unchanged.
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ETF MANAGEMENT
Grail
Advisors, LLC
The Manager, a
majority-owned subsidiary of Grail Partners, LLC, acts as the ETFs investment
manager. The Manager is a Delaware
limited liability company with its principal offices located at One Ferry
Building, Suite 255, San Francisco, CA
94111. The Manager is responsible
for overseeing the management of the ETF but does not oversee the day-to-day
investment of the ETFs portfolio. The
Manager oversees the business affairs of the ETF, provides or oversees the
provision of all administrative and investment advisory services to the ETF and
coordinates the investment activities of RP and Cohanzick. These services are provided under the terms
of an Investment Management Agreement (Investment Management Agreement)
between the Trust, on behalf of the ETF, and the Manager.
Pursuant to the Investment
Management Agreement, the ETF pays the Manager a management fee for the services
and facilities it provides payable on a monthly basis at the annual rate set
forth in the table below, calculated as a percentage of the ETFs average daily
net assets. From time to time, the
Manager may waive all or a portion of its fee; any such waiver would increase
the ETFs performance. The Manager is
responsible for compensating RP and Cohanzick out of the management fees it
receives from the ETF.
ETF
|
|
Management
Fee
|
|
RP Short Duration ETF
|
|
[ ]%
|
|
RiverPark
Advisors, LLC
RP
acts as primary sub-adviser of the ETF.
RP is registered as an investment adviser with the Securities and
Exchange Commission (SEC) and is located at 156 West 56
th
Street, 17
th
Floor, New
York, NY 10019 and is a wholly-owned subsidiary of RP Holding Group LLC, a
newly-organized Delaware limited liability company. RP Holding Group LLC is currently controlled
by Morty Schaja and Mitchell Rubin. In
addition to the services it provides the ETF and other series of the Trust, RP
offers its advisory services to separate accounts and alternative
vehicles. Mr. Schaja, CFA, is RPs
Chief Executive Officer, and Mr. Rubin, CFA, is RPs Chief Investment
Officer.
RP,
in conjunction with the Manager, oversees the day-to-day portfolio management
services provided by Cohanzick to the ETF.
RP has entered into a Primary Investment Sub-Advisory Agreement between
the Manager and RP (RP Sub-Advisory Agreement), and is also a party to the
Cohanzick Subadvisory Agreement described below. Pursuant to the RP Subadvisory Agreement, RP
receives fees from the Manager to provide the services described above. These fees are paid by the Manager out of the
advisory fees it receives from the ETF; they are not separately paid by the
ETF. From time to time, RP may waive all
or a portion of its fee.
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Cohanzick Management, LLC
Cohanzick acts as the
sub-adviser for the ETF. Cohanzick is
registered as an investment adviser with the SEC and is located at 427 Bedford
Road, Pleasantville, NY 10570. David K.
Sherman is the managing member and controlling shareholder of Cohanzick, and
serves as its President. Cohanzick
provides advisory services to separate accounts and alternative vehicles. Cohanzick commenced operations in August 1996. Historically, the primary investment style
offered by the firm has been credit opportunities with a particular focus on
high yield and distressed investments.
Cohanzick provides
day-to-day portfolio management services to the ETF and has discretion to
purchase and sell securities in accordance with the ETFs objectives, policies,
and restrictions.
Cohanzick has entered into
an Investment Sub-Advisory Agreement among the Manager, RP and Cohanzick, dated
December [XX], 2009, with respect to the ETF (Cohanzick Subadvisory
Agreement). Pursuant to the Cohanzick
Subadvisory Agreement, Cohanzick receives fees from the Manager to provide the
services described above. These fees are
paid out of the advisory fees the Manager receives from the ETF; they are not
separately paid by the ETF. From time to
time, Cohanzick may waive all or a portion of its fee.
Portfolio Manager
David K. Sherman is the
portfolio manager for the ETF and has served as portfolio manager since the ETFs
inception. Mr. Sherman is the
President and managing member of Cohanzick Management, LLC. Since 1997, Mr. Sherman, on behalf of
Cohanzick, has managed accounts and alternative investments for various clients
focusing on credit opportunities primarily in high yield and distressed
investment strategies. He has also
provided portfolio management services for clients employing other investment
strategies. From January 1987 to August 1996,
Mr. Sherman held various executive and director positions at Leucadia
National Corporation and/or its subsidiaries.
From August 1992 to August 1996, Mr. Sherman served as a
Vice President of Leucadia with primary responsibility for the oversight of
Leucadias insurance companies investment portfolios. Mr. Sherman holds a B.S. in Business
Administration from Washington University.
The ETFs Statement of
Additional Information provides additional information about the portfolio
manager, including other accounts he manages, his ownership in the ETF, and his
compensation.
Approval of
Advisory Agreements
A discussion regarding the
basis for the Boards approval of the Investment Management Agreement, the RP
Subadvisory Agreement and the Cohanzick Subadvisory Agreement will be available
in the ETFs first report to shareholders.
OTHER SERVICE PROVIDERS
ALPS Distributors, Inc.
(Distributor), 1290 Broadway, Suite 1100, Denver, CO 80203, serves as
the distributor of Creation Units for the ETF on an agency basis. The Distributor does not maintain a secondary
market in Shares.
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Table of Contents
The Bank of New York Mellon
Corporation (BNY Mellon), One Wall Street, New York, New York 10286, is the
administrator, fund accountant and transfer agent for the ETF.
BNY Mellon, One Wall Street,
New York, New York 10286, is also the custodian for the ETF.
K&L Gates LLP, 1601 K
Street, NW, Washington, DC 20006 serves as legal counsel to the ETF.
KPMG LLP, 1601 Market
Street, Philadelphia, Pennsylvania 19103, serves as the ETFs independent
registered public accounting firm. The
independent registered public accounting firm is responsible for auditing the
annual financial statements of the ETF.
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BUYING AND SELLING ETF SHARES
Shares
will be issued or redeemed by the
ETF at NAV per Share only in Creation Units, which are likely to cost over a
million dollars. Shares will trade on
the secondary market, however, which is where most retail investors will buy
and sell Shares. It is expected that
only a limited number of institutional investors will purchase and redeem
shares directly from the ETFs. Thus, certain information in this Prospectus
is not relevant to most retail investors.
For example, information about buying and redeeming Shares directly with
the ETFs and about transaction
fees imposed on such purchases and redemptions is not relevant to most retail
investors.
Except when
aggregated in Creation Units, Shares are not redeemable with the ETF.
Additional
information about the procedures regarding creation and redemption of Creation
Units (including the cut-off times for receipt of creation and redemption
orders) is included in the Statement of Additional Information.
Buying and
Selling Shares on the Secondary Market
Most investors will buy and
sell Shares in secondary market transactions through brokers and therefore,
must have a brokerage account to buy and sell Shares. Shares can be bought or sold throughout the
trading day like shares of any publicly traded issuer. When buying or selling Shares through a
broker, you will incur customary brokerage commissions and charges, and you may
pay some or all of the spread between the bid and the offered prices in the
secondary market for Shares. The price
at which you buy or sell Shares (i.e., the market price) may be more or less
than the NAV of the Shares. Unless
imposed by your broker, there is no minimum dollar amount you must invest in an
ETF and no minimum number of Shares you must buy.
The Shares [will be] listed
on NYSE Arca, Inc. (the Exchange) under the following symbol:
ETF
|
|
Trading
Symbol
|
|
RP Short Duration ETF
|
|
[ ]
|
|
The Exchange is generally
open Monday through Friday and is closed for weekends and the following
holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
For information about buying
and selling Shares on the Exchange or in the secondary markets, please contact
your broker or dealer.
Book Entry
. Shares are held in book entry form, which
means that no stock certificates are issued.
The Depository Trust Company (DTC), or its nominee, will be the
registered owner of all outstanding Shares of the ETF and is recognized as the
owner of all Shares. Participants in DTC
include securities brokers and dealers, banks, trust companies, clearing
corporations and other institutions that directly or indirectly maintain a
custodial relationship with DTC. As a
beneficial owner of Shares, you are not entitled to receive physical delivery
of stock certificates or to have Shares registered in your name, and you are
not considered a registered owner of Shares.
Therefore, to exercise any right as an owner of Shares, you must rely on
the procedures of DTC and its participants.
These procedures are the same as those that apply to any stocks that
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you hold in book entry or street
name through your brokerage account.
Your account information will be maintained by your broker, which will
provide you with account statements, confirmations of your purchases and sales
of Shares, and tax information. Your
broker also will be responsible for distributing income and capital gains
distributions and for ensuring that you receive shareholder reports and other
communications from the ETF.
Share Trading Prices
. The trading prices of the ETFs Shares may
differ from the ETFs daily NAV and can be affected by market forces of supply
and demand for the ETFs Shares, the prices of the ETFs portfolio securities,
economic conditions and other factors.
The Exchange or another
market information provider intends to disseminate the approximate value of the
ETFs portfolio every fifteen seconds.
This approximate value should not be viewed as a real-time update of
the NAV of the ETF because the approximate value may not be calculated in the
same manner as the NAV, which is computed once a day. The ETF is not involved in, or responsible
for, the calculation or dissemination of the approximate values and make no
warranty as to the accuracy of these values.
Buying
Shares Directly from the ETF
You can purchase Shares
directly from the ETF only in Creation Units or multiples thereof. The number of Shares in a Creation Unit may,
but is not expected to, change over time.
The ETF will not issue fractional Creation Units. Creation Units may generally be purchased [in
exchange for a basket of Treasury securities or for a basket of portfolio
securities, known as the
In-Kind Creation
Basket
, and cash equal to the
Cash Component
,
as discussed further below.] The ETF
reserves the right to reject any purchase request at any time, for any reason,
and without notice. The ETF can stop
selling Shares or postpone payment of redemption proceeds at times when the
Exchange is closed or under any emergency circumstances as determined by the
SEC.
To purchase Shares directly
from the ETF, you must be an Authorized Participant or you must purchase
through a broker that is an Authorized Participant. An Authorized Participant is a participant
of the Continuous Net Settlement System of the NSCC or the DTC that has
executed a Participant Agreement with the Distributor. The Distributor will provide a list of
Authorized Participants upon request.
Authorized Participants may purchase Creation Units of Shares, and sell
individual Shares on the Exchange. See Continuous
Offering below.
In-Kind
Creation Basket
. Typically,
purchases may be made in exchange for a basket of securities in a specified
universe of either Treasury securities or portfolio securities. On each business day, prior to the opening of
trading on the Exchange, BNY Mellon will post on the NSCC bulletin board the
In-Kind Creation Basket and/or Treasury securities needed to purchase a
Creation Unit for the ETF for that day.
The posting will identify the name and number of shares of each
[Treasury or portfolio] security that must be contributed to the ETF for each
Creation Unit purchased. The ETF
reserves the right to accept a nonconforming In-Kind Creation Basket [, or to
accept purchases wholly or partially for cash.
Cash
Component.
In addition
to the in-kind deposit of Treasury or portfolio securities, a purchaser will
either pay to, or receive from, the ETF an amount of cash (Balancing Amount)
equal to the difference between the NAV of a Creation Unit and the value of
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the securities being
deposited in kind. The Balancing Amount
ensures that the consideration paid by an investor for a Creation Unit is
exactly equal to the value of the Creation Unit. BNY Mellon will publish, on a daily basis,
information about the previous days Balancing Amount(s). To the extent a purchaser is not owed a
Balancing Amount larger than the Transaction Fee, described below, the
purchaser also must pay a Transaction Fee, in cash. The Balancing Amount and the Transaction Fee,
taken together, are referred to as the Cash Component.
Placement
of Purchase Orders
. All
purchase orders must be placed by or through an Authorized Participant. Purchase orders will be processed either
through a manual clearing process run by DTC or through an enhanced clearing
process that is available only to those DTC participants that also are
participants in the Continuous Net Settlement System of the NSCC. Authorized Participants that do not use the
NSCCs enhanced clearing process may be charged a higher transaction fee
(discussed below). [A purchase order
must be received by the Distributor prior to the close of regular trading on
the NYSE (generally 4:00 p.m., Eastern time) on the day the order is
placed, and all other procedures set forth in the Participant Agreement must be
followed, in order to receive the NAV determined on that day. On days when the NYSE or the bond markets
close earlier than normal (for example, the day before a holiday), the ETF may
require purchase orders to be placed earlier in the day.]
Transaction
Fee on Purchase of Creation Units.
Each ETF will impose a Creation Transaction
Fee on each purchase of Creation Units.
The Creation Transaction Fee for purchases effected through the NSCCs
enhanced clearing process, regardless of the number of units purchased, is as
follows:
ETF
|
|
Creation
Transaction Fee
|
|
RP Short Duration ETF
|
|
$[ ] (minimum)
|
|
A charge of up to four (4) times
the fee shown above may be imposed on purchases outside the NSCCs enhanced
clearing process, including purchases involving non-conforming In-Kind Creation
Baskets or cash. [Creation Units issued
wholly or partially for Treasury securities or for cash will incur a higher
transaction, up to this maximum amount.]
Investors who, directly or indirectly, use the services of a broker or
other such intermediary to compose a Creation Unit may pay additional fees for
these services. The transaction fee is
paid to the ETF. The fee protects
existing shareholders of the ETF from the costs associated with issuing
Creation Units.
Redeeming
Shares Directly From the ETF
You may redeem Shares of the
ETF only in Creation Units or multiples thereof. To redeem Shares directly with the ETF, you
must be an Authorized Participant or you must redeem through an Authorized
Participant. Creation Units generally
may be redeemed in exchange for a basket of Treasury securities or a basket of
portfolio securities, known as the
In-Kind Redemption Basket
,
and cash equal to the
Cash Component
,
as discussed further below.
In-Kind
Redemption Basket.
Typically,
redemption proceeds will partially be paid in kind with a basket of Treasury
securities or with a basket of securities
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known as the In-Kind
Redemption Basket. The composition of
the [basket of Treasury securities and the In-Kind Redemption Basket] will be
available on the NSCC bulletin board.
The ETF may honor a redemption request [wholly or partially in cash or]
with a nonconforming In-Kind Redemption Basket.
Cash
Component.
[If the ETF
redeems Creation Units partially in cash, the Cash Component would be larger
than if the ETF transacted principally in-kind.] Also, depending on whether the NAV of a
Creation Unit is higher or lower than the value of the securities being
redeemed in kind, a redeeming investor will either receive from, or pay to, the
ETF a Balancing Amount in cash. If due
to receive a Balancing Amount, the amount actually received will be reduced by
the amount of the applicable Transaction Fee, described below. The Balancing Amount and the Transaction Fee,
taken together, are referred to as the Cash Component.
Placement
of Redemption Orders.
As
with purchases, redemptions must be processed either through the DTC process or
the enhanced NSCC process. A redemption
order is deemed received on the date of transmittal if it is received by the
Distributor prior to the close of regular trading on the NYSE on that date [,
unless the bond markets close early that day in which case the order must be
received earlier in the day], and if all other procedures set forth in the
Participant Agreement are followed.
Transaction
Fee on Redemption of Creation Units.
The ETF imposes a Redemption Transaction Fee
on each redemption of Creation Units.
The amount of the Redemption Transaction Fee on redemptions effected
through the NSCC and DTC, and on nonconforming redemptions, is the same as the
Creation Transaction Fee (see page [XX]).
[When the ETF redeems Creation Units partially for Treasury securities,
a higher transaction fee will typically apply.] The Redemption Transaction Fee is paid to
the ETF. The fee protects existing
shareholders of the ETF from the costs associated with redeeming Creation
Units.
Legal Restrictions on
Transactions in Certain Securities.
An investor
subject to a legal
restriction
with respect to a particular security required to be deposited in connection
with the purchase of a Creation Unit may, at the ETFs discretion, be permitted
to deposit an equivalent amount of cash in substitution for any security which
would otherwise be included in the In-Kind Creation Basket applicable to the
purchase of a Creation Unit.
Creations and redemptions of
Shares will be subject to compliance with applicable federal and state
securities laws, including that securities accepted for deposit and securities
used to satisfy redemption requests are sold in transactions that would be
exempt from registration under the Securities Act of 1933, as amended (Securities
Act). The ETF (whether or not it
otherwise permits cash redemptions) reserves the right to redeem Creation Units
for cash to the extent that an investor could not lawfully purchase or the ETF
could not lawfully deliver specific securities under such laws or the local
laws of a jurisdiction in which the ETF invests. An Authorized Participant or an investor for
which it is acting subject to a legal restriction with respect to a particular
stock included in an In-Kind Redemption Basket may be paid an equivalent amount
of cash. An Authorized Participant that
is not a qualified institutional buyer (QIB) as defined in Rule 144A under
the Securities Act will not be able to receive, as part of a redemption,
restricted securities eligible for resale under Rule 144A.
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Continuous Offering
. You should be aware of certain legal risks
unique to investors purchasing Creation Units directly from the ETF. Because Shares may be issued on an ongoing
basis, a distribution of Shares could be occurring at any time. Certain activities that you perform with
respect to the sale of Shares could, depending on the circumstances, result in your
being deemed to be a participant in the distribution, in a manner that could
render you a statutory underwriter and subject you to the prospectus delivery
and liability provisions of the Securities Act.
For example, you could be deemed a statutory underwriter if you purchase
Creation Units from the issuing ETF, break them down into the constituent
Shares, and sell those Shares directly to customers, or if you choose 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 persons 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.
Broker-dealer firms should
also note that dealers who are not underwriters but are effecting
transactions in Shares, whether or not participating in the distribution of
Shares, are generally required to deliver a prospectus. This is because the prospectus delivery
exemption in Section 4(3) of the Securities Act is not available in
respect of such transactions as a result of Section 24(d) of the
Investment Company Act. As a result,
broker-dealer firms should note that 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(3)(C) of the Securities
Act, will be unable to take advantage of the prospectus delivery exemption
provided by Section 4(3) of the Securities Act. For delivery of prospectuses to exchange
members, the prospectus delivery mechanism of Rule 153 under the
Securities Act is only available with respect to transactions on a national
exchange.
ACTIVE INVESTORS AND MARKET TIMING
The Board has determined not
to adopt policies and procedures designed to prevent or monitor for frequent
purchases and redemptions of the ETFs Shares because investors primarily
transact in ETF Shares on the secondary market.
Frequent trading of Shares on the secondary market does not disrupt
portfolio management, increase an ETFs trading costs, lead to realization of
capital gains or otherwise harm ETF shareholders because these trades do not
involve the issuance or redemption of ETF Shares.
The ETF sells and redeems
its Shares at NAV only in Creation Units pursuant to the terms of a Participant
Agreement between the Authorized Participant and the Distributor, [principally
in exchange for a basket of securities].
With respect to such trades directly with the ETF, to the extent
effected in-kind (i.e., for portfolio securities), they do not cause the
harmful effects that may result from frequent cash trades.
The Board recognized that to
the extent that the ETF allows or requires trades to be effected in whole or in
part in cash [or for Treasury securities], those trades could result in
dilution to the ETF and increased transaction costs, which could negatively
impact the ETFs ability to achieve its investment objective. The Board also recognized, however, that
direct trading by Authorized Participants is critical to ensuring that the ETFs
Shares trade at or close to NAV.
Further, the
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ETF may employ fair
valuation pricing to minimize the potential for dilution from market
timing. Moreover, the ETF imposes
Transaction Fees on purchases and redemptions of ETF Shares, which increase if
an investor [transacts in Treasury securities or] substitutes cash in part or
in whole for securities, reflecting the fact that the ETFs costs increase in
those circumstances. The ETF reserves
the right to impose additional restrictions on disruptive, excessive or
short-term purchases.
DISTRIBUTION AND SERVICE PLAN
The ETF has adopted a
distribution and service plan (Plan) pursuant to Rule 12b-1 under the
Investment Company Act. Under the Plan,
the ETF is authorized to pay distribution fees to the Distributor and other
firms that provide distribution and shareholder services (Service Providers). If a Service Provider provides such services,
the ETF may pay fees at an annual rate not to exceed 0.25% of average daily net
assets, pursuant to Rule 12b-1 under the Investment Company Act. In addition, if the payment of management
fees by the ETF is deemed to be indirect financing by the ETF of the
distribution of its shares, such payment is authorized by the Plan.
No distribution or service
fees are currently paid by the ETF, however, and there are no current plans to
impose these fees. In the event Rule 12b-1
fees were charged, over time they would increase the cost of an investment in
the ETF.
NET ASSET VALUE
The net asset value, or NAV,
of Shares is calculated each business day as of the close of regular trading on
the NYSE, generally 4:00 p.m., Eastern time[, however, U.S. fixed income
assets may be valued as of the announced closing time for trading in
fixed-income instruments on any day that an early closing time is announced].
The ETF calculates its NAV
per Share by:
·
Taking the current market
value of its total assets,
·
Subtracting any liabilities,
and
·
Dividing that amount by the
total number of Shares owned by shareholders.
If you buy or sell Shares on
the secondary market, you will pay or receive the market price, which may be
higher or lower than NAV. Your
transaction will be priced at NAV only if you purchase or redeem your Shares in
Creation Units.
When calculating the NAV of
the ETFs Shares, expenses are accrued and applied daily and stocks held by the
ETF are valued at their market value when reliable market quotations are
readily available. Common stocks and
other equity securities are valued at the last sales price that day based on
the official closing price of the exchange where the security is primarily
traded. Debt securities (other than
short-term securities) usually are valued on the basis of prices provided by a
third-party independent pricing service using the mean between the bid and ask
price. Prices obtained from independent
pricing services use various observable inputs including
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but not limited to pricing
formulas, such as dividend discount models, option valuation formulas and
discounted cash flow models that might be applicable. In some cases, the price of debt securities
is determined using quotes obtained from brokers. Exchange-traded derivatives are valued at the
last sale price on the exchange. The
values of any foreign securities held by the ETF are converted into U.S.
dollars using an exchange rate obtained from an independent third party.
When reliable market
quotations are not readily available, securities are priced at their fair value
as determined in good faith using methods approved by the Board. The ETF may use fair-value pricing if the
value of a security it holds has been materially affected by events occurring
before the ETFs pricing time but after the close of the primary markets or
exchanges on which the security is traded.
Intervening events might be company-specific (e.g., earnings report,
merger announcement), country-specific (e.g., natural disaster, economic or
political news, act of terrorism, interest rate change), or global. Intervening events include price movements in
U.S. markets that are deemed to affect the value of foreign securities. Fair-value pricing also may be used for
domestic securities for example, if (1) trading in a security is halted
and does not resume before the ETFs pricing time or if a security does not
trade in the course of a day, and (2) the ETF holds enough of the security
that its price could affect the ETFs NAV.
Fair-value
prices are determined by the Valuation Committee, composed of representatives
of Grail and RP, according to procedures adopted by the Board. When fair-value pricing is employed, the
prices of securities used by the ETF to calculate its NAV may differ from
quoted or published prices for the same securities.
ETF WEBSITE AND DISCLOSURE OF PORTFOLIO HOLDINGS
The Trust maintains a
website for the ETF at www.grailadvisors.com.
Among other things, this website includes this Prospectus and the
Statement of Additional Information, and will include the ETFs holdings, the
ETFs last annual and semi-annual reports (when available), pricing information
about Shares trading on the Exchange, daily NAV calculations and a historical
comparison of the trading prices to NAV.
The ETF publicly
disseminates its full portfolio holdings each day the ETF is open for business
through its website at www.grailadvisors.com.
In addition, the [Treasury securities that may be used to purchase
and/or redeem Creation Units, as well as the] In-Kind Creation Basket and
In-Kind Redemption Basket, which identify the securities and share quantities
which are delivered in exchange for purchases and redemptions of Creation
Units, are publicly disseminated daily prior to the opening of trading on the
Exchange via the NSCC.
PORTFOLIO TURNOVER
In contrast to certain ETFs
that seek to replicate the performance of a specified index, the ETF is
actively-managed and may trade securities actively. A higher rate of portfolio turnover (e.g.,
over 100%) may result in higher transaction costs, including brokerage
commissions and generate higher capital gains to an ETF than commonly associated
with index-based ETFs.
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However, the ETF will impose
Transaction Fees, which should offset brokerage costs. Shareholders should consult their own tax
adviser for individual tax advice.
SECTION 12(d)(1) INFORMATION
The Trust and the ETF are
part of the Grail Advisors Actively Managed ETFs family of funds and are
related for purposes of investor and investment services, as defined in Section 12(d)(1)(G) of
the Investment Company Act.
For purposes of the
Investment Company Act, Shares are issued by a registered investment company
and purchases of such Shares by registered investment companies and companies
relying on Section 3(c)(1) or 3(c)(7) of the Investment Company
Act are subject to the restrictions set forth in Section 12(d)(1) of
the Investment Company Act, except as permitted by an exemptive order of the
SEC. The SEC has granted the Trust such
an order to permit registered investment companies to invest in Shares beyond
the limits in Section 12(d)(1)(A), subject to certain terms and
conditions, including that the registered investment company first enter into a
written agreement with the Trust regarding the terms of the investment. Accordingly, registered investment companies
that wish to rely on the order must first enter into such a written agreement
with the Trust and should contact the Trust to do so.
DIVIDENDS, DISTRIBUTIONS AND TAXES
ETF
Distributions
[The ETF pays out dividends
from its net investment income to shareholders [monthly]. The ETF distributes its net capital gains, if
any, annually. The ETF typically earns
income dividends from its investments.
These amounts, net of expenses, are passed along to ETF shareholders as income
dividend distributions. The ETF
realizes capital gains or losses whenever it sells securities. Net long-term capital gains are distributed
to shareholders as capital gains distributions.
You will receive other
services (e.g., dividend reinvestment and average cost information) only if
your broker offers these services.
Brokers may make available
to their customers who own Shares the DTC book-entry dividend reinvestment
service. To determine whether the
dividend reinvestment service is available and whether there is a commission or
other charge for using this service, consult your broker. Brokers may require ETF shareholders to
adhere to specific procedures and timetables.
If this service is available and used, dividend distributions of both
income and realized gains will be automatically reinvested in additional whole
Shares of the same ETF purchased in the secondary market. Without this service, investors would receive
their distributions in cash.
Taxes
As
with any investment, you should consider how your investment in Shares of the
ETF will be taxed. The tax information
in this Prospectus is provided as general information. You should consult your own tax professional
about the tax consequences of an investment in Shares of an ETF.
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ETF
distributions and your sale of your Shares in the ETF will have tax
consequences to you. Such consequences
may not apply if you hold your Shares through a tax-exempt entity or
tax-deferred retirement account, such as an IRA.
Taxes on Distributions
Distributions
by the ETF generally are taxable to you as ordinary income or capital
gains. Distributions of the ETFs investment
company taxable income (which is, generally, ordinary income plus net
short-term capital gains in excess of net long-term capital losses) [which may
be a significant portion of any distribution by the ETF] will be taxable as
ordinary income to the extent of the ETFs current or accumulated earnings and
profits, whether paid in cash or reinvested in additional Shares.
Distributions
of the ETFs net capital gains (which are net long-term capital gains in excess
of net short-term capital losses) properly designated by the ETF as capital
gain dividends will be taxable to you as long-term capital gains at a maximum
rate of 15% (20% after 2010) in the case of individuals, trusts or estates,
regardless of your holding period in the ETFs Shares and regardless of whether
paid in cash or reinvested in additional Shares. Distributions in excess of the ETFs earnings
and profits first will reduce your adjusted tax basis in ETF Shares and, after the
adjusted basis is reduced to zero, will constitute capital gains. Such capital gain will be long-term capital
gain and thus, will be taxed at a maximum rate of 15% for taxable years
beginning on or before December 31, 2010, and 20% thereafter, if the distributions
are attributable to Shares held by you for more than one year. Distributions by the ETF that qualify as
qualified dividend income are taxable to you at the long-term capital gain rate
through 2010 and, without further Congressional action, will be taxable as
ordinary income thereafter. In order for
a distribution by the ETF to be treated as qualified dividend income, the ETF
must meet holding period and other requirements with respect to its dividend paying
stocks and you must meet similar requirements with respect to the ETFs Shares.
Corporate
shareholders are generally eligible for the 70% dividends received deduction
with respect to the ETFs ordinary income dividends, but not capital gains
dividends, to the extent the ETF designates such dividends as qualifying for
this deduction, except that the aggregate amount so designated in any year
cannot exceed the dividends received by the ETF from domestic corporations.
Under
a dividend reinvestment service, you may have the option that all cash
distributions are automatically reinvested in additional ETF Shares. Any distributions reinvested under such a
service will nevertheless be taxable to you.
You will have an adjusted basis in the additional Shares purchased
through such a reinvestment service equal to the amount of the reinvested
distribution. The additional Shares will
have a new holding period commencing on the day following the day on which the
Shares are credited to your account.
In
general, distributions are subject to federal income tax for the year when they
are paid. However, certain distributions
paid in January may be treated as paid on December 31 of the prior
year.
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You
may be subject to Federal back-up withholding, at a current rate of 28%, if you
have not provided a taxpayer identification number or social security number and
made other required certifications.
You
may also be subject to state and local taxes on distributions, sales and
redemptions.
Taxes When Shares are Sold
Generally,
you will recognize taxable gain or loss if you sell or otherwise dispose of
your Shares. Any gain arising from such
sale or disposition generally will be treated as long-term capital gain if you
held the Shares for more than one year.
Otherwise, it would be classified as short-term capital gain. However, any capital loss arising from the
sale or disposition of Shares held for six months or less will be treated as
long-term capital loss to the extent of the amount of capital gain dividends
received, or undistributed capital gain deemed received, with respect to such
Shares. In addition, all or a portion of
any loss recognized upon a disposition of Shares may be disallowed under wash
sale rules if other Shares of the same ETF are purchased (whether through
reinvestment of distributions or otherwise) within 30 days before or after the
disposition. If disallowed, the loss
will be reflected in an adjustment to the basis of the Shares acquired.
Taxes on Purchase and Redemption of Creation Units
An
Authorized Participant who exchanges securities for Creation Units generally
will recognize a gain or a loss. The gain or loss will be equal to the
difference between the market value of the Creation Units at the time and the
exchangers aggregate basis in the securities surrendered and the Cash
Component paid. A person who exchanges
Creation Units for securities will generally recognize a gain or loss equal to
the difference between the exchangers basis in the Creation Units and the
aggregate market value of the securities received and the Cash Component. The Internal Revenue Service, however, may
assert that a loss realized upon an exchange of securities for Creation Units
cannot be deducted currently under the rules governing wash sales, or on
the basis that there has been no significant change in economic position. Persons exchanging securities should consult
their own tax advisor with respect to whether wash sale rules apply and
when a loss might be deductible.
Under
current federal tax laws, any capital gain or loss realized upon redemption of
Creation Units is generally treated as long-term capital gain or loss if the
Shares have been held for more than one year and as short-term capital gain or
loss if the Shares have been held for one year or less.
If you
purchase or redeem Creation Units, you will be sent a confirmation statement
showing how many Shares you purchased or sold and at what price.
The
foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future.
Shareholders such as non-resident aliens, foreign trusts or estates, or
foreign corporations or partnerships, may be subject to different United States
federal income tax treatment.
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You should consult your tax
adviser for further information regarding federal, state, local and/or foreign
tax consequences relevant to your specific situation. More information about taxes is in the ETFs
Statement of Additional Information.]
FINANCIAL HIGHLIGHTS
The ETF is newly organized
and therefore has not yet had any operations as of the date of this Prospectus.
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GRAIL ADVISORS ACTIVELY MANAGED ETFS
If you would like more
information about the ETF and the Trust, the following documents are available
free, upon request:
ANNUAL/SEMI-ANNUAL REPORTS TO
SHAREHOLDERS
Additional information about
the ETF will be in their annual and semi-annual reports to shareholders, when
available. The annual report will
explain the market conditions and investment strategies affecting the ETFs
performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional
Information dated December [XX], 2009, which contains more details about
the ETF, is incorporated by reference in its entirety into this Prospectus,
which means that it is legally part of this Prospectus.
To receive a free copy of
the latest annual or semi-annual report, when available, or the Statement of
Additional Information, or to request additional information about the ETF,
please contact us as follows:
Call: 1-415-677-5870
Write: Grail Advisors ETF
Trust
c/o
Grail Advisors, LLC
One
Ferry Building, Suite 255
San
Francisco, CA 94111
Visit: www.grailadvisors.com
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE COMMISSION
Information about the ETF,
including its reports and the Statement of Additional Information, has been
filed with the SEC. It can be reviewed
and copied at the SECs Public Reference Room in Washington, DC or on the
EDGAR database on the SECs internet site (http://www.sec.gov). Information on the operation of the SECs
Public Reference Room may be obtained by calling the SEC at
(202) 551-8090. You can also
request copies of these materials, upon payment of a duplicating fee, by
electronic request at the SECs e-mail address (publicinfo@sec.gov) or by
writing the Public Reference section of the SEC, 100 F Street NE, Room 1580,
Washington, DC 20549.
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STATEMENT OF ADDITIONAL INFORMATION
GRAIL ADVISORS ETF TRUST
RP
Short Duration ETF
Subject to Completion,
dated October 7, 2009
ONE FERRY BUILDING, SUITE 255, SAN FRANCISCO, CA 94111
PHONE: 1-415-677-5870
December [XX], 2009
The information in this Statement of
Additional Information is not complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional
Information is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any jurisdiction in which the offer or sale is
not permitted.
This SAI describes the Grail
Advisors ETF Trust, which was formed on December 7, 2007. The Trust is an open-end registered
management investment company under the Investment Company Act, and is
currently comprised of nine ETFs. RP
Short Duration ETF is discussed in this SAI.
RP Growth ETF, RP Focused Large Cap Growth ETF, RP Technology ETF and RP
Financials ETF are discussed in a separate Prospectus and Statement of
Additional Information, each dated September 10, 2009, as
supplemented. Grail McDonnell
Intermediate Municipal Bond ETF and Grail McDonnell Core Taxable Bond ETF are
discussed in a separate Prospectus and Statement of Additional Information,
each dated December [XX], 2009.
Grail American Beacon Large Cap Value ETF and Grail American Beacon
International Equity ETF are discussed in a separate Prospectus and Statement
of Additional Information, each dated May 1, 2009.
Each ETF is an actively
managed exchange-traded fund. Grail
Advisors, LLC serves as the Manager to each ETF. RiverPark Advisors, LLC, or RP, serves as the
primary sub-adviser to the RP Short Duration ETF. Cohanzick Management LLC serves as the
sub-adviser of the RP Short Duration ETF.
The Manager oversees the business affairs of the ETFs, provides or
oversees the provision of all administrative and investment advisory services
to the ETFs and coordinates the investment activities of the ETFs
sub-advisers: RP and Cohanzick for the RP Short Duration ETF. RP oversees the day-to-day portfolio
management services provided by Cohanzick to RP Short Duration ETF. ALPS Distributors, Inc. serves as the
Distributor for the ETF.
Shares of
the ETF are neither guaranteed nor insured by the U.S. Government.
This SAI, dated December [XX],
2009 is not a prospectus. It should be
read in conjunction with the ETFs Prospectus, dated December [XX], 2009,
which incorporates this SAI by reference.
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Capitalized terms used
herein 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 writing to the Distributor,
calling 1-415-677-5870 or visiting www.grailadvisors.com. An annual report for the ETF will be
available in the same manner once the ETF has completed its first annual
period.
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No person has been
authorized to give any information or to make any representations other than
those contained in this SAI and the Prospectus and, if given or made, such
information or representations may not be relied upon as having been authorized
by the Trust. The SAI does not
constitute an offer to sell securities.
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GLOSSARY
The
following terms are used throughout this SAI, and have the meanings used below:
1933 Act
means the
Securities Act of 1933, as amended.
1934 Act
means the
Securities Exchange Act of 1934, as amended.
Authorized Participant
means
a broker-dealer or other participant in the Continuous Net Settlement System of
the National Securities Clearing Corporation (NSCC) or a participant in DTC
with access to the DTC system, and who has executed an agreement with the
Distributor that governs transactions in the ETFs Creation Units.
Balancing Amount
means an
amount equal to the difference between the NAV of a Creation Unit and the
market value of the In-Kind Creation (or Redemption) Basket, used to ensure
that the NAV of a Fund Deposit (or Redemption), (other than the Transaction
Fee) is identical to the NAV of the Creation Unit being purchased.
Board
means the Board of
Trustees of the Trust.
Business Day
means any day
on which the Trust is open for business.
Cash Component
means an amount
of cash consisting of a Balancing Amount and a Transaction Fee calculated in
connection with creations.
Cash Redemption Amount
means
an amount of cash consisting of a Balancing Amount and a Transaction Fee
calculated in connection with redemptions.
CFTC
means the Commodity
Futures Trading Commission.
Code
means the Internal
Revenue Code of 1986, as amended.
Cohanzick
means Cohanzick
Management LLC.
Creation Unit
means an
aggregation of [ ] Shares that
the ETF issues and redeems on a continuous basis at NAV. Shares will not be issued or redeemed except
in Creation Units.
Distributor
means ALPS
Distributors, Inc.
DTC
means the Depository
Trust Company.
ETF
means a series of the
Trust discussed in this SAI:
RP Short Duration ETF.
Exchange
means the NYSE Arca, Inc.
FINRA
means the Financial
Industry Regulatory Authority.
Fund Deposit
means the
In-Kind Creation Basket and Cash Component necessary to purchase a Creation
Unit from the ETF.
Fund Redemption
means the
In-Kind Redemption Basket and Cash Redemption Amount received in connection
with the redemption of a Creation Unit.
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IIV
means an approximate
per-Share value of the ETFs portfolio, disseminated every fifteen seconds
throughout the trading day by the Exchange or other information providers,
known as the Intraday Indicative Value.
In-Kind Creation Basket
means the basket of securities to be deposited to purchase Creation Units of
the ETF. The In-Kind Creation Basket
will identify the name and number of shares of each security to be contributed,
in kind, to the ETF for a Creation Unit.
In-Kind Redemption Basket
means the basket of securities a shareholder will receive upon redemption of a
Creation Unit.
Investment Company Act
means
the Investment Company Act of 1940, as amended.
Manager
means Grail
Advisors, LLC.
NAV
means the net asset
value of an ETF.
NYSE
means the New York
Stock Exchange, Inc.
Prospectus
means the ETFs
prospectus, dated December [XX], 2009, as amended and supplemented from
time to time.
RP
means RiverPark Advisors,
LLC.
SAI
means this Statement of
Additional Information, as amended and supplemented from time to time.
SEC
means the United States
Securities and Exchange Commission.
Shares
means the shares of
the ETF.
Transaction Fees
are fees
imposed to compensate the Trust.
For the RP
Short Duration ETF, they will generally be $[
]. A charge of up to four times
this fixed Transaction Fee may be imposed for, among other things, creations
done wholly or partly in cash. [If the
ETF issues or redeems Creation Units partially for a basket of Treasury
securities or for cash, a higher transaction fee will typically apply.]
Trust
means the Grail
Advisors ETF Trust, a Delaware statutory trust.
TRUST AND
ETFS OVERVIEW
The Trust is a Delaware
statutory trust formed on December 7, 2007 and an open-end registered management
investment company comprised of nine ETFs: RP Short Duration ETF, RP Growth
ETF, RP Focused Large Cap Growth ETF, RP Technology ETF, RP Financials ETF,
Grail McDonnell Intermediate Municipal Bond ETF, Grail McDonnell Core Taxable
Bond ETF, Grail American Beacon Large Cap Value ETF and Grail American Beacon
International Equity ETF. RP Growth ETF,
RP Focused Large Cap Growth ETF, RP Technology ETF and RP Financials ETF are
discussed in a separate Prospectus and Statement of Additional Information, each
dated September 10, 2009. Grail
McDonnell Intermediate Municipal Bond ETF and Grail McDonnell Core Taxable Bond
ETF are discussed in a separate Prospectus and Statement of Additional
Information, each dated December [XX], 2009. Grail American Beacon Large Cap Value ETF
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and Grail American Beacon
International Equity ETF are discussed in a separate Prospectus and Statement
of Additional Information, each dated May 1, 2009. As of the date of this SAI, Grail American
Beacon International Equity ETF has not been opened for investment. Each of the ETFs, with the exception of RP
Focused Large Cap Growth ETF, is a diversified, actively managed
exchange-traded fund. RP Focused Large
Cap Growth ETF is a non-diversified, actively-managed exchange-traded
fund. Other ETFs may be added to the
Trust in the future. The offering of the
Shares is registered under the 1933 Act.
The ETF offers and issues
Shares at NAV only in aggregations of a specified number of Shares, generally
in exchange for [a basket of securities included in a specified universe],
together with the deposit of a specified cash payment. Shares of the ETF [will be] listed and traded
on the Exchange. Shares will trade on
the Exchange at market prices that may be below, at, or above NAV.
Unlike
mutual funds, Shares are not individually redeemable securities. Rather, the
ETF issues and redeems Shares, [principally in-kind for a basket of
securities in a specified universe], on
a continuous basis at NAV, only in Creation Units of [ ] Shares. Further, in the event of the liquidation of
the ETF, the Trust may lower the number of Shares in a Creation Unit.
In the instance of creations
and redemptions, Transaction Fees may be imposed. Such fees will be limited in accordance with
requirements of the SEC applicable to management investment companies offering
redeemable securities. Some of the
information contained in this SAI and the Prospectus such as information
about purchasing and redeeming Shares from an ETF and Transaction Fees is not
relevant to most retail investors.
Once created, Shares
generally trade in the secondary market, at market prices that change
throughout the day, in amounts less than a Creation Unit.
Investors purchasing
Shares in the secondary market through a brokerage account or with the
assistance of a broker may be subject to brokerage commissions and charges.
Unlike index-based ETFs, the ETF
is actively managed and does not seek to replicate the performance of a
specified index.
EXCHANGE
LISTING AND TRADING
Shares of the ETF [will be]
listed and traded on the Exchange.
Shares trade on the Exchange or in secondary markets at prices that may
differ from their NAV or IIV, including because such prices may be affected by
market forces (such as supply and demand for Shares). As is the case of other securities traded on
an exchange, when you buy or sell Shares on the Exchange or in the secondary
markets your broker will normally charge you a commission or other transaction
charges. Further, the Trust reserves the
right to adjust the price of Shares in the future to maintain convenient
trading ranges for investors (namely, to maintain a price per Share that is
attractive to investors) by share splits or reverse share splits, which would
have no effect on the NAV.
There can be no assurance
that the requirements of the Exchange necessary to maintain the listing of
Shares of the ETF will continue to be met.
The Exchange may, but is not required to, remove the Shares of the ETF
from listing if: (i) following the initial 12-month period beginning
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at the commencement of
trading of the ETF, there are fewer than 50 beneficial owners of the Shares of
the ETF for 30 or more consecutive trading days, or (ii) such other event
shall occur or condition exist that, in the opinion of the Exchange, makes
further dealings on the Exchange inadvisable.
The Exchange will remove the Shares of the ETF from listing and trading
upon termination of the ETF.
The ETF is not sponsored,
endorsed, sold or promoted by the Exchange.
The Exchange makes no representation or warranty, express or implied, to
the owners of Shares of the ETF or any member of the public regarding the
advisability of investing in securities generally or in the ETF particularly or
the ability of the ETF to achieve its objectives. The Exchange has no obligation or liability
in connection with the administration, marketing or trading of the ETF.
DISCLOSURE OF
PORTFOLIO HOLDINGS
The Board has adopted a
policy regarding the disclosure of information about the ETFs portfolio
securities. Under the policy, portfolio
holdings of the ETF, which will form the basis for the calculation of NAV on a
Business Day, are publicly disseminated prior to the opening of trading on the
Exchange that Business Day through financial reporting and news services,
including the website www.grailadvisors.com.
In addition, each Business Day a portfolio composition file, which
displays the In-Kind Creation Basket and Cash Component, is publicly
disseminated prior to the opening of the Exchange via the NSCC.
INTRADAY
INDICATIVE VALUE
The IIV is an approximate
per-Share value of the ETFs portfolio holdings, which is disseminated every
fifteen seconds throughout the trading day by the Exchange, or by other
information providers. The IIV is based
on the current market value of the ETFs Fund Deposit. The IIV does not necessarily reflect the
precise composition of the current portfolio of securities held by the ETF at a
particular point in time. The IIV should
not be viewed as a real-time update of the NAV of the ETF because the
approximate value may not be calculated in the same manner as the NAV. The ETF is not involved in, or responsible
for, the calculation or dissemination of the IIV and makes no warranty as to
the accuracy of the IIV.
INVESTMENT
POLICIES AND RESTRICTIONS
Pursuant to the investment
policies enumerated in this section, which may be changed with respect to the
ETF only by a vote of the holders of a majority of the ETFs outstanding voting
securities, except as noted below, the ETF may not:
1. Purchase or sell
real estate
limited
partnership interests, provided, however, that the ETF may invest in securities
secured by real estate or interests therein or issued by companies which invest
in real estate or interests therein when consistent with the other policies and
limitations described in the Prospectus.
2. Invest in
physical commodities
unless
acquired as a result of ownership of securities or other instruments (but this
shall not prevent the ETF from purchasing or selling foreign currency, options,
futures contracts, options on futures contracts, forward contracts,
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swaps,
caps, floors, collars, securities on a forward-commitment or delayed-delivery
basis, and other similar financial instruments).
3. Engage in the business of
underwriting
securities issued by others, except to the extent that, in connection with the
disposition of securities, the ETF may be deemed an underwriter under federal
securities law.
4. Lend any security or make any other
loan
except: (i) as otherwise permitted under the Investment Company Act, (ii) pursuant
to a rule, order or interpretation issued by the SEC or its staff, (iii) through
the purchase of debt securities in accordance with the ETFs investment
objective, policies and limitations, or (iv) by engaging in repurchase
agreements with respect to portfolio securities.
5. Issue any
senior security
except as
otherwise permitted: (i) under the Investment Company Act or (ii) pursuant
to a rule, order or interpretation issued by the SEC or its staff.
6.
Borrow
money, except as otherwise
permitted under the Investment Company Act or pursuant to a rule, order or
interpretation issued by the SEC or its staff, including: (i) as a
temporary measure, (ii) by entering into reverse repurchase agreements,
and (iii) by lending portfolio securities as collateral. For purposes of this investment limitation,
the purchase or sale of options, futures contracts, options on futures
contracts, forward contracts, swaps, caps, floors, collars and other similar
financial instruments shall not constitute borrowing.
7. Regarding
diversification
, invest more
than 5% of its total assets (taken at market value) in securities of any one
issuer, other than obligations issued by the U.S. Government, its agencies and
instrumentalities, or purchase more than 10% of the voting securities of any
one issuer, with respect to 75% of the ETFs total assets.
8. Regarding
concentration
, invest more
than 25% of its total assets in the securities of companies primarily engaged
in any one industry or group of industries provided that: (i) this
limitation does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities; and (ii) municipalities
and their agencies and authorities are not deemed to be industries.
The
following non-fundamental investment restrictions apply to the ETF and may be
changed with respect to the ETF by a vote of a majority of the Board.
The
ETF may not:
1.
Invest more than 15% of its net assets in illiquid securities, including time
deposits and repurchase agreements that mature in more than seven days; or
If a percentage limitation
is satisfied at the time of investment, a later increase or decrease in such
percentage resulting from a change in the value of the ETFs investments will
not constitute
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a violation of such
limitation. Thus, the ETF may continue
to hold a security even though it causes the ETF to exceed a percentage
limitation because of fluctuation in the value of the ETFs assets, except that
any borrowing by the ETF that exceeds the fundamental investment limitations
stated above must be reduced to meet such limitations within the period
required by the Investment Company Act or the relevant rules, regulations or
interpretations thereunder. For purposes
of determining concentration in the securities of companies primarily engaged
in any one industry or group of industries, the ETF intends to use the Standard
Industrial Classifications Code (SIC) list.
Also, for purposes of the concentration restriction, mortgage-backed
securities that are issued or guaranteed by the U.S. Government, its agencies
or instrumentalities are not subject to the ETFs concentration limitation, by
virtue of the exclusion from that test available to all U.S. Government
securities. Similarly, municipal bonds
issued by states, municipalities and other political subdivisions, agencies,
authorities and instrumentalities of states and multi-state agencies and
authorities are not subject to the ETFs industry concentration restriction.
INVESTMENT OBJECTIVE, INVESTMENT
STRATEGIES AND RISKS
The investment objective and
principal strategies of, and risks of investing in, the ETF are described in
the Prospectus. Unless otherwise
indicated in the Prospectus or this SAI, the investment objective and policies
of the ETF may be changed without shareholder approval.
Dollar Rolls, Delayed
Delivery Transactions and When Issued or Forward Commitment Securities
The purchase or sale of
when-issued securities enables an investor to hedge against anticipated changes
in interest rates and prices by locking in an attractive price or yield. The price of delayed delivery transactions,
including when-issued securities, is fixed at the time the commitment to
purchase or sell is made, but delivery and payment for the securities takes
place at a later date, normally one to two months after the date of purchase. During the period between purchase and
settlement, no payment is made by the purchaser to the issuer and no interest
accrues to the purchaser. Such
transactions therefore involve a risk of loss if the value of the security to
be purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date. A sale of a when-issued security also
involves the risk that the other party will be unable to settle the transaction. Dollar rolls are a type of forward commitment
transaction. Purchases and sales of
securities on a forward commitment basis involve a commitment to purchase or
sell securities with payment and delivery to take place at some future date,
normally one to two months after the date of the transaction. As with when-issued securities, these
transactions involve certain risks, but they also enable an investor to hedge
against anticipated changes in interest rates and prices. Forward commitment transactions are executed
for existing obligations, whereas in a when-issued transaction, the obligations
have not yet been issued. When
purchasing securities on a when-issued or forward commitment basis, a
segregated or earmarked account of liquid assets at least equal to the value
of purchase commitments for such securities will be maintained until the
settlement date.
To Be Announced Securities (TBAs)
As with other delayed
delivery transactions, a seller agrees to issue a TBA security at a future
date. However, the seller does not
specify the particular securities to be delivered. Instead, the
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ETF agrees to accept any
security that meets specified terms. For example, in a TBA mortgage-backed
transaction, the ETF and the seller would agree upon the issuer, interest rate
and terms of the underlying mortgages.
The seller would not identify the specific underlying mortgages until it
issues the security. TBA mortgage-backed
securities increase market risks because the underlying mortgages may be less
favorable than anticipated by the ETF.
Convertible Securities
A convertible security is a
security (a bond or preferred stock) that may be converted at a stated price
within a specified period into a specified number of shares of common stock of
the same or a different issuer.
Convertible securities are senior to common stock in a corporations
capital structure, but are usually subordinated to senior debt obligations of
the issuer. Convertible securities
provide holders, through their conversion feature, an opportunity to
participate in increases in the market price of their underlying securities. The price of a convertible security is
influenced by the market price of the underlying security, and tends to
increase as the market price rises and decrease as the market price
declines. Convertible securities are
generally regarded as a form of equity security.
Preferred Stocks
Preferred stocks include convertible
and non-convertible preferred and preference stocks that are senior to common
stock. Preferred stocks are equity
securities that are senior to common stock with respect to the right to receive
dividends and a fixed share of the proceeds resulting from the issuers
liquidation. Some preferred stocks also
entitle their holders to receive additional liquidation proceeds on the same
basis as holders of the issuers common stock, and thus represent an ownership
interest in the issuer. Depending on the
features of the particular security, holders of preferred stock may bear the
risks disclosed in the Prospectus or this SAI regarding equity or fixed income
securities.]
Mortgage-Related and Other
Asset-Backed Securities
The
ETF may invest in mortgage- or other asset-backed securities. Mortgage-related securities include mortgage
pass-through securities, collateralized mortgage obligations (CMOs),
commercial mortgage-backed securities, mortgage dollar rolls, CMO residuals,
stripped mortgage-backed securities (SMBSs) and other securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property.
Some of these securities are described in greater detail below. The value of some mortgage- or asset-backed
securities may be particularly sensitive to changes in prevailing interest
rates. Early repayment of principal on
some mortgage-related securities may expose the ETF to a lower rate of return upon
reinvestment of principal. When interest
rates rise, the value of a mortgage-related security generally will decline;
however, when interest rates are declining, the value of mortgage-related
securities with prepayment features may not increase as much as other fixed
income securities. The rate of
prepayments on underlying mortgages will affect the price and volatility of a
mortgage-related security, and may shorten or extend the effective maturity of
the security beyond what was anticipated at the time of purchase. If unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of the security can be expected to increase. The value of these securities may fluctuate
in response to the markets perception of the creditworthiness of the
issuers. Additionally, although
mortgages and mortgage-related securities are generally supported by
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some
form of government or private guarantee and/or insurance, there is no assurance
that private guarantors or insurers will meet their obligations.
Mortgage Pass-Through Securities
. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a pass-through
of the monthly payments made by the individual borrowers on their residential
or commercial mortgage loans, net of any fees paid to the issuer or guarantor
of such securities. Additional payments
are caused by repayments of principal resulting from the sale of the underlying
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related
securities (such as securities issued by GNMA) are described as modified
pass-through. These securities entitle
the holder to receive all interest and principal payments owed on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The
rate of pre-payments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of
shortening or extending the effective duration of the security relative to what
was anticipated at the time of purchase.
To the extent that unanticipated rates of pre-payment on underlying
mortgages increase the effective duration of a mortgage-related security, the
volatility of such security can be expected to increase. The residential mortgage market in the United
States recently has experienced difficulties that may adversely affect the
performance and market value of certain of the ETFs mortgage-related
investments. Delinquencies and losses on
residential mortgage loans (especially subprime and second-lien mortgage loans)
generally have increased recently and may continue to increase, and a decline
in or flattening of housing values (as has recently been experienced and may
continue to be experienced in many housing markets) may exacerbate such delinquencies
and losses. Borrowers with adjustable
rate mortgage loans are more sensitive to changes in interest rates, which
affect their monthly mortgage payments, and may be unable to secure replacement
mortgages at comparably low interest rates.
Also, a number of residential mortgage loan originators have recently
experienced serious financial difficulties or bankruptcy. Owing largely to the foregoing, reduced
investor demand for mortgage loans and mortgage-related securities and
increased investor yield requirements have caused limited liquidity in the
secondary market for mortgage-related securities, which can adversely affect
the market value of mortgage-related securities. It is possible that such limited liquidity in
such secondary markets could continue or worsen.
The
principal governmental guarantor of mortgage-related securities is GNMA. GNMA is a wholly owned United States
Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the
full faith and credit of the United States Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by pools of mortgages insured by the Federal Housing Administration
(the FHA), or guaranteed by the Department of Veterans Affairs (the VA).
Government-related
guarantors (i.e., not backed by the full faith and credit of the United States
Government) include FNMA and the Federal Home Loan Mortgage Corporation (FHLMC). FNMA is a government-sponsored corporation
the common stock of which is owned entirely by
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private
stockholders. FNMA purchases
conventional (i.e., not insured or guaranteed by any government agency)
residential mortgages from a list of approved seller/servicers which include
state and federally chartered savings and loan associations, mutual savings
banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA, but are not
backed by the full faith and credit of the United States Government. FHLMC was created by Congress in 1970 for the
purpose of increasing the availability of mortgage credit for residential
housing. It is a government-sponsored
corporation formerly owned by the twelve Federal Home Loan Banks but now the
common stock is owned entirely by private stockholders. FHLMC issues Participation Certificates (PCs),
which are pass-through securities, each representing an undivided interest in a
pool of residential mortgages. FHLMC guarantees
the timely payment of interest and ultimate collection of principal, but PCs
are not backed by the full faith and credit of the United States Government.
On
September 6, 2008, the Federal Housing Finance Agency (FHFA) placed FNMA
and FHLMC into conservatorship. As the
conservator, FHFA succeeded to all rights, titles, powers and privileges of
FNMA and FHLMC and of any stockholder, officer or director of FNMA and FHLMC
with respect to FNMA and FHLMC and the assets of FNMA and FHLMC. FNMA and FHLMC are continuing to operate as
going concerns while in conservatorship and each remain liable for all of its
obligations, including its guaranty obligations, associated with its
mortgage-backed securities.
Under
the Federal Housing Finance Regulatory Reform Act of 2008 (the Reform Act),
which was included as part of the Housing and Economic Recovery Act of 2008,
FHFA, as conservator or receiver, has the power to repudiate any contract
entered into by FNMA or FHLMC prior to FHFAs appointment as conservator or
receiver, as applicable, if FHFA determines, in its sole discretion, that
performance of the contract is burdensome and that repudiation of the contract
promotes the orderly administration of FNMAs or FHLMCs affairs. The Reform Act requires FHFA to exercise its
right to repudiate any contract within a reasonable period of time after its
appointment as conservator or receiver.
FHFA,
in its capacity as conservator, has indicated that it has no intention to
repudiate the guaranty obligations of FNMA or FHLMC because FHFA views
repudiation as incompatible with the goals of the conservatorship. However, in the event that FHFA, as
conservator or if it is later appointed as receiver for FNMA or FHLMC, were to
repudiate any such guaranty obligation, the conservatorship or receivership
estate, as applicable, would be liable for actual direct compensatory damages
in accordance with the provisions of the Reform Act. Any such liability could be satisfied only to
the extent of FNMAs or FHLMCs assets available therefor.
In
the event of repudiation, the payments of interest to holders of FNMA or FHLMC
mortgage-backed securities would be reduced if payments on the mortgage loans
represented in the mortgage loan groups related to such mortgage-backed
securities are not made by the borrowers or advanced by the servicer. Any actual direct compensatory damages for
repudiating these guaranty obligations may not be sufficient to offset any
shortfalls experienced by such mortgage-backed security holders.
Further,
in its capacity as conservator or receiver, FHFA has the right to transfer or
sell any asset or liability of FNMA or FHLMC without any approval, assignment
or consent. Although FHFA
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has
stated that it has no present intention to do so, if FHFA, as conservator or
receiver, were to transfer any such guaranty obligation to another party,
holders of FNMA or FHLMC mortgage-backed securities would have to rely on that
party for satisfaction of the guaranty obligation and would be exposed to the
credit risk of that party.
In
addition, certain rights provided to holders of mortgage-backed securities
issued by FNMA and FHLMC under the operative documents related to such
securities may not be enforced against FHFA, or enforcement of such rights may
be delayed, during the conservatorship or any future receivership. The operative documents for FNMA and FHLMC
mortgage-backed securities may provide (or with respect to securities issued
prior to the date of the appointment of the conservator may have provided) that
upon the occurrence of an event of default on the part of FNMA or FHLMC, in its
capacity as guarantor, which includes the appointment of a conservator or
receiver, holders of such mortgage-backed securities have the right to replace
FNMA or FHLMC as trustee if the requisite percentage of mortgage-backed
securities holders consent. The Reform
Act prevents mortgage-backed security holders from enforcing such rights if the
event of default arises solely because a conservator or receiver has been
appointed.
Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers also create pass-through
pools of conventional residential mortgage loans. Such issuers may be the originators and/or
servicers of the underlying mortgage loans as well as the guarantors of the
mortgage-related securities. Pools created
by such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely payment of interest and
principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities or private
insurers. Such insurance and guarantees
and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the ETFs investment
quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The ETF may buy mortgage-related securities
without insurance or guarantees if, through an examination of the loan
experience and practices of the originators/servicers and poolers, its
sub-adviser determines that the securities meet the ETFs quality
standards. Securities issued by certain
private organizations may not be readily marketable. The ETF will not purchase mortgage-related
securities or any other assets which in its sub-advisers opinion are illiquid
if, as a result, more than 15% of the value of the ETFs net assets will be
illiquid.
Mortgage-backed
securities that are issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, are not subject to the ETFs industry concentration
restrictions by virtue of the exclusion from that test available to all U.S.
Government securities. The assets
underlying such securities may be represented by a portfolio of first lien residential
mortgages (including both whole mortgage loans and mortgage participation
interests) or portfolios of mortgage pass-through securities issued or
guaranteed by GNMA, FNMA or FHLMC.
Mortgage loans underlying a mortgage-related security may in turn be
insured or guaranteed by the FHA or the VA.
In the case of private issue mortgage-related securities whose
underlying assets are neither U.S. Government securities nor U.S.
Government-insured mortgages, to the extent that real properties securing such
assets may be located in the same geographical region, the security may
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be
subject to a greater risk of default than other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and, ultimately, the ability of residential homeowners to make
payments of principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs)
. A CMO is a debt obligation of a legal entity
that is collateralized by mortgages and divided into classes. Similar to a bond, interest and prepaid
principal is paid, in most cases, on a monthly basis. CMOs may be collateralized by whole mortgage
loans or private mortgage bonds, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs
are structured into multiple classes, often referred to as tranches, with
each class bearing a different stated maturity and entitled to a different
schedule for payments of principal and interest, including pre-payments. Actual maturity and average life will depend
upon the pre-payment experience of the collateral. In the case of certain CMOs (known as sequential
pay CMOs), payments of principal received from the pool of underlying
mortgages, including pre-payments, are applied to the classes of CMOs in the
order of their respective final distribution dates. Thus, no payment of principal will be made to
any class of sequential pay CMOs until all other classes having an earlier
final distribution date have been paid in full.
In
a typical CMO transaction, a corporation (issuer) issues multiple series
(e.g., A, B, C, Z) of CMO bonds (Bonds).
Proceeds of the Bond offering are used to purchase mortgages or mortgage
pass-through certificates (Collateral).
The Collateral is pledged to a third party trustee as security for the
Bonds. Principal and interest payments
from the Collateral are used to pay principal on the Bonds in the order A, B,
C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on
the Series Z Bond is accrued and added to principal and a like amount is
paid as principal on the Series A, B, or C Bond currently being paid
off. When the Series A, B, and C
Bonds are paid in full, interest and principal on the Series Z Bond begins
to be paid currently. CMOs may be less
liquid and may exhibit greater price volatility than other types of mortgage-
or asset-backed securities.
Commercial
Mortgage-Backed Securities include securities that reflect an interest in, and
are secured by, mortgage loans on commercial real property. Many of the risks of investing in commercial
mortgage-backed securities reflect the risks of investing in the real estate
securing the underlying mortgage loans.
These risks reflect the effects of local and other economic conditions
on real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed securities may be
less liquid and exhibit greater price volatility than other types of mortgage-
or asset-backed securities.
Other Mortgage-Related Securities
. Other mortgage-related securities include
securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage
loans on real property, including mortgage dollar rolls, CMO residuals or
stripped mortgage-backed securities (SMBS).
Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
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CMO Residuals
. CMO
residuals are mortgage securities issued by agencies or instrumentalities of
the U.S. Government or by private originators of, or investors in, mortgage
loans, including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks and special purpose entities of the
foregoing.
The
cash flow generated by the mortgage assets underlying a series of CMOs is
applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses and any management fee of
the issuer. The residual in a CMO
structure generally represents the interest in any excess cash flow remaining
after making the foregoing payments.
Each payment of such excess cash flow to a holder of the related CMO
residual represents income and/or a return of capital. The amount of residual cash flow resulting
from a CMO will depend on, among other things, the characteristics of the
mortgage assets, the coupon rate of each class of CMO, prevailing interest
rates, the amount of administrative expenses and the pre-payment experience on
the mortgage assets. In particular, the
yield to maturity on CMO residuals is extremely sensitive to pre-payments on
the related underlying mortgage assets, in the same manner as an interest-only
(IO) class of stripped mortgage-backed securities. In addition, if a series of a CMO includes a
class that bears interest at an adjustable rate, the yield to maturity on the
related CMO residual will also be extremely sensitive to changes in the level
of the index upon which interest rate adjustments are based. As described below
with respect to stripped mortgage-backed securities, in certain circumstances
the ETF may fail to recoup fully its initial investment in a CMO residual.
CMO
residuals are generally purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers. Transactions in CMO residuals are generally
completed only after careful review of the characteristics of the securities in
question. In addition, CMO residuals
may, or pursuant to an exemption therefrom, may not have been registered under
the 1933 Act. CMO residuals, whether or
not registered under the 1933 Act, may be subject to certain restrictions on
transferability, and may be deemed illiquid and subject to the ETFs
limitations on investment in illiquid securities.
Adjustable Rate Mortgage-Backed Securities
. Adjustable rate mortgage-backed securities (ARMBSs)
have interest rates that reset at periodic intervals. Acquiring ARMBSs permits the ETF to
participate in increases in prevailing current interest rates through periodic
adjustments in the coupons of mortgages underlying the pool on which ARMBSs are
based. Such ARMBSs generally have higher
current yield and lower price fluctuations than is the case with more
traditional fixed income debt securities of comparable rating and maturity. In addition, when prepayments of principal
are made on the underlying mortgages during periods of rising interest rates,
the ETF can reinvest the proceeds of such prepayments at rates higher than
those at which they were previously invested.
Mortgages underlying most ARMBSs, however, have limits on the allowable
annual or lifetime increases that can be made in the interest rate that the
mortgagor pays. Therefore, if current
interest rates rise above such limits over the period of the limitation, the
ETF, when holding an ARMBS, does not benefit from further increases in interest
rates. Moreover, when interest rates are
in excess of coupon rates (i.e., the rates being paid by mortgagors) of the
mortgages, ARMBSs behave more like fixed income securities and less like adjustable
rate securities and are subject to the risks associated with fixed income
securities. In addition, during periods
of rising interest rates, increases in the coupon rate of adjustable rate
mortgages generally lag current market interest rates slightly, thereby
creating the potential for capital depreciation on such securities.
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Stripped Mortgage-Backed Securities
. SMBS are derivative multi-class mortgage
securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS
are usually structured with two classes that receive different proportions of
the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class),
while the other class will receive all of the principal (the principal-only or PO
class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
pre-payments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the ETFs yield to
maturity from these securities. If the
underlying mortgage assets experience greater than anticipated pre-payments of
principal, the ETF may fail to recoup some or all of its initial investment in
these securities even if the security is in one of the highest rating
categories.
Collateralized Debt Obligations
. The ETF may invest in collateralized debt
obligations (CDOs), which include collateralized bond obligations (CBOs),
collateralized loan obligations (CLOs) and other similarly structured
securities. CBOs and CLOs are types of
asset-backed securities. A CBO is a
trust which is backed by a diversified pool of high risk, below investment
grade fixed income securities. A CLO is
a trust typically collateralized by a pool of loans, which may include, among
others, domestic and foreign senior secured loans, senior unsecured loans, and
subordinate corporate loans, including loans that may be rated below investment
grade or equivalent unrated loans. CDOs
may charge management fees and administrative expenses.
For
both CBOs and CLOs, the cash flows from the trust are split into two or more
portions, called tranches, varying in risk and yield. The riskiest portion is the equity tranche
which bears the bulk of defaults from the bonds or loans in the trust and
serves to protect the other, more senior tranches from default in all but the
most severe circumstances. Since it is
partially protected from defaults, a senior tranche from a CBO trust or CLO
trust typically have higher ratings and lower yields than their underlying
securities, and can be rated investment grade.
Despite the protection from the equity tranche, CBO or CLO tranches can
experience substantial losses due to actual defaults, increased sensitivity to
defaults due to collateral default and disappearance of protecting tranches,
market anticipation of defaults, as well as aversion to CBO or CLO securities
as a class.
The
risks of an investment in a CDO depend largely on the type of the collateral
securities and the class of the CDO in which the ETF invests. Normally, CBOs, CLOs and other CDOs are
privately offered and sold, and thus, are not registered under the securities
laws. As a result, investments in CDOs
may be characterized by the ETF as illiquid securities, however an active
dealer market may exist for CDOs allowing a CDO to qualify for Rule 144A
transactions. In addition to the normal
risks associated with fixed income securities discussed elsewhere in this SAI
and the Prospectus (e.g., interest rate risk and default risk), CDOs carry
additional risks including, but are not limited to: (i) the possibility
that distributions from collateral securities will not be adequate to make
interest or other payments; (ii) the quality of the collateral may
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decline
in value or default; (iii) the ETF may invest in CDOs that are subordinate
to other classes; and (iv) the complex structure of the security may not
be fully understood at the time of investment and may produce disputes with the
issuer or unexpected investment results.
Asset-Backed Securities
. Asset-backed securities (ABS) are bonds
backed by pools of loans or other receivables.
ABS are created from many types of assets, including auto loans, credit
card receivables, home equity loans, and student loans. ABS are issued through special purpose vehicles
that are bankruptcy remote from the issuer of the collateral. The credit quality of an ABS transaction
depends on the performance of the underlying assets. To protect ABS investors from the possibility
that some borrowers could miss payments or even default on their loans, ABS
include various forms of credit enhancement.
Some
ABS, particularly home equity loan transactions, are subject to interest-rate
risk and prepayment risk. A change in
interest rates can affect the pace of payments on the underlying loans, which
in turn, affects total return on the securities. ABS also carry credit or default risk. If many borrowers on the underlying loans
default, losses could exceed the credit enhancement level and result in losses
to investors in an ABS transaction.
Finally, ABS have structure risk due to a unique characteristic known as
early amortization, or early payout, risk.
Built into the structure of most ABS are triggers for early payout,
designed to protect investors from losses.
These triggers are unique to each transaction and can include: a big
rise in defaults on the underlying loans, a sharp drop in the credit
enhancement level, or even the bankruptcy of the originator. Once early amortization begins, all incoming
loan payments are used to pay investors as quickly as possible.
Consistent
with the ETFs investment objectives and policies, the sub-adviser also may
invest in other types of asset-backed securities.
Derivatives
Although
the ETF does not currently intend to invest in derivatives, in pursuing its
individual objective, the ETF may, to the extent permitted by its investment
objective and policies, purchase and sell (write) both put options and call
options on securities, swap agreements, securities indexes, and enter into
interest rate and index futures contracts and purchase and sell options on such
futures contracts (futures options) for hedging purposes or to seek to
replicate the composition and performance of a particular index, except that
the ETF does not intend to enter into transactions involving currency futures
or options. The ETF also may enter into
swap agreements with respect to interest rates and indexes of securities. The ETF may invest in structured notes. If other types of financial instruments,
including other types of options, futures contracts, or futures options are
traded in the future, the ETF also may use those instruments, provided that
their use is consistent with the ETFs investment objective.
The
value of some derivative instruments in which the ETF invests may be
particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the ETF, the ability of the ETF to successfully utilize
these instruments may depend in part upon the ability of the sub-adviser to
forecast interest rates and other economic factors correctly. If the sub-adviser incorrectly forecasts such
factors and has taken positions in derivative instruments contrary to
prevailing market trends, the ETF could be exposed to the risk of loss.
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The ETF might not employ any of the strategies
described below, and no assurance can be given that any strategy used will
succeed. If the sub-adviser incorrectly
forecasts interest rates, market values or other economic factors in using a
derivatives strategy for the ETF, the ETF might have been in a better position
if it had not entered into the transaction at all. Also, suitable derivative transactions may
not be available in all circumstances.
The use of these strategies involves certain special risks, including a
possible imperfect correlation, or even no correlation, between price movements
of derivative instruments and price movements of related investments. While some strategies involving derivative
instruments can reduce the risk of loss, they can also reduce the opportunity
for gain or even result in losses by offsetting favorable price movements in
related investments or otherwise, due to the possible inability of the ETF to
purchase or sell a portfolio security at a time that otherwise would be
favorable or the possible need to sell a portfolio security at a
disadvantageous time because the ETF is required to maintain asset coverage or
offsetting positions in connection with transactions in derivative instruments,
and the possible inability of the ETF to close out or to liquidate its
derivatives positions. In addition, the
ETFs use of such instruments may cause the ETF to realize higher amounts of
short-term capital gains (generally taxed at ordinary income tax rates) than if
it had not used such instruments.
Options on Securities and Indexes
. The ETF may, to the extent specified in this
SAI or in the Prospectus, purchase and sell both put and call options on fixed
income or other securities or indexes in standardized contracts traded on
foreign or domestic securities exchanges, boards of trade, or similar entities,
or quoted on NASDAQ or on an over-the-counter market, and agreements, sometimes
called cash puts, which may accompany the purchase of a new issue of bonds from
a dealer.
An
option on a security (or index) is a contract that gives the holder of the
option, in return for a premium, the right to buy from (in the case of a call)
or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a security has the
obligation upon exercise of the option to deliver the underlying security upon
payment of the exercise price or to pay the exercise price upon delivery of the
underlying security. Upon exercise, the
writer of an option on an index is obligated to pay the difference between the
cash value of the index and the exercise price multiplied by the specified
multiplier for the index option. (An
index is designed to reflect features of a particular financial or securities
market, a specific group of financial instruments or securities, or certain
economic indicators.)
The
ETF will write call options and put options only if they are covered. In the case of a call option on a security,
the option is covered if the ETF owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional
cash consideration (or, if additional cash consideration is required, cash or
other assets determined to be liquid by the sub-adviser in such amount are
segregated or earmarked) upon conversion or exchange of other securities held
by the ETF. For a call option on an
index, the option is covered if the ETF maintains with its custodian assets
determined to be liquid in an amount equal to the contract value of the index. A call option is also covered if the ETF
holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise
price of the call written, or (ii) greater than the exercise price of the
call written, provided the difference is maintained by the ETF in segregated or
earmarked assets. A put option on a
security or an index is covered if the ETF segregates or earmarks assets
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equal
to the exercise price. A put option is
also covered if the ETF holds a put on the same security or index as the put
written where the exercise price of the put held is (i) equal to or greater
than the exercise price of the put written, or (ii) less than the exercise
price of the put written, provided the difference is maintained by the ETF in
segregated or earmarked assets.
If
an option written by the ETF expires unexercised, the ETF realizes a capital
gain equal to the premium received at the time the option was written. If an option purchased by the ETF expires
unexercised, the ETF realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance, however, that a
closing purchase or sale transaction can be effected when the ETF desires.
The
ETF may sell put or call options it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. Prior
to exercise or expiration, an option may be closed out by an offsetting
purchase or sale of an option of the same series. The ETF will realize a capital gain from a
closing purchase transaction if the cost of the closing option is less than the
premium received from writing the option, or, if it is more, the ETF will
realize a capital loss. If the premium
received from a closing sale transaction is more than the premium paid to
purchase the option, the ETF will realize a capital gain or, if it is less, the
ETF will realize a capital loss. The
principal factors affecting the market value of a put or a call option include
supply and demand, interest rates, the current market price of the underlying
security or index in relation to the exercise price of the option, the
volatility of the underlying security or index, and the time remaining until
the expiration date.
The
premium paid for a put or call option purchased by the ETF is an asset of the
ETF. The premium received for an option
written by the ETF is recorded as a deferred credit. The value of an option purchased or written
is marked to market daily and is valued at the closing price on the exchange on
which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices.
The ETF may write covered straddles consisting of a
combination of a call and a put written on the same underlying security. A straddle will be covered when sufficient
assets are deposited to meet the ETFs immediate obligations. The ETF may use the same liquid assets to
cover both the call and put options where the exercise price of the call and
put are the same, or the exercise price of the call is higher than that of the
put. In such cases, the ETF will also
segregate or earmark liquid assets equivalent to the amount, if any, by which
the put is in the money.
Risks Associated with Options on Securities and Indexes
. There are several risks associated with
transactions in options on securities and on indexes. For example, there are significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
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During
the option period, the covered call writer has, in return for the premium on
the option, given up the opportunity to profit from a price increase in the
underlying security above the exercise price, but, as long as its obligation as
a writer continues, has retained the risk of loss should the price of the
underlying security decline. The writer
of an option has no control over the time when it may be required to fulfill
its obligation as a writer of the option.
Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying security at the exercise price. If a put or call option purchased by the ETF
is not sold when it has remaining value, and if the market price of the
underlying security remains equal to or greater than the exercise price (in the
case of a put), or remains less than or equal to the exercise price (in the
case of a call), the ETF will lose its entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security.
There
can be no assurance that a liquid market will exist when the ETF seeks to close
out an option position. If the ETF were
unable to close out an option that it had purchased on a security, it would
have to exercise the option in order to realize any profit or the option may
expire worthless. If the ETF were unable
to close out a covered call option that it had written on a security, it would
not be able to sell the underlying security unless the option expired without
exercise. As the writer of a covered
call option, the ETF forgoes, during the options life, the opportunity to
profit from increases in the market value of the security covering the call
option above the sum of the premium and the exercise price of the call.
If
trading were suspended in an option purchased by the ETF, the ETF would not be
able to close out the option. If
restrictions on exercise were imposed, the ETF might be unable to exercise an
option it has purchased. Except to the
extent that a call option on an index written by the ETF is covered by an
option on the same index purchased by the ETF, movements in the index may
result in a loss to the ETF; however, such losses may be mitigated by changes
in the value of the ETFs securities during the period the option was
outstanding.
Futures Contracts and Options on Futures Contracts
. A futures contract is an agreement between
two parties to buy and sell a security for a set price on a future date. These contracts are traded on exchanges, so
that, in most cases, either party can close out its position on the exchange
for cash, without delivering the security.
An option on a futures contract gives the holder of the option the right
to buy or sell a position in a futures contract to the writer of the option, at
a specified price and on or before a specified expiration date.
The
ETF may invest in futures contracts and options thereon (futures options)
with respect to, but not limited to, interest rates and security indexes.
An
interest rate or index futures contract provides for the future sale by one
party and purchase by another party of a specified quantity of a financial
instrument or the cash value of an index at a specified price and time. A futures contract on an index is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of these securities is
made. A public market exists in futures
contracts covering a number of indexes as well as financial instruments.
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The
ETF may purchase and write call and put futures options. Futures options possess many of the same
characteristics as options on securities and indexes (discussed above). A futures option gives the holder the right,
in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon
exercise of a call option, the holder acquires a long position in the futures
contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is
true. A call option is in the money if
the value of the futures contract that is the subject of the option exceeds the
exercise price. A put option is in the
money if the exercise price exceeds the value of the futures contract that is
the subject of the option.
Pursuant
to a claim for exemption filed with the CFTC on behalf of the ETF, neither the
Trust nor the ETF is deemed to be a commodity pool or commodity pool operator
under the Commodity Exchange Act, and they are not subject to registration or
regulation as such under the Commodity Exchange Act.
Limitations on Use of Futures and Futures Options
. The ETF will only enter into futures
contracts and futures options which are standardized and traded on a U.S.
exchange, board of trade, or similar entity, or quoted on an automated
quotation system.
When
a purchase or sale of a futures contract is made by the ETF, the ETF is
required to deposit with its custodian (or broker, if legally permitted) a
specified amount of assets determined to be liquid (initial margin). The margin required for a futures contract is
set by the exchange on which the contract is traded and may be modified during
the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit on the
futures contract which is returned to the ETF upon termination of the contract,
assuming all contractual obligations have been satisfied. The ETF expects to earn interest income on
its initial margin deposits. A futures
contract held by the ETF is valued daily at the official settlement price of
the exchange on which it is traded. Each
day the ETF pays or receives cash, called variation margin, equal to the
daily change in value of the futures contract.
This process is known as marking to market. Variation margin does not represent a
borrowing or loan by the ETF but is instead a settlement between the ETF and
the broker of the amount one would owe the other if the futures contract
expired. In computing daily net asset
value, the ETF will mark to market its open futures positions.
The
ETF is also required to deposit and maintain margin with respect to put and
call options on futures contracts written by it. Such margin deposits will vary depending on
the nature of the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other futures
positions held by the ETF.
Although
some futures contracts call for making or taking delivery of the underlying
securities or commodities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). Closing out a futures contract sale is
effected by purchasing a futures contract for the same aggregate amount of the
specific type of financial instrument with the same delivery date. If an offsetting purchase price is less than
the original sale price, the ETF realizes a capital gain, or if it is more, the
ETF realizes a capital loss. Conversely,
if an offsetting sale price is more than the original purchase price, the ETF
realizes a capital gain, or if it is less, the ETF realizes a capital loss. The transaction costs must also be included
in these calculations.
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The
ETF may write covered straddles consisting of a call and a put written on the
same underlying futures contract. A
straddle will be covered when sufficient assets are deposited to meet the ETFs
immediate obligations. The ETF may use
the same liquid assets to cover both the call and put options where the
exercise price of the call and put are the same, or the exercise price of the
call is higher than that of the put. In
such cases, the ETF will also segregate or earmark liquid assets equivalent
to the amount, if any, by which the put is in the money.
When
purchasing a futures contract, the ETF will maintain with its custodian (and
mark-to-market on a daily basis) assets determined to be liquid, that, when
added to the amounts deposited with a futures commission merchant as margin,
are equal to the market value of the futures contract. Alternatively, the ETF may cover its
position by purchasing a put option on the same futures contract with a strike
price as high or higher than the price of the contract held by the ETF.
When
selling a futures contract, the ETF will maintain with its custodian (and
mark-to-market on a daily basis) assets determined to be liquid that are equal
to the market value of the futures contract.
Alternatively, the ETF may cover its position by owning the instruments
underlying the futures contract (or, in the case of an index futures contract,
a portfolio with a volatility substantially similar to that of the index on
which the futures contract is based), or by holding a call option permitting
the ETF to purchase the same futures contract at a price no higher than the
price of the contract written by the ETF (or at a higher price if the
difference is maintained in liquid assets with the Trusts custodian).
With
respect to futures contracts that are not legally required to cash settle,
the ETF may cover the open position by setting aside or earmarking liquid
assets in an amount equal to the market value of the futures contract. With respect to futures that are required to cash
settle, however, the ETF is permitted to set aside or earmark liquid assets
in an amount equal to the ETFs daily marked to market (net) obligation, if
any, (in other words, the ETFs daily net liability, if any) rather than the
market value of the futures contract. By
setting aside or earmarking assets equal to only its net obligation under
cash-settled futures, the ETF will have the ability to utilize these contracts
to a greater extent than if the ETF were required to segregate or earmark
assets equal to the full market value of the futures contract.
When
selling a call option on a futures contract, the ETF will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid,
that, when added to the amounts deposited with a futures commission merchant as
margin, equal the total market value of the futures contract underlying the
call option. Alternatively, the ETF may
cover its position by entering into a long position in the same futures
contract at a price no higher than the strike price of the call option, by
owning the instruments underlying the futures contract, or by holding a
separate call option permitting the ETF to purchase the same futures contract
at a price not higher than the strike price of the call option sold by the ETF.
When
selling a put option on a futures contract, the ETF will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid,
that equal the purchase price of the futures contract, less any margin on
deposit. Alternatively, the ETF may
cover the position either by entering into a short position in the same futures
contract, or by owning a separate put option permitting it to sell the same
futures contract so long as the strike price of the purchased put option is the
same or higher than the strike price of the put option sold by the ETF.
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To
the extent that securities with maturities greater than one year are used to
segregate or earmark assets to cover the ETFs obligations under futures
contracts and related options, such use will not eliminate the risk of a form
of leverage, which may tend to exaggerate the effect on net asset value of any
increase or decrease in the market value of the ETFs portfolio, and may
require liquidation of portfolio positions when it is not advantageous to do
so.
The
requirements for qualification as a regulated investment company also may limit
the extent to which the ETF may enter into futures, futures options and forward
contracts. See Taxation.
Risks Associated with Futures and Futures Options
. There are several risks associated with the
use of futures contracts and futures options.
A purchase or sale of a futures contract may result in losses in excess
of the amount invested in the futures contract. There can be no guarantee that
there will be a correlation between price movements in the hedging vehicle and
in the securities being hedged. In addition,
there are significant differences between the securities and futures markets
that could result in an imperfect correlation between the markets, causing a
given hedge not to achieve its objectives.
The degree of imperfection of correlation depends on circumstances such
as variations in speculative market demand for futures and futures options on
securities, including technical influences in futures trading and futures
options, and differences between the financial instruments being hedged and the
instruments underlying the standard contracts available for trading in such
respects as interest rate levels, maturities, and creditworthiness of
issuers. A decision as to whether, when
and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Changes in the price of
futures contracts may not correlate perfectly with price movements in the
relevant index due to market distortions.
First, all participants in the futures market are subject to margin
deposit and maintenance requirements.
Rather than meeting margin calls, investors may close futures contracts
through offsetting transactions which could distort normal correlations. Second, the margin deposit requirements in
the futures market are less onerous than margin requirements in the securities
market, resulting in more speculators who may cause temporary price
distortions.
Futures
contracts on U.S. Government securities historically have reacted to an
increase or decrease in interest rates in a manner similar to that in which the
underlying U.S. Government securities reacted.
To the extent, however, that the ETF enters into such futures contracts,
the value of such futures will not vary in direct proportion to the value of
such ETFs holdings of U.S. Government securities. Thus, the anticipated spread between the
price of the futures contract and the hedged security may be distorted due to
differences in the nature of the markets.
The spread also may be distorted by differences in initial and variation
margin requirements, the liquidity of such markets and the participation of
speculators in such markets.
Futures
exchanges may limit the amount of fluctuation permitted in certain futures
contract prices during a single trading day.
The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous days settlement
price at the end of the current trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made on that day
at a price beyond that limit. The daily
limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable
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positions. For example, futures prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and subjecting some
holders of futures contracts to substantial losses.
The
ETFs ability to engage in the futures and options on futures strategies
described above depends on the liquidity of the markets in those
instruments. Trading interest in various
types of futures and options on futures cannot be predicted. There can be no assurance that a liquid
market will exist at a time when the ETF seeks to close out a futures or a
futures option position, and the ETF would remain obligated to meet margin
requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no assurance that
an active secondary market will develop or continue to exist.
Swap Agreements and Options on Swap Agreements
. The ETF may engage in swap transactions,
including, but not limited to, swap agreements on interest rates or security
indexes and specific securities. The ETF
also may enter into options on swap agreements (swap options).
The
ETF may enter into swap transactions for any legal purpose consistent with its
investment objectives and policies, such as for the purpose of attempting to
obtain or preserve a particular return or spread at a lower cost than obtaining
a return or spread through purchases and/or sales of instruments in other
markets, as a duration management technique, to protect against any increase in
the price of securities the ETF anticipates purchasing at a later date, or to
gain exposure to certain markets in the most economical way possible.
Swap
agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks 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, which may be
adjusted for an interest factor. The
gross returns to be exchanged or swapped between the parties are generally
calculated with respect to a notional amount, i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate
or in a basket of securities representing a particular index. A quanto or differential swap combines
both an interest rate and a currency transaction. Other 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 rate, 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 ETF may directly or
indirectly use credit default swaps to take an active long or short position
with respect to the likelihood of default by corporate (including asset-backed
security) or sovereign issuers. In a
credit default swap, one party pays, in effect, an insurance premium through a
stream of payments to another party in exchange for the right to receive a
specified return in the event of default (or similar events) by one or more
third parties on their obligations. For
example, in purchasing a credit default swap, the ETF may pay a premium in
return for the right to put specified bonds or loans to the counterparty, such
as a U.S. or foreign issuer or
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basket of such issuers, upon
issuer default (or similar events) at their par (or other agreed-upon)
value. The ETF, as the purchaser in a
credit default swap, bears the risk that the investment might expire
worthless. It also would be subject to
counterparty risk the risk that the counterparty may fail to satisfy its
payment obligations to the ETF in the event of a default (or similar
event). In addition, as a purchaser in a
credit default swap, the ETFs investment would only generate income in the
event of an actual default (or similar event) by the issuer of the underlying
obligation.
The ETF also may use credit
default swaps for investment purposes by selling a credit default swap, in
which case the ETF will receive a premium from its counterparty in return for
the ETFs taking on the obligation to pay the par (or other agreed-upon) value
to the counterparty upon issuer default (or similar events). As the seller in a credit default swap, the
ETF effectively adds economic leverage to its portfolio because, in addition to
its total net assets, the ETF is subject to investment exposure on the notional
amount of the swap. If no event of
default (or similar event) occurs, the ETF would keep the premium received from
the counterparty and would have no payment obligations.
The
ETF also may enter into swap options. A
swap option is a contract that gives a counterparty the right (but not the
obligation) in return for payment of a premium, to enter into a new swap
agreement or to shorten, extend, cancel or otherwise modify an existing swap
agreement, at some designated future time on specified terms. The ETF may write (sell) and purchase put and
call swap options.
Depending
on the terms of the particular option agreement, the ETF will generally incur a
greater degree of risk when it writes a swap option than it will incur when it
purchases a swap option. When the ETF
purchases a swap option, it risks losing only the amount of the premium it has
paid should it decide to let the option expire unexercised. However, when the ETF writes a swap option,
upon exercise of the option the ETF will become obligated according to the
terms of the underlying agreement.
Most
other types of swap agreements entered into by the ETF would calculate the
obligations of the parties to the agreement on a net basis. Consequently, the ETFs current obligations
(or rights) under a swap agreement will generally be equal only to the net
amount to be paid or received under the agreement based on the relative values
of the positions held by each party to the agreement (the net amount). The ETFs current obligations under a swap
agreement will be accrued daily (offset against any amounts owed to the ETF)
and any accrued but unpaid net amounts owed to a swap counterparty will be
covered by the segregation or earmarking of assets determined to be liquid to
avoid any potential leveraging of the ETFs portfolio. Obligations under swap agreements so covered
will not be construed to be senior securities for purposes of the ETFs
investment restriction concerning senior securities.
Whether
the ETFs use of swap agreements or swap options will be successful in
furthering its investment objective will depend on the sub-advisers ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments.
Moreover, the ETF 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 ETF
will enter into swap agreements only with counterparties that meet certain
standards of creditworthiness. Certain
restrictions imposed on the ETF by the Internal Revenue Code may limit the ETFs
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ability
to use swap agreements. The swaps market
is largely unregulated. It is possible
that developments in the swaps market, including potential government
regulation, could adversely affect the ETFs ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Swaps
are highly specialized instruments that require investment techniques, risk
analyses, and tax planning different from those associated with traditional
investments. The use of a swap requires
an understanding not only of the referenced asset, reference rate, or index but
also of the swap itself, without the benefit of observing the performance of
the swap under all possible market conditions.
Because they are two party contracts that may be subject to contractual
restrictions on transferability and termination and because they may have terms
of greater than seven days, swap agreements may be considered to be illiquid
and subject to the ETFs limitation on investments in illiquid securities. To the extent that a swap is not liquid, it
may not be possible to initiate a transaction or liquidate a position at an
advantageous time or price, which may result in significant losses.
In
addition, the ETF generally may only close out a swap with its particular
counterparty, and may only transfer a position with the consent of that
counterparty. If the counterparty
defaults, the ETF will have contractual remedies, but there can be no assurance
that the counterparty will be able to meet its contractual obligations or that
the ETF will succeed in enforcing its rights.
For example, the ETF is subject to the risk that a counterparty may
interpret contractual terms (e.g., the definition of default) differently than
the ETF when the ETF seeks to enforce its contractual rights. The cost and unpredictability of the legal
proceedings required for the ETF to enforce its contractual rights may lead it
to decide not to pursue its claims against the counterparty. The ETF, therefore, assumes the risk that it
may be unable to obtain payments owed to it or that those payments may be
delayed or made only after the ETF has incurred the costs of litigation.
Like
most other investments, swap agreements are subject to the risk that the market
value of the instrument will change in a way detrimental to the ETFs
interest. The ETF bears the risk that
the sub-adviser will not accurately forecast future market trends or the values
of assets, reference rates, indexes, or other economic factors in establishing
swap positions for the ETF. If the
sub-adviser attempts to use a swap as a hedge against, or as a substitute for,
a portfolio investment, the ETF will be exposed to the risk that the swap will
have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the
ETF. While hedging strategies involving
swap instruments can reduce the risk of loss, they can also reduce the
opportunity for gain or even result in losses by offsetting favorable price
movements in other ETF investments. Many
swaps are complex and often valued subjectively.
Certain
swap agreements are exempt from most provisions of the Commodity Exchange Act
and, therefore, are not regulated as futures or commodity option transactions
under such Act, pursuant to regulations approved by the CFTC. This exemption is not exclusive, and
participants may continue to rely on existing exclusions for swaps.
Risk of Potential Government Regulation of Derivatives
. It is possible that government regulation of
various types of derivative instruments, including futures and swap agreements,
may limit or prevent the ETF from using such instruments as a part of its
investment strategy, and could ultimately prevent the ETF from being able to
achieve its investment objective. While
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no
current regulatory or legislative activity is anticipated to have a direct,
immediate effect upon the ETF, it is not possible to predict the course of
future legislation or regulation in this area.
It is possible that if certain proposed measures were to become law,
they could potentially limit the ability of the ETF to use certain instruments
as a part of its investment strategy.
Limits or restrictions applicable to the counterparties with which the
ETF engage in derivative transactions could also prevent the ETF from using
certain instruments.
Warrants and Rights
The ETF may purchase or
otherwise receive warrants or rights.
Warrants and rights generally give the holder the right to receive, upon
exercise, a security of the issuer at a stated price. The ETF typically uses warrants and rights in
a manner similar to their use of options on securities, as described in Options
and Futures below. Risks associated
with the use of warrants and rights are generally similar to risks associated
with the use of options. Unlike most
options, however, warrants and rights are issued in specific amounts, and
warrants generally have longer terms than options. Warrants and rights are not likely to be as
liquid as exchange-traded options backed by a recognized clearing agency. In addition, the terms of warrants or rights
may limit an ETFs ability to exercise the warrants or rights at such time, or
in such quantities, as the ETF would otherwise wish.
Repurchase Agreements
The
ETF may enter into repurchase agreements with banks and broker-dealers. A repurchase agreement is an agreement under
which securities are acquired by the ETF from a securities dealer or bank
subject to resale at an agreed upon price on a later date. The acquiring ETF bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
and the ETF is delayed or prevented from exercising its rights to dispose of
the collateral securities. Such a
default may subject the ETF to expenses, delays, and risks of loss including: (i) possible
declines in the value of the underlying security while the ETF seeks to enforce
its rights, (ii) possible reduced levels of income and lack of access to
income during this period, and (iii) the inability to enforce its rights
and the expenses involved in attempted enforcement. However, the ETFs sub-adviser attempts to
minimize this risk by entering into repurchase agreements only with financial
institutions that are deemed to be of good financial standing.
Zero Coupon Securities
Zero
coupon securities may be issued by a wide variety of corporate and governmental
issuers. Zero coupon securities tend to
be subject to greater market risk than interest-paying securities of similar
maturities. When an investor purchases a
traditional coupon-bearing bond, it is paid periodic interest at a
predetermined rate. Zero coupon
securities tend to be subject to greater price fluctuations in response to
changes in interest rates than are ordinary interest-paying debt securities
with similar maturities. The value of
zero coupon securities appreciates more during periods of declining interest
rates and depreciates more during periods of rising interest rates than
ordinary interest-paying debt securities with similar maturities.
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Bank Obligations
Bank
obligations include certificates of deposit, bankers acceptances, and fixed
time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers acceptances are negotiable drafts or
bills of exchange, normally drawn by an importer or exporter to pay for
specific merchandise, which are accepted by a bank, meaning, in effect, that
the bank unconditionally agrees to pay the face value of the instrument on
maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on
demand by the investor, but may be subject to early withdrawal penalties which
vary depending upon market conditions and the remaining maturity of the
obligation. There are no contractual
restrictions on the right to transfer a beneficial interest in a fixed time
deposit to a third party, although there is no market for such deposits. The ETF will not invest in fixed time
deposits which (1) are not subject to prepayment or (2) provide for
withdrawal penalties upon prepayment (other than overnight deposits) if, in the
aggregate, more than 15% of its net assets would be invested in such deposits,
repurchase agreements maturing in more than seven days and other illiquid
assets. The ETF may invest in U.S.
dollar-denominated bank obligations.
Corporate Debt Securities
The
rate of interest on a corporate debt security may be fixed, floating or
variable, and may vary inversely with respect to a reference rate. Debt securities may be acquired with warrants
attached. The ETF may invest in
commercial interests, including commercial paper, master notes and other
short-term corporate instruments that are denominated in U.S. dollars. Commercial paper consists of short-term
promissory notes issued by corporations.
Commercial paper may be traded in the secondary market after its
issuance. Master notes are demand notes
that permit the investment of fluctuating amounts of money at varying rates of
interest pursuant to arrangements with issuers who meet the quality criteria of
the ETF. The interest rate on a master
note may fluctuate based upon changes in specified interest rates, be reset
periodically according to a prescribed formula or be a set rate. Although there is no secondary market in
master demand notes, if such notes have a demand future, the payee may demand
payment of the principal amount of the note upon relatively short notice. Master notes are generally illiquid and
therefore subject to the ETFs percentage limitations for investments in
illiquid securities.
Securities
rated Baa and BBB are the lowest which are considered investment grade
obligations. Moodys describes
securities rated Baa as subject to moderate credit risk. They are considered medium-grade and as such
may possess certain speculative characteristics. S&P describes securities rated BBB as regarded
as having adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation. For securities rated
BBB, Fitch states that
expectations of default risk are currently
low
capacity for payment of financial commitments is considered adequate, but
adverse business or economic conditions are more likely to impair this
capacity.
High Yield Securities
Securities
rated lower than Baa by Moodys, or equivalently rated by S&P or Fitch, are
sometimes referred to as high yield securities or junk bonds. Investing in these securities
28
Table of
Contents
involves
special risks in addition to the risks associated with investments in
higher-rated fixed income securities.
While offering a greater potential opportunity for capital appreciation
and higher yields, high yield securities typically entail greater potential
price volatility and may be less liquid than higher-rated securities. The ETF may have difficulty selling certain
junk bonds because they may have a thin trading market. The lack of a liquid secondary market may
have an adverse effect on the market price and the ETFs ability to dispose of
particular issues and may also make it more difficult for the ETF to obtain
accurate market quotations in valuing these assets. High yield securities may be regarded as
predominately speculative with respect to the issuers continuing ability to
meet principal and interest payments.
They may also be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher-rated securities. Issuers of securities in default may fail to
resume principal or interest payments, in which case the ETF may lose its
entire investment.
Companies
that issue high yield bonds are often highly leveraged and may not have more
traditional methods of financing available to them. During an economic downturn or recession,
highly leveraged issuers of high-yield securities may experience financial
stress, and may not have sufficient revenues to meet their interest payment
obligations. Economic downturns tend to
disrupt the market for high yield bonds, lowering their values and increasing
their price volatility. The risk of
issuer default is higher with respect to high yield bonds because such issues
may be subordinated to other creditors of the issuer.
The
credit rating of a high yield bond does not necessarily address its market
value risk, and ratings may from time to time change to reflect developments
regarding the issuers financial condition.
The lower the rating of a high yield bond, the more speculative its
characteristics.
Debt and Other Fixed Income
Securities Generally
Debt and other fixed income
securities include fixed and floating rate securities of any maturity. Fixed rate securities pay a specified rate of
interest or dividends. Floating rate
securities pay a rate that is adjusted periodically by reference to a specified
index or market rate. Fixed and floating
rate securities include securities issued by federal, state, local, and foreign
governments and related agencies, and by a wide range of private issuers, and
generally are referred to in this SAI as fixed income securities. Indexed bonds are a type of fixed income
security whose principal value and/or interest rate is adjusted periodically
according to a specified instrument, index, or other statistic (e.g., another
security, inflation index, currency, or commodity).
Holders of fixed income
securities are exposed to both market and credit risk. Market risk (or interest rate risk) relates
to changes in a securitys value as a result of changes in interest rates. In general, the values of fixed income
securities increase when interest rates fall and decrease when interest rates
rise. Credit risk relates to the ability
of an issuer to make payments of principal and interest. Obligations of issuers are subject to
bankruptcy, insolvency and other laws that affect the rights and remedies of
creditors.
Because interest rates vary,
the future income of the ETF cannot be predicted with certainty. The future income of the ETF if it invests in
indexed securities also will be affected by changes in those securities
indices over time (e.g., changes in inflation rates, currency rates, or
commodity prices).
29
Table of Contents
Cash and Cash Items
The ETF may invest a portion
of its assets in cash or cash items pending other investments or to maintain
liquid assets required in connection with some of the ETFs investments. These cash items may include money market
instruments, such as securities issued by the U.S. Government and its agencies,
bankers acceptances, commercial paper, and bank certificates of deposit. The ETF may also use some of these securities
as part of its investment program.
U.S. Government Securities
and Foreign Government Securities
U.S. government securities
include securities issued or guaranteed by the U.S. government or its
authorities, agencies, or instrumentalities.
Foreign government securities include securities issued or guaranteed by
foreign governments (including political subdivisions) or their authorities, agencies,
or instrumentalities or by supra-national agencies. Different kinds of U.S. government securities
and foreign government securities have different kinds of government
support. For example, some U.S. government
securities (e.g., U.S. Treasury bonds) are supported by the full faith and
credit of the U.S. Other U.S. government
securities are issued or guaranteed by federal agencies or government-chartered
or -sponsored enterprises but are neither guaranteed nor insured by the U.S.
government (e.g., debt securities issued by the Federal Home Loan Mortgage
Corporation (Freddie Mac), Federal National Mortgage Association (Fannie Mae),
and Federal Home Loan Banks (FHLBs)).
Similarly, some foreign government securities are supported by the full
faith and credit of a foreign national government or political subdivision and
some are not. Foreign government
securities of some countries may involve varying degrees of credit risk as a
result of financial or political instability in those countries or the possible
inability of an ETF to enforce its rights against the foreign government. As with issuers of other fixed income
securities, sovereign issuers may be unable or unwilling to make timely
principal or interest payments.
It is possible that the
availability and the marketability (that is, liquidity) of the securities
discussed in this section could be adversely affected by actions of the U.S.
and foreign governments to tighten the availability of credit. On September 7, 2008, the Federal
Housing Finance Agency (FHFA), an agency of the U.S. government, placed Fannie
Mae and Freddie Mac into conservatorship, a statutory process with the
objective of returning the entities to normal business operations. FHFA will act as the conservator to operate
Fannie Mae and Freddie Mac until they are stabilized. It is unclear what effect this
conservatorship will have on the securities issued or guaranteed by Fannie Mae
or Freddie Mac.
Supra-national agencies are
agencies whose member nations make capital contributions to support the
agencies activities. Examples include
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community, and the
Inter-American Development Bank.
As with other fixed income
securities, U.S. government securities and foreign government securities expose
their holders to market risk because their values typically change as interest
rates fluctuate. For example, the value
of U.S. government securities or foreign government securities may fall during
times of rising interest rates. Yields
on U.S. government securities and foreign government securities tend to be
lower than those of corporate securities of comparable maturities.
30
Table of Contents
In addition to investing
directly in U.S. government securities and foreign government securities, an
ETF may purchase certificates of accrual or similar instruments evidencing undivided
ownership interests in interest payments and/or principal payments of U.S.
government securities and foreign government securities. Certificates of accrual and similar
instruments may be more volatile than other government securities.
Real Estate Investment
Trusts and other Real Estate-Related Investments
The ETF may invest in pooled
real estate investment vehicles (so-called real estate investment trusts or REITs)
and other real estate-related investments such as securities of companies
principally engaged in the real estate industry. In addition to REITs, companies in the real
estate industry and real estate-related investments may include, for example,
entities that either own properties or make construction or mortgage loans,
real estate developers, and companies with substantial real estate
holdings. Each of these types of
investments is subject to risks similar to those associated with direct
ownership of real estate. Factors
affecting real estate values include the supply of real property in certain
markets, changes in zoning laws, delays in completion of construction,
environmental liability risks, changes in real estate values, changes in
property taxes and operating expenses, levels of occupancy, adequacy of rent to
cover operating expenses, and local and regional markets for competing asset
classes. The value of real estate also
may be affected by changes in interest rates and social and economic trends.
REITs are pooled investment
vehicles that invest in real estate or real estate-related companies. The ETF may invest in different types of
REITs, including equity REITs, which own real estate directly; mortgage REITs,
which make construction, development, or long-term mortgage loans; and hybrid
REITs, which share characteristics of equity REITs and mortgage REITs. In general, the value of a REITs shares
changes in light of factors affecting the real estate industry. REITs are also subject to the risk of poor
performance by the REITs manager, defaults by borrowers, self-liquidation,
adverse changes in the tax laws, and, with regard to U.S. REITs, the risk of
failing to qualify for tax-free pass-through of income under the Internal
Revenue Code of 1986 and/or to maintain exempt status under the Investment
Company Act. See Taxes below for a
discussion of special tax considerations relating to an ETFs investment in
U.S. REITs.]
Illiquid Securities, Private
Placements, Restricted Securities, and IPOs and Other Limited Opportunities
The ETF may invest up to 15%
of its net assets in illiquid securities.
For this purpose, illiquid securities are securities that an ETF may
not sell or dispose of within seven days in the ordinary course of business at
approximately the amount at which the ETF has valued the securities.
A repurchase agreement
maturing in more than seven days is considered illiquid, unless it can be
terminated after a notice period of seven days or less.
The ETFs sub-adviser also
may deem certain securities to be illiquid as a result of the sub-advisers
receipt from time to time of material, non-public information about an issuer,
which may limit the sub-advisers ability to trade such securities for the
account of any of its clients, including the ETF. In some instances, these trading restrictions
could continue in effect for a substantial period of time.
31
Table of
Contents
As
long as the SEC maintains the position that most swap contracts, caps, floors,
and collars are illiquid, the ETF will continue to designate these instruments
as illiquid unless the instrument includes a termination clause or has been
determined to be liquid based on a case-by-case analysis pursuant to procedures
approved by the Board.
Private
Placements and Restricted Investments.
Illiquid securities include securities of
private issuers, securities traded in unregulated or shallow markets, and
securities that are purchased in private placements and are subject to legal or
contractual restrictions on resale.
Because relatively few purchasers of these securities may exist,
especially in the event of adverse market or economic conditions or adverse
changes in the issuers financial condition, the ETF could have difficulty
selling them when its sub-adviser believes it advisable to do so or may be able
to sell them only at prices that are lower than if they were more widely
held. Disposing of illiquid securities
may involve time-consuming negotiation and legal expenses, and selling them
promptly at an acceptable price may be difficult or impossible.
While private placements may
offer attractive opportunities not otherwise available in the open market, the
securities purchased are usually restricted securities or are not readily
marketable. Securities purchased in
private placement offerings made in reliance on the private placement
exemption from registration afforded by Section 4(2) of the 1933 Act,
and resold to qualified institutional buyers under Rule 144A under the
1933 Act, are restricted securities.
Restricted
securities cannot be sold without being registered under the 1933 Act, unless
they are sold pursuant to an exemption from registration (such as Rules 144
or 144A). Securities that are not
readily marketable are subject to other legal or contractual restrictions on
resale. The ETF may have to bear the
expense of registering restricted securities for resale and the risk of
substantial delay in effecting registration.
The ETF may be deemed to be an underwriter for purposes of Section 11
of the 1933 Act when selling its securities in a registered offering. In such event, the ETF may be liable to
purchasers of the securities under Section 11 if the registration
statement prepared by the issuer, or the prospectus forming a part of it, is
materially inaccurate or misleading, although the ETF may have a due diligence
defense.
At times, the inability to
sell illiquid securities can make it more difficult to determine their fair
value for purposes of computing the ETFs net asset value. The judgment of the ETFs sub-adviser
normally plays a greater role in valuing these securities than in valuing
publicly traded securities.
Not all restricted
securities are necessarily deemed to be illiquid. The ETF may invest in Rule 144A
securities. Rule 144A securities
are securities which, while privately placed, are eligible for purchase and
resale pursuant to Rule 144A under the 1933 Act. This Rule permits certain qualified
institutional buyers, such as the ETFs, to trade in privately placed securities
even though such securities are not registered under the 1933 Act. The sub-adviser will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the
ETFs limitations on illiquid securities.
Determination of whether a Rule 144A security is liquid or not is a
question of fact. In making this
determination, the sub-adviser will consider the trading markets for the
specific security taking into account the unregistered nature of a Rule 144A
security, among other factors. The
sub-adviser will also monitor the liquidity of Rule 144A securities, and
if, as a result of changed conditions, the sub-adviser determines that a Rule 144A
security is no longer liquid, the sub-adviser will review the ETFs holdings of
illiquid securities to determine what, if any, action is required to comply with
its limitations on investment of
32
Table of Contents
illiquid securities. Investing in Rule 144A securities could
increase the amount of the ETFs investments in illiquid securities if
qualified institutional buyers are unwilling to purchase such securities.
Investments in Other
Investment Companies or Other Pooled Investments
The ETF may invest in the
securities of other investment companies to the extent permitted by law. Subject to applicable regulatory
requirements, the ETF may invest in shares of both open- and closed-end
investment companies (including money market funds and ETFs). The market price for ETF and closed-end fund
shares may be higher or lower than, respectively, the ETFs and closed-end funds
NAV. Investing in another investment
company exposes an ETF to all the risks of that investment company and, in
general, subjects it to a
pro rata
portion of the other investment companys fees and expenses. The ETF also may invest in private investment
funds, vehicles, or structures.
MANAGEMENT
Board of
Trustees and Officers
As a Delaware trust, the
business and affairs of the Trust are managed by its officers under the
oversight of its Board. The Board sets
broad policies for the Trust and may appoint Trust officers. The Board oversees the performance of the
Manager, RP, Cohanzick and the Trusts other service providers. Each Trustee serves until his or her successor
is duly elected or appointed and qualified.
One of the Trustees is an
officer and employee of the Manager.
This Trustee is an interested person (as defined in Section 2(a)(19)
of the Investment Company Act) of the Trust (an Interested Trustee). The other Trustees are not interested persons
of the Trust (the Independent Trustees).
The Trusts fund complex
currently consists of nine ETFs. Each
Trustee or officer may be contacted by writing to the Trustee or officer c/o
Grail Advisors, LLC, One Ferry Building, Suite 255, San Francisco,
California 94111. The name, age,
address, and principal occupations during the past five years with respect to
each of the Trustees and officers of the Trust is set forth below, along with
the other public directorships held by the Trustees.
33
Table
of Contents
Name,
Address,
Age
|
|
Position(s)
Held with
the Trust
|
|
Term of
Office
and
Length
of Time
Served
|
|
Principal
Occupation(s) During
Past 5 Years
|
|
Number of
Portfolios
in the
Trust
Complex
Overseen
by Trustee
|
|
Other
Directorships
Held by Trustee
|
INDEPENDENT TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradford K. Gallagher
Age: 65
|
|
Chairman of the
Board
|
|
Since 2009
|
|
Founder, Spyglass Investments LLC (a private investment vehicle)
(since 2001); Founder, President and CEO of Cypress Holding Company,
CypressTree Investment Management Company and North American Funds
(1995-2001); President, Allmerica Life & Annuity Company
(1990-1995); Managing Director, Fidelity Investments, Founder of
Institutional Investments (1979-1990).
|
|
9
|
|
Trustee, The Common Fund (since 2005); Trustee, Nicholas Applegate
Institutional Funds (since 2007); Director, Shielding Technology Inc. (since
2006).
|
|
|
|
|
|
|
|
|
|
|
|
Charles H. Salisbury, Jr.
Age: 68
|
|
Trustee
|
|
Since 2009
|
|
Private investor.
|
|
9
|
|
Hobart & William Smith Colleges, Investment Committee
Chair (since 2006); Maryland Institute, College of Art, Chair of Investment
Committee (since 1994);
Trustee, Johns Hopkins Hospital (since
2000); Trustee, Guadalupe Center of Immokalee (since 2007); Director,
|
34
Table of Contents
Name,
Address,
Age
|
|
Position(s)
Held with
the Trust
|
|
Term of
Office
and
Length
of Time
Served
|
|
Principal
Occupation(s) During
Past 5 Years
|
|
Number of
Portfolios
in the
Trust
Complex
Overseen
by Trustee
|
|
Other
Directorships
Held by Trustee
|
|
|
|
|
|
|
|
|
|
|
CeraTech, Inc.
(since 2003).
|
|
|
|
|
|
|
|
|
|
|
|
Dennis G. Schmal
Age: 62
|
|
Trustee
|
|
Since 2009
|
|
Self-employed consultant (since 2003).
|
|
9
|
|
Trustee,
AssetMark Funds (since 2007); Director/ Chairman, Pacific Metrics Corp. (educational
services) (since 2005); Director, Varian Semiconductor Equipment Associates, Inc.
(since 2004); Director, MCF Corp. (financial services) (since 2003); Trustee,
Wells Fargo Multi-Strategy 100 Hedge Fund (since 2008).
|
|
|
|
|
|
|
|
|
|
|
|
INTERESTED TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William M. Thomas
Age: 46
|
|
Chief Executive Officer
|
|
Since 2008
|
|
Chief Executive Officer, Grail Advisors, LLC (since 2008); Senior
Vice President, Charles Schwab (2000-2008).
|
|
9
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
OFFICERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chester G. Chappell
Age: 44
|
|
Assistant
Secretary
|
|
Since 2008
|
|
Head of Distribution, Grail Advisors, LLC (since 2008); Vice
President, National Sales
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Table of Contents
Name,
Address,
Age
|
|
Position(s)
Held with
the Trust
|
|
Term of
Office
and
Length
of Time
Served
|
|
Principal
Occupation(s) During
Past 5 Years
|
|
Number of
Portfolios
in the
Trust
Complex
Overseen
by Trustee
|
|
Other
Directorships
Held by Trustee
|
|
|
|
|
|
|
Manager, Charles Schwab (2003-2008); Director, Asset Management
Strategic Alliances, Charles Schwab (2000-2003).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bryan M. Hiser
Age: 36
|
|
Chief Financial
Officer
|
|
Since 2008
|
|
Director of Investment Research, Grail Advisors, LLC (since
2008); Assistant Vice President Fund Administration, Citi Fund Services
(2007-2008); Financial Analyst, Harbor Capital Advisors (1999-2007).
|
|
N/A
|
|
N/A
|
Equity
Ownership of Trustees.
The
table below shows the dollar range of (i) Shares of the ETF discussed in
this SAI, and (ii) shares of all ETFs in the Trusts family of investment
companies, owned by the Trustees as of [ ], 2009. As of that date, the ETF discussed in this
SAI had not issued any Shares.
Name
|
|
Dollar Range of Equity
Securities in the ETF
|
|
Aggregate Dollar Range
of Equity
Securities in All Registered Investment
Companies Overseen by Trustee in
Family of Investment Companies*
|
|
Bradford K. Gallagher
|
|
$
|
0
|
|
$
|
[ ]
|
|
Charles H. Salisbury, Jr.
|
|
$
|
0
|
|
$
|
[ ]
|
|
Dennis G. Schmal
|
|
$
|
0
|
|
$
|
[ ]
|
|
William M. Thomas
|
|
$
|
0
|
|
$
|
[ ]
|
|
* The Family of Investment Companies
currently consists of nine ETFs.
36
Table of
Contents
Committees
The Board currently has
three standing committees: an Audit Committee, a Nomination Committee and a
Qualified Legal Compliance Committee.
Currently, each Independent Trustee serves on each of these committees.
The purposes of the Audit
Committee are to: (1) oversee generally the ETFs accounting and financial
reporting policies and practices, their internal controls and, as appropriate,
the internal controls of certain service providers; (2) oversee the
quality, integrity, and objectivity of the ETFs financial statements and the
independent audit thereof; (3) assist the full Board with its oversight of
the Trusts compliance with legal and regulatory requirements that relate to
the ETFs accounting and financial reporting, internal controls and independent
audits; (4) approve, prior to appointment, the engagement of the Trusts
independent auditors and, in connection therewith, to review and evaluate the
qualifications, independence and performance of the Trusts independent
auditors; and (5) act as a liaison between the Trusts independent
auditors and the full Board.
The purposes of the
Nomination Committee are, among other things, to: (1) identify and
recommend for nomination candidates to serve as Trustees and/or on Board
committees who are not Interested Persons of the Trust and who meet any
independence requirements of Exchange Rule 5.3(k)(1) or the
applicable rule of any other exchange on which shares of the Trust are
listed; (2) evaluate and make recommendations to the full Board regarding
potential trustee candidates who are not Interested Persons of the Trust and
who meet any independence requirements of Exchange Rule 5.3(k)(1) or
the applicable rule of any other exchange on which shares of the Trust are
listed; and (3) review periodically the workload and capabilities of the
Trustees and, as the Committee deems appropriate, to make recommendations to
the Board if such a review suggests that changes to the size or composition of
the Board and/or its committees are warranted.
The Committee will generally not consider potential candidates for
nomination identified by shareholders.
The
purposes of the Qualified Legal Compliance Committee are to: (1) receive, review and take appropriate
action with respect to any report made or referred to the Committee by an
attorney of evidence of a material violation of applicable U.S. federal or
state securities law, material breach of a fiduciary duty under U.S. federal or
state law or a similar material violation by the Trust or by any Trustee,
officer, director, employee, or agent of the Trust; (2) otherwise fulfill
the responsibilities of a qualified legal compliance committee pursuant to Section 307
of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder;
and (3) perform such other duties as may be assigned to it, from time to
time, by the Board.
Compensation
of Trustees and Officers
Interested Trustees are not
compensated by the Trust. The Trust pays
each Independent Trustee $20,000 per year for attendance at meetings of the
Board. All Trustees are reimbursed for
their travel expenses and other reasonable out-of-pocket expenses incurred in
connection with attending Board meetings.
The Trust does not accrue pension or retirement benefits as part of the
ETFs expenses, and Trustees are not entitled to benefits upon retirement from
the Board. The Trusts officers receive
no compensation directly from the Trust.
37
Table of Contents
The Trust commenced
operations in 2009 and has not had operations for a full year. The table below shows the estimated
compensation that is contemplated to be paid to Trustees for a full year:
Name
|
|
Aggregate
Compensation
from Trust
|
|
Pension or
Retirement
Benefits Accrued
as part of Trust
Expenses
|
|
Estimated Annual
Benefits upon
Retirement
|
|
Total
Compensation
from Fund
Complex* Paid to
Trustees
|
|
Bradford K. Gallagher
|
|
$
|
20,000
|
|
None
|
|
None
|
|
$
|
20,000
|
|
Charles H. Salisbury, Jr.
|
|
$
|
20,000
|
|
None
|
|
None
|
|
$
|
20,000
|
|
Dennis G. Schmal
|
|
$
|
20,000
|
|
None
|
|
None
|
|
$
|
20,000
|
|
*
The Fund Complex currently consists of nine ETFs.
Codes of
Ethics
The Trust, Manager, RP,
Cohanzick and Distributor each have adopted a code of ethics (Code of Ethics),
as required by applicable law, which is designed to prevent their affiliated
persons from engaging in deceptive, manipulative, or fraudulent activities in
connection with securities held or to be acquired by the ETF (which may also be
held by persons subject to a Code of Ethics).
There can be no assurance that the Codes of Ethics will be effective in
preventing such activities. The Codes of
Ethics may permit personnel subject to them to purchase and sell securities,
including securities that may be sold, held or purchased by the ETF. The Manager, RP and Cohanzick do not use
inside information in making investment decisions on behalf of the ETF. The Codes of Ethics are on file with the SEC
and are available to the public.
Proxy
Voting Policies
The Board believes that the
voting of proxies with respect to securities held by the ETF is an important
element of the overall investment process.
In this regard, the Trust has adopted Proxy Voting Policies and
Procedures (Policies) that delegate the responsibility for the voting of
proxies on the ETFs portfolio securities to its sub-advisers. Please see Appendix A for a copy of the
Policies.
Although the voting of
proxies for the fixed income investments held by the ETF is expected to be
rare, proxy voting for the RP Short Duration ETF has been delegated to
Cohanzick. Cohanzicks proxy voting
policies and procedures dictate the voting of proxies in the best interests of
ETF shareholders and include procedures to address potential conflicts of
interest. These policies and procedures
are summarized (or included in their entirety) in Appendix B.
Information on how the ETF
voted proxies relating to portfolio securities during the most recent
twelve-month period ended June 30 will be available: (1) without
charge, upon request, by calling 1-415-677-5870 and (2) on the SECs
website at www.sec.gov.
38
CONTROL PERSONS AND PRINCIPAL
HOLDERS OF SECURITIES
A control person is one who
owns beneficially or through controlled companies more than 25% of the voting
securities of the ETF or acknowledges the existence of control. As of December [XX], 2009, the ETF could
be deemed to be under the control of the Manager because it had voting
authority with respect to 100% of the value of the outstanding interests in the
ETF on such date. As a result, the
Manager could have the ability to approve or reject those matters submitted to
the shareholders of the ETF for their approval, including changes to the ETFs
fundamental policies. It is expected
that, once the ETF commences investment operations, the Manager will not
control the ETF.
INVESTMENT ADVISORY AND OTHER
SERVICES
Grail Advisors, LLC
The Manager, Grail Advisors,
LLC, oversees the performance of the ETF and arranges for transfer agency,
custody and all other services necessary for the ETF to operate, but does not
exercise day-to-day oversight over the ETFs sub-advisers. The Manager oversees the business affairs of
the ETF, provides or oversees the provision of all administrative and
investment advisory services to the ETF and coordinates the investment
activities of RP and Cohanzick. These
services are provided under the terms of an Investment Management Agreement (Investment
Management Agreement) between the Trust, on behalf of the ETF, and the
Manager.
Pursuant to the Investment
Management Agreement, the ETF pays the Manager a management fee for the
services and facilities it provides payable on a monthly basis at the annual
rate set forth in the table below, calculated as a percentage of the ETFs
average daily net assets. From time to
time, the Manager may waive all or a portion of its fee; any such waiver would
increase the ETFs performance. The
Manager is responsible for compensating RP and Cohanzick out of the management
fees it receives from the ETF.
ETF
|
|
Management
Fee
|
|
RP Short Duration ETF
|
|
[ ]%
|
|
The Manager is a
majority-owned subsidiary of Grail Partners, LLC. Grail Partners, LLC is engaged in merchant
banking activities and provides consultative services and capital to global
investment management firms and financial services businesses. Grail Partners, LLC is registered as a
broker-dealer, but is not principally or otherwise engaged in securities
dealing, market making, floor brokerage, exchange specialist activities,
proprietary trading or similar securities-related activities. The Manager is a registered investment
adviser and is located at One Ferry Building, Suite 255, San Francisco, CA
94111.
Under the Investment
Management Agreement, the Manager (or its affiliates) pays all salaries,
expenses, and fees of the Trustees and officers of the Trust who are officers,
directors/trustees, partners, or employees of the Manager or its
affiliates. The Trust pays all expenses
of its organization, operations, and business not specifically assumed or
agreed to be paid by the Manager, RP or Cohanzick. Without limiting the generality of the
foregoing, the Trust pays or
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Table of Contents
arranges for the payment of
the following: the costs of preparing, setting in type, printing and mailing of
Prospectuses, Prospectus supplements, SAIs, annual, semiannual and periodic
reports, and notices and proxy solicitation materials required to be furnished
to shareholders of the Trust or regulatory authorities, and all tax returns;
compensation of the officers and Trustees of the Trust who are not officers,
directors/trustees, partners or employees of Manager or its affiliates; all legal
and other fees and expenses incurred in connection with the affairs of the
Trust, including those incurred with respect to registering its shares with
regulatory authorities and all fees and expenses incurred in connection with
the preparation, setting in type, printing, and filing with necessary
regulatory authorities of any registration statement and Prospectus, and any
amendments or supplements that may be made from time to time, including
registration, filing and other fees in connection with requirements of
regulatory authorities; all expenses of the transfer, receipt, safekeeping,
servicing and accounting for the Trusts cash, securities, and other property,
including all charges of depositories, custodians, and other agents, if any;
the charges for the services and expenses of the independent accountants and
legal counsel retained by the Trust, for itself or its Independent Trustees (as
defined above); the charges and expenses of maintaining shareholder accounts,
including all charges of transfer, bookkeeping, and dividend disbursing agents
appointed by the Trust; all brokers commissions and issue and transfer taxes
chargeable to the Trust in connection with securities transactions to which the
Trust is a party; all taxes and corporate fees payable by or with respect to
the Trust to federal, state, or other governmental agencies, including
preparation of such documents as required by any governmental agency in
connection with such taxes; any membership fees, dues or expenses incurred in
connection with the Trusts membership in any trade association or similar
organizations; all insurance premiums for fidelity and other coverage; all
expenses incidental to holding shareholders and Trustees meetings, including
the printing of notices and proxy materials and proxy solicitation fees and
expenses; all expenses of pricing of the net asset value per share of the ETF,
including the cost of any equipment or services to obtain price quotations; and
extraordinary expenses, such as indemnification payments or damages awarded in
litigation or settlements made.
The Manager has
contractually agreed to reduce its fees and/or reimburse the ETFs expenses
(excluding interest, taxes, brokerage commissions, acquired fund fees and
expenses, and extraordinary expenses) in order to limit Net Annual Operating
Expenses for Shares of the ETF to [ ]%
of its average net assets (Expense Cap).
The Expense Cap will remain in effect until at least December [XX],
2010. The Manager may recoup fees
reduced or expenses reimbursed at any time within three years from the year
such expenses were incurred, so long as the repayment does not cause the
Expense Cap to be exceeded.
The Investment Management
Agreement with respect to the ETF will remain in effect for two (2) years
from its effective date and thereafter continue in effect for as long as its
continuance is specifically approved at least annually, by (1) the Board,
or by the vote of a majority (as defined in the Investment Company Act) of the
outstanding shares of the ETF, and (2) by the vote of a majority of the
Trustees who are not parties to the Investment Management Agreement or
interested persons of the Manager, cast in person at a meeting called for the
purpose of voting on such approval. The
Investment Management Agreement provides that it may be terminated at any time,
without the payment of any penalty, by the Board or by vote of a majority of
the ETFs shareholders, on 60 calendar days written notice to the Manager, and
by the Manager on the same notice to the Trust and that it shall be
automatically terminated if it is assigned.
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The
Investment Management Agreement provides that the Manager will not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the matters to which the Investment Management
Agreement relates, but will be liable only for willful misconduct, bad faith,
gross negligence or reckless disregard of its duties or obligations in
rendering its services to the Trust as specified in that Agreement. The Investment Management Agreement also
provides that the Manager may engage in other businesses, devote time and
attention to any other business whether of a similar or dissimilar nature, and
render investment advisory services to others.
The ETF is newly organized
and as of the date of this SAI has not yet incurred any management fees under
the Investment Management Agreement.
RiverPark Advisors, LLC
RP
acts as primary sub-adviser of the RP Short Duration ETF. RP is registered as an investment adviser
with the Securities and Exchange Commission (SEC) and is located at 156 West
56
th
Street, 17
th
Floor, New
York, NY 10019 and is a wholly-owned subsidiary of RP Holding Group LLC, a
newly-organized Delaware limited liability company. RP Holding Group LLC is currently controlled
by Morty Schaja and Mitchell Rubin. In
addition to the services it provides the ETF, RP offers its advisory services
to separate accounts and alternative vehicles.
Mr. Schaja, CFA, is RPs Chief Executive Officer and Mr. Rubin,
CFA, is RPs Chief Investment Officer.
RP,
in conjunction with the Manager, oversees the day-to-day portfolio management
services provided by Cohanzick to the ETF.
RP has entered into a Primary Investment Sub-Advisory Agreement between
the Manager and RP (the RP Sub-Advisory Agreement), and is also a party to
the Cohanzick Subadvisory Agreement described below. Pursuant to the RP Subadvisory Agreement, RP
receives fees from the Manager to provide the services described above. These fees are paid by the Manager out of the
advisory fees it receives from the ETF; they are not separately paid by the
ETF. These fees are payable on a monthly
basis at the annual rate set forth in the table below, calculated as a
percentage of the ETFs average daily net assets. In addition, the Manager pays the amounts due
Cohanzick for the ETF to RP, who then pays those amounts to Cohanzick. These amounts are included in the table
below, and are separately described in the discussion of Cohanzick. From time to time, RP may waive all or a
portion of its fee.
ETF
|
|
RP
Subadvisory Fee
|
|
RP Short Duration ETF
|
|
[ ]%
|
|
The RP Subadvisory Agreement
will automatically terminate if assigned, and may be terminated without penalty
at any time by the Manager, by a vote of a majority of the Board or by a vote
of a majority of the outstanding voting securities of the ETF on no more than
60 days written notice to RP, or by RP upon 60 days written notice to the
Trust. The RP Subadvisory Agreement will
remain in effect for two (2) years from its effective date and thereafter
continue in effect for as long as its continuance is specifically approved at
least annually, by (1) the Board, or by the vote of a majority (as defined
in the Investment Company Act) of the outstanding shares of the ETF, and (2) by
the vote of a majority of the Trustees who are not
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parties to the RP
Subadvisory Agreement or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such approval.
The ETF is newly organized
and as of the date of this SAI RP has not yet received any management fees
under the RP Subadvisory Agreement.
Cohanzick Management LLC
Cohanzick acts as the
sub-adviser for the ETF. Cohanzick is
registered as an investment adviser with the SEC and is located at 427 Bedford
Road, Pleasantville, NY 10570. David K.
Sherman is the managing member and controlling shareholder of Cohanzick, and
serves as its President. Cohanzick
provides advisory services to separate accounts and alternative vehicles. Cohanzick commenced operations in August 1996. Historically, the primary investment style
offered by the firm has been credit opportunities with a particular focus on
high yield and distressed investments.
Cohanzick provides
day-to-day portfolio management services to the ETF and has discretion to
purchase and sell securities in accordance with the ETFs objectives, policies,
and restrictions.
Cohanzick has entered into
an Investment Sub-Advisory Agreement among the Manager, RP and Cohanzick, dated
December [XX], 2009, with respect to the ETF (Cohanzick Subadvisory
Agreement). Pursuant to the Cohanzick
Subadvisory Agreement, Cohanzick receives fees from the Manager to provide the
services described above. Cohanzick
receives an annual fee of [ ]%,
calculated as a percentage of the ETFs average daily net assets and payable on
a quarterly basis. These fees are paid
out of the advisory fees the Manager receives from the ETF; they are not
separately paid by the ETF. From time to
time, Cohanzick may waive all or a portion of its fee.
The Cohanzick Sub-Advisory
Agreement will automatically terminate if assigned, and may be terminated
without penalty at any time by the Manager, by a vote of a majority of the
Board or by a vote of a majority of the outstanding voting securities of the
ETF on no more than 60 days written notice to Cohanzick, or by Cohanzick upon
60 days written notice to the Trust.
The Cohanzick Sub-Advisory Agreement will also terminate in the event
that the RP Subadvisory Agreement terminates.
The Cohanzick Sub-Advisory Agreement will remain in effect for two (2) years
from its effective date and thereafter continue in effect for as long as its
continuance is specifically approved at least annually, by (1) the Board,
or by the vote of a majority (as defined in the Investment Company Act) of the
outstanding shares of the ETF, and (2) by the vote of a majority of the
Trustees who are not parties to the Cohanzick Sub-Advisory Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval.
The ETF is newly organized
and as of the date of this SAI Cohanzick has not yet received any fees under
the Cohanzick Sub-Advisory Agreement.
Custodian
The Bank of New York Mellon
Corporation (BNY Mellon), located at One Wall Street, New York, New York
10286, serves as Custodian of the ETFs assets.
As Custodian, BNY Mellon has agreed to: (1) make receipts and
disbursements of money on behalf of the ETF, (2) collect
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Table of Contents
and receive all income and
other payments and distributions on account of the ETFs portfolio investments,
(3) respond to correspondence from shareholders, security brokers and
others relating to its duties; and (4) make periodic reports to the ETF
concerning the ETFs operations. BNY
Mellon does not exercise any supervisory function over the purchase and sale of
securities. Pursuant to the Custody
Agreement between BNY Mellon and the Trust the Trust has agreed to pay an
annual custody fee of .50 basis points on the first $1 billion of its gross
adjusted assets, and .25 basis points on gross adjusted assets in excess of $1
billion, plus certain transaction charges and additional global custody fees.
Administrator, Fund Accountant
and Transfer Agent
The Bank of New York Mellon
Corporation, located at One Wall Street, New York, New York 10286 serves as
Administrator, Fund Accountant and Transfer Agent to the ETF. As administrator, BNY Mellon provides the ETF
with all required general administrative services, including, without
limitation, office space, equipment, and personnel; clerical and general back
office services; bookkeeping, internal accounting and secretarial services; the
calculation of NAV; and the preparation and filing of all reports, updates to
registration statements, and all other materials required to be filed or
furnished by the ETF under federal and state securities laws.
As fund accountant and
transfer agent, BNY Mellon has agreed to: (1) perform and facilitate
purchases and redemptions of Creation Units of the ETF, (2) make dividend
and other distributions on Shares of the ETF, (3) record the issuance of
Shares and maintain records of outstanding Shares of the ETF, (4) maintain
certain accounts, (5) make and transmit periodic reports to the ETF and
its other service providers, and (6) otherwise perform the customary
services of a transfer agent and dividend disbursing agent. For the services to be provided by BNY Mellon
to the ETF, the Trust has agreed to pay a $1,000 monthly ETF administration fee
per ETF, a monthly transfer agency services fee of $1,000 per ETF (which
minimum is reduced for the first two years from inception of the ETF), a fund
accounting fee of 1.50 basis points on the first $1 billion of its gross
adjusted assets, and 1.00 basis points on gross adjusted assets in excess of $1
billion, and a fund administration fee of 2.50 basis points on the first $1
billion of its gross adjusted assets, and 2.00 basis points on gross adjusted
assets in excess of $1 billion, plus certain out-of-pocket expenses. There is a minimum fund accounting and fund
administration fee of $75,000 per ETF (which minimum is reduced for the first
two years from inception of the ETF).
PORTFOLIO MANAGERS
The portfolio manager at
Cohanzick (the Portfolio Manager) may have responsibility for the day-to-day
management of accounts other than the ETF.
Information regarding these other accounts has been provided by
Cohanzick and is set forth below. The number
of accounts and assets is shown as of [ ], 2009.
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Name of
|
|
Number of Other Accounts
Managed
and Assets by Account Type
|
|
Number of Accounts and Assets
for Which Advisory
Fee is Performance-Based
|
|
Investment Advisor
and Portfolio
Manager
|
|
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other
accounts
|
|
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cohanzick
Management LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
K. Sherman
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
Conflicts of Interest
As noted in the table above,
the Portfolio Manager manages accounts other than the ETF. This side-by-side management may present
potential conflicts between a Portfolio Managers management of the ETFs
investments, on the one hand, and the investments of the other accounts, on the
other hand.
Set forth below is a
description, provided by Cohanzick, of any other foreseeable material conflicts
of interest that may arise from the concurrent management of ETF and other
accounts.
Cohanzick
. The Portfolio Manager may manage accounts
other than the ETF, which may present potential conflicts between the ETF and
those other accounts. The management of
multiple funds, including the ETF, and other accounts may require the Portfolio
Manager to devote less than all of his or her time to the ETF, particularly if
the ETF and other accounts have different objectives, benchmarks and time
horizons. The Portfolio Manager may also
be required to allocate his or her investment ideas across multiple funds and
accounts, including the ETF. In
addition, if the Portfolio Manager identifies a limited investment opportunity,
such as an initial public offering that may be suitable for the ETF or another
account, the ETF may not be able to take full advantage of that opportunity due
to an allocation of that investment across all eligible funds and
accounts. Further, security purchase and
sale orders for multiple accounts often are aggregated for purpose of
execution. Although such aggregation
generally benefits clients, it may cause the price or brokerage costs to be
less favorable to a particular client than if similar transactions were not
being executed concurrently for other accounts.
[It may also happen that a Portfolio Manager will determine that it
would be in the best interest, and consistent with the investment policies of
another account, to sell short or sell long a security that the ETF holds long,
potentially resulting in a decrease in the market value of the security held by
the ETF.]
In addition,
other accounts managed by the Portfolio Manager may have a higher advisory fee
and/or performance-based fees which may provide a greater incentive to perform
for those accounts than the ETF. The
policies of Cohanzick, however, require that the Portfolio Manager treat all
accounts equitably and fairly in accordance with their investment mandate,
liquidity constraints and anticipated liquidity in a reasonable manner.
As noted above,
the Portfolio Manager may also experience certain conflicts between the
interests of the accounts he manages and his own personal interests (which may
include interests in advantaging Cohanzick).
The structure of the Portfolio Managers compensation may create an
incentive for the Portfolio Manager to favor accounts whose performance has a
greater impact on such compensation. The
Portfolio Manager may, for example, have an incentive to allocate favorable or
limited opportunity investments or structure the timing of investments to favor
such accounts. Similarly, if the
Portfolio Manager holds a larger personal investment in one fund or
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the ETF than he
or she does in another, the Portfolio Manager may have an incentive to favor
the fund or ETF in which he holds a larger stake.
In general,
Cohanzick has policies and procedures to address the various potential
conflicts of interest described above.
The firm has policies and procedures designed to ensure that the
Portfolio Manager has sufficient time and resources to devote to the various
accounts he manages. Similarly, the firm
has policies and procedures designed to ensure that investments and investment
opportunities are allocated fairly across accounts, and that the interests of
client accounts are placed ahead of the Portfolio Managers personal
interests. However, there is no
guarantee that such procedures will detect or address each and every situation
where a conflict arises.
Compensation
The
Portfolio Manager is compensated in various forms by Cohanzick. Following is a description provided by
Cohanzick regarding the structure of and criteria for determining the
compensation of the Portfolio Manager.
[to
come]
Ownership of ETFs
Because
the
ETF is newly organized, the
Portfolio Manager does not own Shares of the ETF.
PORTFOLIO TRANSACTIONS AND
BROKERAGE
When
executing portfolio transactions, Cohanzick will place its own orders to
execute securities transactions that are designed to implement the ETFs
investment objective and policies. In
placing such orders, Cohanzick will seek the most favorable net price and
execution under the circumstances, consistent with its obligations under the
Sub-advisory Agreement. In selecting
broker-dealers and in negotiating prices on such transactions, Cohanzick
considers a number of factors, including but not limited to: [to come]
In
selecting brokers or dealers to execute particular transactions, Cohanzick is
authorized to consider brokerage and research services (as those terms are
defined in Section 28(e) of the 1934 Act), provision of statistical
quotations (including the quotations necessary to determine an ETFs NAV), and
other information provided to the ETF, and/or to Cohanzick, as the case may be,
provided, however, that Cohanzick determines that it has received the best net
price and execution available. Cohanzick
is also authorized to cause an ETF to pay to a broker or dealer who provides
such brokerage and research services a commission (as defined in SEC
interpretations) in excess of the amount another broker-dealer would have
charged for effecting the same transaction.
Cohanzick must determine in good faith, however, that such commission is
reasonable in relation to the value of the brokerage and research services
provided, viewed in terms of that particular transaction or in terms of all the
accounts over which Cohanzick exercises investment discretion. Under these circumstances, Cohanzicks fees
are not reduced by reason of receipt of such brokerage and research
services. However, the ETFs do not allow
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Cohanzick
to enter into arrangements to direct transactions to broker-dealers as compensation
for the promotion or sale of ETF shares by those broker-dealers.
Cohanzick executes discretion for allocation of
investments based on its mandates provided in documents of the ETF and/or
separately managed agreements. In
addition, Cohanzick may deem that certain securities are appropriate for an
account or entity of Cohanzicks as well.
If Cohanzick is not able to acquire the desired aggregate amount of such
securities on terms and conditions which Cohanzick deems advisable, Cohanzick
will endeavor to allocate the limited amount of such securities acquired or
disposed among the various accounts for which Cohanzick considers them to be
suitable. However, after considering
transaction and operating cost, as well as liquidity, the allocation of some
securities which were purchased or sold in limited size may be allocated to one
or a limited number of accounts.
Cohanzick may round purchase or disposal lots at its discretion (
i.e.
to avoid odd lots).
Cohanzick may make such allocations among the accounts in any manner
which it considers to be fair under the circumstances, including but not
limited to allocations based on relative account sizes, the degree of risk
involved in the securities acquired, and the extent to which a position in such
securities is consistent with the investment policies and strategies of the
various accounts involved.
Cohanzick may aggregate purchase and sale
orders of securities held by an account or entity with similar orders being
made simultaneously for other accounts or entities. In many instances, the purchase or sale of
securities for an account or entity will be affected simultaneously with the
purchase or sale of like securities for other accounts or entities. Such transactions may be made at slightly
different prices, due to the volume of securities purchased or sold. In such event, the average price of all
securities purchased or sold in such transactions may be determined, at
Cohanzicks sole discretion, and Cohanzick may be charged or credited, as the
case may be, with the average transaction price.
An
ETFs turnover rate, or the frequency of portfolio transactions, will vary from
year to year depending on market conditions.
High portfolio activity may increase an ETFs transaction costs,
including brokerage commissions, and result in a greater number of taxable
transactions.
Because
the ETF is newly organized, it has not incurred brokerage commissions as of the
date of this SAI.
THE DISTRIBUTOR
The Distributor is located
at 1290 Broadway, Suite 1100, Denver, CO 80203. The Distributor is a broker-dealer registered
under the 1934 Act and a member of FINRA.
Shares will be continuously
offered for sale by the Trust through the Distributor only in Creation Units,
as described in this SAI. The
Distributor acts as an agent for the Trust.
The Distributor will deliver a Prospectus to persons purchasing Shares
in Creation Units and will maintain records of both orders placed with it and
confirmations of acceptance furnished by it.
The Distributor has no role in determining the investments or investment
policies of the ETF.
The Board has adopted a
Distribution and Service Plan pursuant to Rule 12b-1 under the Investment
Company Act (Plan). In accordance with
its Plan, the ETF is authorized to pay an amount up to 0.25% of its average
daily net assets each year for certain distribution-related
46
Table of Contents
activities. In addition, if the payment of management
fees by the ETF is deemed to be indirect financing by the ETF of the
distribution of its shares, such payment is authorized by the Plan. The Plan specifically recognizes that the
Manager and other persons, including RP and Cohanzick, may use management fee
revenue, as well as past profits or other resources, to pay for expenses
incurred in connection with providing services intended to result in the sale
of Shares. The Manager and such other
persons, as well as their affiliates, may pay amounts to third parties for
distribution or marketing services on behalf of the ETF. The Manager may also make payments to certain
market makers in the ETFs Shares for providing
bona fide
consulting and marketing services regarding the ETF. The making of the types of payments described
in this paragraph could create a conflict of interest for a financial
intermediary or market maker receiving such payments.
The Plan was adopted in
order to permit the implementation of the ETFs method of distribution. No fees are currently paid by the ETF under
the Plan, however; and there are no current plans to impose such fees. In the event such fees were to be charged,
over time they would increase the cost of an investment in the ETF.
Under the Plan, the Trustees
would receive and review at the end of each quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for
which such expenditures were made.
ACCOUNTING AND LEGAL SERVICE
PROVIDERS
Independent
Registered Public Accounting Firm
KPMG LLP, located at 1601
Market Street, Philadelphia, Pennsylvania 19103, serves as the independent
registered public accounting firm to the ETF.
KPMG LLP provides audit services, tax return preparation and assistance and
consultation in connection with certain SEC filings.
Legal
Counsel
K&L Gates LLP, located
at 1601 K Street NW, Washington, DC 20006, serves as the Trusts legal counsel.
ADDITIONAL INFORMATION
CONCERNING SHARES
Organization
and Description of Shares of Beneficial Interest
The Trust is a Delaware
statutory trust and registered open-end investment company. The Trust was organized on December 7,
2007 and has authorized capital of unlimited Shares of beneficial interest of
no par value which may be issued in more than one class or series. Currently, the Trust consists of nine
actively managed, exchange-traded series [, one of which has not yet been
opened for investment]. The Board may
designate additional series and classify Shares of a particular series into one
or more classes of that series.
Under Delaware law, the
Trust is not required to hold an annual shareholders meeting if the Investment
Company Act does not require such a meeting.
Generally, there will not be annual meetings of Trust shareholders. If requested by shareholders of at least 10%
of the outstanding Shares of the Trust, the Trust will call a meeting of
shareholders for the purpose of voting upon the question of removal of a
Trustee and will assist in communications with other Trust
47
Table of Contents
shareholders. Shareholders holding two-thirds of Shares
outstanding of all series of the Trust may remove Trustees from office by votes
cast at a meeting of Trust shareholders or by written consent.
All Shares will be freely
transferable. Shares will not have
preemptive rights or cumulative voting rights, and none of the Shares will have
any preference to conversion, exchange, dividends, retirements, liquidation,
redemption, or any other feature. Shares
have equal voting rights, except that in a matter affecting only a particular
ETF, only Shares of that ETF may be entitled to vote on the matter. The Trust Instrument confers upon the Board
the power, by resolution, to alter the number of Shares constituting a Creation
Unit or to specify that Shares of the ETF may be individually redeemable. The Trust reserves the right to adjust the
stock prices of Shares to maintain convenient trading ranges for
investors. Any such adjustments would be
accomplished through stock splits or reverse stock splits which would have no
effect on the NAV of the ETF.
The Trust Instrument of the
Trust disclaims liability of the shareholders or the officers of the Trust for
acts or obligations of the Trust which are binding only on the assets and
property of the Trust. The Trust
Instrument provides for indemnification out of the ETFs property for all loss
and expense of the ETFs shareholders being held personally liable solely by
reason of his or her being or having been a shareholder and not because of his
or her acts or omissions or for some other reason. The risk of a Trust shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the ETF itself would not be able to meet the Trusts obligations and
this risk should be considered remote.
If the ETF does not grow to
a size to permit it to be economically viable, the ETF may cease
operations. In such an event,
shareholders may be required to liquidate or transfer their Shares at an
inopportune time and shareholders may lose money on their investment.
Book Entry
Only System
DTC acts as securities
depositary for Shares. Shares are
registered in the name of the DTC or its nominee, Cede & Co., and
deposited with, or on behalf of, DTC.
Certificates generally will not be issued for Shares.
DTC
has advised the Trust as follows: it is
a limited-purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a clearing corporation within
the meaning of the New York Uniform Commercial Code, and a clearing agency
registered pursuant to the provisions of Section 17A of the 1934 Act. DTC was created to hold securities of its
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 NYSE, and FINRA. Access to the DTC system is also available to
Indirect Participants such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly. DTC
agrees with and represents to DTC Participants that it will administer its
book-entry system in
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accordance
with its rules and by-laws and requirements of law. 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 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 laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such laws may impair the ability of certain
investors to acquire beneficial interests in Shares.
Beneficial
owners are not entitled to have Shares registered in their names, will not
receive or be entitled to receive physical delivery of certificates in
definitive form and are not considered the registered holder thereof. Accordingly, each beneficial owner must rely
on the procedures of DTC, the DTC Participant and any Indirect Participant
through which such beneficial owner holds its interests, to exercise any rights
as a holder of Shares. The Trust
understands that under existing industry practice, in the event the Trust
requests any action of holders of Shares, or a beneficial owner desires to take
any action that DTC, as the record owner of all outstanding Shares, is entitled
to take, DTC would authorize the DTC Participants to take such action and that
the DTC Participants would authorize the Indirect Participants and beneficial
owners (acting through such DTC Participants) to take such action and would
otherwise act upon the instructions of beneficial owners owning through them.
Conveyance
of all notices, statements and other communications to beneficial owners is
effected as follows. Pursuant to the
Depositary Agreement between the Trust and DTC, DTC is required to make
available to the Trust, upon request and for a fee to be charged to the Trust,
a listing of Share holdings of each DTC Participant. The Trust shall inquire of each such DTC
Participant as to the number of beneficial owners holding Shares, directly or
indirectly, through such DTC Participant.
The Trust 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.
Distributions
of Shares shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or
the nominee, upon receipt of any such distributions, shall credit immediately
DTC Participants accounts with payments in amounts proportionate to their
respective beneficial interests in Shares as shown on the records of DTC or the
nominee. Payments by DTC Participants to
Indirect Participants and beneficial owners of Shares (held through DTC
Participants) will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a street name, and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspects of the
records relating to or notices to beneficial owners, or payments made on
account of beneficial ownership interests in such Shares, or for
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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.
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 brokers may make a
dividend reinvestment service available to their clients. Brokers offering such services may require
investors to adhere to specific procedures and timetables in order to
participate. Investors interested in
such a service should contact their broker for availability and other necessary
details. DTC may determine to
discontinue providing its service with respect to Shares at any time by giving
reasonable notice to the Trust and discharging its responsibilities with
respect thereto under applicable law.
Under such circumstances, the Trust shall take action either to find a
replacement for DTC to perform the functions described or make other
arrangements to represent Share ownership satisfactory to the Exchange.
TRANSACTIONS IN CREATION UNITS
The ETF sells and redeems
Shares in Creation Units on a continuous basis through the Distributor, without
a sales load, at the NAV next determined after receipt of an order in proper
form on any Business Day. The ETF will
not issue fractional Creation Units.
To purchase or redeem any
Creation Units from the ETF, you must be, or transact through, an Authorized
Participant. In order to be an
Authorized Participant, you must be either a broker-dealer or other participant
(Participating Party) in the Continuous Net Settlement System (Clearing
Process) of the National Securities Clearing Corporation (NSCC) or a
participant in DTC with access to the DTC system (DTC Participant), and you
must execute an agreement (Participant Agreement) with the Distributor that
governs transactions in the ETFs Creation Units.
Transactions by an
Authorized Participant that is a Participating Party using the NSCC system are
referred to as transactions through the Clearing Process. Transactions by an Authorized Participant
that is a DTC Participant using the DTC system are referred to as transactions outside
the Clearing Process.
Investors who are not
Authorized Participants but want to transact in Creation Units may contact the
Distributor for the names of Authorized Participants. Investors should be aware that their broker
may not be an Authorized Participant and, therefore, may need to place any order
to purchase or redeem Creation Units through another broker or person that is
an Authorized Participant, which may result in additional charges.
Orders must be transmitted
by an Authorized Participant by telephone or other transmission method
acceptable to the Distributor pursuant to procedures set forth in the
Participant Agreement. Market
disruptions and telephone or other communication failures may impede the
transmission of orders.
Non-custom orders must be
received by the Distributor by the Closing Time of the regular trading
session on the Exchange (currently 4:00 p.m. Eastern time) on the Business
Day such
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order is placed to be
effectuated based on the ETFs NAV that day.
Orders effectuated outside the Clearing Process are likely to require
transmittal earlier on the relevant Business Day than orders effectuated
through the Clearing Process. [Also, on
days when the Exchange or the bond markets close earlier than normal, such as
the day before a holiday, the ETF may require orders to be placed earlier than
normal.] Thus, persons placing or
effectuating orders outside the Clearing Process should be mindful of time
deadlines imposed by intermediaries, such as DTC and/or the Federal Reserve
Bank wire system, which may impact the successful processing of such orders.
[Orders for Treasury
securities or for cash, which is expected to be common for the ETF, and]
[c]ustom orders typically clear outside the Clearing Process and, therefore,
like other orders outside the Clearing Process, may need to be transmitted
early on the relevant Business Day to be effectuated at that days NAV. Custom orders may be required to be received
by the Distributor by [3:00 p.m.] Eastern time to be effectuated based on
the ETFs NAV on that Business Day. [The
ETF expects that a portion or all of the Fund Deposit or Fund Redemption will
be in Treasury securities or in cash, necessitating orders outside the Clearing
Process.] A custom order may be placed
when, for example, an Authorized Participant cannot transact in a security in
the In-Kind Creation or Redemption Basket and therefore has additional cash
included in a Fund Deposit or Fund Redemption in lieu of such security. Persons placing or effectuating custom orders
should be mindful of time deadlines imposed by intermediaries, which may impact
the successful processing of such orders.
Transaction Fees
To compensate the Trust for
costs incurred in connection with creation and redemption transactions,
investors will be required to pay to the Trust a Transaction Fee. The Creation Transaction Fee and Redemption
Transaction Fee are fixed for, respectively, all creation and redemption
transactions through the Clearing Process on a Business Day, regardless of the
number of transactions effectuated that day.
A charge of up to four (4) times the fixed fee may be imposed as
part of the Transaction Fee for (i) transactions outside the Clearing
Process and (ii) transactions effectuated wholly or partly in cash,
including custom orders, to offset brokerage and other transaction costs
thereby imposed on the Trust. [If the
ETF issues or redeems Creation Units partially or wholly for Treasury
securities or for cash, a higher transaction fee will typically apply.] The Manager, subject to the approval of the
Board, may adjust the Transaction Fee from time to time. Investors will also be
responsible for the costs associated with transferring the securities in the
In-Kind Creation and Redemption Baskets, respectively, to and from the account
of the Trust. Further, investors who,
directly or indirectly, use the services of a broker or other intermediary to
compose a Creation Unit in addition to an Authorized Participant to effect a
transaction in Creation Units may be charged an additional fee for such
services.
The Standard
Creation/Redemption Transaction Fee for the ETF will be $[ ] and the Maximum Creation/Redemption
Transaction Fee for the ETF will be $[
].
Purchasing Creation Units
Fund
Deposit.
The consideration for a
Creation Unit of the ETF is the Fund Deposit.
The Fund Deposit generally consists of the In-Kind Creation Basket,
which will often be a replication of
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the securities in the ETFs
portfolio [or a basket of Treasury securities] and the Cash Component, which
consists of a Balancing Amount and a Transaction Fee.
The Balancing Amount
reflects the difference, if any, between the NAV of a Creation Unit and the
market value of the securities in the In-Kind Creation Basket. If the NAV per Creation Unit exceeds the
market value of the securities in the In-Kind Creation Basket, the purchaser
pays the Balancing Amount to the ETF. By
contrast, if the NAV per Creation Unit is less than the market value of the
securities in the In-Kind Creation Basket, the ETF pays the Balancing Amount to
the purchaser.
BNY Mellon, in a portfolio
composition file sent via the NSCC, makes available on each Business Day,
immediately prior to the opening of business on the Exchange (currently 9:30 a.m.,
Eastern time), a list of the names and the required number of shares of each security
in the In-Kind Creation Basket to be included in the current Fund Deposit for
the ETF (based on information about the ETFs portfolio at the end of the
previous Business Day). BNY Mellon,
through the NSCC, also makes available on each Business Day, the estimated Cash
Component, effective through and including the previous Business Day.
The Fund Deposit is
applicable for purchases of Creation Units of the ETF until such time as the
next-announced Fund Deposit is made available.
The ETF reserves the right to accept a nonconforming (i.e., custom) Fund
Deposit. In addition, the composition of
the Fund Deposit may change as, among other things, corporate actions and
investment decisions by RP and/or Cohanzick are implemented for the ETFs
portfolio. All questions as to the
composition of the In-Kind Creation Basket and the validity, form, eligibility,
and acceptance for deposit of any securities shall be determined by the ETF,
and the ETFs determination shall be final and binding.
Placement
of Creation Orders Using Clearing Process
. In connection with creation orders made
through the Clearing Process, the Distributor transmits on behalf of the
Authorized Participant, such trade instructions as are necessary to effect the
creation order. Pursuant to such trade
instructions, the Authorized Participant agrees to deliver the requisite Fund
Deposit to the Trust, together with such additional information as may be
required by the Distributor. An order to
create Creation Units through the Clearing Process is deemed received by the
Distributor on the Business Day the order is placed (Transmittal Date) if (i) such
order is received by the Distributor by the Closing Time on such Transmittal
Date and (ii) all other procedures set forth in the Participant Agreement
are properly followed.
Placement
of Creation Orders Outside Clearing Process
. [When the ETF issues Creation Units partially
for Treasury securities or for cash, these orders will be outside the Clearing
Process.] Fund Deposits must be
delivered through the Federal Reserve System (for cash and government
securities) and through a DTC Participant that has executed a Participation
Agreement (for corporate securities).
Fund Deposits made outside the Clearing Process must state that the DTC
Participant is not using the Clearing Process and that the creation of Creation
Units will instead be effected through a transfer of securities and cash
directly through DTC. With respect to
such orders, the Fund Deposit transfer must be ordered by the DTC Participant
on the Transmittal Date in a timely fashion so as to ensure the delivery of the
requisite number of securities in the In-Kind Creation Basket through DTC to
the relevant Trust account by 11:00 a.m., Eastern time, (the DTC Cut-Off
Time) of the Business Day immediately following the
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Transmittal Date. The amount of cash equal to the Cash
Component must be transferred directly to the Custodian through the Federal
Reserve Bank wire transfer system in a timely manner so as to be received by
the Custodian no later than 12:00 p.m., Eastern time, on the Business Day
immediately following the Transmittal Date.
An order to create Creation
Units outside the Clearing Process is deemed received by the Distributor on the
Transmittal Date if (i) such order is received by the Distributor by the
Closing Time on such Transmittal Date and (ii) all other procedures set
forth in the Participant Agreement are properly followed. However, if the Custodian does not receive
both the required In-Kind Creation Basket by the DTC Cut-Off Time and the Cash
Component by 2:00 p.m., Eastern time on the Business Day immediately
following the Transmittal Date, such order will be canceled. Upon written notice to the Distributor, such
canceled order may be resubmitted the following Business Day using a Fund
Deposit as newly constituted to reflect the then-current In-Kind Creation
Basket and Cash Component. The delivery
of Creation Units so created will occur no later than the third
(3rd) Business Day following the day on which the order is deemed received
by the Distributor.
Creation Units may be
created in advance of receipt by the Trust of all or a portion of the
applicable In-Kind Creation Basket, provided the purchaser tenders an initial
deposit consisting of any available securities in the In-Kind Creation Basket
and cash equal to the sum of the Cash Component and 105% of the market value of
the In-Kind Creation Basket securities not delivered (Additional Cash Deposit). Such initial deposit will have a value
greater than the NAV of the Creation Unit on the date the order is placed. The order shall be deemed to be received on
the Transmittal Date provided that it is placed in proper form prior to 4:00 p.m.,
Eastern time, on such date, and federal funds in the appropriate amount are
deposited with the Custodian by the DTC Cut-Off Time the following Business
Day. If the order is not placed in
proper form by 4:00 p.m. or federal funds in the appropriate amount are
not received by the DTC Cut-Off Time the next Business Day, then the order will
be canceled or deemed unreceived and the Authorized Participant effectuating
such transaction will be liable to the ETF for any losses resulting therefrom.
To the extent securities in
the In-Kind Creation Basket remain undelivered, pending delivery of such
securities additional cash will be required to be deposited with the Trust as
necessary to maintain an Additional Cash Deposit equal to 105% of the daily
marked to market value of the missing securities. To the extent that either such securities are
still not received by 1:00 p.m., Eastern time, on the third Business Day
following the day on which the purchase order is deemed received by the
Distributor or a marked-to-market payment is not made within one Business Day
following notification to the purchaser and/or Authorized Participant that such
a payment is required, the Trust may use the cash on deposit to purchase the
missing securities, and the Authorized Participant effectuating such
transaction will be liable to the ETF for any costs incurred therein or losses
resulting therefrom, including any Transaction Fee, any amount by which the
actual purchase price of the missing securities exceeds the Additional Cash
Deposit or the market value of such securities on the day the purchase order
was deemed received by the Distributor, as well as brokerage and related
transaction costs. The Trust will return
any unused portion of the Additional Cash Deposit once all of the missing
securities have been received by the Trust.
The delivery of Creation Units so created will occur no later than the
third Business Day following the day on which the purchase order is deemed
received by the Distributor.
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Acceptance
of Orders for Creation Units
. The Trust reserves the absolute right to
reject a creation order transmitted to it by the Transfer Agent in respect of
an ETF if: (i) the order is not in proper form; (ii) the investor(s),
upon obtaining the Shares, would own 80% or more of the currently outstanding
Shares of an ETF; (iii) the securities delivered do not conform to the
In-Kind Creation Basket for the relevant date; (iv) acceptance of the
In-Kind Creation Basket would have adverse tax consequences to the ETF; (v) acceptance
of the Fund Deposit would, in the opinion of counsel, be unlawful; (vi) acceptance
of the Fund Deposit would otherwise in the discretion of the Trust or the
Manager have an adverse effect on the Trust or the rights of beneficial owners;
or (vii) in the event that circumstances that are outside the control of
the Trust, Custodian, Distributor and Manager make it practically impossible to
process creation orders. Examples of
such circumstances include acts of God, 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 Manager, the Distributor, DTC, NSCC, the Custodian
or sub-custodian or any other participant in the creation process, and similar
extraordinary events.
Redeeming Creation Units
Fund Redemptions
. ETF Shares may be redeemed only in Creation
Units at their NAV next determined after receipt of a redemption request in
proper form by an ETF through the Transfer Agent and only on a Business
Day. There can be no assurance that
there will be sufficient liquidity in Shares in the secondary market to permit
assembly of a Creation Unit. In
addition, investors may incur brokerage and other costs in connection with
assembling a Creation Unit.
The redemption proceeds for
a Creation Unit generally consist of the In-Kind Redemption Basket, which will
often be a replication of the securities in the ETFs portfolio [or a basket of
Treasury securities] and a Cash Redemption Amount, which consists of a
Balancing Amount and a Transaction Fee.
The Balancing Amount
reflects the difference, if any, between the NAV of a Creation Unit and the
market value of the securities in the In-Kind Redemption Basket. If the NAV per Creation Unit exceeds the
market value of the securities in the In-Kind Redemption Basket, the ETF pays
the Balancing Amount to the redeeming investor.
By contrast, if the NAV per Creation Unit is less than the market value
of the securities in the In-Kind Redemption Basket, the redeeming investor pays
the Balancing Amount to the ETF.
BNY Mellon, in a portfolio
composition file sent via 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 identity of the portfolio securities in the current In-Kind
Redemption Basket (subject to possible amendment or correction). The In-Kind Redemption Basket on a particular
Business Day may not be identical to the In-Kind Creation Basket for that day.
The right of redemption may
be suspended or the date of payment postponed: (i) for any period during
which the NYSE is closed (other than customary weekend and holiday closings); (ii) for
any period during which trading on the NYSE is suspended or restricted; (iii) for
any period during which an emergency exists as a result of which disposal of
the Shares or determination of
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the ETFs NAV is not
reasonably practicable; or (iv) in such other circumstances as permitted
by the SEC, including as described below.
Placement of Redemption Orders
Using Clearing Process
.
Orders to redeem Creation Units through the Clearing Process are deemed
received by the Trust on the Transmittal Date if (i) such order is
received by the Transfer Agent not later than 4:00 p.m., Eastern time, on
such Transmittal Date, and (ii) all other procedures set forth in the
Participant Agreement are properly followed.
Orders deemed received will be effectuated based on the NAV of the ETF
as next determined. An order to redeem
Creation Units using the Clearing Process made in proper form but received by
the Trust after 4:00 p.m. Eastern time, will be deemed received on the
next Business Day and will be effected at the NAV next determined on such next
Business Day. The applicable In-Kind
Redemption Basket and the Cash Redemption Amount will be transferred to the
investor by the third NSCC business day following the date on which such
request for redemption is deemed received.
Placement of Redemption Orders
Outside Clearing Process
.
Orders to redeem Creation Units must be delivered through an Authorized
Participant with the ability to transact through the Federal Reserve
System. Such orders are deemed received
by the Trust on the Transmittal Date if: (i) such order is received by the
Transfer Agent not later than 4:00 p.m., Eastern time on the Transmittal
Date; (ii) such order is accompanied or followed by the delivery of both (a) the
Creation Unit(s), which delivery must be made through DTC to the Custodian no
later than the DTC Cut-Off Time on the Business Day immediately following the
Transmittal Date and (b) the Cash Redemption Amount by 12:00 p.m.,
Eastern time on the Business Day immediately following the Transmittal Date;
and (iii) all other procedures set forth in the Participant Agreement are
properly followed. After the Trust has
deemed such an order received, the Trust will initiate procedures to transfer,
and expect to deliver, the requisite In-Kind Redemption Basket and any Cash
Redemption Amount owed to the redeeming party by the third Business Day
following the Transmittal Date on which such redemption order is deemed
received by the Trust.
In
the event that the Authorized Participant has submitted a redemption request in
proper form but is unable to transfer all or part of the Creation Units to be
redeemed to the Transfer Agent, the Distributor will nonetheless accept the
redemption request in reliance on the undertaking by the Authorized Participant
to deliver the missing Shares as soon as possible. Such undertaking shall be secured by the
Authorized Participants delivery and maintenance of collateral consisting of
cash having a value (marked-to-market daily) at least equal to 105% of the
value of the missing Shares, which the Manager may change from time to time.
The
current procedures for collateralization of missing Shares require, among other
things, that any cash collateral shall be in the form of U.S. dollars in
immediately-available funds and shall be held by the Custodian and
marked-to-market daily, and that the fees of the Custodian and any relevant
sub-custodians in respect of the delivery, maintenance and redelivery of the
cash collateral shall be payable by the Authorized Participant. The Authorized Participants agreement will
permit the Trust, on behalf of the relevant ETF, to purchase the missing Shares
at any time and will subject the Authorized Participant to liability for any
shortfall between the cost to the Trust of purchasing such Shares and the value
of the collateral.
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The calculation of the value
of the In-Kind Redemption Basket and the Cash Redemption Amount to be
delivered/received upon redemption will be made by the Custodian computed on
the Business Day on which a redemption order is deemed received by the
Trust. Therefore, if a redemption order
in proper form is submitted to the Transfer Agent by a DTC Participant or an
Authorized Participant with the ability to transact through the Federal Reserve
System, as applicable, not later than Closing Time on the Transmittal Date, and
the requisite number of Shares of the ETF are delivered to the Custodian prior
to the DTC Cut-Off-Time, then the value of the In-Kind Redemption Basket and
the Cash Redemption Amount to be delivered/received will be determined by the
Custodian on such Transmittal Date. If,
however, either: (i) the requisite number of Shares of the relevant ETF
are not delivered by the DTC Cut-Off-Time, as described above, or (ii) the
redemption order is not submitted in proper form, then the redemption order
will not be deemed received as of the Transmittal Date. In such case, the value of the In-Kind
Redemption Basket and the Cash Redemption Amount to be delivered/received will
be computed on the Business Day following the Transmittal Date provided that
the ETF Shares of the relevant ETF are delivered through DTC to the Custodian
by 11:00 a.m. the following Business Day pursuant to a properly submitted
redemption order.
[While the ETF may opt to redeem
Creation Units partially for cash, due to the nature of the portfolio, cash
redemptions may occur in other ways.] If
it is not possible to effect deliveries of the securities in the In-Kind
Redemption Basket, the Trust may in its discretion exercise its option to
redeem such ETF Shares in cash, and the redeeming beneficial owner will be
required to receive its redemption proceeds in cash. In addition, an investor may request a
redemption in cash that an ETF may, in its sole discretion, permit. In either case, the investor will receive a
cash payment equal to the NAV of its ETF Shares based on the NAV of Shares of
the relevant ETF next determined after the redemption request is received in
proper form (minus a redemption transaction fee and additional charge for
requested cash redemptions specified above, to offset the ETFs brokerage and
other transaction costs associated with the disposition of securities in the
In-Kind Redemption Basket). An ETF may
also, in its sole discretion, upon request of a shareholder, provide such
redeemer a portfolio of securities that differs from the exact composition of
the In-Kind Redemption Basket, or cash in lieu of some securities added to the
Cash Component, but in no event will the total value of the securities delivered
and the cash transmitted differ from the NAV.
Redemptions of ETF Shares for the In-Kind Redemption Basket will be
subject to compliance with applicable federal and state securities laws and the
ETF (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 securities in the In-Kind Redemption Basket upon
redemptions or could not do so without first registering the securities in the
In-Kind Redemption Basket 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
In-Kind Redemption Basket applicable to the redemption of a Creation Unit may
be paid an equivalent amount of cash.
The Authorized Participant may request the redeeming beneficial owner of
the ETF Shares to complete an order form or to enter into agreements with
respect to such matters as compensating cash payment, beneficial ownership of
shares or delivery instructions.
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DETERMINATION OF NET ASSET VALUE
The net asset value, or NAV,
of Shares is calculated each business day as of the close of regular trading on
the NYSE, generally 4:00 p.m. Eastern time. An ETFs NAV per Share is computed by
dividing the net assets by the number of Shares outstanding.
TAXATION
[The following supplements the tax information
contained in the Prospectus.
For federal income tax purposes, each ETF is treated
as a separate corporate entity and has elected and intends to continue to
qualify as a regulated investment company under Subchapter M of the Code. Such qualification generally relieves each
ETF of liability for federal income taxes to the extent its earnings are
distributed in accordance with applicable requirements. If, for any reason, an ETF does not qualify
for a taxable year for the special federal tax treatment afforded regulated
investment companies, the ETF would be subject to federal tax on all of its
taxable income at regular corporate rates, without any deduction for dividends
to shareholders. In such event, dividend
distributions would be taxable as ordinary income to shareholders to the extent
of such ETFs current and accumulated earnings and profits and would be
eligible for taxation at reduced rates through 2010 for non-corporate
shareholders and for the dividends received deduction available in some
circumstances to corporate shareholders.
Moreover, if an ETF were to fail to make sufficient distributions in a
year, the ETF would be subject to corporate income taxes and/or excise taxes in
respect of the shortfall or, if the shortfall is large enough, the ETF could be
disqualified as a regulated investment company.
A 4% non-deductible excise tax is imposed on
regulated investment companies that fail to distribute currently an amount
equal to specified percentages of their ordinary taxable income and capital
gain net income (excess of capital gains over capital losses), if any. Each ETF intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any capital
gain net income prior to the end of each calendar year to avoid liability for
this excise tax.
Dividends declared in October, November or December of
any year payable to shareholders of record on a specified date in such months
will be deemed to have been received by shareholders and paid by the ETF on December 31
of such year if such dividends are actually paid during January of the
following year.
The tax principles applicable to transactions in
financial instruments and futures contacts and options that may be engaged in
by the ETF and investments in passive foreign investment companies (PFICs)
are complex and, in some cases, uncertain.
Such transactions and investments may cause the ETF to recognize taxable
income prior to the receipt of cash, thereby requiring the ETF to liquidate
other positions or to borrow money so as to make sufficient distributions to
shareholders to avoid corporate-level tax.
Moreover, some or all of the taxable income recognized may be ordinary
income or short-term capital gain, so that the distributions may be taxable to
shareholders as ordinary income. In
addition, in the case of any shares of a PFIC in which the ETF invests, the ETF
may be liable for corporate-level tax on any ultimate gain or distributions on
the shares if the ETF fails to make an election to recognize income annually
during the period of its ownership of the PFIC shares.
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Special rules govern the federal income tax
treatment of certain transactions denominated in a currency other than the U.S.
dollar or determined by reference to the value of one or more currencies other
than the U.S. dollar. The types of
transactions covered by the special rules include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock); (2) the
accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option, or
similar financial instrument if such instrument is not marked to market. The disposition of a currency other than the
U.S. dollar by a taxpayer whose functional currency is the U.S. dollar is also
treated as a transaction subject to the special currency rules. However, foreign currency-related regulated
futures contracts and non-equity options are generally not subject to the special
currency rules if they are or would be treated as sold for their fair
market value at year-end under the marking-to-market rules applicable to
other futures contracts unless an election is made to have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
income or loss. A taxpayer may elect to
treat as capital gain or loss foreign currency gain or loss arising from
certain identified forward contracts, futures contracts, and options that are
capital assets in the hands of the taxpayer and which are not part of a
straddle. The Treasury Department issued
regulations under which certain transactions subject to the special currency rules that
are part of a Section 988 hedging transaction will be integrated and
treated as a single transaction or otherwise treated consistently for purposes
of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by
the ETF which is not subject to the special currency rules (such as
foreign equity investments other than certain preferred stocks) will be treated
as capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction.
Dividends and interest received by an ETF may give
rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and
the United States may reduce or eliminate such taxes.
The ETF will be required in certain cases to impose backup
withholding on taxable dividends or gross proceeds realized upon sale paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the ETF when required
to do so either that they are not subject to backup withholding or that they
are exempt recipients. Backup
withholding is not an additional tax and any amounts withheld may be credited
against a shareholders ultimate federal income tax liability if proper
documentation is provided.
As a result of tax requirements, the Trust on behalf
of each ETF has the right to reject an order to purchase Shares if the
purchaser (or group of purchasers) would, upon obtaining the Shares so ordered,
own 80% or more of the outstanding Shares of the ETF and if, pursuant to
section 351 of the Code, the ETF would have a basis in the transferred
securities different from the market value of such securities on the date of
deposit. The Trust also has the right to
require information necessary to determine beneficial Share ownership for
purposes of the 80% determination.
Except as described below,
dividends paid by an ETF to non-U.S. Shareholders are generally subject to
withholding tax at a 30% rate or a reduced rate specified by an applicable
income tax
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treaty to the extent derived
from investment income and short-term capital gains. In order to obtain a reduced rate of
withholding, a non-U.S. Shareholder will be required to provide an IRS Form W-8BEN
certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular
dividends paid to a non-U.S. Shareholder who provides a Form W-8ECI,
certifying that the dividends are effectively connected with the non-U.S.
Shareholders conduct of a trade or business within the United States. Instead, the effectively connected dividends
will be subject to regular U.S. income tax as if the non-U.S. Shareholder were
a U.S. Shareholder. A non-U.S.
corporation receiving effectively connected dividends may also be subject to
additional branch profits tax imposed at a rate of 30% (or lower treaty
rate). A non-U.S. Shareholder who fails
to provide an IRS Form W-8BEN or other applicable form may be subject to
backup withholding at the appropriate rate.
In general, United States
federal withholding tax will not apply to any gain or income realized by a
non-U.S. Shareholder in respect of any distributions of net long-term capital
gains over net short-term capital losses, or, through December 31, 2010,
interest-related dividends and short-term capital gain dividends, or upon the
sale or other disposition of shares of an ETF.
The foregoing discussion is based on 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
advisers concerning their specific situations and the application of state,
local and foreign taxes.]
59
Appendix A
Proxy Voting Policies and
Procedures for the Trust
GRAIL
ADVISORS ETF TRUST
Proxy
Voting Policies and Procedures
Grail
Advisors ETF Trust (the Trust) has adopted these Proxy Voting Policies and
Procedures (the Trust Policy), as set forth below, in recognition of the fact
that proxy voting is an important component of investment management and must
be performed in a dutiful and purposeful fashion in order to advance the best
interests of shareholders of the series of the Trust (Funds).
The
Funds are managed by Grail Advisors, LLC (Manager). The Manager may retain a proxy voting service
(Proxy Voting Service) to provide assistance regarding the objective review
and voting of proxies on any assets held by the Funds that invest primarily in
the securities of domestic issuers consistent with these Policies.
Shareholders
of the Funds expect the Trust to vote proxies received from issuers whose voting
securities are held by a Fund. The Trust
exercises its voting responsibilities as a fiduciary, with the goal of
maximizing the value of the Trusts and its shareholders investments. For all of the Funds, the Manager seeks to
ensure that proxies are voted in the best interests of the Trust, Fund and Fund
shareholders.
I.
Delegation
of Proxy Voting to Subadvisers
Each
of the Funds whose portfolio is managed by a sub-adviser (Sub-Adviser) shall
vote all proxies relating to securities held by the Fund and, in that
connection subject to any further policies and procedures contained herein,
shall use proxy voting policies and procedures adopted by the Sub-Adviser in
conformance with Rule 206(4)-6 under the Investment Advisers Act of 1940,
as amended (Advisers Act). For
securities in the portfolio of a Fund that is managed by more than one
Sub-Adviser, each Sub-Adviser shall make voting decisions pursuant to their own
proxy voting policies and procedures, as adopted in conformance with the
Advisers Act for their respective portions of the Funds portfolio,
except
that, to the extent such a Fund has a primary
Sub-Adviser (Primary Sub-Adviser, and with respect to each Fund a subset of
the Funds Sub-Advisers), the securities of the Fund may be voted pursuant to
the policies and procedures adopted by the Primary Sub-Adviser in conformance
with the Advisers Act or, with respect to the various Sub-Advisers portions of
the Funds portfolio, pursuant to each Sub-Advisers proxy voting policies and
procedures, as adopted in conformance with the Advisers Act.
Except
as noted below, the Trust Policy with respect to a Fund shall be the same as
that adopted by the Primary Sub-Adviser or Sub-Adviser, as applicable, with
respect to voting proxies held by its clients (the Sub-Adviser Policy). Each Sub-Adviser Policy, as it may be amended
from time to time, is hereby incorporated by reference into the Trust Policy.
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II.
Material
Conflicts of Interest
If
(i) a Sub-Adviser knows that a vote presents a material conflict between
the interests of: (a) shareholders of the Fund and (b) the Funds
investment advisers (including Sub-Advisers), principal underwriter, or any of
their affiliated persons, and (ii) the Sub-Adviser does not propose to
vote on the particular issue in the manner prescribed by its Sub-Adviser
Policy, then the Sub-Adviser will follow the material conflict of interest
procedures set forth in its Sub-Adviser Policy when voting such proxies.
If
a Sub-Adviser Policy provides that in the case of a material conflict of
interest between Fund shareholders and another party, the Sub-Adviser will ask
the Board of Trustees of the Trust (Board) to provide voting instructions,
the Sub-Adviser, in its discretion, shall vote the proxies as recommended by an
independent third party or according to its own proxy voting policy, or the
Sub-Adviser shall abstain from voting the proxies altogether.
III.
Securities
Lending Program
Certain
of the Funds may participate in a securities lending program through a lending
agent. When a Funds securities are out
on loan, they are transferred into the borrowers name and are voted by the
borrower, in its discretion. Where a
Sub-Adviser determines, however, that a proxy vote may be material to the Fund
or Trust, the Sub-Adviser should request that the Trust recall the security for
the purposes of the Sub-Adviser voting the security.
IV.
Disclosure
of Proxy Voting Policies and Procedures in the Trusts Statement of Additional
Information (SAI)
The
Trust shall include in its SAI a summary of the Trust Policy and of each
Sub-Adviser Policy. In lieu of including
a summary of policy, the Trust may include the policies in full.
V.
Disclosure
of Proxy Voting Policies and Procedures in
Annual and
Semi-Annual Shareholder Reports
The
Trust shall disclose in its annual and semi-annual shareholder reports that a
description of the Trust Policy and the Trusts proxy voting record for the
most recent 12 months ended June 30 are available on the Securities and
Exchange Commissions (SEC) website, and without charge, upon request, by
calling a specified toll-free telephone number.
The Trust will send the foregoing documents within three business days
of receipt of a request, by first-class mail or other means designed to ensure
equally prompt delivery.
VI.
Filing
of Proxy Voting Record on Form N-PX
The
Trust will annually file its complete proxy voting record with the SEC on Form N-PX. The Form N-PX shall be filed for the
twelve months ended June 30 no later than August 31 of that year.
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VII.
Manager,
Sub-Adviser and Trust CCO Responsibilities
The
Trust has delegated proxy voting authority with respect to Fund portfolio
securities to the Funds Sub-Adviser(s), as set forth above. Consistent with this delegation, each
Sub-Adviser is responsible for the following:
1)
Implementing written
policies and procedures, in compliance with Rule 206(4)-6 under the
Advisers Act, reasonably designed to ensure that the Sub-Adviser votes
portfolio securities in the best interest of shareholders of the Fund owning
the portfolio securities voted.
2)
Providing the Manager,
through a Primary Sub-Adviser, as applicable, with a quarterly certification
indicating that the Sub-Adviser did vote proxies of the Fund in a manner
consistent with the Sub-Adviser Policy.
If the Sub-Adviser voted any proxies in a manner inconsistent with the
Sub-Adviser Policy, the Sub-Adviser will promptly provide the Manager with a
report detailing the exceptions prior to the end of the quarter in which the
exceptions occurred.
3)
Providing the Manager,
through a Primary Sub-Adviser, as applicable, with a copy and description of
the Sub-Adviser Policy prior to being approved by the Board as a Sub-Adviser
for the Fund, accompanied by a certification that represents that the
Sub-Adviser Policy has been adopted in conformity with Rule 206(4)-6 under
the Advisers Act. Thereafter, providing
the Manager with notice of any amendment or revision to the Sub-Adviser Policy
or with a description thereof.
4)
The Manager is required to
report all material changes to a Sub-Adviser Policy quarterly to the Board.
5)
The annual written
compliance report of the Trusts Chief Compliance Officer (CCO) to the Board
will contain a summary of the material changes to each Sub-Adviser Policy
during the period covered by the report.
VIII.
Review
Responsibilities
The
Trust may retain a proxy voting service (Proxy Voting Service) to coordinate,
collect, and maintain all proxy-related information, and to prepare and file
the Trusts reports on Form N-PX with the SEC.
The
Manager or, where applicable, a Primary Sub-Adviser will review the Funds
voting records maintained by the Proxy Voting Service in accordance with the
following procedures:
1)
Receive a file with the
proxy voting information directly from the Sub-Adviser, as applicable, on a
quarterly basis.
2)
Select a sample of proxy
votes from the files submitted and examine them against the Proxy Voting
Service files for accuracy of the votes.
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To
the extent that a Primary Sub-Adviser takes responsibility for reviewing a Funds
voting records pursuant to this paragraph, the Primary Sub-Adviser will report
the results of its review to the Manager.
The Trust will deliver instructions to shareholders on how to access
proxy voting information in the Trusts semi-annual and annual shareholder
reports.
IX.
Proxy
Voting Service Responsibilities
Aggregation of Votes:
The Proxy Voting Services
proxy disclosure system will collect Fund-specific voting records, including
votes cast by multiple Sub-Advisers or third party voting services.
Reporting:
The Proxy Voting Services
proxy disclosure system will provide the following reporting features:
1)
multiple report
export options;
2)
report
customization by Fund, account, portfolio manager, security, etc.; and
3)
account details
available for vote auditing.
X.
Form N-PX
Preparation and Filing
Fund
Administrator will be responsible for oversight and completion of the filing of
the Trusts reports on Form N-PX with the SEC. The Proxy Voting Service will prepare the
EDGAR version of Form N-PX and will submit it to Fund Administrator for
review and approval prior to filing with the SEC; the Fund Administrator in
turn will submit it to the Trust for review and approval prior to filing with
the SEC. Upon the approval of the Trust
and Fund Administrator, the Proxy Voting Service will file Form N-PX for
each twelve-month period ended June 30.
The filing for each year will be made with the SEC on or before August 31
of that year.
XI.
Recordkeeping
Records
of all votes will be maintained by Proxy Voting Service. Documentation of all votes for the Trust will
be maintained by the Manager and/or the Proxy Voting Service. Such
documentation will include the recommendations of the Sub-Advisers along with
pertinent supporting comments and letters, the Trust Policy, any additional information
gathered by the Manager, minutes from any meeting at which the Board considered
a proxy voting matter, the conclusion of the Board and the Trusts final vote.
Adopted:
March 18, 2009
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Appendix B
Proxy Voting Policies and
Procedures for Cohanzick
I.
PROXY VOTING
A.
General Proxy Voting Policies
(1)
Cohanzick understands and appreciates the importance of proxy voting.
Cohanzick will endeavor to actively vote proxies.
(2)
To the extent that Cohanzick has discretion to vote the proxies of its
Advisory Clients, Cohanzick will vote any such proxies in the best interests of
Advisory Clients and Investors (as applicable) and in accordance with the
procedures outlined below (as applicable).
B.
Proxy Voting Procedures
(1)
All proxies sent to Advisory Clients that are actually received by
Cohanzick (to vote on behalf of the Advisory Clients) will be provided to the
Chief Compliance Officer and/or Portfolio Manager.
(2)
The Chief Compliance Officer and/or Portfolio Manager will generally
adhere to the following procedures (subject to limited exception):
(a)
A written or electronic record of each voted proxy by Cohanzick (on
behalf of its Advisory Clients) will be kept in Cohanzicks files;
(b)
The Chief Compliance Officer and/or Portfolio Manager will determine
which of Cohanzicks Advisory Clients hold the security to which the proxy
relates;
(c)
The Portfolio Manager will review the proxy and determine how to vote
the proxy in question in accordance with the guidelines set forth in
Section D below
.
(d)
Prior to voting any proxies, the Portfolio Manager and/or Chief
Compliance Officer will determine if there are any conflicts of interest
related to the proxy in question in accordance with the general guidelines in
Section C below
. If a conflict
is identified, the Chief Compliance Officer will make a determination (which
may be in consultation with outside legal counsel) as to whether the conflict
is material or not.
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(i)
If no material conflict is identified pursuant to these procedures,
the Portfolio Manager will make a decision on how to vote the proxy in question
in accordance with the guidelines set forth in
Section D below
.
(e)
Although not presently intended to be used on a regular basis,
Cohanzick is empowered to retain an independent third party to vote proxies in
certain situations (including situations where a material conflict of interest
is identified).
C.
Handling of Conflicts of Interest
(1)
As stated above, in evaluating how to vote a proxy, the Portfolio
Manager and/or the Chief Compliance Officer will first determine whether there
is a conflict of interest related to the proxy in question between Cohanzick
and its Advisory Clients. This examination will include (but will not be
limited to) an evaluation of whether Cohanzick (or any affiliate of Cohanzick)
has any relationship with the company (or an affiliate of the company) to which
the proxy relates outside an investment in such company by an Advisory Client
of Cohanzick.
(2)
If a conflict is identified and deemed material by the Portfolio
Manager and/or the Chief Compliance Officer, Cohanzick will determine whether
voting in accordance with the proxy voting guidelines outlined in
Section D below
is in the best
interests of affected Advisory Clients (which may include utilizing an
independent third party to vote such proxies).
(3)
With respect to material conflicts, Cohanzick will determine whether
it is appropriate to disclose the conflict to affected Advisory Clients and
Investors and give Investors the opportunity to vote the proxies in question
themselves except that if the Advisory Client is subject to the requirements of
the Employee Retirement Income Security Act of 1974, as amended (ERISA), and
the investment management agreement between Cohanzick and the ERISA Advisory
Client reserves the right to vote proxies when Cohanzick has determined that a
material conflict exists that does affect its best judgment as a fiduciary to
the ERISA Advisory Client, Cohanzick will:
(a)
Give the ERISA Advisory Client the opportunity to vote the proxies in
question themselves; or
(b)
Follow designated special proxy voting procedures related to voting
proxies pursuant to the terms of the investment management agreement with such
ERISA Advisory Clients (if any).
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D.
Voting Guidelines
In the absence of
specific voting guidelines mandated by a particular Advisory Client, Cohanzick
will endeavor to vote proxies in the best interests of each Advisory Client.
In some foreign
markets where proxy voting demands fee payment for agent services, Cohanzick
will balance the cost and benefit of proxy voting and may give up the proxy
voting if the cost associated is greater than the benefits from voting.
(1)
Although voting certain proxies may be subject to the discretion of
Cohanzick, Cohanzick is of the view that voting proxies in accordance with the
following general guidelines is in the best interests of its Advisory Clients:
(a)
Cohanzick will generally vote in favor of routine corporate
housekeeping proposals including, but not limited to, the following:
(i)
election of directors (where there are no related corporate governance
issues);
(ii)
selection or reappointment of auditors; or
(iii)
increasing or reclassification of common stock.
E.
Disclosure of Procedures
Employees should note that a brief summary of
these proxy voting procedures will be included in Cohanzicks Form ADV Part II
and will be updated whenever these policies and procedures are updated. Through
the Brochure, Advisory Clients and Investors will also be provided with contact
information as to how such Advisory Clients and Investors can obtain information
about: (a) the details of Cohanzicks proxy voting procedures (i.e., a
copy of these procedures); and (b) how Cohanzick has voted proxies that
are relevant to the affected Advisory Client or Investor.
F.
Record-keeping Requirements
The Chief Compliance Officer will be
responsible for maintaining files relating to Cohanzicks proxy voting
procedures. Records will be maintained and preserved for five years from
the end of the fiscal year during which the last entry was made on a record,
with records for the first two years kept in the offices of Cohanzick.
Records of the following will be included in the files:
(1)
Copies of these proxy voting policies and procedures, and any
amendments thereto;
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(2)
A copy of each proxy statement that Cohanzick actually receives;
provided, however, that Cohanzick may rely on obtaining on an as needed basis a
copy of proxy statements from the SECs EDGAR system or other generally
accepted sources for those proxy statements that are so available. As a general
rule Cohanzick relies on the SECs EDGAR system, or systems provided by
Custodians, or other generally accepted sources.
(3)
A record of each vote that Cohanzick casts;
(4)
A copy of any document that Cohanzick created that was material to
making a decision how to vote the proxies, or memorializes that decision (if
any); and
(5)
A copy of each written request for information on how Cohanzick voted
such Advisory Clients proxies and a copy of any written response to any
request for information on how Cohanzick voted proxies on behalf of Advisory
Clients
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Appendix C
Description
Of Securities Ratings
A.
|
Long-Term Ratings
|
|
|
1.
|
Moodys Investors Service Long-Term Corporate Obligation
Ratings
Moodys
long-term obligation ratings are opinions of the relative credit risk of
fixed-income obligations with an original maturity of one year or more. They
address the possibility that a financial obligation will not be honored as
promised. Such ratings use Moodys Global Scale and reflect both the
likelihood of default and any financial loss suffered in the event of
default.
|
|
|
Aaa
|
Obligations
rated Aaa are judged to be of the highest quality, with minimal credit risk.
|
|
|
Aa
|
Obligations
rated Aa are judged to be of high quality and are subject to very low credit
risk.
|
|
|
A
|
Obligations
rated A are considered upper-medium grade and are subject to low credit risk.
|
|
|
Baa
|
Obligations
rated Baa are subject to moderate credit risk. They are considered medium
grade and as such may possess certain speculative characteristics.
|
|
|
Ba
|
Obligations
rated Ba are judged to have speculative elements and are subject to
substantial credit risk.
|
|
|
B
|
Obligations
rated B are considered speculative and are subject to high credit risk.
|
|
|
Caa
|
Obligations
rated Caa are judged to be of poor standing and are subject to very high
credit risk.
|
|
|
Ca
|
Obligations
rated Ca are highly speculative and are likely in, or very near, default,
with some prospect of recovery of principal and interest.
|
|
|
C
|
Obligations
rated C are the lowest rated class of bonds and are typically in default,
with little prospect for recovery of principal or interest.
|
|
|
Note
|
Moodys
appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
|
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2.
|
Standard and Poors Long-Term Issue Credit Ratings
(including Preferred Stock)
|
|
|
|
Issue
credit ratings are based, in varying degrees, on the following
considerations:
·
Likelihood of
paymentcapacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the obligation;
·
Nature of and provisions of the
obligation;
·
Protection afforded by, and relative
position of, the obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws affecting
creditors rights.
|
|
|
|
Issue
ratings are an assessment of default risk, but may incorporate an assessment
of relative seniority or ultimate recovery in the event of default. Junior
obligations are typically rated lower than senior obligations, to reflect the
lower priority in bankruptcy, as noted above. (Such differentiation may apply
when an entity has both senior and subordinated obligations, secured and
unsecured obligations, or operating company and holding company obligations.)
|
|
|
AAA
|
An
obligation rated AAA has the highest rating assigned by Standard &
Poors. The obligors capacity to meet its financial commitment on the
obligation is extremely strong.
|
|
|
AA
|
An
obligation rated AA differs from the highest-rated obligations only to a
small degree. The obligors capacity to meet its financial commitment on the
obligation is very strong.
|
|
|
A
|
An
obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligors capacity to meet its
financial commitment on the obligation is still strong.
|
|
|
BBB
|
An
obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
|
|
|
Note
|
Obligations
rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
|
|
|
BB
|
An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligors
inadequate capacity to meet its financial commitment on the obligation.
|
|
|
B
|
An
obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation.
|
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|
Adverse
business, financial, or economic conditions will likely impair the obligors
capacity or willingness to meet its financial commitment on the obligation.
|
|
|
CCC
|
An
obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
|
|
|
CC
|
An
obligation rated CC is currently highly vulnerable to nonpayment.
|
|
|
C
|
A
C rating is assigned to obligations that are currently highly vulnerable to
nonpayment, obligations that have payment arrearages allowed by the terms of
the documents, or obligations of an issuer that is the subject of a
bankruptcy petition or similar action which have not experienced a payment
default. Among others, the C rating may be assigned to subordinated debt,
preferred stock or other obligations on which cash payments have been
suspended in accordance with the instruments terms.
|
|
|
D
|
An
obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poors
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
|
|
|
Note
|
Plus
(+) or minus (-). The ratings from AA to CCC may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within the
major rating categories.
|
|
|
NR
|
This
indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poors
does not rate a particular obligation as a matter of policy.
|
|
|
3.
|
Fitch International Long-Term Credit Ratings
International
Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings.
When assigned to most issuers, it is used as a benchmark measure of
probability of default and is formally described as an Issuer Default Rating
(IDR). The major exception is within Public Finance, where IDRs will not be
assigned as market convention has always focused on timeliness and does not
draw analytical distinctions between issuers and their underlying
obligations. When applied to issues or securities, the LTCR may be higher or
lower than the issuer rating (IDR) to reflect relative differences in
recovery expectations.
|
|
|
|
The
following rating scale applies to foreign currency and local currency
ratings:
|
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|
Investment Grade
|
|
|
AAA
|
Highest
credit quality. AAA ratings denote the lowest expectation of credit risk.
They are assigned only in case of exceptionally strong capacity for payment
of financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
|
|
|
AA
|
Very
high credit quality. AA ratings denote expectations of very low credit
risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
|
|
|
A
|
High
credit quality. A ratings denote expectations of low credit risk. The
capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or
in economic conditions than is the case for higher ratings.
|
|
|
BBB
|
Good
credit quality. BBB ratings indicate that there are currently expectations
of low credit risk. The capacity for payment of financial commitments is
considered adequate but adverse changes in circumstances and economic
conditions are more likely to impair this capacity. This is the
lowest investment grade category.
|
|
|
|
Speculative Grade
|
|
|
BB
|
Speculative.
BB ratings indicate that there is a possibility of credit risk developing,
particularly as the result of adverse economic change over time; however,
business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
|
|
|
B
|
Highly
speculative. B ratings indicate that significant credit risk is present,
but a limited margin of safety remains. Financial commitments are currently
being met; however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
|
|
|
CCC
|
Default
is a real possibility. Capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic conditions.
|
|
|
CC
|
Default
of some kind appears probable.
|
|
|
C
|
Default
is imminent.
|
|
|
RD
|
Indicates
an entity that has failed to make due payments (within the applicable grace
period) on some but not all material financial obligations, but continues to
honor other classes of obligations.
|
|
|
D
|
Indicates
an entity or sovereign that has defaulted on all of its financial
obligations. Default generally is defined as one of the following:
|
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|
·
Failure of an
obligor to make timely payment of principal and/or interest under the
contractual terms of any financial obligation;
·
The
bankruptcy filings, administration, receivership, liquidation or other
winding-up or cessation of business of an obligor;
·
The
distressed or other coercive exchange of an obligation, where creditors were
offered securities with diminished structural or economic terms compared with
the existing obligation.
Default
ratings are not assigned prospectively; within this context, non-payment on
an instrument that contains a deferral feature or grace period will not be
considered a default until after the expiration of the deferral or grace
period.
Issuers
will be rated D upon a default. Defaulted and distressed obligations
typically are rated along the continuum of C to B ratings categories,
depending upon their recovery prospects and other relevant characteristics.
Additionally, in structured finance transactions, where analysis indicates
that an instrument is irrevocably impaired such that it is not expected to
meet pay interest and/or principal in full in accordance with the terms of
the obligations documentation during the life of the transaction, but where
no payment default in accordance with the terms of the documentation is
imminent, the obligation may be rated in the B or CCC-C categories.
Default
is determined by reference to the terms of the obligations documentation.
Fitch will assign default ratings where it has reasonably determined that
payment has not been made on a material obligation in accordance with the
requirements of the obligations documentation, or where it believes that
default ratings consistent with Fitchs published definition of default are
the most appropriate ratings to assign.
|
|
|
Note
|
The
modifiers + or - may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the AAA Long-term
rating category, to categories below CCC, or to Short-term ratings other
than F1. (The +/- modifiers are only used to denote issues within the CCC
category, whereas issuers are only rated CCC without the use of modifiers.)
|
|
|
B.
|
Preferred Stock Ratings
|
|
|
1.
|
Moodys Investors Service
|
|
|
aaa
|
An
issue which is rated aaa is considered to be a top-quality preferred stock.
This rating indicates good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.
|
|
|
aa
|
An
issue which is rated aa is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well-maintained in the foreseeable future.
|
C-5
Table of Contents
a
|
An
issue which is rated a is considered to be an upper-medium grade preferred
stock. While risks are judged to be somewhat greater than in the aaa and
aa classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
|
|
|
baa
|
An
issue which is rated baa is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
|
|
|
ba
|
An
issue which is rated ba is considered to have speculative elements and its
future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty
of position characterizes preferred stocks in this class.
|
|
|
b
|
An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of
the issue over any long period of time may be small.
|
|
|
caa
|
An
issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
|
|
|
ca
|
An
issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payments.
|
|
|
c
|
This
is the lowest rated class of preferred or preference stock. Issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
|
|
|
Note
|
Moodys
applies numerical modifiers 1, 2, and 3 in each rating classification; The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
|
|
|
C.
|
Short Term Ratings
|
|
|
1.
|
Moodys Investors Service
|
|
|
|
Moodys
short-term ratings are opinions of the ability of issuers to honor short-term
financial obligations. Ratings may be assigned to issuers, short-term
programs or to individual short-term debt instruments. Such obligations
generally have an original maturity not exceeding thirteen months, unless
explicitly noted.
|
C-6
Table of Contents
|
Moodys
employs the following designations to indicate the relative repayment ability
of rated issuers:
|
|
|
P-1
|
Issuers
(or supporting institutions) rated Prime-1 have a superior ability to repay
short-term debt obligations.
|
|
|
P-2
|
Issuers
(or supporting institutions) rated Prime-2 have a strong ability to repay
short-term debt obligations.
|
|
|
P-3
|
Issuers
(or supporting institutions) rated Prime-3 have an acceptable ability to
repay short-term obligations.
|
|
|
NP
|
Issuers
(or supporting institutions) rated Not Prime do not fall within any of the
Prime rating categories.
|
|
|
Note
|
Canadian
issuers rated P-1 or P-2 have their short-term
ratings enhanced by the senior-most long-term rating of the issuer, its
guarantor or support-provider.
|
|
|
2.
|
Standard and Poors
|
|
|
A-1
|
A
short-term obligation rated A-1 is rated in the highest category by
Standard & Poors. The obligors capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligors capacity to meet its financial commitment on these obligations is
extremely strong.
|
|
|
A-2
|
A
short-term obligation rated A-2 is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
in higher rating categories. However, the obligors capacity to meet its
financial commitment on the obligation is satisfactory.
|
|
|
A-3
|
A
short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
|
|
|
B
|
A
short-term obligation rated B is regarded as having significant speculative
characteristics. Ratings of B-1, B-2, and B-3 may be assigned to
indicate finer distinctions within the B category. The obligor currently
has the capacity to meet its financial commitment on the obligation; however,
it faces major ongoing uncertainties which could lead to the obligors
inadequate capacity to meet its financial commitment on the obligation.
|
|
|
B-1
|
A
short-term obligation rated B-1 is regarded as having significant
speculative characteristics, but the obligor has a relatively stronger capacity
to meet its financial commitments over the short-term compared to other
speculative-grade obligors.
|
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Table of Contents
B-2
|
A
short-term obligation rated B-2 is regarded as having significant
speculative characteristics, and the obligor has an average speculative-grade
capacity to meet its financial commitments over the short-term compared to
other speculative-grade obligors.
|
|
|
B-3
|
A
short-term obligation rated B-3 is regarded as having significant
speculative characteristics, and the obligor has a relatively weaker capacity
to meet its financial commitments over the short-term compared to other
speculative-grade obligors.
|
|
|
C
|
A
short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
|
|
|
D
|
A
short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless
Standard & Poors believes that such payments will be made during
such grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
|
|
|
Note
|
Dual
Ratings. Standard & Poors assigns dual ratings to all debt issues
that have a put option or demand feature as part of their structure. The
first rating addresses the likelihood of repayment of principal and interest
as due, and the second rating addresses only the demand feature. The
long-term rating symbols are used for bonds to denote the long-term maturity
and the short-term rating symbols for the put option (for example,
AAA/A-1+). With U.S. municipal short-term demand debt, note rating symbols
are used with the short-term issue credit rating symbols (for example, SP-1+/A-1+).
|
|
|
3.
|
Fitch
The
following ratings scale applies to foreign currency and local currency
ratings. A Short-term rating has a time horizon of less than 13 months for
most obligations, or up to three years for US public finance, in line with
industry standards, to reflect unique risk characteristics of bond, tax, and
revenue anticipation notes that are commonly issued with terms up to three
years. Short-term ratings thus place greater emphasis on the liquidity
necessary to meet financial commitments in a timely manner.
|
|
|
F1
|
Highest
credit quality. Indicates the strongest capacity for timely payment of
financial commitments; may have an added + to denote any exceptionally
strong credit feature.
|
|
|
F2
|
Good
credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
|
|
|
F3
|
Fair
credit quality. The capacity for timely payment of financial commitments is
adequate; however, near term adverse changes could result in a reduction to
non investment grade.
|
|
|
B
|
Speculative.
Minimal capacity for timely payment of financial commitments, plus
|
C-8
Table of Contents
|
vulnerability
to near term adverse changes in financial and economic conditions.
|
|
|
C
|
High
default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and
economic environment.
|
|
|
D
|
Indicates
an entity or sovereign that has defaulted on all of its financial
obligations.
|
|
|
Note
|
The
modifiers + or - may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the AAA
Long-term rating category, to categories below CCC, or to Short-term
ratings other than F1. (The +/- modifiers are only used to denote issues
within the CCC category, whereas issuers are only rated CCC without the use
of modifiers.)
|
C-9
Table of Contents
PART C
OTHER
INFORMATION
Item 28. Exhibits
(a)
(1)
Certificate of Trust dated December 7, 2007 is
incorporated by reference from Registrants initial registration statement
filed on December 14, 2007
(2)
Certificate of Amendment to Certificate
of Trust dated March 25, 2008 is incorporated by reference from
Pre-Effective Amendment No. 2 to Registrants registration statement filed
on April 8, 2009
(3)
Certificate of Amendment to Certificate
of Trust dated January 12, 2009 is incorporated by reference from
Pre-Effective Amendment No. 2 to Registrants registration statement filed
on April 8, 2009
(4)
Trust Instrument is incorporated by
reference from Pre-Effective Amendment No. 2 to Registrants registration
statement filed on April 8, 2009
(b)
By-laws of Registrant is incorporated by
reference from Pre-Effective Amendment No. 2 to Registrants registration
statement filed on April 8, 2009
(c)
Not applicable
(d)
(1)
Form of Investment Management Agreement between
Registrant and Grail Advisors, LLC with respect to the Large Cap Value ETF and
International Equity ETF is incorporated by reference from Pre-Effective
Amendment No. 3 to Registrants registration statement filed on April 29,
2009
(2)
Form of Primary Investment
Sub-Advisory Agreement between Grail Advisors, LLC and American Beacon Advisors, Inc.
with respect to the Large Cap Value ETF and International Equity ETF is
incorporated by reference from Pre-Effective Amendment No. 3 to Registrants
registration statement filed on April 29, 2009
(3)
Form of Investment Sub-Advisory
Agreement by and among Grail Advisors, LLC, American Beacon Advisors, Inc.
and Brandywine Global Investment Management, LLC with respect to the Large Cap
Value ETF is incorporated by reference from Pre-Effective Amendment No. 3
to Registrants registration statement filed on April 29, 2009
(4)
Form of Investment Sub-Advisory
Agreement by and among Grail Advisors, LLC, American Beacon Advisors, Inc.
and Hotchkis and Wiley Capital Management, LLC with respect to the Large Cap
Value ETF is incorporated by reference from Pre-Effective Amendment No. 3
to Registrants registration statement filed on April 29, 2009
(5)
Form of Investment Sub-Advisory
Agreement by and among Grail Advisors, LLC, American Beacon Advisors, Inc.
and Metropolitan West Capital Management, LLC with respect to the Large Cap
Value ETF is incorporated by reference from Pre-Effective Amendment No. 3
to Registrants registration statement filed on April 29, 2009
(6)
Form of Investment Sub-Advisory
Agreement by and among Grail Advisors, LLC, American Beacon Advisors, Inc.
and Lazard Asset Management LLC with respect to the International Equity ETF is
incorporated by reference from Pre-Effective Amendment No. 3 to Registrants
registration statement filed on April 29, 2009
(7)
Form of Investment Sub-Advisory
Agreement by and among Grail Advisors, LLC, American Beacon Advisors, Inc.
and Templeton Investment Counsel, LLC with respect to the International Equity
ETF is incorporated by reference from Pre-Effective Amendment No. 3 to
Registrants registration statement filed on April 29, 2009
(8)
Form of Investment Sub-Advisory
Agreement by and among Grail Advisors, LLC, American Beacon Advisors, Inc.
and The Boston Company Asset Management with respect to the International
Equity ETF is incorporated by reference from Pre-Effective Amendment No. 3
to Registrants registration statement filed on April 29, 2009
(9)
Form of Investment Management
Agreement between Registrant and Grail Advisors, LLC with respect to the RP
Growth ETF, RP Focused Large Cap Growth ETF, RP Technology ETF and RP
Financials ETF is incorporated by reference from Post-Effective Amendment No. 2
to Registrants registration statement filed on August 28, 2009
Table of Contents
(10)
Form of Primary Investment
Sub-Advisory Agreement between Grail Advisors, LLC and RiverPark Advisors, LLC
with respect to the RP Focused Large Cap Growth ETF is incorporated by
reference from Post-Effective Amendment No. 2 to Registrants registration
statement filed on August 28, 2009
(11)
Form of Investment Sub-Advisory
Agreement between Grail Advisors, LLC and RiverPark Advisors, LLC with respect
to the RP Growth ETF, RP Technology ETF and RP Financials ETF is incorporated
by reference from Post-Effective Amendment No. 2 to Registrants
registration statement filed on August 28, 2009
(12)
Form of Investment Sub-Advisory
Agreement by and among Grail Advisors, LLC, RiverPark Advisors, LLC and
Wedgewood Partners, Inc. with respect to the RP Focused Large Cap Growth
ETF is incorporated by reference from Post-Effective Amendment No. 2 to
Registrants registration statement filed on August 28, 2009
(13)
Form of Investment Management
Agreement between Registrant and Grail Advisors, LLC with respect to the RP
Short Duration ETF, Grail McDonnell Intermediate Municipal Bond ETF and Grail
McDonnell Core Taxable Bond ETF*
(14)
Form of Investment Sub-Advisory
Agreement between Grail Advisors, LLC and McDonnell Investment Management, LLC
with respect to the Grail McDonnell Intermediate Municipal Bond ETF and Grail
McDonnell Core Taxable Bond ETF*
(15)
Form of Primary Investment
Sub-Advisory Agreement between Grail Advisors, LLC and RiverPark Advisors, LLC
with respect to the RP Short Duration ETF*
(16)
Form of Investment Sub-Advisory
Agreement by and among Grail Advisors, LLC, RiverPark Advisors, LLC and
Cohanzick Management, LLC with respect to the RP Short Duration ETF*
(e)
(1)
Form of Distribution Agreement between Registrant
and ALPS Distributors, Inc. is incorporated by reference from
Pre-Effective Amendment No. 2 to Registrants registration statement filed
on April 8, 2009
(2)
Form of Amendment No. 1 to
Distribution Agreement between Registrant and ALPS Distributors, Inc. is
incorporated by reference from Post-Effective Amendment No. 3 to
Registrants registration statement filed on October 5, 2009
(3)
Form of Amendment No. 2 to
Distribution Agreement between Registrant and ALPS Distributors, Inc. *
(f)
Not applicable
(g)
(1)
Form of Custody Agreement between Registrant and
The Bank of New York Mellon Corporation is incorporated by reference from
Pre-Effective Amendment No. 2 to Registrants registration statement filed
on April 8, 2009
(2)
Form of Amended and Restated
Schedule II to the Custody Agreement adding RP Growth ETF, RP Focused Large Cap
Growth ETF, RP Technology ETF and RP Financials ETF #
(3)
Form of Amended and Restated
Schedule II to the Custody Agreement*
(h)
(1)
Form of Fund Administration and Accounting
Agreement between Registrant and The Bank of New York Mellon Corporation is
incorporated by reference from Pre-Effective Amendment No. 2 to Registrants
registration statement filed on April 8, 2009
(2)
Form of Transfer Agency and Service
Agreement between Registrant and The Bank of New York Mellon Corporation is
incorporated by reference from Pre-Effective Amendment No. 2 to Registrants
registration statement filed on April 8, 2009
(3)
Fee Schedule for Custody, Accounting,
Administration and Transfer Agency Agreements is incorporated by reference from
Pre-Effective Amendment No. 2 to Registrants registration statement filed
on April 8, 2009
(4)
Form of Participant Agreement is
incorporated by reference from Pre-Effective Amendment No. 2 to Registrants
registration statement filed on April 8, 2009
(5)
Expense Limit Agreement for Large Cap
Growth ETF and International Equity ETF is incorporated by reference from
Pre-Effective Amendment No. 2 to Registrants registration statement filed
on April 8, 2009
2
Table of Contents
(6)
Expense Limit Agreement for RP Growth
ETF, RP Focused Large Cap Growth ETF, RP Technology ETF and RP Financials ETF
is incorporated by reference from Post-Effective Amendment No. 2 to
Registrants registration statement filed on August 28, 2009
(7)
Form of Amendment to Fund
Administration and Accounting Agreement adding RP Growth ETF, RP Focused Large
Cap Growth ETF, RP Technology ETF and RP Financials ETF #
(8)
Form of Amended and Restated
Appendix 1 to the Transfer Agency and Service Agreement adding RP Growth ETF,
RP Focused Large Cap Growth ETF, RP Technology ETF and RP Financials ETF#
(9)
Expense Limit Agreement for RP Short
Duration ETF, Grail McDonnell Intermediate Municipal Bond ETF and Grail
McDonnell Core Taxable Bond ETF*
(10)
Form of Amendment to Fund
Administration and Accounting Agreement*
(11)
Form of Amended and Restated
Appendix 1 to the Transfer Agency and Service Agreement*
(i)
Opinion and consent of K&L Gates LLP*
(j)
Consent of Independent Registered Public
Accounting Firm not applicable
(k)
Not applicable
(l)
Form of Initial Capital Agreement is
incorporated by reference from Pre-Effective Amendment No. 3 to Registrants
registration statement filed on April 29, 2009
(m)
Form of Distribution and Service
Plan is incorporated by reference from Pre-Effective Amendment No. 2 to
Registrants registration statement filed on April 8, 2009
(n)
Not applicable
(o)
Not applicable
(p)
(1)
Amended Code of Ethics of Registrant is incorporated
by reference from Post-Effective Amendment No. 2 to Registrants
registration statement filed on August 28, 2009
(2)
Code of Ethics of Grail Advisors, LLC is
incorporated by reference from Pre-Effective Amendment No. 2 to Registrants
registration statement filed on April 8, 2009
(3)
Code of Ethics of American Beacon
Advisors, Inc. is incorporated by reference from Pre-Effective Amendment No. 2
to Registrants registration statement filed on April 8, 2009
(4)
Code of Ethics of Distributor is
incorporated by reference from Pre-Effective Amendment No. 2 to Registrants
registration statement filed on April 8, 2009
(5)
Code of Ethics of Brandywine Global
Investment Management, LLC is incorporated by reference from Pre-Effective
Amendment No. 2 to Registrants registration statement filed on April 8,
2009
(6)
Code of Ethics of Hotchkis and Wiley
Capital Management, LLC is incorporated by reference from Pre-Effective
Amendment No. 2 to Registrants registration statement filed on April 8,
2009
(7)
Code of Ethics of Metropolitan West
Capital Management, LLC is incorporated by reference from Pre-Effective
Amendment No. 2 to Registrants registration statement filed on April 8,
2009
(8)
Code of Ethics of Lazard Asset Management
LLC is incorporated by reference from Pre-Effective Amendment No. 2 to
Registrants registration statement filed on April 8, 2009
(9)
Code of Ethics of Templeton Investment
Counsel, LLC is incorporated by reference from Pre-Effective Amendment No. 2
to Registrants registration statement filed on April 8, 2009
(10)
Code of Ethics of The Boston Company
Asset Management, LLC is incorporated by reference from Pre-Effective Amendment
No. 2 to Registrants registration statement filed on April 8, 2009
(11)
Code of Ethics of RiverPark Advisors, LLC
is incorporated by reference from Post-Effective Amendment No. 2 to
Registrants registration statement filed on August 28, 2009
(12)
Code of Ethics of Wedgewood Partners, Inc.
is incorporated by reference from Post-Effective Amendment No. 2 to
Registrants registration statement filed on August 28, 2009
(13)
Code of Ethics of McDonnell Investment
Management, LLC*
(14)
Code of Ethics of Cohanzick Management,
LLC*
3
Table of Contents
#
Filed herewith.
* To
be filed by amendment.
Item 29. Persons Controlled by or Under Common Control
with the Fund
None.
Item
30. Indemnification
Article IX of the
Registrants Trust Instrument provides for indemnification of certain persons
acting on behalf of the Registrant. Article IX,
Section 2 provides as follows:
(a) Subject to the exceptions and limitations contained in subsection (b) below:
(i)
every person who is, or has been, a
Trustee or an officer, employee or agent of the Trust, including persons who
act at the request of the Trust as directors, trustees, officers, employees or
agents of another organization in which the Trust has an interest as a
shareholder, creditor or otherwise (Covered Person) shall be indemnified by
the Trust or the appropriate Series to the fullest extent permitted by law
against liability and against all expenses reasonably incurred or paid by him
or her in connection with any claim, action, suit or proceeding in which he or
she becomes involved as a party or otherwise by virtue of his or her being or
having been a Covered Person
and against amounts paid or incurred by him or her in the settlement thereof.
(ii)
as used herein, the words claim, action,
suit or proceeding shall apply to all claims, actions, suits or proceedings
(whether civil, criminal or administrative proceedings, regulatory
investigations, or other proceedings, including appeals), actual or threatened,
and the words liability and expenses
shall include, without limitation, counsel fees, costs, judgments, amounts paid
in settlement, fines, penalties and other liabilities.
(b)
No indemnification shall be provided
hereunder to a Covered Person:
(i)
who shall have been adjudicated by a
court or body before which the proceeding was brought (A) to be liable to
the Trust or its Shareholders by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office or (B) not to have
acted in good faith in the reasonable belief that his or her action was in the
best interest of the Trust; or
(ii)
in the event of a settlement, if there
has been a determination that such Covered Person engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office:
(A) by the court or other body approving the settlement; (B) by
at least a majority of those Trustees who are neither Interested Persons of the
Trust nor are parties to the matter based upon a review of readily available
facts (as opposed to a full trial-type inquiry); or (C) by written opinion
of independent legal counsel based upon a review of readily available facts (as
opposed to a full trial-type inquiry).
(c)
The rights of indemnification herein
provided may be insured against by policies maintained by the Trust, shall be
severable, shall not be exclusive of or affect any other rights to which any
Covered Person may now or hereafter be entitled and shall inure to the benefit
of the heirs, executors and administrators of a Covered Person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel other than Covered Persons
may be entitled by contract or otherwise under law.
(d)
To the maximum extent permitted by
applicable law, expenses in connection with the preparation and presentation of
a defense to any claim, action, suit or proceeding of the character described
in subsection (a) of this Section shall be paid by the Trust or
applicable Series from time to time prior to final disposition thereof
upon receipt of an undertaking by or on behalf of such Covered Person that such
amount will be paid over by him or her to the Trust or applicable Series if
it is ultimately determined that he or she is not entitled to indemnification
under this Section.
(e)
Any repeal or modification of this Article IX
by the Shareholders, or adoption or modification of any other provision of this
Trust Instrument or the By-laws inconsistent with this Article, shall be
4
Table of Contents
prospective only, to the
extent that such, repeal or modification would, if applied retrospectively, adversely
affect any limitation on the liability of any Covered Person or indemnification
available to any Covered Person with respect to any act or omission which
occurred prior to such repeal, modification or adoption.
Numbered
Paragraph 6.A. of the Management Agreements with Grail Advisors, LLC provide
that:
Manager.
Manager will exercise its best judgment in rendering its services to the
Trust, and the Trust agrees, as an inducement to Managers undertaking to do
so, that Manager will not be liable for any error of judgment or mistake of law
or for any loss suffered by the Trust in connection with the matters to which
this Agreement relates, but will be liable only for willful misconduct, bad
faith, gross negligence or reckless disregard of its duties or obligations in
rendering its services to the Trust as specified in this Agreement. Any person, even though an officer, director,
employee or agent of Manager, who may be or become an officer, Trustee,
employee or agent of the Trust, shall be deemed, when rendering services to the
Trust or when acting on any business of the Trust, to be rendering such
services to or to be acting solely for the Trust and not as an officer,
director, employee or agent, or one under the control or direction of Manager,
even though paid by it.
Numbered
Paragraph 6 of the Primary Investment Sub-Advisory Agreements and the
Investment Sub-Advisory Agreements with each Sub-Adviser provides substantially
to the effect that:
A.
Sub-Adviser.
Sub-Adviser will exercise its best judgment
in rendering its services to the Trust, and the Trust agrees, as an inducement
to Sub-Advisers undertaking to do so that, except as may otherwise be provided
by the Investment Company Act or any other federal securities law, neither
Sub-Adviser nor any of its officers, members or employees (its Affiliates)
shall be liable for any losses, claims, damages, liabilities or litigation
(including legal and other expenses) incurred or suffered by the Manager or the
Trust as a result of any error of judgment or mistake of law by Sub-Adviser or
its Affiliates with respect to the Fund, except that nothing in this Agreement
shall operate or purport to operate in any way to exculpate, waive or limit the
liability of Sub-Adviser or its Affiliates for, and Sub-Adviser shall indemnify
and hold harmless the Trust, the Manager, all affiliated persons thereof
(within the meaning of Section 2(a)(3) of the Investment Company Act)
and all controlling persons (as described in Section 15 of the Securities
Act of 1933, as amended (1933 Act))
(collectively, Manager Indemnitees) against any and
all losses, claims, damages, liabilities or litigation (including reasonable
legal and other expenses) to which any of the Manager Indemnitees may become
subject under the 1933 Act, the Investment Company Act, the Advisers Act, or
under any other statute, or common law or otherwise arising out of or based on (i) any willful misconduct, bad faith,
reckless disregard or gross negligence of Sub-Adviser in the performance of any
of its duties or obligations hereunder or (ii) any untrue statement of a
material fact contained in the Prospectus and SAI, proxy materials,
reports, advertisements, sales literature, or other materials pertaining to the
Fund or the omission to state therein a material
fact known to Sub-Adviser which was required to be stated therein or necessary
to make the statements therein not misleading, if such statement or omission
was made in reliance upon information furnished to the Manager or the Trust by
Sub-Adviser Indemnitees (as defined below) for use therein.
The assets of the Fund
will be maintained in the custody of a custodian (who shall be identified by
the Manager in writing). Sub-Adviser
will not have custody of any securities, cash or other assets of the Fund and
will not be liable for any loss resulting from any act or omission of the
custodian other than acts or omissions arising in reliance on instructions of
Sub-Adviser.
B.
Manager and Trust.
Except as may otherwise be provided by the Investment
Company Act or any other federal securities law, the Manager and the Trust
shall not be liable for any losses, claims, damages, liabilities or litigation
(including legal and other expenses) incurred or suffered by Sub-Adviser as a
result of any error of judgment or mistake of law by the Manager with respect
to the Fund, except that nothing in this Agreement shall operate or purport to
operate in any way to exculpate, waive or limit the liability of the Manager
for, and the Manager shall indemnify and hold harmless Sub-Adviser, all
affiliated persons thereof (within the meaning of Section 2(a)(3) of
the Investment Company Act) and all controlling persons (as described in Section 15
of the 1933 Act) (collectively, Sub-Adviser Indemnitees) against any
and all losses, claims, damages, liabilities or litigation (including
reasonable legal and other expenses) to which any of the Sub-Adviser
Indemnitees may become subject under the 1933 Act, the Investment Company Act,
the Advisers Act, or under any other statute, at common law or otherwise arising out of or based on (i) any willful
misconduct, bad faith, reckless disregard or gross negligence of the Manager in
the performance of any of its duties or obligations hereunder or (ii) any
untrue statement of a
5
Table of Contents
material
fact contained in the Prospectus and SAI,
proxy materials, reports, advertisements, sales
literature, or other materials pertaining to the Fund or the omission to state therein a material fact known to the Manager that
was required to be stated therein or necessary to make the statements therein
not misleading, unless such statement or omission was made in reliance upon information
furnished to the Manager or the Trust.
Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant may, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Item
31. Business and Other Connections of
the Investment Adviser
Grail Advisors, LLC
serves as investment manager to the ETFs and provides investment supervisory
services. Information as to the officers and directors of Grail Advisors, LLC
is included in its Form ADV last filed with the Securities and Exchange
Commission (SEC File No 801-69967) and is incorporated herein by reference.
American Beacon Advisors, Inc.
serves as primary subadviser to the Large Cap Value and International Equity
ETFs and provides investment supervisory services. Information as to the officers and directors
of American Beacon Advisors, Inc. is included in its Form ADV last
filed with the Securities and Exchange Commission (SEC File No. 801-29198)
and is incorporated herein by reference.
RiverPark Advisors, LLC
serves as primary subadviser to the RP Focused Large Cap Growth ETF and RP
Short Duration ETF and subadviser to the RP Growth ETF, RP Technology ETF and
RP Financials ETF. Information as to the
officers and directors of RiverPark Advisors, LLC is included in its Form ADV
last filed with the Securities and Exchange Commission and is incorporated
herein by reference.
McDonnell Investment
Management, LLC serves as subadviser to the Grail McDonnell Intermediate
Municipal Bond ETF and Grail McDonnell Core Taxbale Bond ETF. Information as to the officers and directors
of McDonnell Investment Management, LLC is included in its Form ADV last
filed with the Securities and Exchange Commission and is incorporated herein by
reference.
The sub-advisers listed
below also provide investment advisory services to the ETFs:
Brandywine Global
Investment Management, LLC, 2929 Arch Street, 8th Floor, Philadelphia,
Pennsylvania 19104
Hotchkis and Wiley
Capital Management, LLC, 725 South Figueroa Street, 39
th
Floor, Los
Angeles, California 90017.
Metropolitan West Capital
Management, LLC, 610 Newport Center Drive, Suite 1000, Newport Beach,
California 92660
Lazard Asset Management
LLC, 30 Rockefeller Plaza, New York, New York 10112
Templeton Investment
Counsel, LLC, 500 East Broward Boulevard, Suite 2100, Ft. Lauderdale,
Florida 33394
The Boston Company Asset
Management, LLC, One Boston Place, Boston, Massachusetts 02108
Wedgewood Partners, Inc.,
9909 Clayton Road, Suite 103, St. Louis, Missouri 63124.
Cohanzick Management,
LLC, 427 Bedford Road, Pleasantville, NY 10570.
Information as to the
officers and directors of each of the above sub-advisers is included in that
advisers current Form ADV filed with the SEC and is incorporated by
reference herein.
Item
32. Principal Underwriters
(a) ALPS Distributors, Inc. acts as the
distributor for the Registrant and the following investment companies: AARP
Funds, ALPS ETF Trust, ALPS Variable Insurance Trust, Ameristock Mutual Fund, Inc.,
BLDRS Index Fund Trust,
6
Table of Contents
Campbell Multi-Strategy Trust, CornerCap Group of
Funds, DIAMONDS Trust, Financial Investors Trust, Financial Investors Variable
Insurance Trust, Firsthand Funds, Forward Funds, Heartland Group, Inc.,
Henssler Funds, Inc., Holland Balanced Fund, Laudus Trust, Milestone
Funds, MTB Group of Funds, Pax World Funds, PowerShares QQQ 100 Trust Series 1,
Scottish Widows Investment Partnership, SPDR Trust, MidCap SPDR Trust, Select
Sector SPDR Trust, State Street Institutional Investment Trust, Stonebridge
Funds, Inc., Stone Harbor Investment Funds, TDX Independence Funds, Inc.,
Utopia Funds, W. P. Stewart Funds, Wasatch Funds, Westcore Trust, Williams
Capital Liquid Assets Fund, and WisdomTree Trust.
(b) To the best of Registrants knowledge, the
directors and executive officers of ALPS Distributors, Inc., are as
follows:
Edmund J. Burke
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Director
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Jeremy O. May
|
Director
|
|
|
Spencer Hoffman
|
Director
|
|
|
Thomas Carter
|
President, Director
|
|
|
Richard Hetzer
|
Executive Vice
President
|
|
|
John C. Donaldson
|
Executive Vice
President, Chief Financial Officer
|
|
|
Diana M. Adams
|
Vice President,
Controller, Treasurer
|
|
|
Robert J. Szydlowski
|
Vice President, Chief
Technology Officer
|
|
|
Tané Tyler
|
Vice President, General
Counsel, Secretary
|
|
|
Brad Swenson
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Vice President, Chief
Compliance Officer
|
|
|
Kevin J. Ireland
|
Vice President, Director of Institutional Sales
|
|
|
Mark R. Kiniry
|
Vice President,
National Sales Director-Investments
|
* The principal business address for each of the above
directors and executive officers is 1290 Broadway, Suite 1100, Denver,
Colorado 80203.
Item
33. Location of Accounts and Records
All accounts, books, and
other documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940, as amended, and the rules promulgated
thereunder are maintained at the offices of the: (a) Registrant; (b)
Manager; (c) Primary Subadvisers; (d) Investment Sub-Advisers; (e) Principal
Underwriter; (f) Administrator/ Fund Accountant/ Transfer Agent and (g) Custodian.
The address of each is as follows:
(a)
Registrant
c/o Grail Advisors, LLC
One Ferry Building, Suite 255
San Francisco, CA 94111
(b)
Manager
Grail Advisors, LLC
One Ferry Building, Suite 255
San Francisco, CA 94111
7
Table of Contents
(c)
Primary Subadvisers
American Beacon Advisors, Inc.
4151 Amon Carter
Boulevard
Fort Worth, TX 76155
RiverPark Advisors, LLC
156 West 56
th
Street, 17
th
Floor
New York, NY 10019
McDonnell Investment
Management, LLC
1515 W. 22
nd
Street, 11
th
Floor
Oak Brook, IL 60523
(d)
Investment Sub-advisers
see the addresses listed
in Item 31 above.
(e)
Principal Underwriter
ALPS Distributors, Inc.
1290 Broadway, Suite 1100
Denver, CO 80203
(f)
Custodian
The Bank of New York
Mellon Corporation
One Wall Street
New York, New York 10286
Item
34. Management Services
Not Applicable.
Item
35. Undertakings
None.
8
Table of Contents
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, and State of California, on the 7th day of October 2009.
|
Grail Advisors ETF
Trust
|
|
|
|
|
By:
|
/s/ William M. Thomas
|
|
|
William M. Thomas
Trustee and
Principal Executive Officer
|
Pursuant to the
requirements of the Securities Act of 1933, the Registration Statement has been
signed below by the following person(s) in the capacities and on the date(s) indicated.
/s/ William M. Thomas
|
|
Trustee and Principal
Executive Officer
|
|
October 7,
2009
|
William M. Thomas
|
|
|
|
|
|
|
|
|
|
/s/ Bryan M. Hiser
|
|
Principal Financial
Officer
|
|
October 7,
2009
|
Bryan M. Hiser
|
|
|
|
|
|
|
|
|
|
/s/ Bradford K.
Gallagher*
|
|
Trustee
|
|
October 7,
2009
|
Bradford K. Gallagher
|
|
|
|
|
|
|
|
|
|
/s/ Charles H.
Salisbury*
|
|
Trustee
|
|
October 7,
2009
|
Charles H. Salisbury
|
|
|
|
|
|
|
|
|
|
/s/ Dennis G. Schmal*
|
|
Trustee
|
|
October 7,
2009
|
Dennis G. Schmal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* By:
|
/s/ Stacy L. Fuller
|
|
|
|
|
|
|
|
|
|
Pursuant to Power of
Attorney
|
|
|
|
|
9
Table of Contents
Index to Exhibits
(g)(2)
Form of Amended and Restated Schedule II to the
Custody Agreement
(h)(7)
Form of Amendment to Fund Administration and
Accounting Agreement
(h)(8)
Form of Amended and Restated Appendix 1 to the
Transfer Agency and Service Agreement
10
Table of
Contents
POWER OF ATTORNEY
KNOW ALL MEN BY THESE
PRESENTS that the undersigned Trustee of the Grail Advisors ETF Trust (the Registrant)
hereby constitutes and appoints Stacy L. Fuller, Richard M. Phillips, Mark D.
Perlow and Kurt J. Decko, and each of them severally, my true and lawful
attorneys-in-fact, to sign for me, in my name and in my capacity as Trustee of
the Registrant, any and all amendments to the Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, and Investment Company Act of
1940, as amended, (File Nos. 033-148082; 811-22154) filed with the U.S.
Securities and Exchange Commission, and all instruments necessary in connection
therewith, granting to my said attorneys-in-fact, and each of them severally,
full power and authority, including, but not limited to, full power of
substitution and revocation, to do or cause to be done in my name and on my
behalf each and every act and thing whatsoever requisite or advisable to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact or their substitutes, or any of them, may lawfully
do or cause to be done by virtue of these presents and my signature as it may
be signed by said attorneys-in-fact or their substitutes, or any of them, to
any and all amendments to said Registration Statement.
IN WITNESS WHEREOF,
pursuant to the requirements of the Securities Act of 1933, as amended, this
instrument has been signed below by the undersigned in the capacity and on the
date indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ Dennis G. Schmal
|
|
Trustee
|
|
March 18, 2009
|
Dennis G. Schmal
|
|
|
|
|
Table of
Contents
POWER OF ATTORNEY
KNOW ALL MEN BY THESE
PRESENTS that the undersigned Trustee of the Grail Advisors ETF Trust (the Registrant)
hereby constitutes and appoints Stacy L. Fuller, Richard M. Phillips, Mark D.
Perlow and Kurt J. Decko, and each of them severally, my true and lawful
attorneys-in-fact, to sign for me, in my name and in my capacity as Trustee of
the Registrant, any and all amendments to the Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, and Investment Company Act of
1940, as amended, (File Nos. 033-148082; 811-22154) filed with the U.S.
Securities and Exchange Commission, and all instruments necessary in connection
therewith, granting to my said attorneys-in-fact, and each of them severally,
full power and authority, including, but not limited to, full power of
substitution and revocation, to do or cause to be done in my name and on my
behalf each and every act and thing whatsoever requisite or advisable to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact or their substitutes, or any of them, may lawfully
do or cause to be done by virtue of these presents and my signature as it may
be signed by said attorneys-in-fact or their substitutes, or any of them, to
any and all amendments to said Registration Statement.
IN WITNESS WHEREOF,
pursuant to the requirements of the Securities Act of 1933, as amended, this
instrument has been signed below by the undersigned in the capacity and on the
date indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ Charles H.
Salisbury, Jr.
|
|
Trustee
|
|
March 18, 2009
|
Charles H. Salisbury, Jr.
|
|
|
|
|
Table of
Contents
POWER OF ATTORNEY
KNOW ALL MEN BY THESE
PRESENTS that the undersigned Trustee of the Grail Advisors ETF Trust (the Registrant)
hereby constitutes and appoints Stacy L. Fuller, Richard M. Phillips, Mark D.
Perlow and Kurt J. Decko, and each of them severally, my true and lawful
attorneys-in-fact, to sign for me, in my name and in my capacity as Trustee of
the Registrant, any and all amendments to the Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, and Investment Company Act of
1940, as amended, (File Nos. 033-148082; 811-22154) filed with the U.S.
Securities and Exchange Commission, and all instruments necessary in connection
therewith, granting to my said attorneys-in-fact, and each of them severally,
full power and authority, including, but not limited to, full power of
substitution and revocation, to do or cause to be done in my name and on my
behalf each and every act and thing whatsoever requisite or advisable to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact or their substitutes, or any of them, may lawfully
do or cause to be done by virtue of these presents and my signature as it may
be signed by said attorneys-in-fact or their substitutes, or any of them, to
any and all amendments to said Registration Statement.
IN WITNESS WHEREOF,
pursuant to the requirements of the Securities Act of 1933, as amended, this
instrument has been signed below by the undersigned in the capacity and on the
date indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ Bradford K.
Gallagher
|
|
Trustee
|
|
March 18, 2009
|
Bradford K. Gallagher
|
|
|
|
|
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