Table of Contents
As filed with the Securities and Exchange Commission on December 29, 2009
1933 Act File No. 333-148082
1940 Act File 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. 6
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x
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and/or
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REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
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Amendment No. 9
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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)
(415) 677-5870
(Registrants Telephone Number, including area code)
William M. Thomas
One Ferry Building, Suite 255
San Francisco, CA 94111
(Name and Address of Agent for Service)
Notices should be sent to the Agent for Service
With a copy to:
Stacy L. Fuller, Esq.
K&L Gates LLP
1601 K Street, NW
Washington, DC 20006
(202) 778-9475
It is proposed that this filing will become effective:
o
immediately upon filing pursuant to paragraph (b)
o
on pursuant to paragraph (b)(1)(iii)
x
60 days after filing pursuant to paragraph (a) (i)
o
on pursuant to paragraph (a) (i)
o
75 days after filing pursuant to paragraph (a)(ii)
o
on pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
o
This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
Table of Contents
|
Prospectus | February ,
2010
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Grail Advisors Actively Managed ETFs
RP Growth ETF (RPX)
RP Focused Large Cap Growth ETF
(RWG)
RP Technology ETF (RPQ)
RP Financials ETF (RFF)
This Prospectus provides
important information about the ETFs 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.
Shares
of the ETFs are listed and traded on NYSE Arca, Inc.
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 February , 2010 (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.
2
Table of Contents
SUMMARY INFORMATION
GRAIL ADVISORS ACTIVELY MANAGED ETFS
RP GROWTH ETF
RP FOCUSED LARGE CAP GROWTH ETF
RP TECHNOLOGY ETF
RP FINANCIALS ETF
This
Prospectus describes the RP Growth ETF, RP Focused Large Cap Growth ETF, RP
Technology ETF and the RP Financials ETF (each an ETF and collectively the ETFs),
each of which is a series of Grail Advisors ETF Trust (Trust). Grail Advisors
LLC is each ETFs investment manager (Manager). Each ETF is an exchange
traded fund.
The ETFs are
actively managed ETFs.
T
he ETFs are not index
funds and thus do not seek to replicate the performance of a specified index.
Shares of each of the ETFs (Shares) are 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, each ETF issues and redeems Shares on a continuous basis at NAV
only in large blocks of Shares, typically 50,000 Shares, called Creation
Units.
Creation Units are issued
and redeemed in-kind for securities included in a specified universe. 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.
Except
when aggregated in Creation Units, Shares are not redeemable securities.
An
investment in the ETFs 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 ETFs. Please read this Prospectus carefully before
making any investment decision.
Note to Retail Investors
Shares
can be purchased directly from the ETFs only in exchange for a basket of
securities that is expected to be worth several hundred thousand dollars. Most individual investors, therefore, will
not be able to purchase Shares directly from an 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 ETFs and about
transaction fees imposed on purchases and redemptions of Creation Units is not
relevant to most retail investors.
3
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How Are The ETFs Different From Index ETFs?
Whereas index-based ETFs seek to replicate the holdings of a
specified index, each ETF uses an actively managed investment strategy to meet
its investment objective.
Thus,
each ETFs sub-advisers have the discretion on a daily basis to choose
securities for the ETFs portfolio consistent with the ETFs investment
objective.
The
ETFs are designed for investors who seek exposure to a relatively low-cost
actively managed portfolio of equity securities. The ETFs may be suitable for long-term
investment and may also be used as an asset allocation tool or as a trading
instrument.
How Are The ETFs 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 an ETF, by
contrast, cannot be purchased from or redeemed with the issuing ETF except by
or through Authorized Participants (defined below), and then typically for an
in-kind basket of securities (and a limited cash amount).
Exchange
Listing
. Unlike mutual fund shares,
Shares are 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 an ETFs portfolio holdings. The market price of Shares may differ from
the NAV of an ETF. The difference
between market price of Shares and the NAV of an ETF is expected to be small
most of the time, though it may be significant, especially in times of extreme
market volatility.
Tax
Treatment
. Unlike
interests in mutual funds, Shares have been designed to be tax-efficient. Specifically their in-kind creation and
redemption feature has been designed to protect ETF shareholders from adverse
tax consequences associated with cash transactions in mutual fund shares,
including cash redemptions. Such
transactions can have an adverse tax impact on taxable shareholders due to the
mutual funds need to sell portfolio securities to obtain cash to meet such
redemptions and, as necessary, recognize taxable gains in connection with such
sales. By contrast, the ETFs in-kind
redemption mechanism is designed to minimize taxable gains resulting from
redemptions.
The
active management of the ETFs portfolios is not expected to impact the in-kind
redemption mechanism and the ETFs ability to minimize taxable gains resulting
from redemptions. Nevertheless, to the
extent redemptions are effected for cash, an ETF may realize capital gains or
losses, including in some cases short-term capital gains, upon the sale of
portfolio securities to effect a cash redemption. Because the ETFs are actively managed, they
may generate more taxable gains for shareholders than an index-based ETF,
particularly during the ETFs initial stages when portfolio changes are more
likely to be implemented within the ETF rather than through the in-kind
redemption mechanism.
Transparency
of Portfolio
.
Each ETFs portfolio holdings as
of the time the ETF calculates its NAV are 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.
4
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Fund
Summary
Grail Advisors Actively Managed ETFs
RP Growth ETF
INVESTMENT OBJECTIVE
Long-term capital
appreciation.
FEES AND EXPENSES
This
table describes the fees and expenses that you may pay if you buy and hold
Shares of the ETF.
Shareholder Fees
(fees paid directly from your
investment)
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None
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(1)
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Annual Fund Operating Expenses
(expenses that you pay each year as a
percentage of the value of your investment)
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Management Fee:
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0.65
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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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[0. ]
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%
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Total Annual Fund Operating Expenses:
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[0. ]
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%
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Less: Expense Reduction/Reimbursement: (4)
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[0. ]
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%
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Net Annual Operating Expenses:
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0.89
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%
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Example
The
following example is intended to help you compare the cost of investing in the
ETF with the cost of investing in other funds.
The example assumes that you invest $10,000 for the time periods
indicated and then redeem all of your shares at the end of those periods The example also assumes that the ETF
provides a return of 5% a year, that dividends and distributions are
reinvested, and that operating expenses remain the same. This example does not reflect the brokerage
commissions that you may pay to buy and sell Shares. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
One
Year:
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Three
Years:
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$
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$
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5
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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 $500, or a fee of up to $2,000 if the investor does not
create or redeem through the NSCC (as defined on page [ ]).
(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 of Trustees (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 0.89% of the ETFs average net
assets (Expense Cap). The Expense Cap
will remain in effect until at least February 28, 2011. The expense cap may be terminated earlier
upon the approval of the Board. 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.
PORTFOLIO TURNOVER
The ETF generally acquires
securities for its portfolio and liquidates securities from its portfolio
through in-kind transactions for Shares.
As a result, the ETF generally does not incur portfolio turnover costs
that affect the ETFs performance, which are not reflected in the Fee Table or
in the Example.
PRINCIPAL
INVESTMENT STRATEGIES
RP Growth ETF seeks long-term capital appreciation by investing at
least 80% of its net assets (plus the amount of any borrowings for investment
purposes) in equity securities of companies that RiverPark Advisors, LLC (RP),
the ETFs sub-adviser, believes have above-average growth prospects. RP uses a fundamental research driven
approach to identifying those industries and companies with the strongest
growth prospects for revenue, earnings and/or cash flow over the medium and
long term and seeks to buy stock in those companies at attractive
valuations. The ETF may invest in
companies of any market capitalization and in any industry. The ETF expects to invest primarily in the
securities of US companies, and may also invest in US securities tied economically
to foreign investments, such as American Depositary Receipts.
The
ETF invests in industries that RP believes are the beneficiaries of long-term
secular changes in the global economy and companies within those industries
that are gaining market share and have, what RP believes to be, long-term
sustainable competitive advantages and positions protected by strong barriers
to entry. RP seeks companies with latent
pricing power, expanding free cash flow and a high return on invested
capital. RP also looks for companies
with strong and experienced management teams with clear business
objectives. RP believes it can gain an
investment advantage not only through its primary
6
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research
and by developing conviction in business models, but also because it invests
with a long-term time horizon.
RPs
investment process includes several well-defined steps. First, RP frames the investment opportunity
by analyzing the investment characteristics of both the industry and the
specific company with a focus on the medium- and long-term secular and
structural dynamics involved, such as sustainable competitive advantages, barriers
to entry, technological innovation, changes in government regulation and
demographic trends. The next step
includes fundamental research, including company visits and primary research of
competitors, customers and suppliers, as RP seeks to gain conviction in both
the competitive dynamics within the industry and the reputation, skill and
drive of the management team. Finally,
RP creates and maintains detailed, proprietary financial models of the
revenues, earnings and cash flows of each potential investment and establishes
price targets that encompass its view of the firms future enterprise
value. RPs purchase and sell
disciplines are driven by combining its own proprietary projections of the
future fundamentals of a business with what it believes are conservative
valuation metrics.
RPs
goal is to only invest when it can firmly establish conviction in the business
prospects of the company and when it believes valuations are compelling. RP looks for the opportunity to invest in its
high conviction ideas at times when it believes a companys prospects are
misunderstood by other investors or analysts, the markets react to short-term
events, and/or business models change.
The
ETF may lend its securities to broker-dealers and other institutions to earn
additional income.
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.
Investment grade obligations include securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities, as well as securities
rated in one of the four highest rating categories by at least two nationally
recognized statistical rating organizations rating that security. To the extent the ETF invokes this strategy,
its ability to achieve its investment objective may be affected adversely.
PRINCIPAL
RISKS
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,
in large part, to the fact that supply and demand forces at work in the
secondary trading market for Shares will be closely related to, but not
identical to, the same forces influencing the prices of the securities held by
the ETF. 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, the Manager believes that large discounts or premiums to the NAV of
Shares should not be sustained.
Foreign Investing Risk
. Foreign investing, including investments in
American Depositary Receipts, 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.
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Growth Stock Risk
. Growth stocks are subject to the risk that
their growth prospects and/or expectations will not be fulfilled, which could
result in a substantial decline in their value and adversely impact the ETFs
performance. When growth investing is
out of favor, the ETFs share price may decline even though the companies the
ETF holds have sound fundamentals.
Growth stocks may also experience higher than average volatility.
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
. Since the ETF invests most or a substantial
portion of its assets in stocks, it is subject to stock market risk. Market risk involves the possibility that the
value of the ETFs investments in stocks will decline due to drops in the stock
market. In general, the value of the ETF
will move in the same direction as the overall stock market in which the ETF
invests, which will vary from day to day in response to the activities of
individual companies, as well as general market, regulatory, political and
economic conditions.
Recent Market Events Risk.
Recent unprecedented turbulence in financial
markets and reduced liquidity in credit and fixed income markets may negatively
affect many issuers worldwide, which may have an adverse effect on the ETF.
Securities
Lending Risk
. The ETF may
make secured loans of its portfolio securities.
Borrowers of the ETFs securities may provide collateral in the form of
cash that is reinvested in securities.
The securities in which the collateral is invested may not perform
sufficiently to cover the return collateral payments owed to borrowers. In addition, delays may occur in the recovery
of securities from borrowers, which could interfere with the ETFs ability to
vote proxies or to settle transactions.
To the extent the ETF lends its securities, it may be subject to these
risks.
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 the ETFs investment
results. The 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.
PERFORMANCE
Because
the ETF has not yet completed a calendar year of investment operations,
performance information is not yet available. The ETFs past performance is not
necessarily an indication of how the ETF will perform in the future. For
current performance information, please visit www.grailadvisors.com.
8
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INVESTMENT ADVISER
Grail Advisors, LLC , is the
investment manager for the ETF.
RiverPark Advisors, LLC (RP) is
the primary sub-adviser of the
ETF.
PORTFOLIO MANAGER
Mitchell Rubin, CFA, is the portfolio manager of the ETF and is
responsible for the day-to-day management of the ETFs portfolio. Mr. Rubin has been Chief Investment
Officer of RP and has managed the ETF since its inception.
PURCHASE
AND SALE OF ETF SHARES
The
ETF issues and redeems Shares on a continuous basis at NAV only in large blocks
of Shares, typically 50,000 Shares, called Creation Units. Unlike mutual funds, Shares are not
individually redeemable.
Creation Units
are issued and redeemed in-kind for securities.
Once created, individual Shares generally trade in the secondary market
at market prices that change throughout the day. Market
prices of Shares may be different from their NAV.
TAX INFORMATION
Distributions you receive
from the ETF are subject to federal income tax as ordinary income, except to
the extent designated as capital gains, and may also be subject to state or
local taxes, unless you are investing through a tax-advantaged retirement
account.
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Contents
Fund Summary
Grail Advisors Actively Managed ETFs
RP Focused Large Cap Growth ETF
INVESTMENT OBJECTIVE
Long-term capital
appreciation.
FEES AND EXPENSES
This
table describes the fees and expenses that you may pay if you buy and hold
Shares of the ETF.
Shareholder Fees
(fees paid from your investment)
|
|
None
|
(1)
|
Annual Fund Operating Expenses
(expenses that you pay each year as a
percentage of the value of your investment)
|
|
|
|
Management Fee:
|
|
0.65
|
%
|
Distribution and/or service (12b-1) fees: (2)
|
|
0.00
|
%
|
Other Expenses: (3)
|
|
[0. ]
|
%
|
Total Annual Fund Operating Expenses:
|
|
[0. ]
|
%
|
Less: Expense Reduction/Reimbursement: (4)
|
|
[0 0]
|
%
|
Net Annual Operating Expenses:
|
|
0.89
|
%
|
Example
The
following example is intended to help you compare the cost of investing in the
ETF with the cost of investing in other funds.
The example assumes that you invest $10,000 for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that the ETF provides a return of 5% a year, that
dividends and distributions are reinvested, and that operating expenses remain
the same. This example does not reflect
the brokerage commissions that you pay to buy and sell Shares. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
One Year:
|
|
Three Years:
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
10
Table of Contents
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 $500, or a fee of up to $2,000 if the investor does not
create or redeem through the NSCC (as defined on page [ ]).
(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 0.89% of the ETFs average net
assets (Expense Cap). The Expense Cap
will remain in effect until at least February 28, 2011. The expense cap
may be terminated earlier upon the approval of the Board. 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.
PORTFOLIO TURNOVER
The ETF generally acquires
securities for its portfolio and liquidates securities from its portfolio
through in-kind transactions for Shares.
As a result, the ETF generally does not incur portfolio turnover costs that
affect the ETFs performance, which are not reflected in the Fee Table or in
the Example.
PRINCIPAL
INVESTMENT STRATEGIES
RP Focused Large Cap Growth ETF seeks long-term capital appreciation by
investing at least 80% of its net assets (plus the amount of any borrowings for
investment purposes) in equity securities of large capitalization companies
that Wedgewood Partners, Inc. (Wedgewood), the ETFs sub-adviser,
believes have above-average growth prospects.
The ETF considers companies with market capitalizations in excess of $5
billion to be large capitalization companies.
The ETF is non-diversified and expects to invest in a limited number of
companies, generally holding securities of between 20 and 30 companies. The ETF expects to invest primarily in the
securities of US companies, and may also invest in US securities tied
economically to foreign investments, such as American Depositary Receipts.
Wedgewood seeks investments in market leaders with dominant products or
services that are irreplaceable or lack substitutes in todays economy. Wedgewood invests for the long term, and
expects to hold securities, in many cases, for more than 5 years.
Wedgewoods
investment process involves rigorous qualitative and quantitative inputs as
well as a strict valuation and risk discipline.
Wedgewoods quantitative process seeks to differentiate among the
500-600 largest companies to separate those which exhibit factors such as
above-average returns on equity, returns on capital, cash flow returns on
investment, earnings per share growth and revenue growth. The
11
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qualitative
process then focuses on the sustainability of the companys business model with
particular emphasis on barriers to entry, competition and relative
buyer/supplier leverage. Wedgewood next
uses a valuation model to forecast future performance for sales, earnings and
financial position to create absolute valuation projections for the companys
intrinsic value seeking to invest in a focused (20-30 securities) portfolio of
its highest conviction ideas. Positions
are reduced or eliminated from the portfolio over time when long-term growth
rates fall below Wedgewoods expectations, a superior opportunity becomes
available, the position becomes fully valued according to Wedgewoods valuation
discipline and/or appreciation results in an excessively large holding in the
portfolio.
The
ETF may lend its securities to broker-dealers and other institutions to earn
additional income.
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. Investment grade obligations include
securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, as well as securities rated in one of the four highest
rating categories by at least two nationally recognized statistical rating
organizations rating that security. To
the extent the ETF invokes this strategy, its ability to achieve its investment
objective may be affected adversely.
PRINCIPAL
RISKS
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, in large part, to the fact that supply and
demand forces at work in the secondary trading market for Shares will be
closely related to, but not identical to, the same forces influencing the
prices of the securities held by the ETF.
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, the Manager believes that
large discounts or premiums to the NAV of Shares should not be sustained.
Financial Services Stock Risk
. The financial services industry is highly
correlated and particularly vulnerable to certain factors, such as the
availability and cost of borrowing and raising additional capital, the rate of
corporate and consumer debt defaults, regulatory developments, and price
competition. Profitability can fluctuate
significantly when interest rates change.
The stocks may also be vulnerable to inflation. Some companies in the financial services
industry are subject to extensive government regulation which can limit both
the amounts and types of loans and other financial commitments they can make,
and the interest rates and fees they can charge. Credit losses resulting from financial
difficulties of borrowers can negatively affect companies in the industry. The
financial services industry, as a whole, is currently undergoing relatively
rapid change in light of evolving government regulations, industry
consolidation and as existing distinctions between financial service segments
become less clear.
Foreign Investing Risk
. Foreign investing, including investments in
American Depositary Receipts, 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.
12
Table of Contents
Growth Stock Risk
. Growth stocks are subject to the risk that
their growth prospects and/or expectations will not be fulfilled, which could
result in a substantial decline in their value and adversely impact the ETFs
performance. When growth investing is
out of favor, the ETFs share price may decline even though the companies the
ETF holds have sound fundamentals.
Growth stocks may also experience higher than average volatility.
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
. Since the ETF invests most or a substantial
portion of its assets in stocks, it is subject to stock market risk. Market risk involves the possibility that the
value of the ETFs investments in stocks will decline due to drops in the stock
market. In general, the value of the ETF
will move in the same direction as the overall stock market in which the ETF
invests, which will vary from day to day in response to the activities of
individual companies, as well as general market, regulatory, political and
economic conditions.
Non-Diversification Risk
. The ETF is non-diversified, which means that
it may hold larger positions in a smaller number of individual securities than
if it were diversified. This means that
increases or decreases in the value of any of the individual securities owned
by the ETF may have a greater impact on the ETFs NAV and total return than
would be the case in a diversified fund which would likely hold more
securities. Therefore, the ETFs value
may fluctuate more, and it could incur greater losses as a result of decreases
in the value of any one of its holdings, than if it had invested in a larger
number of stocks.
Recent Market Events Risk.
Recent unprecedented turbulence in financial
markets and reduced liquidity in credit and fixed income markets may negatively
affect many issuers worldwide, which may have an adverse effect on the ETF.
Securities
Lending Risk
. The ETF may
make secured loans of its portfolio securities.
Borrowers of the ETFs securities may provide collateral in the form of
cash that is reinvested in securities.
The securities in which the collateral is invested may not perform
sufficiently to cover the return collateral payments owed to borrowers. In addition, delays may occur in the recovery
of securities from borrowers, which could interfere with the ETFs ability to
vote proxies or to settle transactions.
To the extent the ETF lends its securities, it may be subject to these
risks.
Technology Stock Risk
. Technology industries can be significantly
affected by aggressive pricing, technological innovation, obsolescence of
existing technology, short product cycles, falling prices and profits, the
ability to attract and retain skilled employees, competition from new market
entrants and general economic conditions.
Profitability can also be affected by changing domestic and
international demand, research and development costs and availability and price
of components. In addition, technology
stocks historically have experienced unusually wide price swings, both up and down. The potential for wide variation in
performance reflects the special risks common to companies in the rapidly
changing field of technology. Earnings
disappointments and intense competition for market share can result in sharp
price declines.
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 the ETFs investment
results. The ETF may not achieve its
investment objective using this type of investing.
13
Table of Contents
Trading
Risk
. Although the Shares are 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.
PERFORMANCE
Because
the ETF has not yet completed a calendar year of investment operations,
performance information is not yet available. The ETFs past performance is not
necessarily an indication of how the ETF will perform in the future. For
current performance information, please visit www.grailadvisors.com.
INVESTMENT ADVISER
Grail
Advisors LLC, is the investment manager for the ETF.
RiverPark Advisors, LLC (RP) is
primary sub-adviser for the ETF and WedgewoodPartners, Inc.
(Wedgewood) is the investment
sub-adviser for ETF.
PORTFOLIO MANAGER
David A. Rolfe, CFA, is the
portfolio manager of the ETF and is responsible for the day-to-day management
of the ETFs portfolio. Mr. Rolfe
has been Chief Investment Officer of Wedgewood and has managed the ETF since
its inception.
PURCHASE
AND SALE OF ETF SHARES
The
ETF issues and redeems Shares on a continuous basis at NAV only in large blocks
of Shares, typically 50,000 Shares, called Creation Units. Unlike mutual funds, Shares are not
individually redeemable.
Creation Units
are issued and redeemed in-kind for securities.
Once created, individual Shares generally trade in the secondary market
at market prices that change throughout the day. Market
prices of Shares may be different from their NAV.
TAX INFORMATION
Distributions you receive
from the ETF are subject to federal income tax as ordinary income, except to
the extent designated as capital gains, and may also be subject to state or
local taxes, unless you are investing through a tax-advantaged retirement
account.
14
Table of Contents
Fund Summary
Grail Advisors Actively Managed ETFs
RP Technology ETF
INVESTMENT OBJECTIVE
Long-term capital
appreciation.
FEES AND EXPENSES
This
table describes the fees and expenses that you may pay if you buy and hold
Shares of the ETF.
Shareholder Fees
(fees paid from your investment)
|
|
None
|
(1)
|
Annual Fund Operating Expenses
(expenses that you pay each year as a
percentage of the value of your investment)
|
|
|
|
Management Fee:
|
|
0.65
|
%
|
Distribution and/or service (12b-1) fees: (2)
|
|
0.00
|
%
|
Other Expenses: (3)
|
|
[0. ]
|
%
|
Total Annual Fund Operating Expenses:
|
|
[0. ]
|
%
|
Less: Expense Reduction/Reimbursement: (4)
|
|
[0. ]
|
%
|
Net Annual Operating Expenses:
|
|
0.89
|
%
|
Example
The
following example is intended to help you compare the cost of investing in the
ETF with the cost of investing in other funds. The example assumes that you
invest $10,000 for the time periods indicated and then redeem all of your
shares at the end of those periods. The
example also assumes that the ETF provides a return of 5% a year, that
dividends and distributions are reinvested, and that operating expenses remain
the same. This example does not reflect
the brokerage commissions that you may pay to buy and sell Shares. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
One Year:
|
|
Three Years:
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
15
Table of Contents
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 $500, or a fee of up to $2,000 if the investor does not
create or redeem through the NSCC (as defined on page [ ]).
(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 0.89% of the ETFs average net
assets (Expense Cap). The Expense Cap
will remain in effect until at least February 28, 2011. The expense cap may be terminated earlier
upon the approval of the Board. 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.
PORTFOLIO TURNOVER
The ETF generally acquires
securities for its portfolio and liquidates securities from its portfolio
through in-kind transactions for Shares.
As a result, the ETF generally does not incur portfolio turnover costs
that affect the ETFs performance, which are not reflected in the Fee Table or
in the Example.
PRINCIPAL
INVESTMENT STRATEGIES
RP Technology ETF seeks
long-term capital appreciation by investing at least 80% of its net assets
(plus the amount of any borrowings for investment purposes) in equity securities
of companies that develop, produce or distribute technology-related products
and services. The ETF will invest in
companies both within and outside the technology sector (the technology sector
is narrower than what RP, as the ETFs sub-adviser, considers to be
technology-related businesses) and the ETF will invest in companies whose
value, in RPs view, derive from embracing technological innovation. These companies are not limited to the
technology industry, and may include companies in sectors such as industrial
and business machines; communications; computer hardware and software; computer
services and peripheral products; electronics; electronic media; internet;
television and video equipment and services; satellite technology and
equipment; and semiconductors.
RP
uses a fundamental research driven approach to identify technology-oriented
companies that are suitable for the portfolio, and seeks to buy stock in those
companies at attractive valuations. The
ETF will primarily invest in companies with mid- to large-market
capitalizations, but may invest in companies of any market capitalization. The ETF considers companies with market
capitalizations of between $2 billion and $150 billion to be mid- to large-capitalization
companies. The ETF expects to invest
primarily in the securities of US companies, and may also invest in US
securities tied economically to foreign
16
Table of Contents
investments,
such as American Depositary Receipts.
RPs
investment process includes several well-defined steps. First, RP frames the investment opportunity
by analyzing the investment characteristics of both the industry and the specific
company with a focus on the medium- and long-term secular and structural
dynamics involved, such as sustainable competitive advantages, barriers to
entry, technological innovation, changes in government regulation and
demographic trends. The next step includes
fundamental research, including company visits and primary research of
competitors, customers and suppliers, as RP seeks to gain conviction in both
the competitive dynamics within the industry and the reputation, skill and
drive of the management team. Finally,
RP creates and maintains detailed, proprietary financial models of the
revenues, earnings and cash flows of each potential investment and establishes
price targets that encompass its view of the firms future enterprise
value. RPs purchase and sell
disciplines are driven by combining its own proprietary projections of the
future fundamentals of a business with what it believes are conservative
valuation metrics.
RPs
goal is to
only
invest when it can firmly establish conviction in the business
prospects of the company and when it believes valuations are compelling. RP looks for the opportunity to invest in its
high conviction ideas at times when it believes a companys prospects are
misunderstood by other investors or analysts, the markets react to short-term
events, and/or business models change.
The
ETF may lend its securities to broker-dealers and other institutions to earn
additional income.
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.
Investment grade obligations include securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities, as well as securities
rated in one of the four highest rating categories by at least two nationally
recognized statistical rating organizations rating that security. To the extent the ETF invokes this strategy,
its ability to achieve its investment objective may be affected adversely.
PRINCIPAL
RISKS
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, in large part, to the fact that supply and
demand forces at work in the secondary trading market for Shares will be
closely related to, but not identical to, the same forces influencing the
prices of the securities held by the ETF.
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, the Manager believes that
large discounts or premiums to the NAV of Shares should not be sustained.
Foreign Investing Risk
. Foreign investing, including investments in
American Depositary Receipts, 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.
17
Table of Contents
Growth Stock Risk
. Growth stocks are subject to the risk that
their growth prospects and/or expectations will not be fulfilled, which could
result in a substantial decline in their value and adversely impact the ETFs
performance. When growth investing is
out of favor, the ETFs share price may decline even though the companies the
ETF holds have sound fundamentals.
Growth stocks may also experience higher than average volatility.
Industry Concentration Risk
. The ETF may focus its investments in a
particular industry or group of industries.
Securities of companies in the same industry or group of industries may
decline in price at the same time due to industry-specific developments since
these companies may share common characteristics and are more likely to react
similarly to industry-specific market or economic developments. The ETFs investments in multiple companies
in a particular industry increase the ETFs exposure to risks of the particular
industry and may increase the ETFs volatility.
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
. Since the ETF invests most or a substantial
portion of its assets in stocks, it is subject to stock market risk. Market risk involves the possibility that the
value of the ETFs investments in stocks will decline due to drops in the stock
market. In general, the value of the ETF
will move in the same direction as the overall stock market in which the ETF
invests, which will vary from day to day in response to the activities of
individual companies, as well as general market, regulatory, political and
economic conditions.
Recent Market Events Risk.
Recent unprecedented turbulence in financial
markets and reduced liquidity in credit and fixed income markets may negatively
affect many issuers worldwide, which may have an adverse effect on the ETF.
Securities
Lending Risk
. The ETF may
make secured loans of its portfolio securities.
Borrowers of the ETFs securities may provide collateral in the form of
cash that is reinvested in securities.
The securities in which the collateral is invested may not perform
sufficiently to cover the return collateral payments owed to borrowers. In addition, delays may occur in the recovery
of securities from borrowers, which could interfere with the ETFs ability to
vote proxies or to settle transactions.
To the extent the ETF lends its securities, it may be subject to these
risks.
Technology Stock Risk
. Technology industries can be significantly
affected by aggressive pricing, technological innovation, obsolescence of
existing technology, short product cycles, falling prices and profits, the
ability to attract and retain skilled employees, competition from new market
entrants and general economic conditions.
Profitability can also be affected by changing domestic and
international demand, research and development costs and availability and price
of components. In addition, technology
stocks historically have experienced unusually wide price swings, both up and
down. The potential for wide variation
in performance reflects the special risks common to companies in the rapidly
changing field of technology. Earnings
disappointments and intense competition for market share can result in sharp
price declines.
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 the ETFs investment
results. The ETF may not achieve its
investment objective using this type of investing.
Trading
Risk
. Although the Shares are 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
18
Table of Contents
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.
PERFORMANCE
Because
the ETF has not yet completed a calendar year of investment operations,
performance information is not yet available. The ETFs past performance is not
necessarily an indication of how the ETF will perform in the future. For
current performance information, please visit www.grailadvisors.com.
INVESTMENT ADVISER
Grail Advisors LLC is the investment manager for the
ETF.
RiverPark
Advisors, LLC (RP) is the sub-adviser for the ETF.
PORTFOLIO MANAGER
Conrad van Tienhoven is the portfolio manager of the ETF and is responsible
for the day-to-day management of the ETFs portfolio. Mr. van Tienhoven has been a principal
of RP since 2009 and has managed the ETF since its inception.
PURCHASE
AND SALE OF ETF SHARES
The
ETF issues and redeems Shares on a continuous basis at NAV only in large blocks
of Shares, typically 50,000 Shares, called Creation Units. Unlike mutual funds, Shares are not
individually redeemable.
Creation Units
are issued and redeemed in-kind for securities.
Once created, individual Shares generally trade in the secondary market
at market prices that change throughout the day. Market
prices of Shares may be different from their NAV.
TAX INFORMATION
Distributions you receive from the ETF are subject to federal income
tax as ordinary income, except to the extent designated as capital gains, and
may also be subject to state or local taxes, unless you are investing through a
tax-advantaged retirement account.
19
Table of
Contents
Fund Summary
Grail Advisors Actively Managed ETFs
RP Financials ETF
INVESTMENT OBJECTIVE
Long-term capital
appreciation.
FEES AND EXPENSES
This
table describes the fees and expenses that you may pay if you buy and hold
Shares of the ETF.
Shareholder Fees
(fees paid from your investment)
|
|
None
|
(1)
|
Annual Fund Operating Expenses
(expenses that are deducted from ETF
assets)
|
|
|
|
Management Fee:
|
|
0.65
|
%
|
Distribution and/or service (12b-1) fees: (2)
|
|
0.00
|
%
|
Other Expenses: (3)
|
|
[0. ]
|
%
|
Total Annual Fund Operating Expenses:
|
|
[0. ]
|
%
|
Less: Expense Reduction/Reimbursement: (4)
|
|
[0. ]
|
%
|
Net Annual Operating Expenses:
|
|
0.89
|
%
|
Example
The
following example is intended to help you compare the cost of investing in the
ETF with the cost of investing in other funds. The example assumes that you
invest $10,000 for the time periods indicated and then redeem all of your
shares at the end of those periods. The example also assumes that the ETF
provides a return of 5% a year, that dividends and distributions are
reinvested, and that operating expenses remain the same. This example does not reflect the brokerage
commissions that you may pay to buy and sell Shares. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
One Year:
|
|
Three Years:
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
This example should not be
considered to represent actual expenses or performance from the past or for the
future.
20
Table of Contents
(1)
An investor purchasing or redeeming Creation Units of the ETF will pay the ETF
a transaction fee of $500, or a fee of up to $2,000 if the investor does not
create or redeem through the NSCC (as defined on page [ ]).
(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 0.89% of the ETFs average net
assets (Expense Cap). The Expense Cap
will remain in effect until at least February 28, 2011 The expense cap may be terminated earlier
upon the approval of the Board. 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.
PORTFOLIO TURNOVER
The ETF generally acquires
securities for its portfolio and liquidates securities from its portfolio
through in-kind transactions for Shares.
As a result, the ETF generally does not incur portfolio turnover costs
that affect the ETFs performance, which are not reflected in the Fee Table or
in the Example.
PRINCIPAL
INVESTMENT STRATEGIES
RP Financials ETF seeks
long-term capital appreciation by investing at least 80% of its net assets
(plus the amount of any borrowings for investment purposes) in equity
securities of financial services companies.
The ETF considers financial services companies to be those companies
that derive a significant portion of their revenues from any aspect of the
financial services industry, including, but not limited to, banking, lending,
brokerage, exchanges, insurance, and money management, as well as real estate
investment trusts (REITs).
RP,
the ETFs sub-adviser, uses a fundamental research driven approach to identify
financial services companies that are suitable for the portfolio, and seeks to
buy stock in those companies at attractive valuations. The ETF will primarily invest in companies
with mid- to large-market capitalizations.
The ETF considers companies with market capitalizations of between $2
billion and $150 billion to be mid- to large-capitalization companies. The ETF expects to invest primarily in the
securities of US companies, and may also invest in US securities tied
economically to foreign investments, such as American Depositary Receipts.
RPs
investment process includes several well-defined steps. First, RP frames the investment opportunity
by analyzing the investment characteristics of both the industry and the
specific company with a focus on the medium- and long-term secular and structural
dynamics involved, such as sustainable competitive advantages, barriers to
entry, technological innovation, changes in government regulation and
21
Table of Contents
demographic
trends. The next step includes
fundamental research, including company visits and primary research of
competitors, customers and suppliers, as RP seeks to gain conviction in both
the competitive dynamics within the industry and the reputation, skill and
drive of the management team. Finally,
RP creates and maintains detailed, proprietary financial models of the
revenues, earnings and cash flows of each potential investment and establishes
price targets that encompass its view of the firms future enterprise
value. RPs purchase and sell
disciplines are driven by combining its own proprietary projections of the
future fundamentals of a business with what it believes are conservative
valuation metrics.
RPs
goal is to only invest when it can firmly establish conviction in the business
prospects of the company and when it believes valuations are compelling. RP looks for the opportunity to invest in its
high conviction ideas at times when it believes a companys prospects are
misunderstood by other investors or analysts, the markets react to short-term
events, and/or business models change.
The
ETF may lend its securities to broker-dealers and other institutions to earn
additional income.
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.
Investment grade obligations include securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities, as well as securities
rated in one of the four highest rating categories by at least two nationally
recognized statistical rating organizations rating that security. To the extent the ETF invokes this strategy,
its ability to achieve its investment objective may be affected adversely.
PRINCIPAL
RISKS
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, in large part, to the fact that supply and
demand forces at work in the secondary trading market for Shares will be closely
related to, but not identical to, the same forces influencing the prices of the
securities held by the ETF. 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, the Manager believes that large
discounts or premiums to the NAV of Shares should not be sustained.
Financial Services Stock Risk
. The financial services industry is highly
correlated and particularly vulnerable to certain factors, such as the
availability and cost of borrowing and raising additional capital, the rate of
corporate and consumer debt defaults, regulatory developments, and price
competition. Profitability can fluctuate
significantly when interest rates change.
The stocks may also be vulnerable to inflation. Some companies in the financial services
industry are subject to extensive government regulation which can limit both
the amounts and types of loans and other financial commitments they can make,
and the interest rates and fees they can charge. Credit losses resulting from financial
difficulties of borrowers can negatively affect companies in the industry. The
financial services industry, as a whole, is currently undergoing relatively
rapid change in light of evolving government regulations, industry
consolidation and as existing distinctions between financial service segments
become less clear.
Foreign Investing Risk
. Foreign investing, including investments in
American Depositary Receipts, 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,
22
Table of Contents
(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.
Industry Concentration Risk
. The ETF may focus its investments in a
particular industry or group of industries.
Securities of companies in the same industry or group of industries may
decline in price at the same time due to industry-specific developments since
these companies may share common characteristics and are more likely to react
similarly to industry-specific market or economic developments. The ETFs investments in multiple companies
in a particular industry increase the ETFs exposure to risks of the particular
industry and may increase the ETFs volatility.
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
. Since the ETF invests most or a substantial
portion of its assets in stocks, it is subject to stock market risk. Market risk involves the possibility that the
value of the ETFs investments in stocks will decline due to drops in the stock
market. In general, the value of the ETF
will move in the same direction as the overall stock market in which the ETF
invests, which will vary from day to day in response to the activities of
individual companies, as well as general market, regulatory, political and
economic conditions.
Recent Market Events Risk.
Recent unprecedented turbulence in financial
markets and reduced liquidity in credit and fixed income markets may negatively
affect many issuers worldwide, which may have an adverse effect on the ETF.
REIT Risk
. REITs are pooled investment vehicles that
invest in real estate or real estate-related companies. In general, the value of a REITs shares
changes in light of factors affecting the real estate industry, including 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
also subject to the risk of poor performance by the REITs manager, defaults by
borrowers, self-liquidation, adverse changes in the tax laws, and the risk of
failing to qualify for relevant tax and regulatory exemptions.
Securities
Lending Risk
. The ETF may
make secured loans of its portfolio securities.
Borrowers of the ETFs securities may provide collateral in the form of
cash that is reinvested in securities.
The securities in which the collateral is invested may not perform
sufficiently to cover the return collateral payments owed to borrowers. In addition, delays may occur in the recovery
of securities from borrowers, which could interfere with the ETFs ability to
vote proxies or to settle transactions.
To the extent the ETF lends its securities, it may be subject to these
risks.
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 the ETFs investment
results. The ETF may not achieve its
investment objective using this type of investing.
Trading
Risk
. Although the Shares are 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,
23
Table of Contents
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.
PERFORMANCE
Because
the ETF has not yet completed a calendar year of investment operations, performance
information is not yet available. The
ETFs past performance is not necessarily an indication of how the ETF will
perform in the future. For current performance information, please visit
www.grailadvisors.com.
INVESTMENT ADVISER
Grai Advisors LLCl is the investment manager for the
ETF.
RiverPark
Advisors, LLC (RP) is the sub-adviser for the ETF.
PORTFOLIO MANAGER
Morty Schaja, CFA, is a leader of the ETF management team and is
responsible for the day-to-day management of the ETFs portfolio. Mr. Schaja is Chief Executive Officer of
RP and has managed the ETF since its inception.
PURCHASE
AND SALE OF ETF SHARES
The
ETF issues and redeems Shares on a continuous basis at NAV only in large blocks
of Shares, typically 50,000 Shares, called Creation Units. Unlike mutual funds, Shares are not
individually redeemable.
Creation Units
are issued and redeemed in-kind for securities.
Once created, individual Shares generally trade in the secondary market
at market prices that change throughout the day. Market
prices of Shares may be different from their NAV.
TAX INFORMATION
Distributions you receive
from the ETF are subject to federal income tax as ordinary income, except to
the extent designated as capital gains, and may also be subject to state or
local taxes, unless you are investing through a tax-advantaged retirement
account.
24
Table of Contents
ADDITIONAL INFORMATION ABOUT THE ETFs
This
Prospectus does not describe all of an ETFs investment practices and
additional information about each ETFs risks and investments can be found in
the ETFs SAI.
A
description of the ETFs policies and procedures with respect to the disclosure
of the ETFs portfolio holdings is available in the ETFs SAI. Information
about the premiums and discounts at which the ETFs shares have traded is
available at www.grailadvisors.com.
25
Table of
Contents
ETF MANAGEMENT
Grail
Advisors, LLC
The Manager, a
majority-owned subsidiary of Grail Partners, LLC, acts as each 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 ETFs but does not oversee the day-to-day
investment of the ETFs portfolios. 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 RP and Wedgewood. These services are provided under the terms
of an Investment Management Agreement dated September 10, 2009 (Investment
Management Agreement) between the Trust, on behalf of each ETF, and the
Manager.
Pursuant to the Investment
Management Agreement, each ETF pays the Manager a management fee for the
services and facilities it provides payable on a monthly basis at the annual
rates set forth in the table below, calculated as a percentage of an 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 an ETFs performance. The
Manager is responsible for compensating RP and Wedgewood out of the management
fees it receives from each ETF.
ETF
|
|
Management
Fee
|
|
RP Growth ETF
|
|
0.65
|
%
|
RP Focused Large Cap Growth
ETF
|
|
0.65
|
%
|
RP Technology ETF
|
|
0.65
|
%
|
RP Financials ETF
|
|
0.65
|
%
|
RiverPark Advisors, LLC
RP acts as primary sub-adviser of the RP Focused Large Cap Growth ETF
and as the exclusive sub-adviser of the RP Growth ETF, RP Technology ETF and RP
Financials 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
recently-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 ETFs, 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
provides day-to-day portfolio management services to RP Growth ETF, RP
Technology ETF and RP Financials ETF and, in conjunction with the Manager,
oversees the day-to-day portfolio management services provided by Wedgewood to
RP Focused Large Cap Growth ETF. For the
RP Growth ETF, RP Technology ETF and RP Financials ETF, RP has discretion to
purchase and sell securities in accordance with these ETFs objectives,
policies, and restrictions.
With
respect to the RP Growth ETF, RP Technology ETF and RP Financials ETF, RP has
entered into an Investment Sub-Advisory Agreement between the Manager and RP,
dated September 10, 2009 (RP Agreement I). With respect to the RP Focused Large Cap
Growth ETF, RP has entered into a Primary Investment Sub-Advisory Agreement
between the Manager and RP, dated September 10, 2009 (together with RP
Agreement I, the RP Sub-Advisory Agreements), and is also a party to the
Wedgewood
26
Table of Contents
Subadvisory
Agreement described below. Pursuant to
the RP Subadvisory Agreements, 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 an ETF; they are
not separately paid by an ETF. From time
to time, RP may waive all or a portion of its fee.
Portfolio
Managers
Below
are the backgrounds of the RP Portfolio Managers responsible for the day-to-day
portfolio management of the RP Growth ETF, RP Technology ETF and RP Financials
ETF. The RP Financials ETF is managed by
a team of RP professionals, led by Mr. Schaja and Mr. Rubin. This team also oversees Wedgewoods portfolio
management of the RP Focused Large Cap Growth ETF. In addition, the RP Portfolio Managers are
supported by a group of outside advisors.
Mitchell
Rubin, CFA, is the portfolio manager of RP Growth ETF and a leader of the RP
Financials ETF management team, and has served in these capacities since the
ETFs inception. Mr. Rubin is the
Chief Investment Officer of RP. Mr. Rubin
received a BA in Economics and Political Science from the University of
Michigan in 1988 and a JD from Harvard Law School in 1991. From 1991 to 1994, he was an associate at
Latham & Watkins specializing in corporate finance transactions. From 1994 until joining Baron Capital in November of
1995, Mr. Rubin was an equity research analyst for Smith Barney, focusing
on emerging growth stocks. In 1995, he
joined Baron Capital as a research analyst covering consumer/retail,
gaming/leisure/lodging and real estate.
In 1999, he was co-portfolio manager for Baron Growth Fund. He served as portfolio manager for the Baron
iOpportunity Fund, a technology-focused mutual fund, from the funds inception
in March 2000 through March 2006, and was also the portfolio manager
of Baron Fifth Avenue Growth Fund, a large-cap growth mutual fund, from the
funds inception in May 2004 through March 2006. From June 2006 to June 2008, he was
a managing general partner of RiverPark Partners, a long/short equity fund.
Conrad
van Tienhoven is the portfolio manager of RP Technology ETF and has served as
portfolio manager since the ETFs inception.
Mr. van Tienhoven is a principal of RP. He graduated from the University of Texas
with a BA in Economics in 1997. In 1997,
he joined Baron Capital as an analyst focusing on the real estate and
consumer/retail industries. In 2000, he
became an analyst on the Baron iOpportunity Fund focusing on internet media,
ecommerce, hardware, software, and online business services. In 2004, Mr. van Tienhoven became an
analyst for the Baron Fifth Avenue Growth Fund.
From June 2006 to June 2008, he was a senior analyst of
RiverPark Partners, a long/short equity fund.
Morty
Schaja, CFA, is a leader of the RP Financials ETF management team, and has
served in this capacity since the ETFs inception. Mr. Schaja is the Chief Executive
Officer of RP. Mr. Schaja graduated
from Tel-Aviv University in 1975 with a BS in Physics and from Columbia
University in 1976 with an MBA in finance and accounting. From 1977 to 1985, he was Vice President for
Consulting with Data Resources, Inc., a leading economic consulting and
forecasting firm. From 1986 through 1987
he was a Senior Analyst with Donaldson, Lufkin & Jenrettes Stock
Index Department. From 1987 until 1990, Mr. Schaja
was Executive Vice President of First Security, a registered investment adviser
and hedge fund adviser. From February 1991
through March 2006, Mr. Schaja had various responsibilities with
Baron Capital leading to his position as President and Chief Operating Officer,
where he managed the growth of the firm from $50 million in assets under
management to over $15 billion. From June 2006
to April 2009, he was a managing general partner of RiverPark Capital, a
registered investment adviser that managed long only and long/short strategies.
27
Table of Contents
Wedgewood Partners, Inc.
Wedgewood acts as the
sub-adviser for RP Focused Large Cap Growth ETF. Wedgewood is registered as an investment
adviser with the SEC and is located at 9909 Clayton Road, Suite 103, St.
Louis, MO 63124. Anthony L. Guerrerio is
the majority owner of Wedgewood, and David A. Rolfe is the minority owner. The firms investment style is large cap
focused growth.
Wedgewood began operations
in 1988 and was founded by Anthony L. Guerrerio, who is its Chief Executive
Officer. Mr. Guerrerio has over 30
years experience in the investment business having founded Mark Twain Brokerage
Services, Inc., one of the first commercial bank brokerage businesses in
the United States. Prior to that, he was
with the investment firm of Salomon Brothers in New York. He holds a BS in Engineering from the United
States Military Academy, West Point, NY and an MBA from Harvard Business School.
Wedgewood provides
day-to-day portfolio management services to RP Focused Large Cap Growth
ETF. For this ETF, Wedgewood has
discretion to purchase and sell securities in accordance with the ETFs
objectives, policies, and restrictions.
Wedgewood has entered into
an Investment Sub-Advisory Agreement among the Manager, RP and Wedgewood, dated
September 10, 2009, with respect to the RP Focused Large Cap Growth ETF (Wedgewood
Subadvisory Agreement). Pursuant to the
Wedgewood Subadvisory Agreement, Wedgewood 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 RP Focused Large Cap Growth ETF; they are not separately paid by the RP
Focused Large Cap Growth ETF. From time
to time, Wedgewood may waive all or a portion of its fee.
Portfolio Manager
David A. Rolfe, CFA, is the
portfolio manager of RP Focused Large Cap Growth ETF and has served as
portfolio manager since the ETFs inception.
Mr. Rolfe is the Chief Investment Officer of Wedgewood. He has been responsible for Wedgewoods
Focused Large Cap Growth strategy since its inception in 1992. Prior to that, he was an Investment Officer
at Boatmens Trust Company in St. Louis.
He holds a BSBA in Finance from the University of Missouri.
The Wedgewood Portfolio Managers Performance Information
The following table contains performance
information for Wedgewoods Equity Composite (the Composite). The Composite represents a composite of all
fully discretionary taxable and non-taxable accounts managed by Wedgewood with
substantially similar objectives, policies, strategies and risks to those of
the RP Focused Large Cap Growth ETF.
The
performance information is limited and may not reflect performance in all
economic cycles. The accounts in the
Composite were not subject to certain investment limitations, diversification
requirements and other restrictions imposed on registered investment companies
such as the RP Focused Large Cap Growth ETF, including those under the
Investment Company Act of 1940, as amended (Investment Company Act), and the
Internal Revenue Code of 1986, as amended, which, if applicable, might have
adversely affected the performance of the accounts in the Composite. Further, none of the accounts in the
Composite have operated as an ETF, and different performance results for the RP
Focused Large Cap Growth ETF are likely due to, among other things, anticipated
differences between the cash positions of the ETF and the accounts in the Composite.
28
Table of Contents
The
performance information below is presented after deduction of fees applicable
to the accounts in the Composite, as described in the notes to the Composite,
which vary from the RP Focused Large Cap Growth ETFs estimated fees and
expenses, as described in the ETFs fee tables (see Fees and Expenses above).
Annual
return data is presented for each full calendar year since the inception of the
Composite in 1992. Average annual total
returns are presented for the one-year, three-year, five-year and ten-year
periods through December 31, 2009, as well as the period from inception
through December 31, 2009.
This performance information is
not the historical performance of RP Focused Large Cap Growth ETF. Past performance is no guarantee of future
results, and the past performance of the Composite is not indicative of the
future performance of RP Focused Large Cap Growth ETF.
Wedgewood Equity Composite:
[TO BE UPDATED]
Net of Fees (as of
12/31/2009)
|
|
Wedgewood
|
|
Russell 1000
Growth
|
|
1 Year
|
|
|
|
|
|
3 Year
|
|
|
|
|
|
5 Year
|
|
|
|
|
|
10 Year
|
|
|
|
|
|
Inception (9/30/1992)
|
|
|
|
|
|
29
Table of Contents
Annual Performance Results
Year End
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Composite Net
|
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
Russell 1000 Growth
|
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
Year End
|
|
2000
|
|
1999
|
|
1998
|
|
1997
|
|
1996
|
|
1995
|
|
1994
|
|
1993
|
|
|
|
Composite Net
|
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
|
Russell 1000 Growth
|
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
|
Notes:
As
of December 31, 2009, the Composite consisted of
accounts. The minimum account size for
accounts in the Composite is $65 thousand.
Results are based on fully discretionary accounts under management,
including those accounts no longer with the firm.
The
US Dollar is the currency used to express performance. Returns are presented net of management fees
and include the reinvestment of all income.
Net of fee performance was calculated using actual management fees,
which may vary by client, but ranged from %
to %.
Some accounts in the Composite may pay an all-inclusive wrap fee based
on a percentage of assets under management; these accounts are reduced by all
actual fees and transaction costs incurred.
Other than brokerage commissions, the fee includes investment
management, portfolio monitoring, consulting services, and in some cases,
custodial services. Wrap accounts
represent approximately % of the Composites
assets as of December 31, 2009.
Carve-outs
(non-equity positions) are included in the Composite and performance reflects
total segment plus cash returns using an actual pro rata allocation. As of December 31 2009, less than 1% of
the Composites assets were comprised of carve-out segments.
The ETFs Statement of
Additional Information provides additional information about the portfolio
managers at RP and Wedgewood, including other accounts they manage, their
ownership in the ETFs they manage, and their compensation.
Approval of
Advisory Agreements
A
discussion regarding the basis for the Boards approval of the Investment
Management Agreement, the RP Subadvisory Agreements and the Wedgewood
Subadvisory Agreement is available in the ETFs report to shareholders dated October 31,
2009.
OTHER SERVICE PROVIDERS
ALPS Distributors, Inc.
(Distributor), 1290 Broadway, Suite 1100, Denver, CO 80203, serves as
the distributor of Creation Units for each ETF on an agency basis. The Distributor does not maintain a secondary
market in Shares.
The
Bank of New York Mellon (BNY Mellon), One Wall Street, New York, New York
10286, is the administrator, fund accountant and transfer agent for the ETFs.
BNY Mellon, One Wall Street,
New York, New York 10286, is also the custodian for the ETFs.
30
Table of Contents
K&L Gates LLP, 1601 K
Street, NW, Washington, DC 20006 serves as legal counsel to the ETFs.
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 ETFs.
BUYING AND SELLING ETF
SHARES
Shares are issued or redeemed by each
ETF at NAV per Share only in Creation Units,
which are likely to cost several hundred thousand dollars. The value of one Creation Unit of the ETFs,
as of [ ], is set forth below
ETF
|
|
Value
of One Creation Unit
|
|
RP Growth ETF
|
|
$
|
|
|
RP Focused Large Cap Growth ETF
|
|
$
|
|
|
RP Technology ETF
|
|
$
|
|
|
RP Financials ETF
|
|
$
|
|
|
Shares 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 ETFs.
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 are listed on NYSE Arca, Inc. (the Exchange) under the following
symbols:
ETF
|
|
Trading
Symbol
|
|
RP Growth ETF
|
|
RPX
|
|
RP Focused Large Cap
Growth ETF
|
|
RWG
|
|
RP Technology ETF
|
|
RPQ
|
|
RP Financials ETF
|
|
RFF
|
|
31
Table of Contents
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, is the registered owner of all outstanding Shares of the ETFs 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 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 ETFs.
Share Trading Prices
. The trading prices of an 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
each ETFs portfolio every fifteen seconds.
This approximate value should not be viewed as a real-time update of
the NAV of an ETF because the approximate value may not be calculated in the
same manner as the NAV, which is computed once a day. The quotations for certain investments may
not be updated during U.S. trading hours if such holdings do not trade in the
U.S., except such quotations may be updated to reflect currency
fluctuations. The ETFs are 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 ETFs
You can purchase Shares
directly from the ETFs 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 ETFs will not issue fractional Creation Units. Creation Units may generally be purchased in
exchange for a basket of securities - known as the
In-Kind Creation Basket
and cash equal to the
Cash Component
, as discussed further below. The ETFs reserve the right to reject any
purchase request at any time, for any reason, and without notice. The ETFs 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 an 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
. 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 for each ETF for
32
Table of Contents
that day. The In-Kind Creation Basket will identify the
name and number of shares of each security that must be contributed to an ETF
for each Creation Unit purchased. Each
ETF reserves the right to accept a nonconforming In-Kind Creation Basket.
Cash
Component.
In addition
to the in-kind deposit of 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 the securities
in the In-Kind Creation Basket. 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. 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.
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 Growth ETF
|
|
$
|
500
|
|
RP Focused Large Cap
Growth ETF
|
|
$
|
500
|
|
RP Technology ETF
|
|
$
|
500
|
|
RP Financials ETF
|
|
$
|
500
|
|
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. 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 relevant
ETF. The fee protects existing
shareholders of an ETF from the costs associated with issuing Creation Units.
Redeeming
Shares Directly From an ETF
You may redeem Shares of the
ETFs only in Creation Units or multiples thereof. To redeem Shares directly with an 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 securities known as the
In-Kind Redemption Basket
and cash equal to the
Cash Component
, as discussed further below.
In-Kind
Redemption Basket.
Redemption
proceeds will generally be paid in kind with a basket of securities known as
the In-Kind Redemption Basket. In most
cases, the In-Kind Redemption Basket will be the same as the In-Kind Creation
Basket for that same day.
33
Table of Contents
There will be times,
however, when the In-Kind Creation Basket and In-Kind Redemption Baskets
differ. The composition of the In-Kind
Redemption Basket will be available on the NSCC bulletin board. An ETF may honor a redemption request with a
nonconforming In-Kind Redemption Basket.
Cash
Component.
Depending on
whether the NAV of a Creation Unit is higher or lower than the value of the
securities in the In-Kind Redemption Basket, 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, and
if all other procedures set forth in the Participant Agreement are followed.
Transaction
Fee on Redemption of Creation Units.
The ETFs impose 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]).
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 ETFs (whether or not they
otherwise permit cash redemptions) reserve the right to redeem Creation Units
for cash to the extent that an investor could not lawfully purchase or an 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.
Continuous Offering
. You should be aware of certain legal risks
unique to investors purchasing Creation Units directly from an 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.
34
Table of Contents
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 ETFs sell and redeem
their 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
ETFs, to the extent effected in-kind (i.e., for securities), they do not cause
the harmful effects that may result from frequent cash trades.
The Board recognized that to
the extent that the ETFs allow or require trades to be effected in whole or in
part in cash, those trades could result in dilution to an ETF and increased
transaction costs, which could negatively impact an 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 ETFs may employ fair valuation
pricing to minimize the potential for dilution from market timing. Moreover, each ETF imposes Transaction Fees
on purchases and redemptions of ETF Shares, which increase if an investor
substitutes cash in part or in whole for securities, reflecting the fact that
an ETFs costs increase in those circumstances.
Each ETF reserves the right to impose additional restrictions on
disruptive, excessive or short-term purchases.
DISTRIBUTION AND SERVICE
PLAN
Each ETF has adopted a
distribution and service plan (Plan) pursuant to Rule 12b-1 under the
Investment Company Act. Under the Plan, an
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,
an 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.
No distribution or service
fees are currently paid by any 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
an 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.
35
Table of Contents
Each 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
an 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.
In some cases, the price of debt securities is determined using quotes
obtained from brokers. Certain
short-term debt instruments used to manage an ETFs cash are valued on the
basis of amortized cost. The values of
any foreign securities held by an 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. An 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 the
Manager 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 ETFs at www.grailadvisors.com. Among other things, this website includes
this prospectus and the Statement of Additional Information, 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 ETFs publicly
disseminate their full portfolio holdings each day the ETF is open for business
through its website at www.grailadvisors.com.
In addition, 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.
36
SECTION 12(d)(1) INFORMATION
The Trust and the ETFs 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
Each ETF pays out dividends
from its net investment income to shareholders annually. Each ETF distributes its net capital gains,
if any, annually. Each ETF typically
earns income dividends from stocks.
These amounts, net of expenses, are passed along to ETF shareholders as income
dividend distributions. Each 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 an 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.
ETF distributions and your sale of your Shares in an
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.
37
Table of Contents
Taxes on Distributions
Distributions by an ETF generally are taxable to you
as ordinary income or capital gains.
Distributions of an ETFs investment company taxable income (which is,
generally, ordinary income plus net short-term capital gains in excess of net
long-term capital losses) 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 an 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 an
ETFs Shares and regardless of whether paid in cash or reinvested in additional
Shares. Distributions in excess of an
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 an
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 an 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 an 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 an 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.
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
38
Table
of Contents
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 equity
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
equity 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.
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.
39
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand each ETFs financial performance since inception. [Certain information reflects financial results for a single ETF share]. The total return in the table represent the rate that an investor would have earned (or lost) on an investment in the ETF (assuming reinvestment of all dividends and distributions). For the period October 2, 2009 (commencement of offering of shares) through October 31, 2009, the information has been audited by KPMG LLP, independent registered public accounting firm for the ETFs. The financial statements and independent accountants report thereon of the ETFs are incorporated into the Statement of Additional Information.
[TO BE UPDATED]
RP GROWTH ETF
|
|
For the period
|
|
|
|
October 2, 2009*
|
|
|
|
through
|
|
|
|
October 31, 2009
|
|
|
|
|
|
Per share operating performance for a share outstanding throughout
the period
|
|
|
|
|
|
|
|
Beginning net asset value per share
|
|
$
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
Dividends from net investment income
|
|
|
|
|
|
|
|
Ending net asset value per share
|
|
$
|
|
|
|
|
|
|
Total return(a)
|
|
|
%
|
|
|
|
|
Ratios/supplemental data
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
Expenses(b)
|
|
|
%
|
Net investment income
|
|
|
%
|
|
|
|
|
Net assets at the end of period (000s omitted)
|
|
$
|
|
|
* Commencement of offering of shares.
40
Table of Contents
[TO BE UPDATED]
RP FOCUSED LARGE CAP GROWTH ETF
|
|
For the period
|
|
|
|
October 2, 2009*
|
|
|
|
through
|
|
|
|
October 31, 2009
|
|
|
|
|
|
Per share operating performance for a share outstanding throughout
the period
|
|
|
|
|
|
|
|
Beginning net asset value per share
|
|
$
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
Dividends from net investment income
|
|
|
|
|
|
|
|
Ending net asset value per share
|
|
$
|
|
|
|
|
|
|
Total return(a)
|
|
|
%
|
|
|
|
|
Ratios/supplemental data
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
Expenses(b)
|
|
|
%
|
Net investment income
|
|
|
%
|
|
|
|
|
Net assets at the end of period (000s omitted)
|
|
$
|
|
|
* Commencement of offering of shares.
41
Table of Contents
[TO BE UPDATED]
RP TECHNOLOGY ETF
|
|
For the period
|
|
|
|
October 2, 2009*
|
|
|
|
through
|
|
|
|
October 31, 2009
|
|
|
|
|
|
Per share operating performance for a share outstanding throughout
the period
|
|
|
|
|
|
|
|
Beginning net asset value per share
|
|
$
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
Dividends from net investment income
|
|
|
|
|
|
|
|
Ending net asset value per share
|
|
$
|
|
|
|
|
|
|
Total return(a)
|
|
|
%
|
|
|
|
|
Ratios/supplemental data
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
Expenses(b)
|
|
|
%
|
Net investment income
|
|
|
%
|
|
|
|
|
Net assets at the end of period (000s omitted)
|
|
$
|
|
|
* Commencement of offering of shares.
42
Table of Contents
[TO BE UPDATED]
RP FINANCIALS ETF
|
|
For the period
|
|
|
|
October 2, 2009*
|
|
|
|
through
|
|
|
|
October 31, 2009
|
|
|
|
|
|
Per share operating performance for a share outstanding throughout
the period
|
|
|
|
|
|
|
|
Beginning net asset value per share
|
|
$
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
Dividends from net investment income
|
|
|
|
|
|
|
|
Ending net asset value per share
|
|
$
|
|
|
|
|
|
|
Total return(a)
|
|
|
%
|
|
|
|
|
Ratios/supplemental data
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
Expenses(b)
|
|
|
%
|
Net investment income
|
|
|
%
|
|
|
|
|
Net assets at the end of period (000s omitted)
|
|
$
|
|
|
* Commencement of offering of shares.
43
Table of Contents
GRAIL ADVISORS ACTIVELY MANAGED ETFS
If you would like more
information about the ETFs and the Trust, the following documents are available
free, upon request:
ANNUAL/SEMI-ANNUAL REPORTS TO
SHAREHOLDERS
Additional information about
the ETFs 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 each ETFs
performance during the last fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION
A
Statement of Additional Information dated February ,
2010, which contains more details about the ETFs, 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 ETFs,
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 ETFs,
including their 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.
Investment Company Act File No. 811-22154.
44
Table of
Contents
STATEMENT OF ADDITIONAL INFORMATION
GRAIL ADVISORS ETF TRUST
RP Growth ETF (RPX)
RP Focused Large Cap Growth ETF (RWG)
RP Technology ETF (RPG)
RP Financials ETF (RFF)
ONE FERRY BUILDING, SUITE 255, SAN FRANCISCO, CA 94111
PHONE: 1-415-677-5870
February , 2010
Shares
of the ETFs are istsed and traded on NYSE Arca, Inc
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 eight ETFs.
Grail American Beacon Large Cap Value ETF, Grail American Beacon
International Equity ETF, RP Growth ETF, RP Focused Large Cap Growth ETF, RP
Technology ETF, RP Financials ETF, Grail McDonnell Intermediate Municipal Bond
ETF and Grail McDonnell Core Taxable Bond ETF.
RP Growth ETF, RP Focused Large Cap Growth ETF, RP Technology ETF and RP
Financials ETF are described in this SAI; the other ETFs are described in
separate statements of additional information.
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 Focused Large Cap Growth ETF and as the exclusive
sub-adviser to the RP Growth ETF, RP Technology ETF and RP Financials ETF. Wedgewood Partners, Inc. serves as the
sub-adviser of the RP Focused Large Cap Growth 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 Wedgewood RP provides day-to-day portfolio management
services to RP Growth ETF, RP Technology ETF and RP Financials ETF and, in
conjunction with the Manager, oversees the day-to-day portfolio management
services provided by Wedgewood to RP Focused Large Cap Growth ETF. ALPS Distributors, Inc. serves as the
Distributor for each ETF.
Shares of
the ETFs are neither guaranteed nor insured by the U.S. Government.
This
SAI, dated February , 2010, is not a
prospectus. It should be read in
conjunction with the ETFs Prospectus, dated February ,
2010, which incorporates
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this
SAI by reference. 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 ETFs for the period October 2,
2009 (commencement of operations) through October 31, 2009 is available in
the same manner.
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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.
3
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.
Creation
Unit
means an aggregation of 50,000 Shares that each 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 Growth ETF, RP Focused Large Cap Growth
ETF, RP Technology ETF and RP Financials 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 an ETF.
Fund Redemption
means the
In-Kind Redemption Basket and Cash Redemption Amount received in connection
with the redemption of a Creation Unit.
IIV
means an approximate
per-Share value of an ETFs portfolio, disseminated every fifteen seconds
throughout the trading day by the Exchange or other information providers, known
as the Intraday Indicative Value.
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In-Kind Creation Basket
means the basket of securities to be deposited to purchase Creation Units of an
ETF. The In-Kind Creation Basket will
identify the name and number of shares of each security to be contributed, in
kind, to an 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 February , 2010,
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
an ETF.
Transaction Fees
are fees
imposed to compensate the Trust.
For each of the
RP Growth ETF, RP Focused Large Cap Growth ETF, RP Technology ETF and RP
Financials ETF, they will generally be $500.
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.
Trust
means the Grail
Advisors ETF Trust, a Delaware statutory trust.
Wedgewood
means Wedgewood
Partners, Inc.
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 eight ETFs: RP
Growth ETF, RP Focused Large Cap Growth ETF, RP Technology ETF, RP Financials
ETF, Grail American Beacon Large Cap Value ETF, Grail American Beacon
International Equity ETF, Grail McDonnell Intermediate Municipal Bond ETF and
Grail McDonnell Core Taxable Bond ETF.
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 31, 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 February ,
2010. As of the date of this statement
of additional information, 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.
Each
ETF offers and issues Shares at NAV only in aggregations of a specified number
of Shares, generally in exchange for a basket of securities constituting the
portfolio holdings of the ETF, together
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with
the deposit of a specified cash payment.
Shares of each ETF are 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, each
ETF issues and redeems Shares, principally in
kind, on a continuous basis at NAV, only in Creation Units of 50,000 Shares,
though the Trust reserves the right to offer a cash option for creations and
redemptions. Further, in the event of
the liquidation of an 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 are 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 ETFs
are actively managed and do not seek to replicate the performance of a
specified index.
EXCHANGE
LISTING AND TRADING
Shares
of each ETF are 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 each ETF will continue to be met.
The Exchange may, but is not required to, remove the Shares of an ETF
from listing if: (i) following the initial 12-month period beginning at
the commencement of trading of an 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 an ETF
from listing and trading upon termination of an ETF.
The ETFs are 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 ETFs or any member of the public regarding the
advisability of investing in securities generally or in the ETFs particularly
or the ability of the ETFs to achieve their objectives. The Exchange has no obligation or liability
in connection with the administration, marketing or trading of the ETFs.
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 ETFs, which will form the basis for the calculation
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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 an 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 quotations for certain investments may
not be updated during U.S. trading hours if such holdings do not trade in the
U.S., except such quotations may be updated to reflect currency
fluctuations. The ETFs are not involved
in, or responsible for, the calculation or dissemination of the IIV and make 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 an
ETF only by a vote of the holders of a majority of the ETFs outstanding voting
securities, except as noted below, no ETF may:
1. Purchase or sell
real estate
limited
partnership interests, provided, however, that an 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 an ETF from purchasing or selling foreign currency, options,
futures contracts, options on futures contracts, forward contracts, 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, an 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 an 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
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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 an ETFs total assets.
This diversification
limitation does not apply to the RP Focused Large Cap Growth ETF.
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.
This concentration
limitation does not apply to the RP Technology ETF or RP Financials ETF.
The
following non-fundamental investment restrictions apply to each ETF and may be
changed with respect to an ETF by a vote of a majority of the Board.
No
ETF may:
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
2.
Purchase securities on margin or effect short sales, except that an ETF may
obtain such short term credits as may be necessary for the clearance of
purchases or sales of securities.
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 an ETFs investments will
not constitute a violation of such limitation.
Thus, an 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 an 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 ETFs intend
to use the Standard Industrial Classifications Code (SIC) list.
INVESTMENT
OBJECTIVE, INVESTMENT STRATEGIES AND RISKS
The investment objective and
principal strategies of, and risks of investing in, each ETF are described in
the Prospectus. Unless otherwise
indicated in the Prospectus or this SAI, the investment objective and policies
of an ETF may be changed without shareholder approval.
In addition to the
investment strategies described in the Prospectus, each ETF may invest up to
20% of its total assets in debt securities that are investment grade at the
time of purchase, including obligations of the U.S. Government, its agencies
and instrumentalities, corporate debt securities, mortgage-backed securities,
asset-backed securities, master-demand notes, Yankee dollar and Eurodollar bank
certificates of deposit, time deposits, bankers acceptances, commercial paper
and other notes, inflation-indexed securities, and other debt securities. Investment grade securities include
securities issued or guaranteed
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by the U.S. Government, its
agencies and instrumentalities, as well as securities rated in one of the four
highest rating categories by at least two nationally recognized statistical
rating organizations (Rating Organizations) rating that security, such as
Standard & Poors Ratings Services (Standard & Poors) or
Moodys Investors Service, Inc. (Moodys), or rated in one of the four
highest rating categories by one Rating Organization if it is the only Rating
Organization rating that security or unrated, if deemed to be of comparable
quality by an ETFs sub-adviser.
Obligations rated in the fourth highest rating category are limited to
25% of each ETFs debt allocations. An
ETF, at the discretion of its sub-adviser, may retain a debt security that has
been downgraded below the initial investment criteria.
Each
ETF may also engage in the following investment strategies or techniques
(except where indicated otherwise).
Securities Lending
An ETF may make secured
loans of its portfolio securities, however, securities loans will not be made
if, as a result, the aggregate amount of all outstanding securities loans by an
ETF exceeds 33 1/3% of its total assets (including the market value of
collateral received). For purposes of
complying with an ETFs investment policies and restrictions, collateral
received in connection with securities loans is deemed an asset of the ETF to
the extent required by law. An ETF
continues to receive dividends or interest, as applicable, on the securities
loaned and simultaneously earns either interest on the investment of the cash
collateral or fee income if the loan is otherwise collateralized.
To the extent an ETF engages
in securities lending, securities loans will be made to broker-dealers that its
sub-adviser believes to be of relatively high credit standing pursuant to
agreements requiring that the loans continuously be collateralized by cash,
liquid securities, or shares of other investment companies with a value at
least equal to the market value of the loaned securities. As with other extensions of credit, the ETF
bears the risk of delay in the recovery of the securities and of loss of rights
in the collateral should the borrower fail financially. The ETF also bears the risk that the value of
investments made with collateral may decline.
Voting rights or rights to
consent with respect to the loaned securities pass to the borrower. An ETF has the right to call loans at any
time on reasonable notice. However, the
ETF bears the risk of delay in the return of the security, impairing the ETFs
ability to vote on such matters. An ETFs
sub-adviser will retain lending agents on behalf of the ETFs that are
compensated based on a percentage of the ETFs return on its securities
lending. An ETF may also pay various
fees in connection with securities loans, including shipping fees and custodian
fees.
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
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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 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 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.
Depository Receipts
The ETFs may invest in
foreign securities by purchasing depositary receipts, including American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs) or other securities convertible into securities of
issuers based in foreign countries.
These securities may not necessarily be denominated in the same currency
as the securities which they represent.
Generally, ADRs, in registered form, are denominated in U.S. dollars and
are designed for use in the U.S. securities markets, GDRs, in bearer form, are
issued and designed for use outside the United States and EDRs (also referred
to as Continental Depositary Receipts (CDRs)), in bearer form, may be
denominated in other currencies and are designed for use in European securities
markets. ADRs are receipts typically
issued by a U.S. bank or trust company evidencing ownership of the underlying
securities. EDRs are European receipts
evidencing a similar arrangement. GDRs are receipts typically issued by
non-United States banks and trust companies that evidence ownership of either
foreign or domestic securities. For
purposes of an ETFs investment policies, ADRs, GDRs and EDRs are deemed to
have the same classification as the underlying securities they represent. Thus, an ADR, GDR or EDR representing
ownership of common stock will be treated as common stock.
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.
Equity-linked Securities
Investments in enhanced convertible
or equity-linked securities may subject the ETFs to additional risks not
ordinarily associated with investments in traditional convertible
securities. Particularly when such
securities are issued by a third party on an underlying linked security of
another company, the ETFs are subject to risks if the underlying security
underperforms or the issuer defaults on the payment of the dividend or the
underlying security at maturity. In
addition, the trading market for certain securities may be less liquid than for
other convertible securities making it difficult for the ETFs to dispose of a
particular security in a timely manner, and reduced liquidity in the secondary
market for any such
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securities may make it more
difficult to obtain market quotations for valuing the ETFs portfolio. Investments in linked securities have the
potential to lead to significant losses because of unexpected movements in the
underlying financial asset, index, currency or other investment. The ability of
an ETF to utilize linked securities successfully will depend on its sub-advisers
ability correctly to predict pertinent market movements, which cannot be
assured.
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
ETFs 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.
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 some form
of government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will meet their obligations.
One
type of SMBS has one class receiving all of the interest from the mortgage
assets (the interest-only, or 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 prepayments) on the 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. The ETFs may
invest in other asset-backed securities that have been offered to investors.
Warrants and Rights
The ETFs 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. An 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
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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.
Options and Futures
Although not currently
anticipated, the ETFs may use options and futures for various purposes,
including for hedging and investment purposes.
The use of options contracts, futures contracts, and options on futures
contracts involves risk. Thus, while the
ETF may benefit from the use of options, futures, and options on futures,
unanticipated changes in interest rates, securities prices, currency exchange
rates, or other underlying assets or reference rates may adversely affect an
ETFs performance.
The
ETFs ability to write and purchase call and put options is limited by the
requirements for qualifying as a regulated investment company under the
Internal Revenue Code of 1986, as amended.
Options on Securities and
Indices.
The ETFs
may purchase and sell put and call options on equity, fixed income, or other
securities or indices in standardized exchanged-traded contracts. An option on a security or index is a
contract that gives the holder of the option, in return for a premium, the
right (but not the obligation) 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 underlying the option) at a specified
price. Upon exercise, the writer of an
option on a security has the obligation 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 required to pay the difference between the
cash value of the index and the exercise price multiplied by the specified
multiplier for the index option.
Purchasing
Options on Securities and Indices.
Among other reasons, the ETFs may purchase a
put option to hedge against a decline in the value of a portfolio
security. If such a decline occurs, the
put option will permit an ETF to sell the security at the higher exercise price
or to close out the option at a profit.
By using put options in this manner, an ETF will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by its transaction costs. In order for a put option purchased by an ETF
to be profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium paid by the ETF and
transaction costs.
Among other reasons, an ETF
may purchase call options to hedge against an increase in the price of
securities the ETF anticipates purchasing in the future. If such a price increase occurs, a call
option will permit an ETF to purchase the securities at the exercise price or
to close out the option at a profit. The
premium paid for the call option, plus any transaction costs, will reduce the
benefit, if any, that an ETF realizes upon exercise of the option and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the ETF. Thus, for a call
option purchased by an ETF to be profitable, the market price of the underlying
security must rise sufficiently above the exercise price to cover the premium
paid by the ETF to the writer and transaction costs.
In the case of both call and
put options, the purchaser of an option risks losing the premium paid for the
option plus related transaction costs if the option expires worthless.
Writing
Options on Securities and Indices.
Because an ETF receives a premium for writing
a put or call option, the ETF may seek to increase its return by writing call
or put options on securities or indices.
The premium an ETF receives for writing an option will increase the ETFs
return in the event the option expires unexercised or is closed out at a
profit. The size of the premium an ETF
receives reflects, among other things, the relationship of the market price and
volatility of the underlying security or index to the exercise price of the
option, the remaining term of the option, supply and demand, and interest
rates.
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An ETF may write a call
option on a security or other instrument held by the ETF. In such case the ETF limits its opportunity
to profit from an increase in the market price of the underlying security above
the exercise price of the option. Alternatively,
an ETF may write a call option on securities in which it may invest but that
are not currently held by the ETF.
During periods of declining securities prices or when prices are stable,
writing these types of call options can be a profitable strategy to increase an
ETFs income with minimal capital risk.
However, when securities prices increase, an ETF is exposed to an
increased risk of loss, because if the price of the underlying security or
instrument exceeds the options exercise price, the ETF will suffer a loss
equal to the amount by which the market price exceeds the exercise price at the
time the call option is exercised, minus the premium received. Calls written on securities that an ETF does
not own are riskier than calls written on securities owned by the ETF because
there is no underlying security held by the ETF that can act as a partial
hedge. When such a call is exercised, an
ETF must purchase the underlying security to meet its call obligation or make a
payment equal to the value of its obligation in order to close out the
option. Calls written on securities that
an ETF does not own have speculative characteristics and the potential for loss
is unlimited. There is also a risk,
especially with less liquid preferred and debt securities, that the securities
may not be available for purchase.
An ETF also may write a put
option on a security. In so doing, the
ETF assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then current market price,
resulting in a loss on exercise equal to the amount by which the market price
of the security is below the exercise price minus the premium received.
OTC
Options
. An ETF may also invest in
over-the-counter (OTC) options. OTC
options differ from exchange-traded options in that they are two-party
contracts, with price and other terms negotiated between the buyer and seller,
and generally do not have as much market liquidity as exchange-traded options.
Closing
Options Transactions.
The
holder of an option may terminate its position in a put or call option it has
purchased by allowing it to expire or by exercising the option. If an option is American style, it may be
exercised on any day up to its expiration date.
In contrast, a European style option may be exercised only on its
expiration date. In addition, a holder
of an option may terminate its obligation prior to the options expiration by
effecting an offsetting closing transaction.
In the case of exchange-traded options, an ETF, as a holder of an
option, may effect an offsetting closing sale transaction by selling an option
of the same series as the option previously purchased. An ETF realizes a loss from a closing sale
transaction if the premium received from the sale of the option is less than
the premium paid to purchase the option (plus transaction costs). Similarly, an ETF that has written an option
may effect an offsetting closing purchase transaction by buying an option of
the same series as the option previously written. An ETF realizes a loss from a closing
purchase transaction if the cost of the closing purchase transaction (option
premium plus transaction costs) is greater than the premium received from
writing the option. If an ETF desires to
sell a security on which it has written a call option, it will effect a closing
purchase prior to or concurrently with the sale of the security. There can be no assurance, however, that a
closing purchase or sale can be effected when an ETF desires to do so.
An OTC option may be closed
out only with the counterparty, although either party may engage in an
offsetting transaction that puts that party in the same economic position as if
it had closed out the option with the counterparty.
No guarantee exists that an
ETF will be able to effect a closing purchase or a closing sale with respect to
a specific option at any particular time.
Risk
Factors in Options Transactions.
There are various risks associated with
transactions in exchange-traded and OTC options. The value of options written by an ETF, which
will be priced daily, will be
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affected by, among other
factors, changes in the value of underlying securities (including those
comprising an index), changes in the dividend rates of underlying securities
(including those comprising an index), changes in interest rates, changes in
the actual or perceived volatility of the stock market and underlying
securities, and the remaining time to an options expiration. The value of an option also may be adversely
affected if the market for the option is reduced or becomes less liquid. In addition, since an American style option allows
the holder to exercise its rights any time prior to expiration of the option,
the writer of an American style option has no control over the time when it may
be required to fulfill its obligations as a writer of the option. This risk is not present when writing a
European style option since the holder may only exercise the option on its
expiration date.
An ETFs ability to use
options as part of its investment program depends on the liquidity of the
markets in those instruments. In
addition, there can be no assurance that a liquid market will exist when an ETF
seeks to close out an option position.
If an 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
an ETF were unable to close out a call option that it had written on a
portfolio security owned by the ETF, it would not be able to sell the
underlying security unless the option expired without exercise. As the writer of a call option on a portfolio
security, during the options life, an ETF foregoes the opportunity to profit
from increases in the market value of the security underlying the call option
above the sum of the premium and the strike price of the call, but retains the risk
of loss (net of premiums received) should the price of the underlying security
decline. Similarly, as the writer of a
call option on a securities index, an ETF foregoes the opportunity to profit
from increases in the index over the strike price of the option, though it
retains the risk of loss (net of premiums received) should the price of the ETFs
portfolio securities decline.
An exchange-traded option
may be closed out by means of an offsetting transaction only on a national
securities exchange, which generally provides a liquid secondary market for an
option of the same series. If a liquid
secondary market for an exchange-traded option does not exist, an ETF might not
be able to effect an offsetting closing transaction for a particular option as described
above. Reasons for the absence of a
liquid secondary market on a national securities exchange include the
following: (i) insufficient trading interest in some options; (ii) restrictions
by a national securities exchange on opening or closing transactions, or both; (iii) trading
halts, suspensions, or other restrictions on particular classes or series of
options or underlying securities; (iv) unusual or unforeseen interruptions
in normal operations on a national securities exchange; (v) inability to
handle current trading volume; or (vi) discontinuance of options trading (or
trading in a particular class or series of options) (although outstanding
options on a national securities exchange that were issued by the Options
Clearing Corporation should continue to be exercisable in accordance with their
terms). In addition, the hours of
trading for options on a national securities exchange may not conform to the
hours during which the securities held by an ETF are traded. To the extent that the options markets close
before the markets for the underlying securities, significant price and rate
movements can take place in the underlying markets that may not be reflected in
the options markets.
National securities
exchanges have established limits on the maximum number of options an investor
or group of investors acting in concert may write. The ETFs, the Manager, RP, Wedgewood and
other clients of the ETFs advisers may constitute such a group. These limits restrict an ETFs ability to
purchase or sell options on a particular security.
An OTC option may be closed
out only with the counterparty, although either party may engage in an
offsetting transaction that puts that party in the same economic position as if
it had closed out the option with the counterparty. See Swap Contracts and Other Two-Party
Contracts Risk Factors in Swap Contracts, OTC Options, and Other Two-Party
Contracts for a discussion of counterparty risk and other risks associated
with investing in OTC options below.
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An ETFs ability to engage
in options transactions may be limited by tax considerations.
Futures
.
To the extent consistent with applicable law,
the ETFs may invest in futures contracts on, among other things, financial
instruments (such as a U.S. government security or other fixed income
security), individual equity securities (single stock futures), securities
indices, interest rates, currencies, inflation indices, and commodities or
commodities indices. Futures contracts
on securities indices are referred to herein as Index Futures.
Certain futures contracts
are physically settled (i.e., involve the making and taking of delivery of a
specified amount of an underlying security or other asset). For instance, the sale of futures contracts
on foreign currencies or financial instruments creates an obligation of the
seller to deliver a specified quantity of an underlying foreign currency or
financial instrument called for in the contract for a stated price at a
specified time. Conversely, the purchase
of such futures contracts creates an obligation of the purchaser to pay for and
take delivery of the underlying foreign currency or financial instrument called
for in the contract for a stated price at a specified time. In some cases, the specific instruments
delivered or taken, respectively, on the settlement date are not determined
until on or near that date. That
determination is made in accordance with the rules of the exchange on
which the sale or purchase was made.
Some futures contracts are cash settled (rather than physically
settled), which means that the purchase price is subtracted from the current
market value of the instrument and the net amount, if positive, is paid to the
purchaser by the seller of the futures contract and, if negative, is paid by
the purchaser to the seller of the futures contract. In particular, Index Futures are agreements
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of a securities 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 a securities index might be a function of the
value of certain specified securities, no physical delivery of these securities
is made.
The purchase or sale of a
futures contract differs from the purchase or sale of a security or option in
that no price or premium is paid or received.
Instead, an amount of cash, U.S. government securities, or other liquid
assets equal in value to a percentage of the face amount of the futures
contract must be deposited with the broker.
This amount is known as initial margin.
The amount of the initial margin is generally set by the market on which
the contract is traded (margin requirements on foreign exchanges may be
different than those on U.S. exchanges).
Subsequent payments to and from the broker, known as variation margin,
are made on a daily basis as the price of the underlying futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as marking to the market. For futures contracts which are cash settled,
an ETF may designate or segregate liquid assets in an amount equal to the ETFs
daily marked-to-market value of such contract.
Prior to the settlement date of the futures contract, the position may
be closed by taking an opposite position.
A final determination of variation margin is then made, additional cash
is required to be paid to or released by the broker, and the purchaser realizes
a loss or gain. In addition, a
commission is paid to the broker on each completed purchase and sale. Although some futures contracts call for
making or taking delivery of the underlying securities, currencies, commodities
or other underlying instrument, in most cases, futures contracts are closed
before the settlement date without the making or taking of delivery by
offsetting purchases or sales of matching futures contracts (i.e., with the
same exchange, underlying financial instrument, currency, commodity, or index,
and delivery month). If the price of the
initial sale exceeds the price of the offsetting purchase, the seller is paid
the difference and realizes a gain.
Conversely, if the price of the offsetting purchase exceeds the price of
the initial sale, the seller realizes a loss.
Similarly, a purchase of a futures contract is closed out by selling a
corresponding futures contract. If the
offsetting sale price exceeds the original purchase price, the purchaser
realizes a gain, and, if the original purchase price exceeds the offsetting
sale price, the purchaser realizes a loss.
Any transaction costs must also be included in these calculations. In the U.S., futures contracts are traded
only on commodity exchanges or boards of trade known as contract markets
approved by the CFTC, and must be executed through a futures commission
merchant or brokerage firm that is a member of the relevant market.
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Index
Futures
. An ETFs purchase and sale of
Index Futures is limited to contracts and exchanges approved by the CFTC. An ETF may close open positions on an
exchange on which Index Futures are traded at any time up to and including the
expiration day. In general, all
positions that remain open at the close of business on that day must be settled
on the next business day (based on the value of the relevant index on the
expiration day). Additional or different
margin requirements as well as settlement procedures may apply to foreign stock
Index Futures.
Interest
Rate
Futures
.
An ETF may engage
in transactions involving the use of futures on interest rates. These transactions may be in connection with
investments in U.S. government securities and other fixed income securities.
Options on
Futures Contracts.
Options on
futures contracts give the purchaser the right in return for the premium paid
to assume a long position (in the case of a call option) or a short position
(in the case of a put option) in a futures contract at the option exercise
price at any time during the period of the option (in the case of an American
style option) or on the expiration date (in the case of European style
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 holder acquires a short position and the writer
is assigned the opposite long position in the futures contract. Accordingly, in the event that an option is
exercised, the parties will be subject to all the risks associated with the
trading of futures contracts, such as payment of initial and variation margin
deposits.
An ETF may use options on
futures contracts in lieu of writing or buying options directly on the
underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against
a possible decrease in the value of its portfolio securities, an ETF may
purchase put options or write call options on futures contracts rather than
selling futures contracts. Similarly, an
ETF may hedge against a possible increase in the price of securities the ETF
expects to purchase by purchasing call options or writing put options on
futures contracts rather than purchasing futures contracts. Options on futures contracts generally
operate in the same manner as options purchased or written directly on the
underlying investments.
An 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 may 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 an ETF.
A position in an option on a
futures contract may be terminated by the purchaser or seller prior to
expiration by effecting a closing purchase or sale transaction, subject to the
availability of a liquid secondary market, which is the purchase or sale of an
option of the same type (i.e., the same exercise price and expiration date) as
the option previously purchased or sold.
The difference between the premiums paid and received represents an ETFs
profit or loss on the transaction.
Risk
Factors in Futures and Futures Options Transactions.
Investment in futures contracts involves
risk. A purchase or sale of futures
contracts may result in losses in excess of the amount invested in the futures
contract. If a futures contract is used
for hedging, an imperfect correlation between movements in the price of the
futures contract and the price of the security, currency, or other investment
being hedged creates risk. Correlation
is higher when the investment being hedged underlies the futures contract. Correlation is lower when the investment being
hedged is different than the instrument underlying the futures contract, such
as when a futures contract on an index of securities or commodities is used to
hedge a single security or commodity, a futures contract on one security (e.g.,
U.S. Treasury bonds) or commodity (e.g., gold) is used to hedge a different
security (e.g., a mortgage-backed security) or commodity (e.g., copper), or
when a futures contract in one currency is used to hedge a security denominated
in another currency. In the event of an imperfect
correlation between a futures position and
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the portfolio position (or
anticipated position) intended to be protected, an ETF may realize a loss on
the futures contract and/or on the portfolio position intended to be
protected. The risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches. To compensate for
imperfect correlations, an ETF may purchase or sell futures contracts in a
greater amount than the hedged investments if the volatility of the price of
the hedged investments is historically greater than the volatility of the
futures contracts. Conversely, an ETF
may purchase or sell fewer futures contracts if the volatility of the price of
the hedged investments is historically less than that of the futures contract.
In the case of Index Futures
and commodity futures on commodity indices, changes in the price of those
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. Third, trading hours for
foreign stock Index Futures may not correspond perfectly to the trading hours
of the foreign exchange to which a particular foreign stock Index Future
relates. As a result, the lack of
continuous arbitrage may cause a disparity between the price of foreign stock
Index Futures and the value of the relevant index.
An ETF also may purchase
futures contracts (or options on them) as an anticipatory hedge against a
possible increase in the price of a currency in which securities the ETF
anticipates purchasing is denominated.
In such instances, the currency may instead decline. If an ETF does not then invest in those
securities, the ETF may realize a loss on the futures contract that is not
offset by a reduction in the price of the securities purchased.
An 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. Therefore, no
assurance can be given that an ETF will be able to utilize these instruments
effectively. In addition, there can be
no assurance that a liquid market will exist at a time when an ETF seeks to
close out a futures or option on a futures contract position, and that ETF
would remain obligated to meet margin requirements until the position is
closed. The liquidity of a secondary
market in a futures contract may be adversely affected by daily price
fluctuation limits established by commodity exchanges to limit the amount of
fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached, no
trades of the contract may be entered at a price beyond the limit, thus
preventing the liquidation of open futures positions. In the past, prices have exceeded the daily
limit on several consecutive trading days.
Short positions in Index Futures or commodity futures on commodities
indices may be closed out only by purchasing a futures contract on the exchange
on which the Index Futures or commodity futures, as applicable, are traded.
The successful use of
futures contracts and related options for hedging and risk management also
depends on the ability of an ETFs sub-adviser to forecast correctly the
direction and extent of movements in exchange rates, interest rates, and
securities or commodity prices within a given time frame. For example, to the extent an ETF invests in
fixed income securities and interest rates remain stable (or move in a
direction opposite to that anticipated) during the period a futures contract or
related option on those securities is held by the ETF, the ETF would realize a
loss on the futures contract that is not offset by an increase in the value of
its portfolio securities. As a result,
the ETFs total return would be less than if it had not used the futures.
As discussed above, an ETF
that purchases or sells a futures contract is only required to deposit initial
and variation margin as required by relevant CFTC regulations and the rules of
the contract market. Because the
purchase of a futures contract obligates an ETF to purchase the underlying
security or other
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instrument at a set price on
a future date, the ETFs net asset value will fluctuate with the value of the
security or other instrument as if it were already in the ETFs portfolio. Futures transactions have the effect of
investment leverage to the extent an ETF does not maintain liquid assets equal
to the face amount of the contract. If
an ETF combines short and long positions, in addition to possible declines in
the values of its investment securities, the ETF will incur losses if the index
underlying the long futures position underperforms the index underlying the
short futures position. Each ETFs
ability to engage in futures and options on futures transactions also may be
limited by tax considerations.
Additional
Risks Associated with Commodity Futures
Transactions
.
Several additional risks are associated with
transactions in commodity futures contracts.
Storage
Costs.
The price of a commodity
futures contract reflects the storage costs of purchasing the underlying
commodity, including the time value of money invested in the commodity. To the extent that the storage costs change,
the value of the futures contracts may change correspondingly.
Reinvestment
Risk.
In the commodity futures
markets, producers of an underlying commodity may sell futures contracts to
lock in the price of the commodity at delivery.
To induce speculators to purchase the other side (the long side) of the
contract, the commodity producer generally must sell the contract at a lower
price than the expected futures spot price.
Conversely, if most purchasers of the underlying commodity purchase
futures contracts to hedge against a rise in commodity prices, then speculators
will only sell the contract at a higher price than the expected future spot
price of the commodity. The changing
nature of the hedgers and speculators in the commodity markets will influence
whether futures prices are above or below the expected futures spot price. As a result, when an ETFs sub-adviser
reinvests the proceeds from a maturing contract, it may purchase a new futures
contract at a higher or lower price than the expected futures spot prices of
the maturing contract or choose to pursue other investments.
Additional
Risks of Options on Securities, Futures Contracts, and Options on Futures
Contracts Traded on Foreign Exchanges
.
Options on securities, futures contracts,
options on futures contracts, and options on currencies may be traded on
foreign exchanges. Such transactions may
not be regulated as effectively as similar transactions in the U.S. (which are
regulated by the CFTC) and may be subject to greater risks than trading on
domestic exchanges. For example, some
foreign exchanges may be principal markets so that no common clearing facility
exists and a trader may look only to the broker for performance of the
contract. The lack of a common clearing
facility creates counterparty risk. If a
counterparty defaults, an ETF normally will have contractual remedies against
that counterparty, but may be unsuccessful in enforcing those remedies. When seeking to enforce a contractual remedy,
an ETF also is subject to the risk that the parties may interpret contractual
terms (e.g., the definition of default) differently. If a dispute occurs, the cost and
unpredictability of the legal proceedings required for an ETF to enforce its
contractual rights may lead the ETF to decide not to pursue its claims against
the counterparty. An ETF thus assumes
the risk that it may be unable to obtain payments owed to it under foreign
futures contracts or that those payments may be delayed or made only after the
ETF has incurred the costs of litigation.
In addition, unless an ETF hedges against fluctuations in the exchange
rate between the U.S. dollar and the currencies in which trading is done on
foreign exchanges, any profits that the ETF might realize in trading could be
offset (or worse) by adverse changes in the exchange rate. ).
Swap Contracts and Other
Two-Party Contracts
An ETF may use swap
contracts (or swaps) and other two-party contracts for the same or similar
purposes as options and futures.
Swap
Contracts
. An ETF may
directly or indirectly use various different types of swaps, such as swaps on
securities and securities indices, interest rate swaps, currency swaps, credit
default swaps, commodity swaps, inflation swaps, and other types of available
swap agreements, depending on the ETFs investment
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objective and policies. Swap contracts are two-party contracts
entered into primarily by institutional investors for periods ranging from a
few weeks to a number of years. Under a
typical swap, one party may agree to pay a fixed rate or a floating rate
determined by reference to a specified instrument, rate, or index, multiplied
in each case by a specified amount (notional amount), while the other party
agrees to pay an amount equal to a different floating rate multiplied by the
same notional amount. On each payment
date, the parties obligations are netted, with only the net amount paid by one
party to the other.
Swap contracts are typically
individually negotiated and structured to provide exposure to a variety of
different types of investments or market factors. Swap contracts may be entered into for
hedging or non-hedging purposes and therefore may increase or decrease an ETFs
exposure to the underlying instrument, rate, asset or index. Swaps can take many different forms and are
known by a variety of names. An ETF is
not limited to any particular form or variety of swap agreement if the ETFs
sub-adviser determines it is consistent with the ETFs investment objective and
policies.
For example, the parties to
a swap contract may agree to exchange returns calculated on a notional amount
of a security, basket of securities, or securities index (e.g., S&P 500
Index). An ETF may use such swaps to
gain investment exposure to the underlying security or securities where direct
ownership is either not legally possible or is economically unattractive. To the extent the total return of the
security, basket of securities, or index underlying the transaction exceeds or
falls short of the offsetting interest rate obligation, an ETF will receive a
payment from or make a payment to the counterparty, respectively. In addition, an ETF may enter into an
interest rate swap in order to protect against declines in the value of fixed
income securities held by the ETF. In
such an instance, an ETF may agree with a counterparty to pay a fixed rate
(multiplied by a notional amount) and the counterparty pay a floating rate multiplied
by the same notional amount. If interest
rates rise, resulting in a diminution in the value of an ETFs portfolio, the
ETF would receive payments under the swap that would offset, in whole or in
part, such diminution in value. An ETF
may also enter into swaps to modify its exposure to particular currencies using
currency swaps. For instance, an ETF may
enter into a currency swap between the U.S. dollar and the Japanese Yen in
order to increase or decrease its exposure to each such currency.
An ETF may use inflation
swaps, which involve commitments to pay a regular stream of inflation indexed
cash payments in exchange for receiving a stream of nominal interest payments
(or vice versa), where both payment streams are based on a notional
amount. The nominal interest payments
may be based on either a fixed interest rate or variable interest rate, such as
LIBOR. Inflation swaps may be used to
hedge the inflation risk in nominal bonds (i.e., non-inflation indexed bonds),
thereby creating synthetic inflation indexed bonds, or combined with U.S.
Treasury futures contracts to create synthetic inflation indexed bonds issued
by the U.S. Treasury. See Indexed
Securities Inflation Indexed Bonds below.
In addition, an 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, an 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 basket of such issuers, upon
issuer default (or similar events) at their par (or other agreed-upon)
value. An 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 an ETF in the event of a default (or similar event) (see
Risk Factors in Swap Contracts, OTC Options, and Other Two-Party Contracts
below). In addition, as a purchaser in a
credit default swap, an ETFs investment would only generate income in the
event of an actual default (or similar event) by the issuer of the underlying
obligation.
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An 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, an 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, an ETF would keep the premium received from
the counterparty and would have no payment obligations.
Contracts
for Differences
.
Contracts for differences are swap
arrangements in which the parties agree that their return (or loss) will be
based on the relative performance of two different groups or baskets of
securities. Often, one or both baskets
will be an established securities index.
An ETFs return will be based on changes in value of theoretical long
futures positions in the securities comprising one basket (with an aggregate
face value equal to the notional amount of the contract for differences) and
theoretical short futures positions in the securities comprising the other
basket. An ETF also may use actual long
and short futures positions and achieve similar market exposure by netting the
payment obligations of the two contracts.
An ETF will only enter into contracts for differences (and analogous
futures positions) when its sub-adviser believes that the basket of securities
constituting the long position will outperform the basket constituting the
short position. If the short basket
outperforms the long basket, an ETF will realize a loss even in circumstances
when the securities in both the long and short baskets appreciate in value.
Interest
Rate Caps, Floors, and Collars
.
An ETF may use interest rate caps, floors,
and collars for the same or similar purposes as they use interest rate futures
contracts and related options and, as a result, will be subject to similar
risks. See Options and Futures Risk
Factors in Options Transactions and Risk Factors in Futures and Futures
Options Transactions above. Like
interest rate swap contracts, interest rate caps, floors, and collars are
two-party agreements in which the parties agree to pay or receive interest on a
notional principal amount. The purchaser
of an interest rate cap receives interest payments from the seller to the
extent that the return on a specified index exceeds a specified interest rate. The purchaser of an interest rate floor
receives interest payments from the seller to the extent that the return on a
specified index falls below a specified interest rate. The purchaser of an interest rate collar
receives interest payments from the seller to the extent that the return on a
specified index falls outside the range of two specified interest rates.
Swaptions
. An option on a swap agreement, also called a swaption,
is an OTC option that gives the buyer the right, but not the obligation, to
enter into a swap on a specified future date in exchange for paying a
market-based premium. A receiver
swaption gives the owner the right to receive the total return of a specified
asset, reference rate, or index (such as a call option on a bond). A payer swaption gives the owner the right to
pay the total return of a specified asset, reference rate, or index (such as a
put option on a bond). Swaptions also
include options that allow one of the counterparties to terminate or extend an
existing swap.
Risk
Factors in Swap Contracts, OTC Options, and Other Two-Party Contracts
.
The most significant factor in the
performance of swaps, contracts for differences, caps, floors, and collars is
the change in the value of the underlying price, rate, or index level that
determines the amount of payments to be made under the arrangement. If an ETFs sub-adviser is incorrect in its
forecasts of such factors, the investment performance of an ETF would be less
than what it would have been if these investment techniques had not been
used. If a swap or other two-party
contract calls for payments by an ETF, the ETF must be prepared to make such
payments when due.
In addition, an ETF may only
close out a swap, contract for differences, cap, floor, collar, or OTC option
(including swaption) with its particular counterparty, and may only transfer a
position with the consent of that counterparty.
If the counterparty defaults, an ETF will have contractual remedies, but
there can be no assurance that the counterparty will be able to meet its contractual
obligations or that an ETF will succeed
20
Table of Contents
in enforcing its
rights. For example, because the
contract for each OTC derivatives transaction is individually negotiated with a
specific counterparty, an 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 an ETF to enforce its contractual rights may lead it
to decide not to pursue its claims against the counterparty. An ETF, therefore, assumes the risk that it
may be unable to obtain payments owed to it under an OTC derivatives contract
or that those payments may be delayed or made only after the ETF has incurred
the costs of litigation.
The ETFs sub-adviser
monitors the creditworthiness of OTC derivatives counterparties. Typically, an ETF will enter into these
transactions only with counterparties that, at the time they enter into a
transaction, have long-term debt ratings of A or higher by S&P or Moodys
(or, if unrated, have comparable credit ratings as determined by the ETFs
sub-adviser). Short-term derivatives may
be entered into with counterparties that do not have long-term debt ratings if
they have short-term debt ratings of A-1 by S&P and/or a comparable rating
by Moodys. The credit rating of a
counterparty may be adversely affected by larger-than-average volatility in the
markets, even if the counterpartys net market exposure is small relative to
its capital.
Additional
Regulatory Limitations on the Use of Futures and Related Options, Interest Rate
Floors, Caps and Collars, Certain Types of Swap Contracts and Related
Instruments
.
The ETFs have claimed an exclusion from the
definition of commodity pool operator under the Commodity Exchange Act and,
therefore, are not subject to registration or regulation as a pool operator
under that Act.
Repurchase Agreements
The
ETFs may enter into repurchase agreements with banks and broker-dealers. A repurchase agreement is an agreement under
which securities are acquired by an 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 an 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, an 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.
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
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Table of Contents
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 an ETF that invests in fixed income securities cannot be
predicted with certainty. The future
income of an ETF that 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).
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.
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 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. 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 an ETF may lose its entire
investment.
Cash and Other High Quality
Investments
An ETF may temporarily
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 and other
high quality debt securities 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.
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
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Table of
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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.
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.
Municipal Securities
Each
ETF may invest in municipal securities.
Municipal securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities.
Other types of municipal securities include short-term General
Obligation Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue
Anticipation Notes, Project Notes, Tax-Exempt Commercial Paper, Construction
Loan Notes and other forms of short-term tax-exempt loans. Such instruments are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues. An issuers
obligations under its municipal securities are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the federal bankruptcy code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon the
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its municipal securities may be
materially adversely affected by litigation or other conditions.
Municipal
securities can be significantly affected by political changes as well as
uncertainties in the municipal market related to taxation, legislative changes,
or the rights of municipal security holders.
Because many municipal securities are issued to finance similar
projects, especially those relating to
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Table of
Contents
education,
health care, transportation and utilities, conditions in those sectors can
affect the overall municipal market. In
addition, changes in the financial condition of an individual municipal insurer
can affect the overall municipal market.
Municipal
bonds, which generally have maturities of more than one year when issued, are
designed to meet longer-term capital needs.
Some longer-term municipal bonds allow an investor to put or sell the
security at a specified time and price to the issuer or other put provider.
If a put provider fails to honor its commitment to purchase the security, the
ETF holding the security may have to treat the securitys final maturity as its
effective maturity, potentially increasing the volatility of the ETF.
Each
ETF may invest in municipal lease obligations.
Municipal leases frequently carry risks distinct from those associated
with general obligation or revenue bonds.
State constitutions and statutes set requirements that states and
municipalities must meet to incur debt. These may include voter referenda,
interest rate limits or public sale requirements. Many leases and contracts include
nonappropriation clauses, which provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purposes by the appropriate legislative body on a yearly
or other periodic basis. Municipal lease
obligations also may be subject to abatement risk. For example, construction delays or
destruction of a facility as a result of an uninsurable disaster that prevents
occupancy could result in all or a portion of a lease payment not being made.
An
ETF that invests in the municipal bond market is subject to certain risks. The amount of public information available
about the municipal bonds held by an ETF is generally less than that for
corporate equities or bonds, and the investment performance of the ETF may
therefore be more dependent on the analytical abilities of its
sub-adviser. The secondary market for
municipal bonds, particularly the lower-rated bonds, also tends to be less well
developed or liquid than many other securities markets, which may adversely
affect an ETFs ability to sell its bonds at attractive prices. The ability of municipal issuers to make
timely payments of interest and principal may be diminished during general
economic downturns and as governmental cost burdens are reallocated among
federal, state and local governments. In
addition, laws enacted in the future by Congress or state legislatures or
referenda could extend the time for payment of principal and/or interest, or
impose other constraints on enforcement of such obligations, or on the ability
of municipal issuers to levy taxes.
Issuers of municipal securities might seek protection under the
bankruptcy laws. In the event of
bankruptcy of such an issuer, an ETF investing in the issuers securities could
experience delays in collecting principal and interest and the ETF may not, in
all circumstances, be able to collect all principal and interest to which it is
entitled.
Real Estate Investment
Trusts and other Real Estate-Related Investments
The ETFs 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. An ETF may
invest in different types of REITs, including equity REITs, which own real
estate directly; mortgage
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Table of Contents
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, as amended, 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
An 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.
An 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 an ETF. In some instances, these trading restrictions
could continue in effect for a substantial period of time.
As long as the SEC maintains
the position that most swap contracts, caps, floors, and collars are illiquid,
an 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, an 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. An ETF may have
to bear the expense of registering restricted securities for resale and the
risk of substantial delay in effecting registration. An 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, an
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.
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Table of Contents
At times, the inability to
sell illiquid securities can make it more difficult to determine their fair
value for purposes of computing an 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.
Investments in Other
Investment Companies or Other Pooled Investments
Each ETF may invest in the
securities of other investment companies to the extent permitted by law. Subject to applicable regulatory
requirements, an 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. An 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, Wedgewood 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 eight 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.
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: 66
|
|
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,
|
|
8
|
|
Trustee,
The Common Fund (since 2005); Trustee, Nicholas Applegate Institutional Funds
(since 2007); Director, Shielding Technology Inc. (since 2006).
|
26
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
|
|
|
|
|
|
|
Founder of Institutional
Investments (1979-1990).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles H. Salisbury, Jr.
Age: 69
|
|
Trustee
|
|
Since 2009
|
|
Private investor.
|
|
8
|
|
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, CeraTech, Inc. (since 2003).
|
|
|
|
|
|
|
|
|
|
|
|
Dennis G. Schmal
Age: 63
|
|
Trustee
|
|
Since 2009
|
|
Self-employed consultant (since 2003).
|
|
8
|
|
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: 47
|
|
Chief Executive Officer
|
|
Since 2008
|
|
Chief
Executive Officer, Grail Advisors, LLC (since 2008); Senior Vice President,
Charles Schwab (2000-2008).
|
|
8
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
OFFICERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chester G. Chappell
Age: 45
|
|
Assistant Secretary
|
|
Since 2008
|
|
Head of Distribution, Grail Advisors,
LLC (since 2008); Vice President, National Sales Manager, Charles Schwab
(2003-2008); Director, Asset Management Strategic Alliances, Charles Schwab
(2000-2003).
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Bryan M. Hiser
Age: 37
|
|
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
|
|
N/A
|
|
N/A
|
27
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
|
|
|
|
|
|
|
Advisors (1999-2007).
|
|
|
|
|
Equity Ownership of Trustees.
The table below shows the dollar range of (i) Shares
of the ETFs discussed in this SAI, and (ii) shares of all ETFs in the
Trusts family of investment companies, owned by the Trustees as of February 1,
2010.
UPDATE
Name
|
|
Dollar Range of Equity
Securities in the ETFs
|
|
Aggregate Dollar Range of
Equity Securities in All
Registered Investment Companies Overseen by Trustee
in Family of Investment Companies*
|
|
Bradford
K. Gallagher
|
|
|
|
|
|
|
|
|
|
|
|
Name
of ETF
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Name
of ETF
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Charles H. Salisbury, Jr
|
|
|
|
|
|
|
|
|
|
|
|
Name
of ETF
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Name
of ETF.
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Dennis G. Schmal
|
|
|
|
|
|
|
|
|
|
|
|
Name of ETF
|
|
|
|
$
|
|
|
|
|
|
|
|
Name of ETF
|
|
$
|
|
$
|
|
|
|
|
|
|
|
William M. Thomas
|
|
|
|
|
|
|
|
|
|
|
|
Name
of ETF
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Name
of ETF
|
|
$
|
|
$
|
|
* The Family of Investment Companies
currently consists of eight ETFs.
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 each 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 each 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 each ETFs accounting and financial
reporting, internal
28
Table
of Contents
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.
During the fiscal year ended October 31, 2009, the Audit Committee
met one_ time.
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.
During the fiscal year ended October 31, 2009, the Nomination
Committee did not meet.
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. During the fiscal
year ended October 31, 2009, the Qualified Legal Compliance Committee did
not meet.
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.
The
table below sets forth the total remuneration of Trustees and Officers of the
Trust for the fiscal year ended October 31, 2009:
Name
|
|
Aggregate
Compensation
from ETFs*
|
|
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
|
|
$
|
[ ]
|
|
None
|
|
None
|
|
$
|
20,000
|
|
Charles H. Salisbury, Jr.
|
|
$
|
[ ]
|
|
None
|
|
None
|
|
$
|
20,000
|
|
Dennis G. Schmal
|
|
$
|
[ ]
|
|
None
|
|
None
|
|
$
|
20,000
|
|
* The Fund Complex currently consists of
eight ETFs.
29
Table of Contents
Codes of
Ethics
The Trust, Manager, RP,
Wedgewood 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 ETFs (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 ETFs.
The Manager, RP and Wedgewood do not use inside information in making
investment decisions on behalf of an 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 ETFs 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 their sub-advisers. Please see Appendix A for a copy of the
Policies.
Proxy voting for the RP
Growth ETF, RP Technology ETF and RP Financials ETF has been delegated to
RP. Proxy voting for the RP Focused
Large Cap Growth ETF has been delegated to Wedgewood. RPs and Wedgewoods 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 ETFs 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.
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 an ETF or acknowledges the existence
of control. As of February 1, 2010,
to the best of the ETFs knowledge, no person controlled any of the ETFs.
The
following table shows, to the best of the ETFs knowledge, those persons who
owned 5% or more of the outstanding shares of each ETFs shares as of [February 1],
2010.
RP GROWTH ETF
Name and Address
|
|
Ownership
|
|
Number of Shares
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
30
Table of Contents
RP FOCUSED LARGE CAP
GROWTH ETF
Name and Address
|
|
Ownership
|
|
Number of Shares
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
RP TECHNOLOGY ETF
Name and Address
|
|
Ownership
|
|
Number of Shares
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
RP FINANCIALS ETF
Name and Address
|
|
Ownership
|
|
Number of Shares
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
31
Table of Contents
[table
to come]
As
of [February 1], 2010, the officers and Trustees, as a group, owned of
record or beneficially less than 1% of the outstanding voting securities of
each ETF.
INVESTMENT ADVISORY AND OTHER SERVICES
Grail Advisors, LLC
The Manager, Grail Advisors,
LLC, oversees the performance of the ETFs and arranges for transfer agency,
custody and all other services necessary for the ETFs to operate, but does not
exercise day-to-day oversight over the ETFs sub-advisers. 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 RP and Wedgewood. These
services are provided under the terms of an Investment Management Agreement
dated September 10, 2009 (Investment Management Agreement) between the
Trust, on behalf of each ETF, and the Manager.
Pursuant to the Investment
Management Agreement, each ETF pays the Manager a management fee for the
services and facilities it provides payable on a monthly basis at the annual
rates set forth in the table below, calculated as a percentage of an 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 an ETFs performance. The
Manager is responsible for compensating RP and Wedgewood out of the management
fees it receives from each ETF.
ETF
|
|
Management
Fee
|
|
RP
Growth ETF
|
|
0.65
|
%
|
RP
Focused Large Cap Growth ETF
|
|
0.65
|
%
|
RP
Technology ETF
|
|
0.65
|
%
|
RP
Financials ETF
|
|
0.65
|
%
|
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 Wedgewood.
Without limiting the generality of the foregoing, the Trust pays or
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
32
Table of Contents
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 each 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 each 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 each ETF to 0.89% of its average net assets (Expense
Cap). The Expense Cap will remain in effect
until at least February 28, 2011.
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 an 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 an 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 an
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.
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.
For
the period October 2, 2009 (commencement of operations) through October 31,
2009, the Manager received fees in the amounts of
$ ,.
$ ,
$ , and $ ,
respectively, for managing each of RP Growth ETF, RP Focused Large Cap Growth
ETF, RP Technology ETF and RP Financials ETF.
33
Table of Contents
RiverPark Advisors, LLC
RP
acts as primary sub-adviser of the RP Focused Large Cap Growth ETF and as the
exclusive sub-adviser of the RP Growth ETF, RP Technology ETF and RP Financials
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 ETFs, 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
provides day-to-day portfolio management services to RP Growth ETF, RP
Technology ETF and RP Financials ETF and, in conjunction with the Manager,
oversees the day-to-day portfolio management services provided by Wedgewood to
RP Focused Large Cap Growth ETF. For the
RP Growth ETF, RP Technology ETF and RP Financials ETF, RP has discretion to
purchase and sell securities in accordance with these ETFs objectives,
policies, and restrictions.
With
respect to the RP Growth ETF, RP Technology ETF and RP Financials ETF, RP has
entered into an Investment Sub-Advisory Agreement between the Manager and RP,
dated September 10, 2009 (RP Agreement I). With respect to the RP Focused Large Cap
Growth ETF, RP has entered into a Primary Investment Sub-Advisory Agreement
between the Manager and RP, dated September 10, 2009 (RP Agreement II
and together with RP Agreement I, the RP Sub-Advisory Agreements), and is
also a party to the Wedgewood Subadvisory Agreement described below. Pursuant to the RP Subadvisory Agreements, 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 an ETF; they are not separately paid by an
ETF. These fees are payable on a monthly
basis at the annual rates set forth in the table below, calculated as a
percentage of an ETFs average daily net assets. In addition, the Manager pays the amounts due
Wedgewood for the RP Focused Large Cap Growth ETF to RP, who then pays those
amounts to Wedgewood. These amounts are
included in the table below, and are separately described in the discussion of
Wedgewood. From time to time, RP may
waive all or a portion of its fee.
ETF
|
|
RP
Subadvisory Fee
|
|
RP
Growth ETF
|
|
0.50
|
%
|
RP
Focused Large Cap Growth ETF
|
|
0.50
|
%
|
RP
Technology ETF
|
|
0.50
|
%
|
RP
Financials ETF
|
|
0.50
|
%
|
The RP Subadvisory
Agreements 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
applicable 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 with respect to an 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 an ETF, and (2) by the vote of a majority of the
Trustees who are not 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.
For
the period October 2, 2009 (commencement of operations) through October 31,
2009, RiverPark received fees in the amount of
$ ,
$ ,
$ , and
$ , respectively,
for its services to the RP Growth ETF, RP Focused Large Cap Growth ETF, RP
Technology ETF and RP Financials ETF.
34
Table of Contents
Wedgewood Partners, Inc.
Wedgewood acts as the
sub-adviser for RP Focused Large Cap Growth ETF. Wedgewood is registered as an investment
adviser with the SEC and is located at 9909 Clayton Road, Suite 103, St.
Louis, MO 63124. Anthony L. Guerrerio is
the majority owner of Wedgewood, and David A. Rolfe is the minority owner. The firms investment style is large cap
focused growth. Wedgewood began
operations in 1988 and was founded by Anthony L. Guerrerio, who is its Chief
Executive Officer.
Wedgewood provides
day-to-day portfolio management services to RP Focused Large Cap Growth
ETF. For this ETF, Wedgewood has
discretion to purchase and sell securities in accordance with the ETFs
objectives, policies, and restrictions.
Wedgewood has entered into
an Investment Sub-Advisory Agreement among the Manager, RP and Wedgewood, dated
September 10, 2009, with respect to the RP Focused Large Cap Growth ETF (Wedgewood
Subadvisory Agreement). Pursuant to the
Wedgewood Subadvisory Agreement, Wedgewood receives fees from the Manager to
provide the services described above.
Wedgewood receives an annual fee of 0.25%, calculated as a percentage of
the RP Focused Large Cap Growth ETFs average daily net assets and payable on a
quarterly basis. This fee is paid out of
the advisory fees the Manager receives from the RP Focused Large Cap Growth
ETF; they are not separately paid by the RP Focused Large Cap Growth ETF. From time to time, Wedgewood may waive all or
a portion of its fee.
The Wedgewood 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 RP
Focused Large Cap Growth ETF on no more than 60 days written notice to
Wedgewood, or by Wedgewood upon 60 days written notice to the Trust. The Wedgewood Sub-Advisory Agreement will
also terminate in the event that the RP Subadvisory Agreement for the RP
Focused Large Cap Growth ETF terminates.
The Wedgewood 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 RP Focused Large Cap Growth ETF, and (2) by the
vote of a majority of the Trustees who are not parties to the Wedgewood
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.
For
the period October 2, 2009 (commencement of operations) through October 31,
2009, Wedgewood received fees in the amount of
$ for sub-advising the RP
Focused Large Cap Growth ETF.
Custodian
The
Bank of New York Mellon (BNY Mellon), located at One Wall Street, New York,
New York 10286, serves as Custodian of each ETFs assets. As Custodian, BNY Mellon has agreed to: (1) make
receipts and disbursements of money on behalf of the ETF, (2) collect 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
35
Table of Contents
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
BNY
Mellon, located at One Wall Street, New York, New York 10286 serves as
Administrator, Fund Accountant and Transfer Agent to each ETF. As administrator, BNY Mellon provides each
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 an 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 each ETF, (2) make dividend
and other distributions on Shares of each ETF, (3) record the issuance of
Shares and maintain records of outstanding Shares of each ETF, (4) maintain
certain accounts, (5) make and transmit periodic reports to an 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 ETFs, 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 ETFs), 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 ETFs).
For the period ended October 31, 2009, BNY Mellon received
$ ,
$ ,
$ and
$ , in fees as administrator of
each of RP Growth ETF, RP Focused Large Cap Growth ETF, RP Technology ETF and
RP Financials ETF, respectively.
PORTFOLIO MANAGERS
Portfolio
managers at RP and Wedgewood (the Portfolio Managers) have responsibility for
the day-to-day management of accounts other than the ETFs. Information regarding these other accounts
has been provided by each Portfolio Managers firm and is set forth below. The number of accounts and assets is shown as
of [December 31], 2009.
36
Table of Contents
UPDATE CHART!
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
|
|
RiverPark Advisors, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morty Schaja
|
|
($ bil)
|
|
N/A
|
|
($ bil)
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Mitch Rubin
|
|
($
bil)
|
|
N/A
|
|
(
$
bil)
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Wedgewood
Partners, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David A. Rolfe
|
|
(
$
bil)
|
|
($ mil)
|
|
($ bil)
|
|
N/A
|
|
N/A
|
|
($ mil)
|
|
Conflicts of Interest
The
Portfolio Managers [may in the future] manage accounts other than the
ETFs. This side-by-side management may
present potential conflicts between a Portfolio Managers management of an 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 RP and Wedgewood, of any other foreseeable material
conflicts of interest that may arise from the concurrent management of ETFs and
other accounts.
RP and Wedgewood
. The Portfolio Managers at each firm may manage
accounts other than the ETFs, which may present potential conflicts between the
ETFs and those other accounts. The
management of multiple funds, including the ETFs, and other accounts may
require the Portfolio Manager to devote less than all of his or her time to an
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 ETFs. In addition, if the Portfolio Manager
identifies a limited investment opportunity, such as an initial public offering
that may be suitable for more than one ETF or other account, an 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 a security that an 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 RP and Wedgewood, however, require that Portfolio Managers treat
all accounts they manage equitably and fairly.
As noted above,
Portfolio Managers may also experience certain conflicts between the interests
of the accounts they manage and their own personal interests (which may include
interests in advantaging RP and/or Wedgewood).
The structure of a 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 a Portfolio
Manager holds a larger personal investment in one fund or an ETF than he or she
does in another, the Portfolio Manager may have an incentive to favor the fund
or ETF in which he or she holds a larger stake.
37
Table of Contents
In general, RP
and Wedgewood have policies and procedures to address the various potential
conflicts of interest described above.
Both firms have policies and procedures designed to ensure that
Portfolio Managers have sufficient time and resources to devote to the various
accounts they manage. Similarly, both
firms have 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 a 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 Managers are compensated in various forms by RP or Wedgewood. Following is a description provided by RP and
Wedgewood regarding the structure of and criteria for determining the
compensation of each Portfolio Manager.
RP
. RP seeks to maintain a compensation program
that is competitively positioned to attract, retain and motivate top-quality
investment professionals. Portfolio
Managers receive a base salary, a cash incentive bonus opportunity, an equity
compensation opportunity, and a benefits package. Portfolio Manager compensation is reviewed
annually and the level of compensation is based
on individual performance, the performance of the Portfolio Managers accounts
and contribution to the overall growth and profitability of the firm. Portfolio Managers are provided no financial
incentive to favor one fund or account over another. In addition, Mr. Schaja and Mr. Rubin
are substantial equity owners of RP Holding Group LLC, RPs parent, and thus
receive compensation based on the RPs overall profitability.
Wedgewood
. Wedgewood seeks to maintain a compensation
program that is competitively positioned to attract, retain and motivate
top-quality investment professionals. Mr. Rolfe
receives a base salary, a cash incentive bonus opportunity, an equity
compensation opportunity, and a benefits package. Mr. Rolfes compensation is reviewed
annually and the level of compensation is based
on individual performance, the performance of his accounts and contribution to
the overall growth and profitability of the firm. Mr. Rolfe is provided no financial
incentive to favor one fund or account over another. In addition, Mr. Rolfe is a substantial
equity owners of Wedgewood, and thus receives compensation based on the
Wedgewoods overall profitability.
Ownership of ETFs
The following table discloses the dollar range of equity securities
beneficially owned by each Portfolio Manager in each below ETF as of December 31,
2009:
|
|
Dollar Range of Securities
|
|
Portfolio
Manager
|
|
RP
Growth ETF
|
|
RP
Focused Large
Cap Growth ETF
|
|
RP
Technology
ETF
|
|
RP
Financials
ETF
|
|
Portfolio
Manager
|
|
|
|
|
|
|
|
|
|
RiverPark
Advisors, LLC
|
|
|
|
|
|
|
|
|
|
Morty Schaja
|
|
|
|
|
|
|
|
|
|
Mitchell Rubin
|
|
|
|
|
|
|
|
|
|
Conrad van Tienhoven
|
|
|
|
|
|
|
|
|
|
Wedgewood
Partners, Inc.
|
|
|
|
|
|
|
|
|
|
David A. Rolfe
|
|
N/A
|
|
|
|
N/A
|
|
N/A
|
|
38
Table of Contents
PORTFOLIO
TRANSACTIONS AND BROKERAGE
Portfolio
changes will generally be implemented through in-kind transactions for Creation
Units, and in these cases RP and Wedgewood will not execute brokerage
transactions for an ETF and an ETF will not incur brokerage commissions. However, RP and Wedgewood may execute
portfolio transactions for the ETFs for cash, incurring brokerage commissions,
particularly during the early stages of the ETFs development or in the case of
transactions involving realized losses.
Also, an ETF may accept cash as part or all of an In-Kind Creation or
Redemption Basket, in which case RP or Wedgewood may need to execute brokerage
transactions for an ETF. When executing
portfolio transactions, RP or Wedgewood will place its own orders to execute
securities transactions that are designed to implement the applicable ETFs
investment objective and policies. In
placing such orders, RP or Wedgewood will seek the best net price and most
favorable execution, consistent with their obligations under the Subadvisory
Agreements. The full range and quality
of services offered by the executing broker or dealer will be considered when
making these determinations.
In
these cases, in selecting brokers or dealers to execute particular
transactions, RP or Wedgewood are 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 RP or Wedgewood (or their affiliates), as the case may be,
provided, however, that RP or Wedgewood determines that it has received the
best net price and execution available.
RP and Wedgewood are 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 of the commission
another broker or dealer would have charged for effecting the same
transaction. RP and Wedgewood, as
appropriate, must determine in good faith, however, that such commission was
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 RP or Wedgewood exercises investment discretion. Under these circumstances, the fees of RP or
Wedgewood are not reduced by reason of receipt of such brokerage and research
services. In addition, with disclosure
to and pursuant to written guidelines approved by the Board, RP or Wedgewood
(or a broker-dealer affiliated with them) may execute portfolio transactions
and receive usual and customary brokerage commissions (within the meaning of Rule 17e-1
under the Investment Company Act) for doing so.
However, the ETFs do not allow RP or Wedgewood to enter into
arrangements to direct transactions to broker-dealers as compensation for the
promotion or sale of ETF shares by those broker-dealers.
An ETFs turnover rate, or the frequency of portfolio transactions,
will vary from year to year depending on market conditions and the ETFs cash
flows The ETFs portfolio turnover for
the fiscal year ended October 31, 2009 appears in the ETFs
prospectus. High portfolio activity may
increase an ETFs transaction costs, including brokerage commissions, and
result in a greater number of taxable transactions.
It
is expected that, if RP or Wedgewood executes brokerage transactions for an
ETF, securities ordinarily will be purchased for the ETF in the primary
markets, and that in assessing the best net price and execution available, RP
or Wedgewood, as applicable, shall consider all factors it deems relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. Transactions involving
securities of small and emerging
39
Table of Contents
growth
companies may involve specialized services on the part of the broker or dealer
and therefore entail higher commissions or spreads than transactions involving
more widely traded securities.
To
the extent that accounts managed by RP or Wedgewood are simultaneously engaged
in the purchase of the same security as an ETF, then, as authorized by the
Board, available securities may be allocated to the ETF and other client
accounts and may be averaged as to price in a manner determined by RP or
Wedgewood, as applicable, to be fair and equitable. Such allocation and pricing may affect the
amount of brokerage commissions paid by an ETF.
In some cases, this system might adversely affect the price paid by an
ETF (for example, during periods of rapidly rising or falling interest rates)
or limit the size of the position obtainable for an ETF (for example, in the
case of a small issue).
During the fiscal year ended October 31, 2009,
received brokerage commissions in the amount of
$ .
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
are 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 ETFs.
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, each ETF is authorized to pay an amount up to 0.25% of its average
daily net assets each year for certain distribution-related activities. In addition, if the payment of management
fees by an 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 Wedgewood, 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 ETFs. The Manager may also make payments to certain
market makers in the ETFs Shares for providing
bona fide
consulting and marketing services regarding the ETFs. 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 an ETFs method of distribution. No fees are currently paid by any ETF under a
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 an ETF.
Under each 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.
40
Table of Contents
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 ETFs.
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 eight
actively managed, exchange-traded series, although one series has not 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 shareholders. Shareholders holding two-thirds of Shares
outstanding of all ETFs may remove Trustees from office by votes cast at a
meeting of Trust shareholders or by written consent.
All
Shares are 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 an
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 an 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 an ETFs property for all loss and expense
of an 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 an ETF itself would not be able
to meet the Trusts obligations and this risk should be considered remote.
If an 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.
41
Table of Contents
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 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.
42
Table of Contents
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) are governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a street name, and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspects of the
records relating to or notices to beneficial owners, or payments made on
account of beneficial ownership interests in such Shares, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between DTC and the DTC
Participants or the relationship between such DTC Participants and the Indirect
Participants and beneficial owners owning through such DTC Participants.
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
Each 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. No ETF will
issue fractional Creation Units.
To purchase or redeem any
Creation Units from an 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.
43
Table of Contents
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 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. 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.
Custom 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. 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. 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 each of the RP Growth ETF, RP
Focused Large Cap Growth ETF, RP Technology ETF and RP Financials ETF is $500
and the Maximum Creation/Redemption Transaction Fee for each such ETF is
$2,000.
Purchasing Creation Units
Fund
Deposit.
The consideration for a
Creation Unit of an ETF is the Fund Deposit.
The Fund Deposit generally consists of the In-Kind Creation Basket,
which will often be a replication of the stocks in the ETFs portfolio, 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
44
Table of Contents
included in the current Fund
Deposit for each 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.
Each 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 Wedgewood 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
. 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 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
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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.
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 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
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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 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 outside the Clearing Process must state
that the DTC Participant is not using the Clearing Process and that redemption
of Creation Units will instead be effected through transfer of ETF Shares
directly through DTC. 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
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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.
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.
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.
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.
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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.
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
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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 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.
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FINANCIAL
STATEMENTS
The Financial Statements for the RP Growth ETF, RP Focused Large Cap
Growth ETF, RP Technology ETF and RP Financials ETF for the fiscal year ended October 31,
2009 are incorporated by reference to the Annual Report to Shareholders of the
ETFs for the period ended October 31, 2009. Such Financial Statements have
been incorporated herein in reliance upon such reports and on the authority of
KMPG LLP as experts in accounting and auditing.
The Annual Report is available upon request without charge by contacting
the ETFs at the address or telephone number set forth on the cover page of
this SAI or at www.grailadvisors.com.
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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.
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.
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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.
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.
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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.
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.
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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 RP and Wedgewood
RP Advisors, LLC - Policies and Procedures
Proxy Voting
Policy
RP Advisors, LLC (RP) as a matter of policy and as a fiduciary to its
clients, has responsibility for voting proxies for portfolio securities
consistent with the best economic interests of its clients. RP maintains written policies and procedures
as to the handling, research, voting and reporting of proxy voting and makes
appropriate disclosures about its proxy policies and practices. RPs policy and
practice includes the responsibility to monitor corporate actions, receive and
vote client proxies, maintain relevant and required records and disclose any
potential conflicts of interest as well as making information available to
clients about the voting of proxies for their portfolio securities.
Background
Proxy
voting is an important right of shareholders and reasonable care and diligence must
be undertaken to ensure that such rights are properly and timely exercised.
Investment
advisors registered with the SEC, and which exercise voting authority with
respect to client securities, are required by Rule 206(4)-6 under the
Investment Advisors Act of 1940, as amended (Advisors Act) to (a) adopt and implement written
policies and procedures that are reasonably designed to ensure that client
securities are voted in the best interests of clients, which must include how
an advisor addresses material conflicts that may arise between an advisors interests
and those of its clients; (b) to disclose to clients how they may
obtain information from the advisor with respect to the voting of
proxies for their securities; (c) to describe to clients a summary
of its proxy voting policies and procedures and, upon request, furnish a
copy to its clients; and (d) maintain certain records relating to the
advisors proxy voting activities when the advisor does have proxy voting
authority.
Proxy Voting Procedures & Guidelines for
Funds Directly Managed by RP
With
respect to any funds directly managed by RP, RP has adopted the following
procedures and guidelines to implement the firms policy and reviews these
procedures and guidelines to monitor and ensure that the firms policy is
observed, implemented properly and amended or updated, as appropriate.
Voting Procedures
·
All employees will forward
any proxy materials received on behalf of clients to RPs Chief Compliance
Officer (RPs CCO);
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·
RPs CCO will determine how
RP should vote the proxy in a timely and appropriate manner according to the
below voting guidelines;
·
RPs CCO may, in his or her
discretion, employ a credible third-party service to coordinate, collect and
maintain any proxy related material and to prepare and file RPs votes.
Voting Guidelines
·
In the absence of specific
voting guidelines or other qualifying restrictions from a client, RP will vote
all proxies from a specific issuer the same way for each client. Clients are permitted to place reasonable
restrictions on RPs voting authority in the same manner that they may place
such restrictions on the actual selection of account securities.
·
RP will generally vote in
favor of routine corporate proposals including but not limited to the election
of directors and selection of auditors.
·
RP will generally vote
against proposals that cause board members to become entrenched or cause
unequal voting rights.
·
With respect to all other
proposals, RP will consider the effect of such proposals on shareholder value
and the issuers business practices as well as the opinion of management and
the effect on management of the proposal and will vote, on a case-by-case
basis, in a manner that RP considers consistent with the best economic
interests of its clients.
Voting
Different from Proxy Guidelines
A
portfolio manager or other party involved with a clients account may conclude
that the best interest of a client requires that a proxy be voted in a manner that
differs from the above Voting Guidelines.
In this situation, he or she may request that RP consider voting the
proxy other than according to such Voting Guidelines. If any person, group, or entity requests that
RP vote a proxy other than according to the predetermined Voting Guidelines,
that person will furnish to RP a written explanation of the reasons for the
request and a description of the persons, groups, or entitys relationship,
if any, with the parties proposing and/or opposing the matters adoption. RP
may consider such request in its determination of a given vote, subject to the
conflicts of interest procedures discussed below.
Abstaining
from Voting a Proxy with respect to non-U.S. Securities
With
respect to non-U.S. securites, RP may abstain from voting a client proxy for
cost or other reasons. RP will weigh the
costs and benefits of voting proxy proposals relating to non-U.S. securities
and will make an informed decision as to whether voting a given proxy proposal
is prudent and solely in the interests of its clients. RPs decision in such circumstances will take
into account the effect that the proxy vote, either by itself or together with
other votes, is expected to have on the value of the clients investment and
whether this expected effect would outweigh the cost of voting.
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Delegation of Proxy Voting
to Sub-Advisors of RP
With respect to funds that
are managed by a sub-advisor to RP (Sub-Advisor), the Sub-Advisor shall make
voting decisions pursuant to their own proxy voting policies and procedures, as
adopted in compliance with the Advisors Act and reasonably designed to ensure
that the Sub-Advisor votes portfolio securities in the best interest of the
clients owning the portfolio securities voted (Sub-Advisor Policy).
Sub-Advisor
Responsibilities
To the extent RP has
delegated proxy voting authority to a Sub-Advisor, as set forth above, the
Sub-Advisor shall be responsible for the following:
1)
Implementing its Sub-Advisor Policy.
2) Providing
RP with a copy and description of its Sub-Advisor Policy as accompanied by a
certification that represents that the Sub-Advisor Policy has been adopted in
conformity with the Advisors Act.
Thereafter, providing RP with notice of any amendment or revision to the
Sub-Advisor Policy and a description thereof.
3) Providing
RP with a quarterly certification indicating that the Sub-Advisor did vote
proxies in a manner consistent with the Sub-Advisor Policy. If the Sub-Advisor voted any proxies in a
manner inconsistent with the Sub-Advisor Policy, the Sub-Advisor will promptly
provide RP with a report detailing the exceptions prior to the end of the
quarter in which the exceptions occurred.
4) Providing
RP a copy of each written request from a client for information on how the
Sub-Advisor voted such clients proxies, and a copy of any written response.
Conflicts of Interest
RP
will identify any conflicts that exist between its interests and those of its
clients by reviewing the relationship of RP, any of RPs employees and any
Sub-Advisors with the issuer of each security to determine if there is any
material financial, business or personal relationship with the issuer.
If
a material conflict of interest exists, RPs CCO will, in its discretion, (i) determine
the most appropriate manner in which to address the conflict in a manner
consistent with the best interests of RPs clients and in a manner not affected
by the conflict of interest including, but not limited to, voting in a manner
consistent with a predetermined voting policy or receiving an independent third
party voting recommendation and (ii) maintain a record of the voting
resolution of any conflict of interest.
Securities Lending Program
RP
or its Sub-Advisors may, on behalf of its clients, participate in a securities
lending program through a lending agent with respect to certain of the
securities in portfolios managed by RP or its Sub-Advisors. To the extent any of such securities are out
on loan, such securities would be transferred into the borrowers name and
would, in most circumstances, be voted by the borrower, in its discretion. To the extent that RP or a Sub-Advisor determines
that a proxy vote
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is,
in its discretion, material, RP or the Sub-Advisor will recall the security for
the purposes of voting the proxy.
Disclosure
RP
will disclose a summary of its proxy voting policies and procedures including a
statement that clients may request information regarding how RP voted a clients
proxies and that clients may request a complete copy of these policies and
procedures.
Client Requests for Information
All
client requests for information regarding proxy votes, or policies and
procedures, received by any employee will be forwarded to RPs CCO.
In
response to any such request, RPs CCO will prepare a written response to
the client with the information requested and, as applicable, will include the
name of the issuer, the proposal voted upon, and how RP and its respective
Sub-Advisors voted the clients proxy with respect to each proposal about which
client inquired.
Recordkeeping
RPs
CCO shall retain the following proxy records in accordance with the SECs
five-year retention requirement.
·
These policies and procedures and any amendments;
·
Proxy statements received for client securities;
·
Records of votes cast on behalf of clients;
·
Any document RP or its respective Sub-Advisors
created that was material to making a decision how to vote proxies, or that
memorializes that decision; and
·
A copy of each written
request from a client for information on how RP or its respective Sub-Advisor(s) voted
such clients proxies, and a copy of any written response.
Where
possible RP shall rely on the SECs electronic EDGAR system rather than
maintaining its own copies. With respect
to proxy statements and records of votes cast by RP or any Sub-Advisor, rather
than maintaining its own copies, RP shall rely on records maintained by a third
party such as a proxy voting service approved by RPs CCO, provided that RP
shall obtain an undertaking from such third party to provide a copy of these
records promptly upon request.
Adopted: August 25, 2009
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Wedgewood - Policies and Procedures
Proxy Voting
Policy
Wedgewood
Partners, Inc., as a matter of policy and as a fiduciary to our clients,
has responsibility for voting proxies for portfolio securities consistent with
the best economic interests of third party accounts. Wedgewood/Ridge
Clearing clients receive voting proxies direct. Our firm maintains
written policies and procedures as to the handling, research, voting and
reporting of proxy voting and makes appropriate disclosures about our firms
proxy policies and practices. Our policy and practice includes the
responsibility to monitor corporate actions, receive and vote client proxies
and disclose any potential conflicts of interest as well as making information
available to clients about the voting of proxies for their portfolio securities
and maintaining relevant and required records.
Background
Proxy
voting is an important right of shareholders and reasonable care and diligence
must be undertaken to ensure that such rights are properly and timely
exercised.
Investment
advisers registered with the SEC, and which exercise voting authority with
respect to client securities, are required by Rule 206(4)-6 of the
Advisers Act to (a) adopt and implement written policies and procedures
that are reasonably designed to ensure that client securities are voted in the
best interests of clients, which must include how an adviser addresses material
conflicts that may arise between an advisers interests and those
of its clients; (b) to disclose to clients how they may obtain
information from the adviser with respect to the voting of proxies
for their securities; (c) to describe to clients a summary
of its proxy voting policies and procedures and, upon request, furnish a
copy to its clients; and (d) maintain certain records relating to the
advisers proxy voting activities when the adviser does have proxy voting
authority.
Responsibility
Sheila
Godfrey has the responsibility for the implementation and monitoring of
our proxy voting policy, practices, disclosures and record keeping, including
outlining our voting guidelines in our procedures.
Procedure
Wedgewood
Partners, Inc. has adopted procedures to implement the firms policy and
reviews to monitor and insure the firms policy is observed, implemented
properly and amended or updated, as appropriate, which include the following:
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Voting Procedures
·
All employees will forward any proxy materials
received on behalf of clients to Sheila Godfrey;
·
Absent material conflicts, Sheila Godfrey will
determine how Wedgewood Partners, Inc. should vote the proxy in accordance
(always with management), complete the proxy and vote the proxy in a
timely and appropriate manner.
Disclosure
·
Wedgewood Partners, Inc. will provide
conspicuously displayed information in its Disclosure Document summarizing this
proxy voting policy and procedures, including a statement that clients may
request information regarding how Wedgewood Partners, Inc. voted a clients
proxies, and that clients may request a copy of these policies and procedures.
·
Sheila Godfrey upon request will also send a copy of
this summary to all existing clients who have previously received Wedgewood
Partners, Inc.s Disclosure Document; or Sheila Godfrey may send each
client the amended Disclosure Document. Either mailing shall highlight the
inclusion of information regarding proxy voting.
Client Requests for Information
·
All client requests for information regarding proxy
votes, or policies and procedures, received by any employee should be forwarded
to Sheila Godfrey.
·
In response to any request Sheila Godfrey will
prepare a written response to the client with the information requested, and as
applicable will include the name of the issuer, the proposal voted upon, and
how Wedgewood Partners, Inc. voted the clients proxy with respect to each
proposal about which client inquired.
Voting Guidelines
·
In the absence of specific voting guidelines from
the client, Wedgewood Partners, Inc. will vote proxies in the best
interests of each particular client. Wedgewood Partners, Inc.s policy is
to vote all proxies from a specific issuer the same way for each client absent
qualifying restrictions from a client. Clients are permitted to place
reasonable restrictions on Wedgewood Partners, Inc.s voting authority in
the same manner that they may place such restrictions on the actual selection
of account securities.
·
Wedgewood Partners, Inc. will generally vote in
favor of routine corporate housekeeping proposals such as the election of
directors and selection of auditors absent conflicts of interest raised by an
auditors non-audit services.
·
Wedgewood Partners, Inc. will generally vote
against proposals that cause board members to become entrenched or cause
unequal voting rights.
·
In reviewing proposals, Wedgewood Partners, Inc.
will further consider the opinion of management and the effect on management,
and the effect on shareholder value and the issuers business practices.
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Conflicts of Interest
·
Wedgewood Partners, Inc. will identify any
conflicts that exist between the interests of the adviser and the client by
reviewing the relationship of Wedgewood Partners, Inc. with the issuer of
each security to determine if Wedgewood Partners, Inc. or any of its
employees has any financial, business or personal relationship with the issuer.
·
If a material conflict of interest exists, Sheila
Godfrey will determine whether it is appropriate to disclose the conflict
to the affected clients, to give the clients an opportunity to vote the proxies
themselves, or to address the voting issue through other objective means such
as voting in a manner consistent with a predetermined voting policy or
receiving an independent third party voting recommendation.
·
Wedgewood Partners, Inc. will maintain a record
of the voting resolution of any conflict of interest.
Recordkeeping
Sheila
Godfrey shall retain the following proxy records in accordance with the
SECs five-year retention requirement.
·
These policies and procedures and any amendments;
·
Any document Wedgewood Partners, Inc. created
that was material to making a decision how to vote proxies, or that
memorializes that decision including period reports to the General Manager;
·
A copy of each written request from a client for
information on how Wedgewood Partners, Inc. voted such clients proxies,
and a copy of any written response.
·
Chief Compliance Officer/Anthony Guerrerio
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Appendix C
Description
Of Securities Ratings
A.
|
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Long-Term Ratings
|
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|
|
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.
|
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Aaa
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|
Obligations
rated Aaa are judged to be of the highest quality, with minimal credit risk.
|
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|
Aa
|
|
Obligations
rated Aa are judged to be of high quality and are subject to very low credit
risk.
|
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|
A
|
|
Obligations
rated A are considered upper-medium grade and are subject to low credit risk.
|
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Baa
|
|
Obligations
rated Baa are subject to moderate credit risk. They are considered medium
grade and as such may possess certain speculative characteristics.
|
|
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|
Ba
|
|
Obligations
rated Ba are judged to have speculative elements and are subject to
substantial credit risk.
|
|
|
|
B
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|
Obligations
rated B are considered speculative and are subject to high credit risk.
|
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|
Caa
|
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Obligations
rated Caa are judged to be of poor standing and are subject to very high
credit risk.
|
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Ca
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|
Obligations
rated Ca are highly speculative and are likely in, or very near, default,
with some prospect of recovery of principal and interest.
|
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C
|
|
Obligations
rated C are the lowest rated class of bonds and are typically in default,
with little prospect for recovery of principal or interest.
|
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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.
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|
Standard and Poors Long-Term Issue Credit Ratings
(including Preferred Stock)
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|
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|
|
Issue
credit ratings are based, in varying degrees, on the following
considerations:
|
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|
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|
·
|
Likelihood
of paymentcapacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the obligation;
|
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|
·
|
Nature
of and provisions of the obligation;
|
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|
·
|
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
|
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affecting
creditors rights.
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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.)
|
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AAA
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|
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.
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AA
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|
An
obligation rated AA differs from the highest-rated obligations only to a
small degree. The obligors capacity to meet its financial commitment on the
obligation is very strong.
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A
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|
An
obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligors capacity to meet its
financial commitment on the obligation is still strong.
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BBB
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An
obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
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Note
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Obligations
rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
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BB
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An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligors
inadequate capacity to meet its financial commitment on the obligation.
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B
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|
An
obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic conditions
will likely impair the obligors capacity or willingness to meet its
financial commitment on the obligation.
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CCC
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An
obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial 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.
|
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CC
|
|
An
obligation rated CC is currently highly vulnerable to nonpayment.
|
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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.
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D
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|
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.
|
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Note
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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.
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NR
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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.
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3.
|
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Fitch International Long-Term Credit Ratings
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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.
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The
following rating scale applies to foreign currency and local currency
ratings:
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Investment Grade
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AAA
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|
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.
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AA
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|
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.
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A
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|
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.
|
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BBB
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|
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.
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Speculative Grade
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BB
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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.
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Table of Contents
B
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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.
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CCC
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Default
is a real possibility. Capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic conditions.
|
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CC
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Default
of some kind appears probable.
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C
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Default
is imminent.
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RD
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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:
|
|
|
|
|
|
·
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.)
|
C-4
Table of Contents
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.
|
|
|
|
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
|
C-5
Table of Contents
|
|
debt
instruments. Such obligations generally have an original maturity not
exceeding thirteen months, unless explicitly noted.
|
|
|
|
|
|
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.
|
|
|
|
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
|
C-6
Table of Contents
|
|
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
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-7
Table of Contents
|
Prospectus | February ,
2010
|
Grail Advisors Actively Managed ETFs
Grail American Beacon Large Cap Value ETF (GVT)
Grail American Beacon International Equity ETF* (GFL)
* Not open for investment
This Prospectus provides
important information about the ETFs 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.
Shares
of the Large Cap Value ETF are listed and traded on NYSE Arca, Inc.
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 February , 2010
(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.
2
Table of Contents
SUMMARY
INFORMATION
GRAIL ADVISORS ACTIVELY MANAGED ETFS
GRAIL AMERICAN BEACON LARGE CAP VALUE ETF
GRAIL AMERICAN BEACON INTERNATIONAL EQUITY ETF
This
Prospectus describes the Grail American Beacon Large Cap Value ETF (Large Cap
Value ETF) and Grail American Beacon International Equity ETF (International
Equity ETF and together with the Large Cap Value ETF, the ETFs), each of
which is a series of Grail Advisors ETF Trust (Trust). Grail Advisors, LLC is
each ETFs investment manager (Manager). Each ETF is an exchange traded fund.
The ETFs are actively
managed ETFs.
T
he ETFs are not index
funds and thus do not seek to replicate the performance of a specified index.
Shares of each of the ETFs (Shares) are 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, each ETF issues and redeems Shares on a continuous basis at NAV
only in large blocks of Shares, typically 50,000 Shares, called Creation
Units.
Creation Units are issued
and redeemed in-kind for securities included in a specified universe. 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.
Except
when aggregated in Creation Units, Shares are not redeemable securities.
An
investment in the ETFs 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 ETFs. Please read this Prospectus carefully before
making any investment decision.
Note to
Retail Investors
Shares
can be purchased directly from the ETFs only in exchange for a basket of
securities that is expected to be worth over a million dollars. Most individual investors, therefore, will
not be able to purchase Shares directly from an 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
3
Table of Contents
Shares directly with the ETFs and about transaction
fees imposed on purchases and redemptions of Creation Units is not relevant to
most retail investors.
How Are The
ETFs Different From Index ETFs?
Whereas index-based ETFs seek to replicate the holdings of a
specified index, each ETF uses an actively managed investment strategy to meet
its investment objective.
Thus,
each ETFs investment sub-advisers have the discretion on a daily basis to
choose securities for the ETFs portfolio consistent with the ETFs investment
objective.
The
ETFs are designed for investors who seek exposure to a relatively low-cost
actively managed portfolio of equity securities. The ETFs may be suitable for long-term
investment and may also be used as an asset allocation tool or as a trading
instrument.
How Are The
ETFs 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 an ETF, by
contrast, cannot be purchased from or redeemed with the issuing ETF except by
or through Authorized Participants (defined below), and then typically for an
in-kind basket of securities (and a limited cash amount).
Exchange
Listing
. Unlike mutual fund shares,
Shares are 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 an ETFs portfolio holdings. The market price of Shares may differ from
the NAV of an ETF. The difference
between market price of Shares and the NAV of an ETF is expected to be small most
of the time, though it may be significant, especially in times of extreme
market volatility.
Tax
Treatment
. Unlike
interests in mutual funds, Shares have been designed to be tax-efficient. Specifically their in-kind creation and
redemption feature has been designed to protect ETF shareholders from adverse
tax consequences associated with cash transactions in mutual fund shares,
including cash redemptions. Such
transactions can have an adverse tax impact on taxable shareholders due to the
mutual funds need to sell portfolio securities to obtain cash to meet such
redemptions and, as necessary, recognize taxable gains in connection with such
sales. By contrast, the ETFs in-kind
redemption mechanism is designed to minimize taxable gains resulting from
redemptions.
The
active management of the ETFs portfolios is not expected to impact the in-kind
redemption mechanism and the ETFs ability to minimize taxable gains resulting
from redemptions. Nevertheless, to the
extent redemptions are effected for cash, an ETF may realize capital gains or losses,
including in some cases short-term capital gains, upon the sale of portfolio
securities to effect a cash redemption.
Because the ETFs are actively managed, they may generate more taxable
gains for shareholders than an index-based ETF.
In addition, the International Equity ETF may invest in derivatives, the
use of which will generally result in distributions to investors that are
treated as ordinary income.
Transparency
of Portfolio
.
Each ETFs portfolio holdings as
of the time the ETF calculates its NAV are 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.
4
Table of Contents
Fund
Summary
Grail Advisors Actively Managed ETFs
Large Cap Value ETF
INVESTMENT OBJECTIVE
Long-term capital
appreciation and current income.
FEES AND EXPENSES
This
table describes the fees and expenses that you may pay if you buy and hold
Shares of the ETF.
Shareholder
Fees
(fees paid directly from your
investment
|
|
None
|
(1)
|
Annual Fund Operating Expenses
(expenses that you pay each year as a
percentage of the value of your investment)
|
|
|
|
Management Fee:
|
|
0.50
|
%
|
Distribution and/or service (12b-1) fees: (2)
|
|
0.00
|
%
|
Other Expenses: (3)
|
|
[0. ]
|
%
|
Total Annual Fund Operating Expenses:
|
|
[0. ]
|
%
|
Less: Expense Reduction/Reimbursement: (4)
|
|
[(0. )]
|
%
|
Net Annual Operating Expenses:
|
|
0.79
|
%
|
Example
The
following example is intended to help you compare the cost of investing in the
ETF with the cost of investing in other funds. The example assumes that you
invest $10,000 for the time periods indicated and then redeem all of your
shares at the end of those periods. The example also assumes that the ETF
provides a return of 5% a year, that dividends and distributions are
reinvested, and that operating expenses remain the same. This example does not reflect the brokerage
commissions that you may pay to buy and sell Shares. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
One
Year:
|
|
Three
Years:
|
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
5
Table of Contents
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 $1,000, or a fee of up to $4,000 if the investor does not
create or redeem through the NSCC (as defined on page [ ]).
(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 of Trustees (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 0.79% of the ETFs average net
assets (Expense Cap). The Expense Cap
will remain in effect until at least February 28, 2011. The expense cap may be terminated earlier upon the approval of
the Board. 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.
PORTFOLIO TURNOVER
The ETF generally acquires
securities for its portfolio and liquidates securities from its portfolio
through in-kind transactions for Shares.
As a result, the ETF generally does not incur portfolio turnover costs
that affect the ETFs performance, which are not reflected in the Fee Table or
in the Example.
PRINCIPAL
INVESTMENT STRATEGIES
Ordinarily,
at least 80% of the ETFs net assets (plus the amount of any borrowings for
investment purposes) are invested in equity securities of large market
capitalization U.S. companies. These
companies generally have market capitalizations similar to the market
capitalizations of the companies in the Russell 1000® Index* at the time of
investment. The Russell 1000 Index
measures the performance of the 1,000 largest U.S. companies based on total
market capitalization. As of December 31,
2009, the market capitalizations of the companies in the Russell 1000 Index
ranged from $ million to
$ billion.
The ETFs investments may include common stocks, preferred stocks, securities
convertible into U.S. common stocks, U.S. dollar-denominated American
Depositary Receipts, and U.S. dollar-denominated foreign stocks traded on U.S.
exchanges (collectively referred to as stocks).
The ETFs assets are
currently allocated among three investment sub-advisers:
Brandywine Global Investment
Management, LLC
Hotchkis and Wiley Capital
Management, LLC
Metropolitan West Capital
Management, LLC
6
Table of Contents
The ETFs investment
sub-advisers select stocks that, in their opinion, have most or all of the
following characteristics (relative to the Russell 1000® Index):
·
above-average earnings
growth potential,
·
below-average price to
earnings ratio,
·
below-average price to book
value ratio, and
·
above-average dividend
yields.
Each
of the ETFs investment sub-advisers determines the earnings growth prospects
of companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to sell a stock is typically
based on the belief that the company is no longer considered undervalued or
shows deteriorating fundamentals, or that better investment opportunities exist
in other stocks. The Manager and
American Beacon Advisors, Inc. (ABA) believe that this strategy will
help the ETF outperform other investment styles over the longer term while minimizing
volatility and downside risk.
If, for any reason, one of
the investment sub-advisers listed above no longer serves as investment
sub-adviser to the ETF, the Manager and ABA will seek to employ alternative
arrangements so that the ETFs assets will continue to be allocated and managed
in at least three separate portions.
These arrangements may, but need not, include: engaging a new investment
sub-adviser and seeking any required shareholder approvals, as necessary,
actively managing a portion of the ETFs assets directly, or investing a
portion of the ETFs assets in a pooled investment vehicle in accordance with
the ETFs investment objective and strategies, and applicable law.
The ETF may lend its
securities to broker-dealers and other institutions to earn additional income.
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. Investment grade obligations
include securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities, as well as securities rated in one of the four highest
rating categories by at least two nationally recognized statistical rating
organizations rating that security (such as Standard & Poors Ratings
Services or Moodys Investors Service, Inc.) or rated in one of the four
highest rating categories by one rating organization if it is the only
organization rating that security. To
the extent that the ETF invokes this strategy, its ability to achieve its
investment objective may be affected adversely.
As noted above, the ETF has
a policy of investing at least 80% of its assets in securities that are
consistent with the ETFs name.
*
Russell 1000 Index is a
registered trademark of Frank Russell Company.
PRINCIPAL
RISKS
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, in large part, to the fact that supply and
demand forces at work in the secondary trading market for Shares will be
closely related to, but not identical to, the same forces influencing the
prices of the securities held by the ETF.
However, given that Shares can be purchased and redeemed in Creation
Units (unlike shares of closed-end funds, which frequently trade at appreciable
7
Table of Contents
discounts
from, and sometimes at premiums to, their NAV), and the ETFs portfolio
holdings are disclosed on a daily basis, the Manager believes that large
discounts or premiums to the NAV of Shares should not be sustained.
Foreign
Investing Risk
. Foreign
investing 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, (7) delays in
transaction settlement in some foreign markets, and (8) less availability
of information for an investment sub-adviser to determine a companys financial
condition.
Management Risk
. Securities selected by the investment
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
. Since the ETF invests most or a substantial
portion of its assets in stocks, it is subject to stock market risk. Market risk involves the possibility that the
value of the ETFs investments in stocks will decline due to drops in the stock
market. In general, the value of the ETF
will move in the same direction as the overall stock market in which the ETF
invests, which will vary from day to day in response to the activities of
individual companies, as well as general market, regulatory, political and
economic conditions.
Multi-Manager Risk
. Because each investment sub-adviser makes
investment decisions independently, it is possible that the security selection
process of the investment sub-advisers may not complement one another. As a result, the ETFs exposure to a given
security, industry sector or market capitalization could be smaller or larger
than would be the case if the ETF were managed by a single sub-adviser.
Recent Market Events Risk.
Recent unprecedented turbulence in financial
markets and reduced liquidity in credit and fixed income markets may negatively
affect many issuers worldwide, which may have an adverse effect on the ETF.
Securities
Lending Risk
. The ETF may
make secured loans of its portfolio securities.
Borrowers of the ETFs securities may provide collateral in the form of
cash that is reinvested in securities.
The securities in which the collateral is invested may not perform
sufficiently to cover the return collateral payments owed to borrowers. In addition, delays may occur in the recovery
of securities from borrowers, which could interfere with the ETFs ability to
vote proxies or to settle transactions.
To the extent the ETF lends its securities, it may be subject to these
risks.
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 the ETFs investment
results. The ETF may not achieve its
investment objective using this type of investing.
Trading
Risk
. Although the Shares are 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.
8
Table of Contents
Value Stock Risk
. Value stocks are subject to the risk that
their intrinsic value may never be realized by the market or that their prices
may go down. While the ETFs investments
in value stocks may limit its downside risk over time, the ETF may produce more
modest gains than riskier stock funds as a trade-off for this potentially lower
risk.
PERFORMANCE
Because
the ETF has not yet completed a calendar year of investment operations,
performance information is not yet available. The ETFs past performance is not
necessarily an indication of how the ETF will perform in the future. For current performance information, please
visit www.grailadvisors.com.
INVESTMENT ADVISER
Grail Advisors LLC is the investment manager for the
ETF.
American Beacon Advisors, Inc.(ABA) is the primary sub-adviser of the ETF
and Metropolitan West Capital
Management, LLC, Hotchkis and Wiley Capital Management, LLC and Brandywine
Global Investment Management, LLC, serve as the investment sub-advisers of the
ETF.
PORTFOLIO MANAGER
William F. Quinn and Wyatt
L. Crumpler are the leading portfolio managers of the ETF. Mr. Quinn is Chairman of ABA and has
managed the ETF since its inception. Mr. Crumpler
is Vice President of Trust Investments and has managed the ETF since its
inception.
PURCHASE AND SALE OF ETF SHARES
The
ETF issues and redeems Shares on a continuous basis at NAV only in large blocks
of Shares, typically 50,000 Shares, called Creation Units. Unlike mutual funds, Shares are not
individually redeemable.
Creation Units
are issued and redeemed in-kind for securities.
Once created, individual Shares generally trade in the secondary market
at market prices that change throughout the day. Market
prices of Shares may be different from their NAV.
TAX INFORMATION
Distributions you receive
from the ETF are subject to federal income tax as ordinary income, except to
the extent designated as capital gains, and may also be subject to state or
local taxes, unless you are investing through a tax-advantaged retirement
account.
9
Table of Contents
Fund Summary
Grail Advisors Actively Managed ETFs
International
Equity ETF
(not
open for investment)
INVESTMENT OBJECTIVE
Long-term capital
appreciation.
FEES AND EXPENSES
This
table describes the fees and expenses that you may pay if you buy and hold
Shares of the ETF.
Shareholder Fees
(fees paid from your investment)
|
|
None
|
(1)
|
Annual Fund Operating Expenses
(expenses that you pay each year as a
percentage of the value of your investment)
|
|
|
|
Management Fee:
|
|
0.58
|
%
|
Distribution and/or service (12b-1) fees: (2)
|
|
0.00
|
%
|
Other Expenses: (3)
|
|
[0. ]
|
%
|
Total Annual Fund Operating Expenses:
|
|
[0. ]
|
%
|
Less: Expense Reduction/Reimbursement: (4)
|
|
[(0. )]
|
%
|
Net Annual Operating Expenses:
|
|
0.89
|
%
|
Example
The
following example is intended to help you compare the cost of investing in the
ETF with the cost of investing in other funds.
The example assumes that you invest $10,000 for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that the ETF provides a return of 5% a year, that
dividends and distributions are reinvested, and that operating expenses remain
the same. This example does not reflect
the brokerage commissions that you may pay to buy and sell Shares. Although
your actual cost may be higher or lower, based on those assumptions your costs
would be:
One
Year:
|
|
Three
Years:
|
|
$
|
|
$
|
|
10
Table of Contents
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 $3,200, or a fee of up to $12,800 if the investor does not
create or redeem through the NSCC (as defined on page [ ]).
(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 0.89% of the ETFs average net
assets (Expense Cap). The Expense Cap
will remain in effect until at least February 28, 2011. The expense cap may be terminated earlier upon
the approval of the Board. 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.
PORTFOLIO TURNOVER
The ETF generally acquires
securities for its portfolio and liquidates securities from its portfolio
through in-kind transactions for Shares.
As a result, the ETF generally does not incur portfolio turnover costs
that affect the ETFs performance, which are not reflected in the Fee Table or
in the Example.
PRINCIPAL
INVESTMENT STRATEGIES
Ordinarily,
at least 80% of the ETFs net assets (plus the amount of any borrowings for
investment purposes) are invested in common stocks and securities convertible into
common stocks (collectively, stocks) of issuers based in at least three
different countries located outside the United States, and the ETF will
primarily hold securities of large capitalization companies that have last sale
reporting in the countries in which it invests.
The ETF will primarily invest in countries comprising the Morgan Stanley
Capital International Europe Australasia Far East Index (MSCI EAFE Index). The MSCI EAFE Index is comprised of equity
securities of companies from various industrial sectors whose primary trading
markets are located outside the United States.
Companies included in the MSCI EAFE Index are selected from among the
larger capitalization companies in these markets. The ETF considers companies with market
capitalizations of more than $1 billion to be large capitalization companies.
The ETFs assets are
currently allocated among three investment sub-advisers:
Lazard Asset Management LLC
11
Table of Contents
Templeton Investment
Counsel, LLC
The Boston Company Asset
Management, LLC
The investment sub-advisers
select stocks that, in their opinion, have most or all of the following
characteristics (relative to that stocks country, sector or industry):
·
above-average return on
equity or earnings growth potential,
·
below-average price to
earnings or price to cash flow ratio,
·
below-average price to book
value ratio, and
·
above-average dividend
yields.
The
investment sub-advisers may consider potential changes in currency exchange
rates when choosing stocks. Each of the
investment sub-advisers determines the earnings growth prospects of companies
based upon a combination of internal and external research using fundamental
analysis and considering changing economic trends. The decision to sell a stock is typically
based on the belief that the company is no longer considered undervalued or
shows deteriorating fundamentals, or that better investment opportunities exist
in other stocks. The Manager and ABA
believe that this strategy will help the ETF outperform other investment styles
over the longer term while minimizing volatility and downside risk. An investment sub-adviser may trade forward
foreign currency contracts or currency futures in an attempt to reduce the ETFs
risk exposure to adverse fluctuations in currency exchange rates.
If, for any reason, one of
the investment sub-advisers listed above no longer serves as investment
sub-adviser to the ETF, the Manager and ABA will seek to employ alternative
arrangements so that the ETFs assets will continue to be allocated and managed
in at least three separate portions.
These arrangements may, but need not, include: engaging a new investment
sub-adviser and seeking any required shareholder approvals, as necessary,
actively managing a portion of the ETFs assets directly, or investing a
portion of the ETFs assets in a pooled investment vehicle in accordance with
the ETFs investment objective and strategies, and applicable law.
The ETF may lend its
securities to broker-dealers and other institutions to earn additional income.
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. Investment grade
obligations include securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, as well as securities rated in one of the four
highest rating categories by at least two nationally recognized statistical
rating organizations rating that security (such as Standard & Poors
Ratings Services or Moodys Investors Service, Inc.) or rated in one of
the four highest rating categories by one rating organization if it is the only
organization rating that security. To
the extent that the ETF invokes this strategy, its ability to achieve its
investment objective may be affected adversely.
As noted above, the ETF has
a policy of investing at least 80% of its assets in securities that are
consistent with the ETFs name.
PRINCIPAL
RISKS
Derivatives
Risk
. Derivatives are financial
contracts whose value depends on, or is derived from, the value of underlying
assets, such as a reference security, rate or index. Since the value of derivatives is calculated
and derived from the value of other assets, instruments or references, there is
a risk that they will be improperly valued.
The ETF may use derivatives, such as futures contracts and foreign
currency forward contracts, as a hedge against foreign currency
fluctuations. If one of the investment
sub-advisers incorrectly forecasts currency exchange rates in utilizing a
derivatives strategy for the ETF, the ETF
12
Table of Contents
could
lose money. For certain derivatives, it
is possible to lose more than the amount invested in the derivative. There can be no assurance that any strategy
used will succeed.
Derivatives
also are subject to market risk, liquidity risk, and credit and counterparty
risk. Counterparty risk is the risk that
the counterparty on a derivative transaction will be unable to honor its
financial obligations to the ETF.
Derivatives also involve the risk that changes in their value may not
correlate perfectly with the assets, rates, or indices they are designed to
hedge or closely track. The ETFs
Statement of Additional Information contains a description of the various
derivatives the ETF may utilize.
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, in large part, to the fact that supply and
demand forces at work in the secondary trading market for Shares will be
closely related to, but not identical to, the same forces influencing the
prices of the securities held by the ETF.
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, the Manager believes that
large discounts or premiums to the NAV of Shares should not be sustained.
Foreign
Investing Risk
. Foreign
investing 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, (7) delays in
transaction settlement in some foreign markets, and (8) less availability
of information for an investment sub-adviser to determine a companys financial
condition.
Management Risk
. Securities selected by the investment
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
. Since the ETF invests most or a substantial
portion of its assets in stocks, it is subject to stock market risk. Market risk involves the possibility that the
value of the ETFs investments in stocks will decline due to drops in the stock
market. In general, the value of the ETF
will move in the same direction as the overall stock market in which the ETF
invests, which will vary from day to day in response to the activities of
individual companies, as well as general market, regulatory, political and
economic conditions.
Multi-Manager Risk
. Because each investment sub-adviser makes
investment decisions independently, it is possible that the security selection
process of the investment sub-advisers may not complement one another. As a result, the ETFs exposure to a given
security, industry sector or market capitalization could be smaller or larger
than would be the case if the ETF were managed by a single sub-adviser.
Recent Market Events Risk.
Recent unprecedented turbulence in financial
markets and reduced liquidity in credit and fixed income markets may negatively
affect many issuers worldwide, which may have an adverse effect on the ETF.
13
Table of Contents
Securities
Lending Risk
. The ETF may
make secured loans of its portfolio securities.
Borrowers of the ETFs securities may provide collateral in the form of
cash that is reinvested in securities.
The securities in which the collateral is invested may not perform
sufficiently to cover the return collateral payments owed to borrowers. In addition, delays may occur in the recovery
of securities from borrowers, which could interfere with the ETFs ability to
vote proxies or to settle transactions.
To the extent the ETF lends its securities, it may be subject to these
risks.
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 the ETFs investment
results. The 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.
Value Stock Risk
. Value stocks are subject to the risk that
their intrinsic value may never be realized by the market or that their prices
may go down. While the ETFs investments
in value stocks may limit its downside risk over time, the ETF may produce more
modest gains than riskier stock funds as a trade-off for this potentially lower
risk.
PERFORMANCE
Because
the ETF has not yet completed a calendar year of investment operations,
performance information is not yet available.
INVESTMENT ADVISER
Grail Advisors LLC is the investment manager for the
ETF.
American Beacon Advisors, Inc.
(ABA) is the primary sub-adviser of the ETF and Lazard Asset Management LLC,
Templeton Investment Counsel, LLC and The Boston Company Asset Management, LLC
are the invesment sub-advisers of the ETF.
PORTFOLIO MANAGER
William F. Quinn and Wyatt
L. Crumpler are the leading portfolio managers of the ETF. Mr. Quinn is Chairman of ABA and has
managed the ETF since its inception. Mr. Crumpler
is Vice President of Trust Investments and has managed the ETF since its
inception.
14
Table of Contents
PURCHASE
AND SALE OF ETF SHARES
The
ETF issues and redeems Shares on a continuous basis at NAV only in large blocks
of Shares, typically 50,000 Shares, called Creation Units. Unlike mutual funds, Shares are not
individually redeemable.
Creation Units
are issued and redeemed in-kind for securities.
Once created, individual Shares generally trade in the secondary market
at market prices that change throughout the day. Market
prices of Shares may be different from their NAV.
TAX INFORMATION
Distributions you receive
from the ETF are subject to federal income tax as ordinary income, except to
the extent designated as capital gains, and may also be subject to state or
local taxes, unless you are investing through a tax-advantaged retirement
account.
15
Table of
Contents
ADDITIONAL INFORMATION ABOUT
THE ETFs RISKS AND INVESTMENTS
This
Prospectus does not describe all of an ETFs investment practices and
additional information about each ETFs risks and investments can be found in
the ETFs SAI.
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. Information
about the premiums and discounts at which the ETFs shares have traded is
available at www.grailadvisors.com.
16
Table of Contents
ETF MANAGEMENT
The Manager
The
Manager, a majority-owned subsidiary of Grail Partners, LLC, acts as each 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 ETFs but does not oversee the day-to-day investment of the
ETFs portfolios. 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 ABA and the investment sub-advisers. Based upon evaluations of the investment
sub-advisers provided to the Manager by ABA, the Manager allocates assets among
investment sub-advisers, and monitors ABA and the investment sub-advisers
investment programs and results. These
services are provided under the terms of an Investment Management Agreement
dated April 30, 2009 (Investment Management Agreement) between the
Trust, on behalf of each ETF, and the Manager.
Pursuant to the Investment
Management Agreement, each ETF pays the Manager a management fee for the
services and facilities it provides payable on a monthly basis at the annual
rates set forth in the table below, calculated as a percentage of an ETFs
average daily net assets. From time to
time, the Manager may waive all or a portion of its fee. The Manager is responsible for compensating
ABA and the investment sub-advisers out of the management fees it receives from
each ETF.
ETF
|
|
Management
Fee
|
|
Large Cap Value ETF
|
|
0.50
|
%
|
International Equity
ETF
|
|
0.58
|
%
|
The
ETFs and the Manager have received exemptive relief from the SEC under which
they may use a Manager of Managers structure.
Using this structure, the Manager, subject to oversight by the Board,
oversees ABA and the investment sub-advisers and recommends to the Board the
hiring and termination of ABA and investment sub-advisers. In overseeing the investment sub-advisers,
the Manager would seek input and recommendations from ABA. The exemptive relief permits, once the ETFs
and the Manager begin to rely upon it, the Manager, with the approval of the
Board but without shareholder approval, to materially amend the contract of
and/or appoint a replacement for ABA or an investment sub-adviser (provided the
appointee is not affiliated with the Manager).
Under the exemption, within 90 days after such action, affected
shareholders would receive information about it, and the Prospectus would be
supplemented as necessary.
ABA
American
Beacon Advisors, Inc. (ABA) acts as each ETFs primary subadviser. ABA, located at 4151 Amon Carter Boulevard,
Fort Worth, Texas 76155, is a wholly-owned subsidiary of Lighthouse Holdings, Inc.,
a financial services holding company.
ABA was organized in 1986 to provide investment management, advisory,
administrative and asset management consulting services. As of December 31, 2009, ABA had
approximately $ billion of assets under
management, including approximately $
billion under active management and $
billion as named fiduciary or financial advisor.
17
Table of Contents
ABA serves as investment
adviser to registered mutual funds with investment programs that are
substantially similar to those of the ETFs.
The ETFs portfolio holdings are expected to be disclosed on a more
frequent basis than those of the registered mutual funds.
ABA provides or oversees the
provision of portfolio management services to the ETFs. ABA develops the investment programs for each
ETF, evaluates investment sub-advisers (subject to requisite approvals),
recommends to the Manager allocations of assets among investment sub-advisers,
monitors the investment sub-advisers investment programs and results, invests
the portion of ETF assets that the investment sub-advisers determine should be
allocated to high quality short-term debt obligations, and to the extent that
an ETF engages in securities lending, oversees the ETFs securities lending
activities and actions taken by the securities lending agent.
ABA
has entered into a Primary Investment Sub-Advisory Agreement between the
Manager and ABA, dated April 30, 2009, with respect to each ETF (Primary
Subadvisory Agreement). Pursuant to the
Primary Subadvisory Agreement, ABA 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 an ETF; they
are not separately paid by an ETF.
William
F. Quinn and Wyatt L. Crumpler are the leaders of ABAs portfolio management
team whose members have joint responsibility for the day-to-day management of
the ETFs. Mr. Quinn and Mr. Crumpler
are responsible for developing each ETFs investment program and recommending
investment sub-advisers to the Manager.
In addition, Mr. Quinn and Mr. Crumpler, in conjunction with
Adriana R. Posada for the Large Cap Value ETF and Kirk L. Brown for the
International Equity ETF, oversee the investment sub-advisers, review each
investment sub-advisers performance and recommend allocations of the ETFs
assets among the investment sub-advisers and ABA, as applicable.
Mr. Quinn
is Chairman of ABA and has served on each ETFs portfolio management team since
each ETFs inception. Mr. Crumpler
is Vice President of Trust Investments and has served on each ETFs portfolio
management team since each ETFs inception.
Ms. Posada is Managing Director of Trust Investments for ABA and
has been a member of each ETFs portfolio management team since inception. Mr. Brown is Managing Director of Trust
and Alternative Investments for ABA, and he has served on each ETFs portfolio
management team since inception.
The ETFs Statement of
Additional Information provides additional information about members of the
portfolio management team, including other accounts they manage, their
ownership in the ETFs they manage, and their compensation.
The ABA Portfolio Managers Performance Information
The following tables contain performance
information for a Large Cap Value Representative Account and an International
Equity Representative Account. Each of
the Large Cap Value and the International Equity Representative Account
represent a registered mutual fund with substantially similar objectives,
policies, strategies and risks to those of the Large Cap Value ETF and the
International Equity ETF, respectively.
The Representative Accounts have been managed by ABA for over ten years.
During that time, different investment sub-advisers, under the oversight of
ABA, have been retained for the Representative Accounts.
The
performance information is limited and may not reflect performance in all
economic cycles. The Representative
Accounts were registered mutual funds and, therefore, subject to certain
investment limitations, diversification requirements and other restrictions
imposed on registered investment companies, such as the ETFs, including those
under the Investment Company Act of 1940, as amended
18
Table of
Contents
(Investment
Company Act) and the Internal Revenue Code of 1986, as amended (Internal
Revenue Code). These registered mutual
funds, however, have not operated as ETFs, and different performance results
for the ETFs are likely due to, among other things, anticipated differences
between the cash positions of the ETFs and the Representative Accounts, and
between the time that portfolio management decisions will be implemented for
the ETFs and the Representative Accounts.
The performance information below is presented after deduction of fees
and expenses applicable to the Representative Accounts, which generally are
higher than the ETFs estimated fees and expenses, as described in the ETFs
fee tables (see Fees and Expenses above).
Annual return data is
presented for each of the last ten calendar years for each Representative
Account. Average annual total returns
are presented for the one-year, five-year and ten-year periods of each
Representative Account through December 31, 2009, and also include
after-tax return information applicable to the Representative Account. After-tax returns are calculated using the
highest historical individual federal marginal income tax rates and do not
reflect the impact of state and local taxes.
Actual after-tax returns depend on an investors tax situation and may
differ from those shown.
This performance information is
not the historical performance of either ETF.
Past performance is no guarantee of future results, and the past
performance of the Representative Accounts is not indicative of the future
performance of either ETF.
Large Cap Value Representative
Account:
TO BE
UPDATED
19
Table of Contents
|
|
Average Annual Total Return
|
|
|
|
as of 12/31/08
|
|
|
|
1 Year
|
|
5 Years
|
|
10 Years
|
|
Return Before Taxes
|
|
-39.58
|
%
|
-0.72
|
%
|
1.65
|
%
|
Return After Taxes on Distributions
|
|
-39.86
|
%
|
-1.31
|
%
|
0.46
|
%
|
Return After Taxes on Distributions and Sale of
Fund Shares
|
|
-25.38
|
%
|
-0.51
|
%
|
1.01
|
%
|
Russell
1000
®
Value Index(1)
|
|
-36.85
|
%
|
-0.79
|
%
|
1.36
|
%
|
Lipper
Large-Cap Value Funds Index(2)
|
|
-37.00
|
%
|
-1.90
|
%
|
-0.36
|
%
|
(1)
Russell 1000 Value Index is a
registered trademark of Frank Russell Company. The Russell 1000 Value Index is
an unmanaged index of those stocks in the Russell 1000 Index with lower
price-to-book ratios and lower forecasted growth values.
(2)
The Lipper Large-Cap Value Funds
Index tracks the results of the 30 largest mutual funds in the Lipper Large-Cap
Value Funds category. Lipper is an
independent mutual fund research and ranking service.
International Equity
Representative Account:
TO BE
UPDATED
20
Table of Contents
|
|
Average Annual Total Return
|
|
|
|
as of 12/31/08
|
|
|
|
1 Year
|
|
5 Years
|
|
10 Years
|
|
Return Before Taxes
|
|
-40.73
|
%
|
2.28
|
%
|
3.35
|
%
|
Return After Taxes on Distributions
|
|
-40.56
|
%
|
1.39
|
%
|
2.35
|
%
|
Return After Taxes on Distributions and Sale of
Fund Shares
(2)
|
|
-24.92
|
%
|
2.58
|
%
|
2.97
|
%
|
EAFE
Index(1)
|
|
-43.38
|
%
|
1.66
|
%
|
0.80
|
%
|
Lipper
International Funds Index(2)
|
|
-43.63
|
%
|
2.15
|
%
|
2.14
|
%
|
(1)
The MSCI EAFE Index is a market
capitalization weighted index of international stock performance composed of
equities from developed markets excluding the U.S. and Canada.
(2)
The Lipper International Funds
Index tracks the results of the 30 largest mutual funds in the Lipper
International Funds category. Lipper is
an independent mutual fund research and ranking service.
The
Investment Sub-Advisers
Each ETFs assets are
allocated among one or more investment sub-advisers. With respect to any assets allocated to it,
each investment sub-adviser has discretion to purchase and sell securities in
accordance with the ETFs objectives, policies, restrictions and more specific
policies provided by the Manager or ABA.
Each investment sub-adviser has entered into an Investment Sub-Advisory
Agreement among the Manager, ABA and the investment sub-adviser, dated April 30,
2009, with respect to the relevant ETF (Subadvisory Agreement). Pursuant to the Subadvisory Agreement, an
investment sub-adviser receives fees from ABA to provide day-to-day investment
advisory services to the ETF. These fees
are paid out of the advisory fees the Manager receives from an ETF; they are
not separately paid by an ETF.
The investment sub-advisers
also serve as sub-advisers to registered mutual funds with investment programs
that are substantially similar to the ETFs.
The ETFs portfolio holdings are expected to be disclosed on a more
frequent basis than the registered mutual funds.
Set forth below is a brief
description of each investment sub-adviser and the portfolio managers with
primary responsibility for the day-to-day management of the ETFs. The SAI provides additional information about
the portfolio managers, including other accounts they manage, their ownership
in the ETFs and their compensation.
Large Cap Value ETF
BRANDYWINE
GLOBAL INVESTMENT MANAGEMENT, LLC
(Brandywine
Global)
,
formerly known
as Brandywine Asset Management, LLC, 2929
Arch Street,
8th Floor,
Philadelphia, PA 19104, is a professional investment
advisory firm founded in 1986. Brandywine Global
is a wholly owned subsidiary of Legg Mason, Inc. As of
December 31,
2009, Brandywine Global had assets under
management
totaling approximately $ billion.
Paul R. Lesutis, CFA,
Managing Director, is a member of Brandywine Globals Executive Committee and
serves as lead Portfolio Manager of Brandywine Globals fundamental large cap
value equity strategy. In addition, he
is responsible for research coverage of the Banks and Paper & Forest
Products
21
Table of Contents
sectors, contributing
insight and stock recommendations to all of Brandywine Globals domestic equity
products. Mr. Lesutis joined
Brandywine Global in 1991 and has served as lead portfolio manager to
Brandywine Globals portion of the Large Cap Value ETF since its inception.
Earl J. Gaskins, Managing
Director, is a lead Portfolio Manager for Brandywine Globals large cap value
and socially responsible large cap value equity strategies and is Co-Manager
for the fundamental large cap value equity strategy. He is responsible for research coverage of
the Chemicals and Energy sectors, contributing industry insight and stock
recommendations to all of Brandywine Globals equity products. Mr. Gaskins has been with Brandywine
Global since 1996 and has co-managed Brandywine Globals portion of the Large
Cap Value ETF since its inception.
HOTCHKIS
AND WILEY CAPITAL MANAGEMENT, LLC
(Hotchkis)
,
725 South Figueroa Street,
39th Floor,
Los Angeles,
California 90017, is a professional investment
management firm. Hotchkis was
formed in October 2001 from the key domestic equity management personnel
at Merrill Lynch Investment Managers,
L.P. As of December 31, 2009,
Hotchkis had approximately
$ billion in assets under
management.
In addition to the Large Cap
Value ETF, Hotchkis manages institutional separate accounts and is the advisor
and sub-advisor to other mutual funds.
The investment process employed is the same for similar accounts,
including the Large Cap Value ETF, and is team-based utilizing primarily
in-house, fundamental research. The
investment research staff is organized by industry and sector and supports all
of the accounts managed in each of Hotchkis investment strategies. Portfolio coordinators for each strategy
ensure that the best thinking of the investment team is reflected in the target
portfolios. Investment ideas for the
Large Cap Value ETF are generated by Hotchkis investment team.
Although the Large Cap Value
ETF is managed by Hotchkis investment team, Hotchkis has identified the
portfolio managers with the most significant responsibility for Hotchkis
portion of the ETFs assets. This list
does not include all members of the investment team. George Davis, Judd Peters, Scott McBride,
Patricia McKenna, and Sheldon Lieberman participate in the investment research
review and decision making process for the Large Cap Value ETF. Mr. McBride, Mr. Peters and Mr. Davis
coordinate the day-to-day management of the Large Cap Value ETF.
Mr. Davis, Principal,
Portfolio Manager and Chief Executive Officer, joined Hotchkis investment team
in 1988. Mr. Peters, Portfolio
Manager, joined Hotchkis investment team in 1999. Mr. McBride, Portfolio Manager, joined Hotchkis
investment team in 2001. Ms. McKenna,
Principal and Portfolio Manager, joined Hotchkis investment team in 1995. Mr. Lieberman, Principal and Portfolio
Manager, joined Hotchkis investment team in 1994. Hotchkis investment team has managed Hotchkis
portion of the Large Cap Value ETF since its inception.
METROPOLITAN
WEST CAPITAL MANAGEMENT, LLC
(MetWest
Capital)
,
610 Newport
Center Drive,
Suite 1000,
Newport Beach, California 92660, is an investment advisor founded in 1997. The firm
is
majority owned by Wells Fargo & Company and minority owned by its
key professionals. As of December 31, 2009, MetWest
Capital had approximately
$ billion of assets under
management.
Howard Gleicher oversees the
MetWest Capital investment team that has responsibility for a portion of the
Large Cap Value ETF. Mr. Gleicher
has served as Chief Investment Officer since MetWest Capitals inception in August 1997. In addition to Mr. Gleicher, the Large
Cap Value ETFs investment team includes senior members Gary W. Lisenbee, David
M. Graham, Jeffrey Peck, and Jay Cunningham.
Mr. Lisenbee has served as President since MetWest Capitals
inception in August 1997. Mr. Graham
has served as Research Analyst since September 2000. Mr. Peck has served as Research Analyst
since March 2004. From 2002 to March 2004,
he was an equity research analyst with Janney Montgomery Scott,
22
Table of Contents
LLC. Mr. Cunningham has served as Research
Analyst since November 2005. From August 2003
to November 2005, he was a Senior Analyst with Hibernia Southcoast
Capital. From June 2001 through July 2003,
he served as a Senior Analyst for AIM Investments. Each individual has managed MetWest Capitals
portion of the Large Cap Value ETF since its inception.
International Equity ETF
LAZARD
ASSET MANAGEMENT LLC
(Lazard)
,
30 Rockefeller Plaza, New
York, New York 10112, an
SEC
registered investment advisor, is a subsidiary of
Lazard Frères & Co. LLC, a registered broker-dealer.
Lazard
and its affiliates provided investment management
services to client discretionary accounts with assets
totaling approximately
$ billion as of December 31,
2009.
The following individuals
comprise Lazards International Equity management team, which is responsible
for the day-to-day management of the portion of the International Equity ETF
allocated to Lazard. Responsibility is
shared equally among each member of the team.
Each member has co-managed Lazards portion of the International Equity
ETF since its inception.
John R. Reinsberg is a
Deputy Chairman of Lazard responsible for oversight of the firms international
and global strategies. He is also
Portfolio Manager/Analyst on the Global Equity and International Equity
portfolio teams. He joined Lazard in
1992 and began working in the investment field in 1981.
Michael A. Bennett is a
Managing Director of Lazard and a Portfolio Manager/Analyst on the International
Equity portfolio teams. He joined Lazard
in 1992 and has worked in the investment field since 1987.
Michael G. Fry is a Managing
Director of Lazard and a Portfolio Manager/Analyst on the Global Equity and
International Equity portfolio teams.
Prior to joining Lazard in 2005, Mr. Fry was Head of Global Equity
Portfolio Management, Global Head of Equity Research and Head of Australian
Equities with UBS Global Asset Management.
Mr. Fry began working in the investment field in 1981.
Michael Powers is a Managing
Director of Lazard and a Portfolio Manager/Analyst on the Global Equity and
International Equity portfolio teams. He
began working in the investment field in 1990 when he joined Lazard.
TEMPLETON
INVESTMENT COUNSEL, LLC
(Templeton)
,
500 East Broward Blvd., Suite 2100,
Fort Lauderdale,
Florida 33394, is
an indirect wholly owned
subsidiary
of Franklin Resources, Inc., a global investment
organization operating as Franklin Templeton
Investments. Franklin Templeton Investments provides
global and domestic investment management
services,
through its Franklin,
Templeton, Mutual Series and Fiduciary
Trust
subsidiaries. The San Mateo, CA-based
company
has over 60 years of
investment experience and
more
than $ billion in assets under
management as
of December 31,
2009.
Gary P. Motyl has served as
a portfolio manager to Templetons portion of the International Equity ETF
since its inception. Mr. Motyl is
President of Templeton and Chief Investment Officer of Templeton Global
Equities. He joined Templeton in 1981.
THE BOSTON
COMPANY ASSET MANAGEMENT, LLC
(The
Boston Company)
,
One Boston
Place, Boston,
Massachusetts
02108, is a wholly-owned subsidiary of The Bank of New York Mellon
Corporation. Assets under management as
of
December 31, 2009 were
$ billion.
Certain of the assets managed by The Boston Company are managed as dual
officers of affiliated entities.
23
Table of Contents
D. Kirk Henry is the
Director of International Value Equities for The Boston Company. He is the lead portfolio manager for the
International Value strategy. Mr. Henry
joined The Boston Company in 1994.
Clifford A. Smith, Senior Vice President, has been with The Boston
Company since 1998. Prior to becoming a
portfolio manager in March 2003, he served as a research analyst. Mr. Smith focuses on global technology
and European capital goods companies. Mr. Henry
and Mr. Smith have served as portfolio managers for a portion of the
International Equity ETF since its inception.
The Manager, ABA and the
investment sub-advisers (and their affiliates) may deal, trade and invest for
their own accounts in the types of securities in which the ETFs may also
invest. The Manager, ABA and the
investment sub-advisers do not use inside information in making investment
decisions on behalf of the ETFs.
Approval of
Advisory Agreements
A
discussion regarding the basis for the Boards approval of the Investment
Management Agreement, Primary Subadvisory Agreement and the Subadvisory
Agreements is available in the ETFs report to shareholders dated October 31,
2009.
OTHER SERVICE PROVIDERS
ALPS Distributors, Inc.
(Distributor), 1290 Broadway, Suite 1100, Denver, CO 80203, serves as
the distributor of Creation Units for each ETF on an agency basis. The Distributor does not maintain a secondary
market in Shares.
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 ETFs.
BNY Mellon, One Wall Street,
New York, New York 10286, is also the custodian for the ETFs.
K&L Gates LLP, 1601 K
Street, NW, Washington, DC 20006 serves as legal counsel to the ETFs.
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 ETFs.
24
Table of Contents
BUYING AND SELLING ETF
SHARES
Shares are issued or redeemed by each
ETF at NAV per Share only in Creation Units,
which are likely to cost millions of dollars.
The value of one Creation Unit of the Large Cap Value ETF as of
was $ .
The International Equity ETF had not opened for investment as of that date.
Shares 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 ETFs.
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 are listed on NYSE Arca, Inc. (the Exchange) under the following
symbols:
ETF
|
|
Trading
Symbol
|
|
Large Cap Value ETF
|
|
GVT
|
|
International Equity ETF*
|
|
GFL
|
|
*
Not open for investment.
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, is the registered owner of all outstanding Shares of the ETFs 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
25
Table of Contents
those
that apply to any stocks that 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
ETFs.
Share Trading Prices
. The trading prices of an 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
each ETFs portfolio every fifteen seconds.
This approximate value should not be viewed as a real-time update of
the NAV of an ETF because the approximate value may not be calculated in the
same manner as the NAV, which is computed once a day. The quotations for certain investments may
not be updated during U.S. trading hours if such holdings do not trade in the
U.S., except such quotations may be updated to reflect currency
fluctuations. The ETFs are 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 ETFs
You can purchase Shares
directly from the ETFs 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 ETFs will not issue fractional Creation Units. Creation Units may generally be purchased in
exchange for a basket of securities - known as the
In-Kind Creation Basket
and cash equal to the
Cash Component
, as discussed further below. The ETFs reserve the right to reject any
purchase request at any time, for any reason, and without notice. The ETFs 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 Securities and Exchange
Commission (SEC).
To purchase Shares directly
from an 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
. 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 for each ETF for
that day. The In-Kind Creation Basket will
identify the name and number of shares of each security that must be
contributed to an ETF for each Creation Unit purchased. Each ETF reserves the right to accept a
nonconforming In-Kind Creation Basket.
Cash
Component.
In addition
to the in-kind deposit of 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 the securities
in the In-Kind Creation Basket. 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. 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.
26
Table of Contents
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.
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
|
|
Large Cap Value ETF
|
|
$
|
1,000
|
|
International Equity
ETF
|
|
$
|
3,200
|
|
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. 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 relevant
ETF. The fee protects existing
shareholders of an ETF from the costs associated with issuing Creation Units.
Redeeming
Shares Directly From an ETF
You may redeem Shares of the
ETFs only in Creation Units or multiples thereof. To redeem Shares directly with an 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 securities known as the
In-Kind Redemption Basket
and cash equal to the
Cash Component
, as discussed further below.
In-Kind
Redemption Basket.
Redemption
proceeds will generally be paid in kind with a basket of securities known as
the In-Kind Redemption Basket. In most
cases, the In-Kind Redemption Basket will be the same as the In-Kind Creation
Basket for that same day. There will be
times, however, when the In-Kind Creation Basket and In-Kind Redemption Baskets
differ. The composition of the In-Kind
Redemption Basket will be available on the NSCC bulletin board. An ETF may honor a redemption request with a
nonconforming In-Kind Redemption Basket.
Cash
Component.
Depending on
whether the NAV of a Creation Unit is higher or lower than the value of the
securities in the In-Kind Redemption Basket, 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
27
Table of Contents
close of regular trading on
the NYSE on that date, and if all other procedures set forth in the Participant
Agreement are followed.
Transaction
Fee on Redemption of Creation Units.
The ETFs impose 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 [
]). 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 ETFs (whether or not they
otherwise permit cash redemptions) reserve the right to redeem Creation Units
for cash to the extent that an investor could not lawfully purchase or an 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.
Continuous Offering
. You should be aware of certain legal risks
unique to investors purchasing Creation Units directly from an 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.
28
Table of Contents
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 ETFs sell and redeem
their 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
ETFs, to the extent effected in-kind (i.e., for securities), they do not cause
the harmful effects that may result from frequent cash trades.
The Board recognized that to
the extent that the ETFs allow or require trades to be effected in whole or in
part in cash, those trades could result in dilution to an ETF and increased transaction
costs, which could negatively impact an 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 ETFs may employ fair valuation pricing to minimize the
potential for dilution from market timing.
Moreover, each ETF imposes Transaction Fees on purchases and redemptions
of ETF Shares, which increase if an investor substitutes cash in part or in
whole for securities, reflecting the fact that an ETFs costs increase in those
circumstances. Each ETF reserves the
right to impose additional restrictions on disruptive, excessive or short-term
purchases.
DISTRIBUTION AND SERVICE
PLAN
Each ETF has adopted a
distribution and service plan (Plan) pursuant to Rule 12b-1 under the
Investment Company Act. Under the Plan,
an 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,
an 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.
No distribution or service
fees are currently paid by either 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
an 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.
Each 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.
29
Table of Contents
Because securities listed on
foreign exchanges may trade on weekends or other days when the ETFs do not
price their Shares, the NAV of ETFs that hold foreign securities may change on
days when shareholders will not be able to purchase or sell Shares.
When calculating the NAV of
an 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.
In some cases, the price of debt securities is determined using quotes
obtained from brokers. Certain
short-term debt instruments used to manage an ETFs cash are valued on the
basis of amortized cost. The values of
any foreign securities held by an 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. An 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 the
Manager and ABA, 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 ETFs at www.grailadvisors.com. Among other things, this website includes
this Prospectus and the Statement of Additional Information, 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 ETFs publicly
disseminate their full portfolio holdings each day the ETF is open for business
through its website at www.grailadvisors.com.
In addition, 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.
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SECTION 12(d)(1) INFORMATION
The Trust and the ETFs 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
Each ETF pays out dividends
from its net investment income to shareholders annually. Each ETF distributes its net capital gains,
if any, annually. Each ETF typically
earns income dividends from stocks.
These amounts, net of expenses, are passed along to ETF shareholders as income
dividend distributions. Each 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 an 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.
ETF distributions and your sale of your Shares in an
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.
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Taxes on Distributions
Distributions by an ETF generally are taxable to you
as ordinary income or capital gains.
Distributions of an ETFs investment company taxable income (which is,
generally, ordinary income plus net short-term capital gains in excess of net
long-term capital losses) 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 an 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 an
ETFs Shares and regardless of whether paid in cash or reinvested in additional
Shares. Distributions in excess of an
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 an
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 an 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 an 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 an 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.
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
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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 equity
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
equity 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.
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.
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand each ETFs financial performance since inception. [Certain information reflects financial results for a single ETF share.] The total return in the table represent the rate that an investor would have earned (or lost) on an investment in the ETF (assuming reinvestment of all dividends and distributions). For the period May 1, 2009 (commencement of offering of shares) through October 31, 2009, the information has been audited by KPMG LLP, independent registered public accounting firm for the ETFs. The financial statements and independent accountants report thereon of the ETFs are incorporated into the Statement of Additional Information.
TO BE UPDATED
GRAIL AMERICAN BEACON LARGE CAP VALUE ETF
|
|
For the period
|
|
|
|
May 1, 2009*
|
|
|
|
through
|
|
|
|
October 31, 2009
|
|
|
|
|
|
Per share operating performance for a share outstanding throughout
the period
|
|
|
|
|
|
|
|
Beginning net asset value per share
|
|
$
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
Dividends from net investment income
|
|
|
|
|
|
|
|
Ending net asset value per share
|
|
$
|
|
|
|
|
|
Total return(a)
|
|
|
%
|
|
|
|
|
Ratios/supplemental data
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
Expenses(b)
|
|
|
%
|
Net investment income
|
|
|
%
|
|
|
|
|
Net assets at the end of period (000s omitted)
|
|
$
|
|
*
Commencement of offering of shares.
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GRAIL AMERICAN BEACON LARGE CAP VALUE ETF
No financial information is presented for the ETF because it had not commenced investment 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 ETFs and the Trust, the following documents are available
free, upon request:
ANNUAL/SEMI-ANNUAL REPORTS TO
SHAREHOLDERS
Additional information about
the ETFs 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 each ETFs
performance during the last fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION
A
Statement of Additional Information dated February ,
2010, which contains more details about the ETFs, 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 ETFs,
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 ETFs,
including their 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.
Investment Company Act File No. 811- 22154.
Table of
Contents
STATEMENT OF ADDITIONAL INFORMATION
GRAIL ADVISORS ETF TRUST
GRAIL AMERICAN BEACON LARGE CAP VALUE ETF (GVT)
GRAIL AMERICAN BEACON INTERNATIONAL EQUITY ETF (GFL)*
ONE FERRY BUILDING, SUITE 255, SAN FRANCISCO, CA 94111
PHONE: 1-415-677-5870
February , 2010
* Not open for investment.
Shares
of the Large Cap Value ETF are listed and traded on NYSE Arca, Inc.
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 eight ETFs:
Large Cap Value ETF, International Equity ETF, RP Growth ETF, RP Focused
Large Cap Growth ETF, RP Technology ETF, RP Financials ETF, Grail McDonnell
Intermediate Municipal Bond ETF and Grail McDonnell Core Taxable Bond ETF. The Large Cap Value ETF and International Equity
ETF are described in this SAI; the other ETFs are described in separate statements
of additional information.
Each ETF is an actively
managed exchange-traded fund. Grail
Advisors, LLC serves as the Manager to each ETF. The ETFs are subadvised by American Beacon
Advisors, Inc. The Manager in
consultation with ABA allocates day-to-day portfolio management for each ETF
among one or more investment sub-advisers, as discussed in the ETFs
prospectus, consistent with the Managers intention to operate the ETFs as
multi-manager ETFs. ALPS Distributors, Inc.
serves as the Distributor for each ETF.
Shares of
the ETFs are neither guaranteed nor insured by the U.S. Government.
This
SAI, dated February , 2010 is not a
prospectus. It should be read in
conjunction with the ETFs Prospectus, dated February ,
2010, which incorporates this SAI by reference.
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 ETFs for the period May 1,
2009 (commencement of operations) through October 31, 2009 is available in
the same manner.
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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.
ABA
means American Beacon
Advisors, Inc., the primary subadviser for each ETF.
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.
Creation Unit
means an
aggregation of 50,000 Shares that each 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: Large Cap Value ETF and
International Equity 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 an 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 an 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 an
ETF. The In-Kind Creation Basket will
identify the name and number of shares of each security to be contributed, in
kind, to an ETF for a Creation Unit.
In-Kind Redemption Basket
means the basket of securities a shareholder will receive upon redemption of a
Creation Unit.
International Equity ETF
means Grail American Beacon International Equity ETF.
Investment Company Act
means
the Investment Company Act of 1940, as amended.
Large Cap Value ETF
means
Grail American Beacon Large Cap Value ETF.
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 February , 2010,
as amended and supplemented from time to time.
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
an ETF.
Transaction Fees
are fees
imposed to compensate the Trust.
For the Large
Cap Value ETF, they will generally be $1,000 and for the International Equity
ETF, they will generally be $3,200. 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.
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 eight ETFs: Large Cap Value ETF, International Equity ETF,
RP Growth ETF, RP Focused Large Cap Growth ETF, RP Technology ETF, RP
Financials ETF, Grail McDonnell Intermediate Municipal Bond ETF and Grail
McDonnell Core Taxable Bond ETF. RP
Growth ETF, RP Focused Large Cap Growth ETF, RP Technology ETF and RP
Financials ETF are discussed in a separate prospectus and SAI, each dated February ,
2010. 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 31,
2009. As of the date of this statement
of additional information, 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.
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Each
ETF offers and issues Shares at NAV only in aggregations of a specified number
of Shares, generally in exchange for a basket of securities constituting the
portfolio holdings of the ETF, together with the deposit of a specified cash
payment. Shares of each ETF are 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, each
ETF issues and redeems Shares, principally in kind, on a continuous basis at
NAV, only in Creation Units of 50,000 Shares, though the Trust reserves the
right to offer a cash option for creations and redemptions. Further, in the event of the liquidation of
an 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 are 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 ETFs
are actively managed and do not seek to replicate the performance of a
specified index.
EXCHANGE LISTING AND TRADING
Shares
of each ETF are 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 each ETF will continue to be met.
The Exchange may, but is not required to, remove the Shares of an ETF
from listing if: (i) following the initial 12-month period beginning at
the commencement of trading of an 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 an ETF
from listing and trading upon termination of an ETF.
The ETFs are 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 ETFs or any member of the public regarding the
advisability of investing in securities generally or in the ETFs particularly
or the ability of the ETFs to achieve their objectives. The Exchange has no obligation or liability
in connection with the administration, marketing or trading of the ETFs.
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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 ETFs, 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 an 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 quotations for certain investments may
not be updated during U.S. trading hours if such holdings do not trade in the
U.S., except such quotations may be updated to reflect currency
fluctuations. The ETFs are not involved
in, or responsible for, the calculation or dissemination of the IIV and make 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 an
ETF only by a vote of the holders of a majority of the ETFs outstanding voting
securities, no ETF may:
1. Purchase or sell
real estate
limited
partnership interests, provided, however, that an 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 an ETF from purchasing or selling foreign currency,
options, futures contracts, options on futures contracts, forward contracts,
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, an 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 an 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.
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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 an 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 each ETF and may be
changed with respect to an ETF by a vote of a majority of the Board.
No
ETF may:
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
2.
Purchase securities on margin or effect short sales, except that an ETF may
obtain such short term credits as may be necessary for the clearance of
purchases or sales of securities.
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 an ETFs investments will not
constitute a violation of such limitation.
Thus, an 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 an 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 ETFs intend to use the classifications provided by the Global
Industry Classification Standard.
INVESTMENT OBJECTIVE, INVESTMENT
STRATEGIES AND RISKS
The investment objective and
principal strategies of, and risks of investing in, each ETF are described in
the Prospectus. Unless otherwise
indicated in the Prospectus or this SAI, the investment objective and policies
of an ETF may be changed without shareholder approval.
In addition to the
investment strategies described in the Prospectus, each ETF may invest up to
20% of its total assets in debt securities that are investment grade at the
time of purchase, including obligations of the U.S. Government, its agencies
and instrumentalities, corporate debt securities, mortgage-backed securities,
asset-backed securities, master-demand notes, Yankee dollar and Eurodollar bank
certificates of deposit, time deposits, bankers acceptances, commercial paper
and other notes, inflation-indexed
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securities, and other debt
securities. Investment grade securities
include securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities, as well as securities rated in one of the four highest
rating categories by at least two nationally recognized statistical rating
organizations (Rating Organizations) rating that security, such as Standard &
Poors Ratings Services (Standard & Poors) or Moodys Investors
Service, Inc. (Moodys), or rated in one of the four highest rating
categories by one Rating Organization if it is the only Rating Organization rating
that security or unrated, if deemed to be of comparable quality by ABA or the
applicable investment sub-adviser and traded publicly on the world market. Obligations rated in the fourth highest
rating category are limited to 25% of each ETFs debt allocations. The ETFs, at the discretion of ABA or the
applicable investment sub-adviser, may retain a debt security that has been
downgraded below the initial investment criteria. The International Equity ETF may invest up to
20% of its total assets in non-U.S. debt securities that are rated at the time
of purchase in one of the three highest rating categories by any Rating
Organization or, if unrated, are deemed to be of comparable quality by the
applicable investment sub-adviser and traded publicly on a world market.
Each
ETF may also engage in the following investment strategies or techniques
(except where indicated otherwise).
Securities Lending
An
ETF may make secured loans of its portfolio securities, however, securities
loans will not be made if, as a result, the aggregate amount of all outstanding
securities loans by an ETF exceeds 33 1/3% of its total assets (including the
market value of collateral received).
For purposes of complying with an ETFs investment policies and
restrictions, collateral received in connection with securities loans is deemed
an asset of the ETF to the extent required by law. An ETF continues to receive dividends or
interest, as applicable, on the securities loaned and simultaneously earns
either interest on the investment of the cash collateral or fee income if the
loan is otherwise collateralized.
To the extent an ETF engages
in securities lending, securities loans will be made to broker-dealers that ABA
believes to be of relatively high credit standing pursuant to agreements
requiring that the loans continuously be collateralized by cash, liquid
securities, or shares of other investment companies with a value at least equal
to the market value of the loaned securities.
As with other extensions of credit, the ETF bears the risk of delay in
the recovery of the securities and of loss of rights in the collateral should
the borrower fail financially. The ETF
also bears the risk that the value of investments made with collateral may
decline.
Voting rights or rights to consent
with respect to the loaned securities pass to the borrower. An ETF has the right to call loans at any
time on reasonable notice. However, the
ETF bears the risk of delay in the return of the security, impairing the ETFs
ability to vote on such matters. ABA
will retain lending agents on behalf of the ETFs that are compensated based on
a percentage of the ETFs return on its securities lending. An ETF may also pay various fees in
connection with securities loans, including shipping fees and custodian fees.
Dollar Rolls 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 when-issued securities is fixed
at the time the commitment to purchase or sell is made, but delivery and
payment for the when-issued 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
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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 account of liquid assets at least
equal to the value of purchase commitments for such securities will be
maintained until the settlement date.
Depository Receipts
The ETFs invest in American
Depositary Receipts (ADRs), Global Depository Receipts (GDRs), and European
Depository Receipts (EDRs) (collectively, Depository Receipts). Depository Receipts generally evidence an
ownership interest in a foreign security on deposit with a financial
institution. Transactions in Depository
Receipts usually do not settle in the same currency in which the underlying
foreign securities are denominated or traded.
Generally, ADRs are designed for use in the U.S. securities markets and
EDRs are designed for use in European securities markets. GDRs may be traded in any public or private
securities market and may represent securities held by institutions located
anywhere in the world.
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.
Warrants and Rights
The ETFs 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. An 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
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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.
Options and Futures
Although not currently
anticipated, except in the case of the International Equity ETF to reduce the
ETFs risk exposure to adverse fluctuations in currency exchange rates, the
ETFs may use options and futures for various purposes, including for hedging
and investment purposes. The use of
options contracts, futures contracts, and options on futures contracts involves
risk. Thus, while the ETF may benefit
from the use of options, futures, and options on futures, unanticipated changes
in interest rates, securities prices, currency exchange rates, or other
underlying assets or reference rates may adversely affect an ETFs performance.
The
ETFs ability to write and purchase call and put options is limited by the
requirements for qualifying as a regulated investment company under the
Internal Revenue Code of 1986, as amended.
Options on Securities and
Indices.
The ETFs may purchase and
sell put and call options on equity, fixed income, or other securities or
indices in standardized exchanged-traded contracts. An option on a security or index is a
contract that gives the holder of the option, in return for a premium, the
right (but not the obligation) 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 underlying the option) at a specified
price. Upon exercise, the writer of an
option on a security has the obligation 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 required to pay the difference between the
cash value of the index and the exercise price multiplied by the specified
multiplier for the index option.
Purchasing
Options on Securities and Indices.
Among other reasons, the ETFs may purchase a
put option to hedge against a decline in the value of a portfolio
security. If such a decline occurs, the
put option will permit an ETF to sell the security at the higher exercise price
or to close out the option at a profit.
By using put options in this manner, an ETF will reduce any profit it
might otherwise have realized in the underlying security by the amount of the premium
paid for the put option and by its transaction costs. In order for a put option purchased by an ETF
to be profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium paid by the ETF and
transaction costs.
Among other reasons, an ETF
may purchase call options to hedge against an increase in the price of
securities the ETF anticipates purchasing in the future. If such a price increase occurs, a call
option will permit an ETF to purchase the securities at the exercise price or
to close out the option at a profit. The
premium paid for the call option, plus any transaction costs, will reduce the
benefit, if any, that an ETF realizes upon exercise of the option and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the ETF. Thus, for a call
option purchased by an ETF to be profitable, the market price of the underlying
security must rise sufficiently above the exercise price to cover the premium
paid by the ETF to the writer and transaction costs.
In the case of both call and
put options, the purchaser of an option risks losing the premium paid for the
option plus related transaction costs if the option expires worthless.
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Writing
Options on Securities and Indices.
Because an ETF receives a premium for writing
a put or call option, the ETF may seek to increase its return by writing call
or put options on securities or indices.
The premium an ETF receives for writing an option will increase the ETFs
return in the event the option expires unexercised or is closed out at a
profit. The size of the premium an ETF
receives reflects, among other things, the relationship of the market price and
volatility of the underlying security or index to the exercise price of the
option, the remaining term of the option, supply and demand, and interest
rates.
An ETF may write a call
option on a security or other instrument held by the ETF. In such case the ETF limits its opportunity
to profit from an increase in the market price of the underlying security above
the exercise price of the option.
Alternatively, an ETF may write a call option on securities in which it
may invest but that are not currently held by the ETF. During periods of declining securities prices
or when prices are stable, writing these types of call options can be a
profitable strategy to increase an ETFs income with minimal capital risk. However, when securities prices increase, an
ETF is exposed to an increased risk of loss, because if the price of the
underlying security or instrument exceeds the options exercise price, the ETF
will suffer a loss equal to the amount by which the market price exceeds the
exercise price at the time the call option is exercised, minus the premium
received. Calls written on securities
that an ETF does not own are riskier than calls written on securities owned by
the ETF because there is no underlying security held by the ETF that can act as
a partial hedge. When such a call is
exercised, an ETF must purchase the underlying security to meet its call
obligation or make a payment equal to the value of its obligation in order to
close out the option. Calls written on
securities that an ETF does not own have speculative characteristics and the
potential for loss is unlimited. There
is also a risk, especially with less liquid preferred and debt securities, that
the securities may not be available for purchase.
An ETF also may write a put
option on a security. In so doing, the
ETF assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then current market price, resulting
in a loss on exercise equal to the amount by which the market price of the
security is below the exercise price minus the premium received.
OTC
Options
. An ETF may also invest in
over-the-counter (OTC) options. OTC
options differ from exchange-traded options in that they are two-party
contracts, with price and other terms negotiated between the buyer and seller,
and generally do not have as much market liquidity as exchange-traded options.
Closing
Options Transactions.
The
holder of an option may terminate its position in a put or call option it has
purchased by allowing it to expire or by exercising the option. If an option is American style, it may be
exercised on any day up to its expiration date.
In contrast, a European style option may be exercised only on its expiration
date. In addition, a holder of an option
may terminate its obligation prior to the options expiration by effecting an
offsetting closing transaction. In the
case of exchange-traded options, an ETF, as a holder of an option, may effect
an offsetting closing sale transaction by selling an option of the same series
as the option previously purchased. An
ETF realizes a loss from a closing sale transaction if the premium received
from the sale of the option is less than the premium paid to purchase the option
(plus transaction costs). Similarly, an
ETF that has written an option may effect an offsetting closing purchase
transaction by buying an option of the same series as the option previously
written. An ETF realizes a loss from a
closing purchase transaction if the cost of the closing purchase transaction
(option premium plus transaction costs) is greater than the premium received
from writing the option. If an ETF
desires to sell a security on which it has written a call option, it will
effect a closing purchase prior to or concurrently with the sale of the
security. There can be no assurance,
however, that a closing purchase or sale can be effected when an ETF desires to
do so.
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An OTC option may be closed
out only with the counterparty, although either party may engage in an
offsetting transaction that puts that party in the same economic position as if
it had closed out the option with the counterparty.
No guarantee exists that an
ETF will be able to effect a closing purchase or a closing sale with respect to
a specific option at any particular time.
Risk
Factors in Options Transactions.
There are various risks associated with
transactions in exchange-traded and OTC options. The value of options written by an ETF, which
will be priced daily, will be affected by, among other factors, changes in the
value of underlying securities (including those comprising an index), changes
in the dividend rates of underlying securities (including those comprising an
index), changes in interest rates, changes in the actual or perceived
volatility of the stock market and underlying securities, and the remaining
time to an options expiration. The
value of an option also may be adversely affected if the market for the option
is reduced or becomes less liquid. In
addition, since an American style option allows the holder to exercise its
rights any time prior to expiration of the option, the writer of an American
style option has no control over the time when it may be required to fulfill
its obligations as a writer of the option.
This risk is not present when writing a European style option since the
holder may only exercise the option on its expiration date.
An ETFs ability to use
options as part of its investment program depends on the liquidity of the
markets in those instruments. In
addition, there can be no assurance that a liquid market will exist when an ETF
seeks to close out an option position.
If an 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
an ETF were unable to close out a call option that it had written on a
portfolio security owned by the ETF, it would not be able to sell the
underlying security unless the option expired without exercise. As the writer of a call option on a portfolio
security, during the options life, an ETF foregoes the opportunity to profit
from increases in the market value of the security underlying the call option
above the sum of the premium and the strike price of the call, but retains the
risk of loss (net of premiums received) should the price of the underlying
security decline. Similarly, as the
writer of a call option on a securities index, an ETF foregoes the opportunity
to profit from increases in the index over the strike price of the option,
though it retains the risk of loss (net of premiums received) should the price
of the ETFs portfolio securities decline.
An exchange-traded option
may be closed out by means of an offsetting transaction only on a national
securities exchange, which generally provides a liquid secondary market for an
option of the same series. If a liquid
secondary market for an exchange-traded option does not exist, an ETF might not
be able to effect an offsetting closing transaction for a particular option as
described above. Reasons for the absence
of a liquid secondary market on a national securities exchange include the
following: (i) insufficient trading interest in some options; (ii) restrictions
by a national securities exchange on opening or closing transactions, or both; (iii) trading
halts, suspensions, or other restrictions on particular classes or series of
options or underlying securities; (iv) unusual or unforeseen interruptions
in normal operations on a national securities exchange; (v) inability to
handle current trading volume; or (vi) discontinuance of options trading
(or trading in a particular class or series of options) (although outstanding
options on a national securities exchange that were issued by the Options
Clearing Corporation should continue to be exercisable in accordance with their
terms). In addition, the hours of
trading for options on a national securities exchange may not conform to the
hours during which the securities held by an ETF are traded. To the extent that the options markets close
before the markets for the underlying securities, significant price and rate
movements can take place in the underlying markets that may not be reflected in
the options markets.
National securities
exchanges have established limits on the maximum number of options an investor or
group of investors acting in concert may write.
The ETFs, the Manager, ABA, an investment sub-adviser
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and other clients of the
investment sub-adviser may constitute such a group. These limits restrict an ETFs ability to
purchase or sell options on a particular security.
An OTC option may be closed
out only with the counterparty, although either party may engage in an
offsetting transaction that puts that party in the same economic position as if
it had closed out the option with the counterparty. See Swap Contracts and Other Two-Party
Contracts Risk Factors in Swap Contracts, OTC Options, and Other Two-Party
Contracts for a discussion of counterparty risk and other risks associated
with investing in OTC options below.
An ETFs ability to engage
in options transactions may be limited by tax considerations.
Futures
.
To the extent consistent with applicable law,
the ETFs may invest in futures contracts on, among other things, financial
instruments (such as a U.S. government security or other fixed income
security), individual equity securities (single stock futures), securities
indices, interest rates, currencies, inflation indices, and commodities or
commodities indices. Futures contracts
on securities indices are referred to herein as Index Futures.
Certain futures contracts
are physically settled (i.e., involve the making and taking of delivery of a
specified amount of an underlying security or other asset). For instance, the sale of futures contracts
on foreign currencies or financial instruments creates an obligation of the
seller to deliver a specified quantity of an underlying foreign currency or
financial instrument called for in the contract for a stated price at a
specified time. Conversely, the purchase
of such futures contracts creates an obligation of the purchaser to pay for and
take delivery of the underlying foreign currency or financial instrument called
for in the contract for a stated price at a specified time. In some cases, the specific instruments
delivered or taken, respectively, on the settlement date are not determined
until on or near that date. That
determination is made in accordance with the rules of the exchange on
which the sale or purchase was made.
Some futures contracts are cash settled (rather than physically
settled), which means that the purchase price is subtracted from the current
market value of the instrument and the net amount, if positive, is paid to the
purchaser by the seller of the futures contract and, if negative, is paid by
the purchaser to the seller of the futures contract. In particular, Index Futures are agreements
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of a securities 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 a securities index might be a function of the
value of certain specified securities, no physical delivery of these securities
is made.
The purchase or sale of a
futures contract differs from the purchase or sale of a security or option in
that no price or premium is paid or received.
Instead, an amount of cash, U.S. government securities, or other liquid
assets equal in value to a percentage of the face amount of the futures
contract must be deposited with the broker.
This amount is known as initial margin.
The amount of the initial margin is generally set by the market on which
the contract is traded (margin requirements on foreign exchanges may be
different than those on U.S. exchanges).
Subsequent payments to and from the broker, known as variation margin,
are made on a daily basis as the price of the underlying futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as marking to the market. For futures contracts which are cash settled,
an ETF may designate or segregate liquid assets in an amount equal to the ETFs
daily marked-to-market value of such contract.
Prior to the settlement date of the futures contract, the position may
be closed by taking an opposite position.
A final determination of variation margin is then made, additional cash
is required to be paid to or released by the broker, and the purchaser realizes
a loss or gain. In addition, a
commission is paid to the broker on each completed purchase and sale. Although some futures contracts call for
making or taking delivery of the underlying securities, currencies, commodities
or other underlying instrument, in most cases, futures contracts are closed
before the settlement date without the making or taking of delivery by
offsetting purchases or sales of matching futures contracts (i.e., with the
same exchange, underlying financial
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instrument, currency,
commodity, or index, and delivery month).
If the price of the initial sale exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if the price of the offsetting
purchase exceeds the price of the initial sale, the seller realizes a
loss. Similarly, a purchase of a futures
contract is closed out by selling a corresponding futures contract. If the offsetting sale price exceeds the
original purchase price, the purchaser realizes a gain, and, if the original
purchase price exceeds the offsetting sale price, the purchaser realizes a
loss. Any transaction costs must also be
included in these calculations. In the
U.S., futures contracts are traded only on commodity exchanges or boards of
trade known as contract markets approved by the CFTC, and must be
executed through a futures commission merchant or brokerage firm that is a
member of the relevant market.
Index
Futures
. An ETFs purchase and sale of
Index Futures is limited to contracts and exchanges approved by the CFTC. An ETF may close open positions on an
exchange on which Index Futures are traded at any time up to and including the
expiration day. In general, all
positions that remain open at the close of business on that day must be settled
on the next business day (based on the value of the relevant index on the
expiration day). Additional or different
margin requirements as well as settlement procedures may apply to foreign stock
Index Futures.
Interest
Rate
Futures
.
An ETF may engage
in transactions involving the use of futures on interest rates. These transactions may be in connection with
investments in U.S. government securities and other fixed income securities.
Options on
Futures Contracts.
Options on
futures contracts give the purchaser the right in return for the premium paid
to assume a long position (in the case of a call option) or a short position
(in the case of a put option) in a futures contract at the option exercise
price at any time during the period of the option (in the case of an American
style option) or on the expiration date (in the case of European style
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 holder acquires a short position and the writer is
assigned the opposite long position in the futures contract. Accordingly, in the event that an option is
exercised, the parties will be subject to all the risks associated with the
trading of futures contracts, such as payment of initial and variation margin
deposits.
An ETF may use options on
futures contracts in lieu of writing or buying options directly on the
underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against
a possible decrease in the value of its portfolio securities, an ETF may
purchase put options or write call options on futures contracts rather than
selling futures contracts. Similarly, an
ETF may hedge against a possible increase in the price of securities the ETF
expects to purchase by purchasing call options or writing put options on
futures contracts rather than purchasing futures contracts. Options on futures contracts generally
operate in the same manner as options purchased or written directly on the
underlying investments.
An 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 may 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 an ETF.
A position in an option on a
futures contract may be terminated by the purchaser or seller prior to
expiration by effecting a closing purchase or sale transaction, subject to the
availability of a liquid secondary market, which is the purchase or sale of an
option of the same type (i.e., the same exercise price and expiration date) as
the option previously purchased or sold.
The difference between the premiums paid and received represents an ETFs
profit or loss on the transaction.
Risk
Factors in Futures and Futures Options Transactions.
Investment in futures contracts involves
risk. A purchase or sale of futures
contracts may result in losses in excess of the amount invested in the futures
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contract. If a futures contract is used for hedging, an
imperfect correlation between movements in the price of the futures contract
and the price of the security, currency, or other investment being hedged creates
risk. Correlation is higher when the
investment being hedged underlies the futures contract. Correlation is lower when the investment
being hedged is different than the instrument underlying the futures contract,
such as when a futures contract on an index of securities or commodities is
used to hedge a single security or commodity, a futures contract on one
security (e.g., U.S. Treasury bonds) or commodity (e.g., gold) is used to hedge
a different security (e.g., a mortgage-backed security) or commodity (e.g.,
copper), or when a futures contract in one currency is used to hedge a security
denominated in another currency. In the
event of an imperfect correlation between a futures position and the portfolio
position (or anticipated position) intended to be protected, an ETF may realize
a loss on the futures contract and/or on the portfolio position intended to be
protected. The risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches. To compensate for
imperfect correlations, an ETF may purchase or sell futures contracts in a
greater amount than the hedged investments if the volatility of the price of
the hedged investments is historically greater than the volatility of the
futures contracts. Conversely, an ETF
may purchase or sell fewer futures contracts if the volatility of the price of
the hedged investments is historically less than that of the futures contract.
In the case of Index Futures
and commodity futures on commodity indices, changes in the price of those
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. Third, trading hours for
foreign stock Index Futures may not correspond perfectly to the trading hours
of the foreign exchange to which a particular foreign stock Index Future
relates. As a result, the lack of
continuous arbitrage may cause a disparity between the price of foreign stock
Index Futures and the value of the relevant index.
An ETF also may purchase
futures contracts (or options on them) as an anticipatory hedge against a
possible increase in the price of a currency in which securities the ETF
anticipates purchasing is denominated.
In such instances, the currency may instead decline. If an ETF does not then invest in those
securities, the ETF may realize a loss on the futures contract that is not
offset by a reduction in the price of the securities purchased.
An 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. Therefore, no
assurance can be given that an ETF will be able to utilize these instruments
effectively. In addition, there can be
no assurance that a liquid market will exist at a time when an ETF seeks to
close out a futures or option on a futures contract position, and that ETF
would remain obligated to meet margin requirements until the position is
closed. The liquidity of a secondary
market in a futures contract may be adversely affected by daily price
fluctuation limits established by commodity exchanges to limit the amount of
fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached, no
trades of the contract may be entered at a price beyond the limit, thus
preventing the liquidation of open futures positions. In the past, prices have exceeded the daily
limit on several consecutive trading days.
Short positions in Index Futures or commodity futures on commodities
indices may be closed out only by purchasing a futures contract on the exchange
on which the Index Futures or commodity futures, as applicable, are traded.
The successful use of
futures contracts and related options for hedging and risk management also
depends on the ability of the investment sub-adviser to forecast correctly the
direction and extent of movements in exchange rates, interest rates, and
securities or commodity prices within a given time frame. For
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example, to the extent an
ETF invests in fixed income securities and interest rates remain stable (or
move in a direction opposite to that anticipated) during the period a futures
contract or related option on those securities is held by the ETF, the ETF
would realize a loss on the futures contract that is not offset by an increase
in the value of its portfolio securities.
As a result, the ETFs total return would be less than if it had not
used the futures.
As discussed above, an ETF
that purchases or sells a futures contract is only required to deposit initial
and variation margin as required by relevant CFTC regulations and the rules of
the contract market. Because the
purchase of a futures contract obligates an ETF to purchase the underlying
security or other instrument at a set price on a future date, the ETFs net
asset value will fluctuate with the value of the security or other instrument as
if it were already in the ETFs portfolio.
Futures transactions have the effect of investment leverage to the
extent an ETF does not maintain liquid assets equal to the face amount of the
contract. If an ETF combines short and
long positions, in addition to possible declines in the values of its
investment securities, the ETF will incur losses if the index underlying the
long futures position underperforms the index underlying the short futures
position. Each ETFs ability to engage
in futures and options on futures transactions also may be limited by tax
considerations.
Additional
Risks Associated with Commodity Futures
Transactions
.
Several additional risks are associated with
transactions in commodity futures contracts.
Storage
Costs.
The price of a commodity
futures contract reflects the storage costs of purchasing the underlying
commodity, including the time value of money invested in the commodity. To the extent that the storage costs change,
the value of the futures contracts may change correspondingly.
Reinvestment
Risk.
In the commodity futures
markets, producers of an underlying commodity may sell futures contracts to
lock in the price of the commodity at delivery.
To induce speculators to purchase the other side (the long side) of the
contract, the commodity producer generally must sell the contract at a lower
price than the expected futures spot price.
Conversely, if most purchasers of the underlying commodity purchase
futures contracts to hedge against a rise in commodity prices, then speculators
will only sell the contract at a higher price than the expected future spot
price of the commodity. The changing
nature of the hedgers and speculators in the commodity markets will influence
whether futures prices are above or below the expected futures spot price. As a result, when an investment sub-adviser
reinvests the proceeds from a maturing contract, it may purchase a new futures
contract at a higher or lower price than the expected futures spot prices of
the maturing contract or choose to pursue other investments.
Additional
Risks of Options on Securities, Futures Contracts, and Options on Futures
Contracts Traded on Foreign Exchanges
.
Options on securities, futures contracts,
options on futures contracts, and options on currencies may be traded on
foreign exchanges. Such transactions may
not be regulated as effectively as similar transactions in the U.S. (which are
regulated by the CFTC) and may be subject to greater risks than trading on
domestic exchanges. For example, some
foreign exchanges may be principal markets so that no common clearing facility
exists and a trader may look only to the broker for performance of the
contract. The lack of a common clearing
facility creates counterparty risk. If a
counterparty defaults, an ETF normally will have contractual remedies against
that counterparty, but may be unsuccessful in enforcing those remedies. When seeking to enforce a contractual remedy,
an ETF also is subject to the risk that the parties may interpret contractual
terms (e.g., the definition of default) differently. If a dispute occurs, the cost and
unpredictability of the legal proceedings required for an ETF to enforce its
contractual rights may lead the ETF to decide not to pursue its claims against
the counterparty. An ETF thus assumes
the risk that it may be unable to obtain payments owed to it under foreign
futures contracts or that those payments may be delayed or made only after the
ETF has incurred the costs of litigation.
In addition, unless an ETF hedges against fluctuations in the exchange
rate
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between the U.S. dollar and
the currencies in which trading is done on foreign exchanges, any profits that
the ETF might realize in trading could be offset (or worse) by adverse changes
in the exchange rate. ).
Swap
Contracts and Other Two-Party Contracts
An ETF may use swap
contracts (or swaps) and other two-party contracts for the same or similar
purposes as options and futures.
Swap
Contracts
. An ETF may
directly or indirectly use various different types of swaps, such as swaps on
securities and securities indices, interest rate swaps, currency swaps, credit
default swaps, commodity swaps, inflation swaps, and other types of available
swap agreements, depending on the ETFs investment objective and policies. Swap contracts are two-party contracts
entered into primarily by institutional investors for periods ranging from a
few weeks to a number of years. Under a
typical swap, one party may agree to pay a fixed rate or a floating rate
determined by reference to a specified instrument, rate, or index, multiplied
in each case by a specified amount (notional amount), while the other party
agrees to pay an amount equal to a different floating rate multiplied by the
same notional amount. On each payment
date, the parties obligations are netted, with only the net amount paid by one
party to the other.
Swap contracts are typically
individually negotiated and structured to provide exposure to a variety of
different types of investments or market factors. Swap contracts may be entered into for
hedging or non-hedging purposes and therefore may increase or decrease an ETFs
exposure to the underlying instrument, rate, asset or index. Swaps can take many different forms and are
known by a variety of names. An ETF is
not limited to any particular form or variety of swap agreement if the
investment sub-adviser determines it is consistent with an ETFs investment
objective and policies.
For example, the parties to
a swap contract may agree to exchange returns calculated on a notional amount
of a security, basket of securities, or securities index (e.g., S&P 500
Index). An ETF may use such swaps to
gain investment exposure to the underlying security or securities where direct
ownership is either not legally possible or is economically unattractive. To the extent the total return of the
security, basket of securities, or index underlying the transaction exceeds or
falls short of the offsetting interest rate obligation, an ETF will receive a
payment from or make a payment to the counterparty, respectively. In addition, an ETF may enter into an interest
rate swap in order to protect against declines in the value of fixed income
securities held by the ETF. In such an
instance, an ETF may agree with a counterparty to pay a fixed rate (multiplied
by a notional amount) and the counterparty pay a floating rate multiplied by
the same notional amount. If interest
rates rise, resulting in a diminution in the value of an ETFs portfolio, the
ETF would receive payments under the swap that would offset, in whole or in
part, such diminution in value. An ETF
may also enter into swaps to modify its exposure to particular currencies using
currency swaps. For instance, an ETF may
enter into a currency swap between the U.S. dollar and the Japanese Yen in
order to increase or decrease its exposure to each such currency.
An ETF may use inflation
swaps, which involve commitments to pay a regular stream of inflation indexed
cash payments in exchange for receiving a stream of nominal interest payments
(or vice versa), where both payment streams are based on a notional amount. The nominal interest payments may be based on
either a fixed interest rate or variable interest rate, such as LIBOR. Inflation swaps may be used to hedge the
inflation risk in nominal bonds (i.e., non-inflation indexed bonds), thereby
creating synthetic inflation indexed bonds, or combined with U.S. Treasury
futures contracts to create synthetic inflation indexed bonds issued by the
U.S. Treasury. See Indexed Securities
Inflation Indexed Bonds below.
In addition, an 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
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default (or similar events) by
one or more third parties on their obligations.
For example, in purchasing a credit default swap, an 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 basket of such issuers, upon
issuer default (or similar events) at their par (or other agreed-upon)
value. An 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
an ETF in the event of a default (or similar event) (see Risk Factors in Swap
Contracts, OTC Options, and Other Two-Party Contracts below). In addition, as a purchaser in a credit default
swap, an ETFs investment would only generate income in the event of an actual
default (or similar event) by the issuer of the underlying obligation.
An 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, an
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, an ETF would keep the premium received from
the counterparty and would have no payment obligations.
Contracts
for Differences
.
Contracts for differences are swap
arrangements in which the parties agree that their return (or loss) will be
based on the relative performance of two different groups or baskets of
securities. Often, one or both baskets
will be an established securities index.
An ETFs return will be based on changes in value of theoretical long
futures positions in the securities comprising one basket (with an aggregate
face value equal to the notional amount of the contract for differences) and
theoretical short futures positions in the securities comprising the other
basket. An ETF also may use actual long
and short futures positions and achieve similar market exposure by netting the
payment obligations of the two contracts.
An ETF will only enter into contracts for differences (and analogous
futures positions) when an investment sub-adviser believes that the basket of
securities constituting the long position will outperform the basket
constituting the short position. If the
short basket outperforms the long basket, an ETF will realize a loss even in
circumstances when the securities in both the long and short baskets appreciate
in value.
Interest
Rate Caps, Floors, and Collars
.
An ETF may use interest rate caps, floors,
and collars for the same or similar purposes as they use interest rate futures
contracts and related options and, as a result, will be subject to similar
risks. See Options and Futures Risk
Factors in Options Transactions and Risk Factors in Futures and Futures
Options Transactions above. Like
interest rate swap contracts, interest rate caps, floors, and collars are
two-party agreements in which the parties agree to pay or receive interest on a
notional principal amount. The purchaser
of an interest rate cap receives interest payments from the seller to the
extent that the return on a specified index exceeds a specified interest rate. The purchaser of an interest rate floor
receives interest payments from the seller to the extent that the return on a
specified index falls below a specified interest rate. The purchaser of an interest rate collar
receives interest payments from the seller to the extent that the return on a
specified index falls outside the range of two specified interest rates.
Swaptions
. An option on a swap agreement, also called a swaption,
is an OTC option that gives the buyer the right, but not the obligation, to
enter into a swap on a specified future date in exchange for paying a
market-based premium. A receiver
swaption gives the owner the right to receive the total return of a specified
asset, reference rate, or index (such as a call option on a bond). A payer swaption gives the owner the right to
pay the total return of a specified asset, reference rate, or index (such as a
put option on a bond). Swaptions also
include options that allow one of the counterparties to terminate or extend an
existing swap.
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Risk
Factors in Swap Contracts, OTC Options, and Other Two-Party Contracts
.
The most significant factor in the
performance of swaps, contracts for differences, caps, floors, and collars is
the change in the value of the underlying price, rate, or index level that
determines the amount of payments to be made under the arrangement. If an investment sub-adviser is incorrect in
its forecasts of such factors, the investment performance of an ETF would be
less than what it would have been if these investment techniques had not been
used. If a swap or other two-party
contract calls for payments by an ETF, the ETF must be prepared to make such
payments when due.
In addition, an ETF may only
close out a swap, contract for differences, cap, floor, collar, or OTC option
(including swaption) with its particular counterparty, and may only transfer a
position with the consent of that counterparty.
If the counterparty defaults, an ETF will have contractual remedies, but
there can be no assurance that the counterparty will be able to meet its
contractual obligations or that an ETF will succeed in enforcing its
rights. For example, because the
contract for each OTC derivatives transaction is individually negotiated with a
specific counterparty, an 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 an ETF to enforce its contractual rights may lead it
to decide not to pursue its claims against the counterparty. An ETF, therefore, assumes the risk that it
may be unable to obtain payments owed to it under an OTC derivatives contract
or that those payments may be delayed or made only after the ETF has incurred
the costs of litigation.
The investment sub-adviser
monitors the creditworthiness of OTC derivatives counterparties. Typically, an ETF will enter into these
transactions only with counterparties that, at the time they enter into a
transaction, have long-term debt ratings of A or higher by S&P or Moodys
(or, if unrated, have comparable credit ratings as determined by the investment
sub-adviser). Short-term derivatives may
be entered into with counterparties that do not have long-term debt ratings if
they have short-term debt ratings of A-1 by S&P and/or a comparable rating
by Moodys. The credit rating of a counterparty
may be adversely affected by larger-than-average volatility in the markets,
even if the counterpartys net market exposure is small relative to its
capital.
Additional
Regulatory Limitations on the Use of Futures and Related Options, Interest Rate
Floors, Caps and Collars, Certain Types of Swap Contracts and Related
Instruments
.
The ETFs have claimed an exclusion from the
definition of commodity pool operator under the Commodity Exchange Act and,
therefore, are not subject to registration or regulation as a pool operator
under that Act.
Repurchase
Agreements
The
ETFs may enter into repurchase agreements with banks and broker-dealers. A repurchase agreement is an agreement under
which securities are acquired by an 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 an 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, ABA or the
investment sub-advisers, as applicable, attempt to minimize this risk by entering
into repurchase agreements only with financial institutions that are deemed to
be of good financial standing.
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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. Fixed income securities
denominated in foreign currencies also are subject to the risk of a decline in
the value of the denominating currency.
Because interest rates vary,
the future income of an ETF that invests in fixed income securities cannot be
predicted with certainty. The future
income of an ETF that 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).
Cash and
Other High Quality Investments
An ETF may temporarily
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 and other
high quality debt securities 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.
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.
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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.
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 ETFs 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. An 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, as amended, 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.
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Illiquid
Securities, Private Placements, Restricted Securities, and IPOs and Other
Limited Opportunities
An 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.
An investment sub-adviser
also may deem certain securities to be illiquid as a result of the investment
sub-advisers receipt from time to time of material, non-public information
about an issuer, which may limit the investment sub-advisers ability to trade
such securities for the account of any of its clients, including an ETF. In some instances, these trading restrictions
could continue in effect for a substantial period of time.
As long as the SEC maintains
the position that most swap contracts, caps, floors, and collars are illiquid,
an 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, an ETF could have difficulty
selling them when an investment 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. An ETF may have
to bear the expense of registering restricted securities for resale and the
risk of substantial delay in effecting registration. An 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, an
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 an ETFs net asset value. The judgment of the investment sub-adviser
normally plays a greater role in valuing these securities than in valuing
publicly traded securities.
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Investments
in Other Investment Companies or Other Pooled Investments
Each ETF may invest in the
securities of other investment companies to the extent permitted by law. Subject to applicable regulatory
requirements, an 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. In addition, if an ETF invests in a money
market fund managed by ABA, ABA will receive fees from both the ETF and that
money market fund. An 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, ABA and the investment sub-advisers 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 the eight 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.
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: 66
|
|
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).
|
|
8
|
|
Trustee, The Common Fund (since 2005); Trustee, Nicholas Applegate
Institutional Funds (since 2007); Director, Shielding Technology Inc. (since
2006).
|
23
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
|
Charles H. Salisbury, Jr.
Age: 69
|
|
Trustee
|
|
Since 2009
|
|
Private investor.
|
|
8
|
|
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, CeraTech, Inc. (since 2003).
|
|
|
|
|
|
|
|
|
|
|
|
Dennis G. Schmal
Age: 63
|
|
Trustee
|
|
Since 2009
|
|
Self-employed consultant (since
2003).
|
|
8
|
|
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: 47
|
|
Chief Executive Officer
|
|
Since 2008
|
|
Chief Executive Officer, Grail Advisors, LLC (since 2008); Senior Vice
President, Charles Schwab (2000-2008).
|
|
8
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
OFFICERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chester G. Chappell
Age: 45
|
|
Assistant Secretary
|
|
Since 2008
|
|
Head of Distribution, Grail
Advisors, LLC (since 2008); Vice President, National Sales Manager, Charles
Schwab (2003-2008); Director, Asset Management Strategic Alliances, Charles
Schwab (2000-2003).
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Bryan M. Hiser
Age: 37
|
|
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
|
24
Table of Contents
Equity Ownership of Trustees.
The Manager currently does not sponsor any
other registered investment companies.
ABA, however, serves as investment adviser to registered mutual funds
with investment programs that are substantially similar to those of the
ETFs. The table below shows the dollar
range of (i) Shares of the ETFs discussed in this SAI, and (ii) shares
of all ETFs in the Trusts family of investment companies, owned by the
Trustees as of February , 2010.
Name
|
|
Dollar Range of Equity Securities in the
ETFs*
|
|
Aggregate Dollar Range of Equity Securities in All
Registered Investment Companies Overseen by Trustee
in Family of Investment Companies**
|
Bradford K. Gallagher
|
|
$
|
|
$
|
Charles H. Salisbury, Jr.
|
|
$
|
|
$
|
Dennis G. Schmal
|
|
$
|
|
$
|
William M. Thomas
|
|
$
|
|
$
|
* International Equity ETF was not open for
investment as of February 1, 2010.
** The Family of Investment Companies
currently consists of eight ETFs.
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 each 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 each
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 each 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. During the
fiscal year ended October 31, 2009, the Audit Committee met one time.
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
25
Table of Contents
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.
During the fiscal year ended October 31, 2009, the Nomination
Committee did not meet.
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. During the fiscal
year ended October 31, 2009, the Qualified Legal Compliance Committee did
not meet.
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.
The
table below sets forth the total remuneration of Trustees and Officers of the
Trust for the fiscal year ended October 31, 2009:
Name
|
|
Aggregate
Compensation
from ETFs*
|
|
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
|
|
$
|
[ ]
|
|
None
|
|
None
|
|
$
|
20,000
|
|
Charles H. Salisbury, Jr.
|
|
$
|
[ ]
|
|
None
|
|
None
|
|
$
|
20,000
|
|
Dennis G. Schmal
|
|
$
|
[ ]
|
|
None
|
|
None
|
|
$
|
20,000
|
|
* International Equity ETF was not open for
investment as of October 31, 2009.
** The Fund Complex currently consists of
eight ETFs.
Codes of
Ethics
The Trust, Manager, ABA,
investment sub-advisers 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 ETFs (which may also be held by persons subject to a Code of Ethics). There can be
26
Table of Contents
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 ETFs.
The Manager, ABA and investment sub-advisers do not use inside
information in making investment decisions on behalf of an 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 ETFs 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 their investment advisers. Please see Appendix A for a copy of the
Policies.
Proxy voting for the Large
Cap Value ETF has been delegated to ABA.
Proxy voting for the International Equity ETF, which invests primarily
in the securities of foreign issuers, has been delegated to such ETFs
investment sub-advisers. Each of ABA and
the International Equity ETFs investment sub-advisers proxy voting policy 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 ETFs voted proxies relating to portfolio securities during the most
recent twelve-month period ended June 30 are available: (1) without
charge, upon request, by calling 1-415-677-5870 and (2) on the SECs
website at www.sec.gov.
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 an ETF or acknowledges the existence
of control. As of February 1, 2010,
to the best of the ETFs knowledge, no person controlled the Large Cap Value
ETF. The International Equity 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 International Equity 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 International Equity ETF for their approval, including
changes to the International Equity ETFs fundamental policies. It is expected that, once the International
Equity ETF commences investment operations, the Manager will not control the
International Equity ETF.
The
following table shows, to the best of the ETFs knowledge, those persons who
owned 5% or more of the outstanding shares of the Large Cap Value ETFs shares
as of [February 1], 2010.
LARGE CAP VALUE ETF
Name and Address
|
|
Ownership
|
|
Number of Shares
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Owner
|
|
|
|
|
%
|
27
Table of Contents
[table
to come]
As
of [February 1], 2010, the officers and Trustees, as a group, owned of
record or beneficially less than 1% of the outstanding voting securities of
each ETF.
INVESTMENT
ADVISORY AND OTHER SERVICES
Manager
The Manager, Grail Advisors,
LLC, oversees the performance of the ETFs and arranges for transfer agency,
custody and all other services necessary for the ETFs to operate, but does not
exercise day-to-day oversight over the ETFs investment sub-advisers. 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 ABA and the investment sub-advisers.
Based upon evaluations of the investment sub-advisers provided to the
Manager by ABA, the Manager allocates assets among investment sub-advisers, and
monitors ABA and the investment sub-advisers investment programs and
results. These services are provided
under the terms of an Investment Management Agreement dated April 30, 2009
(Investment Management Agreement) between the Trust, on behalf of each ETF,
and the Manager.
Pursuant
to the Investment Management Agreement, each ETF pays the Manager a management
fee for the services and facilities it provides payable on a monthly basis at
the annual rates set forth in the table below, calculated as a percentage of an
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 an ETFs performance.
The Manager is responsible for compensating ABA and the investment
sub-advisers out of the management fees it receives from each ETF.
ETF
|
|
Management Fee
|
|
Large
Cap Value ETF
|
|
0.50
|
%
|
International
Equity ETF
|
|
0.58
|
%
|
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, ABA or an investment sub-adviser. Without limiting the generality of the
foregoing, the Trust pays or 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
28
Table of Contents
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 each 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 each 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 Large Cap Value ETF and the International
Equity ETF to 0.79% and 0.89%, respectively, of each ETFs average net assets
(Expense Cap). The Expense Cap will
remain in effect until at least February 28, 2011. 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 an 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 an 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 an
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.
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.
For
the period May 1, 2009 (commencement of operations) through October 31,
2009, the Manager received fees in the amount of
$ for managing the Large Cap
Value ETF. The International Equity ETF
had not commenced operations as of the date of this SAI and thus has not
incurred any management
29
Table of Contents
fees
under the Investment Management Agreement.
The
ETFs and the Manager have received exemptive relief from the SEC under which
they may use a Manager of Managers structure.
Using this structure, the Manager, subject to oversight by the Board,
oversees ABA and the investment sub-advisers and recommends to the Board the
hiring and termination of ABA and investment sub-advisers. In overseeing the investment sub-advisers,
the Manager seeks input and recommendations from ABA. The exemptive relief permits, once the ETFs
and the Manager begin to rely upon it,
the Manager, with the approval of the Board but without shareholder
approval, to materially amend the contract of and/or appoint a replacement for
ABA or an investment sub-adviser (provided the appointee is not affiliated with
the Manager). Under the exemption,
within 90 days after such action, affected shareholders would receive
information about it, and the Prospectus would be supplemented as necessary.
ABA
ABA
acts as each ETFs primary subadviser and lead portfolio manager. ABA is located at 4151 Amon Carter Boulevard,
Fort Worth, Texas 76155 and is a subsidiary of Lighthouse Holdings, Inc.,
a financial services holding company.
ABA was organized in 1986 to provide investment management, advisory,
administrative and asset management consulting services. As of December 31, 2009, ABA had
approximately $ billion of assets under
management, including approximately $
billion under active management and $
billion as named fiduciary or financial advisor.
ABA serves as investment
adviser to registered mutual funds with investment programs that are
substantially similar to those of the ETFs.
The ETFs portfolio holdings are expected to be disclosed on a more
frequent basis than those of the registered mutual funds.
ABA provides or oversees the
provision of portfolio management services to the ETFs. ABA develops the investment programs for each
ETF, evaluates investment sub-advisers (subject to requisite approvals),
recommends to the Manager allocations of assets among investment sub-advisers,
monitors the investment sub-advisers investment programs and results, invests
the portion of ETF assets that the investment sub-advisers determine should be
allocated to high quality short-term debt obligations, and to the extent that
an ETF engages in securities lending, oversees the ETFs securities lending
activities and actions taken by the securities lending agent.
ABA
has entered into a Primary Investment Sub-Advisory Agreement between the
Manager and ABA, dated April 30, 2009, with respect to each ETF (Primary
Subadvisory Agreement). Pursuant to the
Primary Subadvisory Agreement, ABA receives fees from the Manager to provide
the services noted above. These fees are
paid by the Manager out of the advisory fees it receives from an ETF; they are
not separately paid by an ETF. These
fees are payable on a monthly basis at the annual rates set forth in the table
below, calculated as a percentage of an ETFs average daily net assets. In addition, the Manager pays the amounts due
the investment sub-advisers to ABA, who then pays those amounts to the
investment sub-advisers. These amounts
are not reflected in the table below, but are described in the discussion of
the investment sub-advisers below.
ETF
|
|
Primary Subadvisory Fee
|
|
Large
Cap Value ETF
|
|
0.10
|
%
|
International
Equity ETF
|
|
0.10
|
%
|
30
Table of Contents
The Primary 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
applicable ETF on no more than 60 days written notice to ABA, or by ABA upon
60 days written notice to the Trust.
The Primary Subadvisory Agreement with respect to an 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 an ETF, and (2) by
the vote of a majority of the Trustees who are not parties to the Primary
Subadvisory Agreement or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such approval.
For
the period May 1, 2009 (commencement of operations) through October 31,
2009, the Primary Subadviser received fees in the amount of
$ for its services to the Large
Cap Value ETF. The International Equity
ETF had not commenced operations as of the date of this SAI, and thus, ABA has
not yet received any management fees for providing services for the
International Equity ETF under the Primary Subadvisory Agreement..
Investment
Sub-Advisers
The ETFs investment
sub-advisers are listed below with information regarding their controlling
persons or entities. According to the
Investment Company Act, a person or entity with control with respect to an
investment advisor has the power to exercise a controlling influence over the
management or policies of a company, unless such power is solely the result of
an official position with such company.
Persons and entities affiliated with an investment sub-adviser are
considered to be affiliates for that portion of ETF assets managed by that
sub-adviser (Allocated Portion).
Investment Sub-adviser
|
|
Controlling Person/Entity
|
|
Basis of Control
|
|
Nature of Controlling
Person/Entitys Business
|
|
|
|
|
|
|
|
Brandywine Global
Investment Management, LLC
|
|
Legg Mason, Inc.
|
|
Parent Co.
|
|
Financial Services
|
|
|
|
|
|
|
|
Hotchkis and Wiley Capital
Management, LLC
|
|
HWCap Holdings, LLC
Stephens H&W
|
|
Majority Owner
Minority Owner
|
|
Financial Services
Financial Services
|
|
|
|
|
|
|
|
Lazard Asset Management LLC
|
|
Lazard Freres &
Co. LLC
|
|
Parent Co.
|
|
Financial Services
|
|
|
|
|
|
|
|
Metropolitan West Capital
Management, LLC
|
|
Wells Fargo &
Company
Howard Gleicher
Gary W. Lisenbee
Steve Borowski
|
|
Majority Owner
Minority Owner
Minority Owner
Minority Owner
|
|
Financial Services
Financial Services
Financial Services
Financial Services
|
|
|
|
|
|
|
|
Templeton Investment Counsel,
LLC
|
|
Franklin Resources, Inc.
|
|
Parent Co.
|
|
Financial Services
|
31
Table of Contents
The Boston Company Asset
Management, LLC
|
|
Bank of New York Mellon
Corporation
|
|
Parent Co.
|
|
Financial Services
|
The Investment Sub-Advisory
Agreements with the ETFs investment sub-advisers (Investment Sub-Advisory
Agreements) 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
applicable ETF on no more than 60 days written notice to the investment
sub-adviser, or by the investment sub-adviser upon 60 days written notice to
the Trust. The Investment Sub-Advisory
Agreements with respect to an ETF will also terminate in the event that the
Primary Subadvisory Agreement for that ETF terminates. The Investment Sub-Advisory Agreements with
respect to an 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 an ETF, and (2) by the vote of a majority of the
Trustees who are not parties to the Investment Sub-Advisory Agreements or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval.
Pursuant to the Investment
Sub-Advisory Agreements, the investment sub-advisers receive fees from ABA to
provide day-to-day investment advisory services to the Allocated Portion of an
ETF. These fees are paid out of the
advisory fees the Manager receives from an ETF; they are not separately paid by
an ETF. These fees are payable on a
quarterly basis at the annual rates set forth in the table below, calculated as
a percentage of an ETFs average daily net assets and based on the combined
assets of the relevant ETF and the comparable registered mutual fund and other
accounts subadvised by the investment sub-adviser with ABA as the manager.
Large Cap Value ETF
|
|
Subadvisory
Fee for combined assets that are:
|
|
|
|
|
|
|
|
Brandywine Global
Investment Management, LLC
|
|
Less than $500 million
|
|
0.25
|
%
|
|
|
Between $500 million and $600 million
|
|
0.225
|
%
|
|
|
More than $600 million
|
|
0.20
|
%
|
|
|
|
|
|
|
Hotchkis and Wiley
Capital Management, LLC
|
|
Less than $10 million
|
|
0.60
|
%
|
|
|
Between $10 million and $50 million
|
|
0.50
|
%
|
|
|
Between $50 million and $150 million
|
|
0.30
|
%
|
|
|
Between $150 million and $400 million
|
|
0.20
|
%
|
|
|
Between $400 million and $800 million
|
|
0.15
|
%
|
|
|
More than $800 million
|
|
0.125
|
%
|
|
|
|
|
|
|
Metropolitan West
Capital Management, LLC
|
|
Less than $100 million
|
|
0.275
|
%
|
|
|
More than $100 million
|
|
0.20
|
%
|
|
|
|
|
|
|
International Equity ETF
|
|
Subadvisory Fee
|
|
|
|
|
|
|
|
Lazard Asset Management
LLC
|
|
Less than $100 million
|
|
0.50
|
%
|
|
|
Between $100 million and $500 million
|
|
0.325
|
%
|
|
|
More than $500 million
|
|
0.20
|
%
|
|
|
|
|
|
|
Templeton Investment
Counsel, LLC
|
|
Less than $100 million
|
|
0.50
|
%
|
|
|
Between $100 million and $150 million
|
|
0.35
|
%
|
|
|
Between $150 million and $400 million
|
|
0.30
|
%
|
|
|
More than $400 million
|
|
0.25
|
%
|
32
Table of Contents
The Boston Company
Asset Management, LLC
|
|
Less than $100 million
|
|
0.50
|
%
|
|
|
Between $100 million and $200 million
|
|
0.30
|
%
|
|
|
Between $200 million and $300 million
|
|
0.25
|
%
|
|
|
More than $300 million
|
|
0.20
|
%
|
For
the period May 1, 2009 (commencement of operations) through October 31,
2009, each of Brandywine Global Investment Management, Hotchkis and Wiley
Capital Management and Metropolitan West Capital Management received fees in
the amount of $ ,
$ , and
$ , respectively, for sub-advising the Large
Cap Value ETF. The International Equity ETF has not commenced operations as of
the date of this SAI and thus the investment sub-advisers to that ETF have not
yet received any fees under the Investment Sub-Advisory Agreement.
Custodian
The
Bank of New York Mellon (BNY Mellon), located at One Wall Street, New York,
New York 10286, serves as Custodian of each ETFs assets. As Custodian, BNY Mellon has agreed to: (1) make
receipts and disbursements of money on behalf of the ETF, (2) collect 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
BNY
Mellon, located at One Wall Street, New York, New York 10286 serves as
Administrator, Fund Accountant and Transfer Agent to each ETF. As administrator, BNY Mellon provides each
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 an 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 each ETF, (2) make dividend and other
distributions on Shares of each ETF, (3) record the issuance of Shares and
maintain records of outstanding Shares of each ETF, (4) maintain certain
accounts, (5) make and transmit periodic reports to an 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 ETFs, 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 ETFs), 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
33
Table of Contents
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 ETFs).
For the period ended October 31, 2009, BNY Mellon received
$ ,
in fees as administrator of Large Cap Value ETF. The International Equity ETF was not open for
investment as of October 31, 2009.
PORTFOLIO
MANAGERS
Portfolio
managers at ABA and the investment sub-advisers to the ETFs (the Portfolio
Managers) have responsibility for the day-to-day management of accounts other
than the ETFs. Information regarding
these other accounts has been provided by each Portfolio Managers firm and is
set forth below. The number of accounts
and assets is shown as of [December 31], 2009.
UPDATE CHART!
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Beacon
Advisors, Inc.
|
|
|
|
|
|
|
|
|
Kirk L. Brown
|
|
4 ($1.7 bil)
|
|
N/A
|
|
2 ($2.9 bil)
|
|
N/A
|
|
N/A
|
|
N/A
|
Wyatt Crumpler
|
|
15 ($11.2 bil)
|
|
N/A
|
|
3($8.8 bil)
|
|
N/A
|
|
N/A
|
|
N/A
|
Adriana R. Posada
|
|
6 ($8.9 bil)
|
|
N/A
|
|
3 ($4.6 bil)
|
|
N/A
|
|
N/A
|
|
N/A
|
William F. Quinn
|
|
15 ($11.2 bil)
|
|
N/A
|
|
3($8.8 bil)
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brandywine Global
Investment Management, LLC
|
|
|
|
|
|
|
|
|
Paul Lesutis
|
|
2 ($1.8 bil)
|
|
2 ($62.4 mil)
|
|
62 ($2.1 bil)
|
|
N/A
|
|
N/A
|
|
3 ($354.7 mil)
|
Earl Gaskins
|
|
2 ($1.8 bil)
|
|
2 ($62.4 mil)
|
|
62 ($2.1 bil)
|
|
N/A
|
|
N/A
|
|
3 ($354.7 mil)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotchkis and Wiley Capital Management, LLC
|
|
|
|
|
|
|
|
|
Patty McKenna
|
|
15 ($6.3 bil)
|
|
3 ($177 mil)
|
|
108 ($5.8 bil)
|
|
1 ($1.4 bil)
|
|
N/A
|
|
5 ($217 mil)
|
Sheldon Lieberman
|
|
15 ($6.3 bil)
|
|
3 ($177 mil)
|
|
108 ($5.8 bil)
|
|
1 ($1.4 bil)
|
|
N/A
|
|
5 ($217 mil)
|
George Davis
|
|
15 ($6.3 bil)
|
|
3 ($177 mil)
|
|
108 ($5.8 bil)
|
|
1 ($1.4 bil)
|
|
N/A
|
|
5 ($217 mil)
|
Judd Peters
|
|
15 ($6.3 bil)
|
|
3 ($177 mil)
|
|
108 ($5.8 bil)
|
|
1 ($1.4 bil)
|
|
N/A
|
|
5 ($217 mil)
|
Scott McBride
|
|
15 ($6.3 bil)
|
|
3 ($177 mil)
|
|
108 ($5.8 bil)
|
|
1 ($1.4 bil)
|
|
N/A
|
|
5 ($217 mil)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lazard Asset Management
LLC
|
|
|
|
|
|
|
|
|
John Reinsberg
|
|
6 ($1.7 bil)
|
|
5 ($123.6 mil)
|
|
60 ($3.6 bil)
|
|
N/A
|
|
N/A
|
|
N/A
|
Michael A. Bennett
|
|
7 ($1.8 bil))
|
|
N/A
|
|
375 ($9.0 bil)
|
|
N/A
|
|
N/A
|
|
N/A
|
Michael G. Fry
|
|
5 ($819.6 bil)
|
|
3 ($83 mil)
|
|
40 ($4.2 bil)
|
|
N/A
|
|
N/A
|
|
N/A
|
Michael Powers
|
|
7 ($961.4 mil)
|
|
N/A
|
|
405 ($9.7 bil)
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metropolitan West Capital Management, LLC-
|
|
|
|
|
|
|
|
|
Investment Team (Howard Gleicher, David M. Graham, Jeffrey Peck, Jay
Cunningham)
|
|
9 ($3.3 bil)
|
|
6 ($375.8 mil)
|
|
436 ($4.3 bil)
|
|
N/A
|
|
N/A
|
|
1 ($22.5 mil)
|
Gary W. Lisenbee
|
|
14 ($3.7 bil)
|
|
9 ($430.5 mil)
|
|
444 ($4.4 bil)
|
|
N/A
|
|
N/A
|
|
1 ($22.5 mil)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Templeton Investment Counsel, LLC
|
|
|
|
|
|
|
|
|
Gary Motyl
|
|
3 ($5.8 bil)
|
|
2 ($548.8 mil)
|
|
13 ($3.5 bil)
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Boston Company Asset Management, LLC
|
|
|
|
|
|
|
|
|
D. Kirk Henry
|
|
9 ($2.35 bil)
|
|
10 ($2.5 bil)
|
|
40 ($5.0 bil)
|
|
N/A
|
|
N/A
|
|
1 ($178.0 mil)
|
Clifford A. Smith
|
|
9 ($2.35 bil)
|
|
10 ($2.5 bil)
|
|
40 ($5.0 bil)
|
|
N/A
|
|
N/A
|
|
1 ($178.0 mil)
|
34
Table of Contents
Conflicts of Interest
As noted in the table above,
the Portfolio Managers manage accounts other than the ETFs. This side-by-side management may present
potential conflicts between a Portfolio Managers management of an ETFs
investments, on the one hand, and the investments of the other accounts, on the
other hand.
As
noted above, ABA serves as investment adviser to registered mutual funds with
investment programs that are substantially similar to those of the ETFs. All of the investment sub-advisers also
provide advisory services to those registered mutual funds, as well as other
accounts with investment programs substantially similar to those of the
ETFs. The ETFs are expected to have
substantially similar investment portfolios as the registered mutual funds, and
the portfolio holdings of each ETF that will form the basis of the ETFs NAV on
each Business Day will be disclosed before the opening of trading that
day. At the time of the ETFs disclosure
of their portfolio holdings, the registered mutual funds and the investment
sub-advisers other accounts may have
unexecuted portfolio transactions outstanding or be in the process of
implementing changes to their portfolios.
In order to prevent the disclosure of the ETFs portfolios from
signaling or providing information to the market about upcoming transactions
for the registered mutual funds, the investment sub-advisers intend to
implement portfolio changes in a security for an ETF
after
the
corresponding registered mutual fund and the investment sub-advisers other
accounts have completed transactions in that security. Thus, portfolio decisions may not be made for
an ETF concurrently with the portfolio decision for the corresponding
registered mutual fund, notwithstanding that the ETF and the registered mutual
fund and the investment sub-advisers other accounts have substantially similar
objectives, policies, strategies, and risks.
By the time a portfolio decision is implemented for an ETF, the price
for the security may be different than the price at the time the decision is
made for the corresponding registered mutual fund and the investment
sub-advisers other accounts , and due to the mutual funds or other accouunts
transactions in the security or other market movements, may be less favorable
for the ETF.
Set forth below is a
description by ABA and each investment sub-adviser of any other foreseeable
material conflicts of interest that may arise from the concurrent management of
ETFs and other accounts. The information
regarding potential conflicts of interest of ABA and the investment
sub-advisers was provided by each firm.
ABA
. ABAs Portfolio Managers are responsible for
managing one or more of the ETFs and other accounts, including registered
investment companies and employee benefit plans. ABA typically assigns ETFs and accounts with
similar investment strategies to the same Portfolio Manager to mitigate the
potentially conflicting investment strategies of accounts. Other than potential conflicts between
investment strategies, the side-by-side management of both the ETFs and other
accounts may raise potential conflicts of interest due to the interest held by
ABA or one of its affiliates in an account and differing fee schedules across
account types. ABA has developed
policies and procedures reasonably designed to mitigate those conflicts.
Potential
conflicts of interest may occur when ABAs Portfolio Managers invest ETF assets
in money market funds managed by ABA, since ABA has the potential to earn more
fees under this scenario. This potential
conflict of interest is disclosed to the Board in connection with the process
of approving ABA as a subadviser to the ETFs.
Brandywine
Global Investment Management, LLC (Brandywine Global).
Brandywine Global does not foresee any
potentially material conflicts of interest as a result of concurrent management
of the Large Cap Value ETF and other accounts.
Brandywine Global follows the same buy and sell discipline for all
stocks across all portfolios, subject to client specific restrictions. All portfolios are managed in the same manner
by the investment team. Portfolios may
differ slightly due to differences in available cash, contributions and withdrawals.
35
Table of
Contents
Hotchkis
and Wiley Capital Management, LLC (Hotchkis).
A portion of the Large Cap Value ETF is
managed by Hotchkis investment team (Investment Team). The Investment Team also manages
institutional accounts and other mutual funds in several different investment
strategies. The portfolios within an
investment strategy are managed using a target portfolio; however, each portfolio
may have different restrictions, cash flows, tax and other relevant
considerations which may preclude a portfolio from participating in certain
transactions for that investment strategy.
Consequently, the performance of portfolios may vary due to these
different considerations. The Investment
Team may place transactions for one investment strategy that are directly or
indirectly contrary to investment decisions made on behalf of another
investment strategy. Hotchkis may be
restricted from purchasing more than a limited percentage of the outstanding
shares of a company. If a company is a
viable investment for more than one investment strategy, Hotchkis has adopted
policies and procedures reasonably designed to ensure that all of its clients
are treated fairly and equitably.
Different
types of accounts and investment strategies may have different fee
structures. Additionally, certain
accounts pay Hotchkis performance-based fees, which may vary depending on how
well the account performs compared to a benchmark. Because such fee arrangements have the
potential to create an incentive for Hotchkis to favor such accounts in making
investment decisions and allocations, Hotchkis has adopted polices and
procedures reasonably designed to ensure that all of its clients are treated
fairly and equitably, including in respect of allocation decisions, such as
initial public offerings.
Since
all accounts are managed to a target portfolio by the Investment Team, adequate
time and resources are consistently applied to all accounts in the same
investment strategy.
Lazard
Asset Management LLC (Lazard).
Lazards Portfolio Managers manage multiple
accounts for a diverse client base, including private clients, institutions and
investment funds. Lazard manages all
portfolios on a team basis. The team is
involved at all levels of the investment process. This team approach allows for every portfolio
manager to benefit from his/her peers, and for clients to receive the firms
best thinking, not that of a single portfolio manager. Lazard manages all like investment mandates
against a model portfolio. Specific
client objectives, guidelines or limitations then are applied against the
model, and any necessary adjustments are made.
Although
the potential for conflicts of interest exist because Lazard and the Portfolio
Managers manage other accounts with similar investment objectives and
strategies as the International Equity ETF (Similar Accounts), Lazard has
procedures in place that are designed to ensure that all accounts are treated
fairly and that the ETF is not disadvantaged, including procedures regarding
trade allocations and conflicting trades (e.g., long and short positions in
the same security, as described below).
In addition, the ETF, as a registered investment company, is subject to
different regulations than certain of the Similar Accounts, and, consequently,
may not be permitted to engage in all the investment techniques or
transactions, or to engage in such techniques or transactions to the same
degree, as the Similar Accounts.
Potential
conflicts of interest may arise because of Lazards management of the ETF and
Similar Accounts. For example, conflicts
of interest may arise with both the aggregation and allocation of securities
transactions and allocation of limited investment opportunities, as Lazard may
be perceived as causing accounts it manages to participate in an offering to
increase Lazards overall allocation of securities in that offering, or to
increase Lazards ability to participate in future offerings by the same
underwriter or issuer. Allocations of
bunched trades, particularly trade orders that were only partially filled due
to limited availability, and allocation of investment opportunities generally,
could raise a potential conflict of interest, as Lazard may have an incentive
to allocate securities that are expected to increase in value to preferred
accounts. Initial public offerings, in
particular, are frequently of very limited availability. Additionally, Portfolio Managers may be
perceived to have a conflict of interest
36
Table of
Contents
because
of the large number of Similar Accounts, in addition to the ETF, that they are
managing on behalf of Lazard. Although
Lazard does not track each individual Portfolio Managers time dedicated to
each account, Lazard periodically reviews each Portfolio Managers overall
responsibilities to ensure that they are able to allocate the necessary time and
resources to effectively manage the ETF.
In addition, Lazard could be viewed as having a conflict of interest to
the extent that Lazard and/or its Portfolio Managers have a materially larger
investment in a Similar Account than their investment in the ETF.
A
potential conflict of interest may be perceived to arise if transactions in one
account closely follow related transactions in a different account, such as
when a purchase increases the value of securities previously purchased by the
other account, or when a sale in one account lowers the sale price received in
a sale by a second account. Lazard
manages hedge funds that are subject to performance/incentive fees. Certain hedge funds managed by Lazard may
also be permitted to sell securities short.
When Lazard engages in short sales of securities of the type in which
the ETF invests, Lazard could be seen as harming the performance of the ETF for
the benefit of the account engaging in short sales if the short sales cause the
market value of the securities to fall.
As described above, Lazard has procedures in place to address these
conflicts. Portfolio managers and
portfolio management teams are generally not permitted to manage long-only
assets alongside long/short assets, although may from time to time manage both
hedge funds that engage in short sales and long-only accounts, including
open-end and closed-end registered investment companies.
Metropolitan
West Capital Management, LLC (MetWest Capital).
MetWest Capitals Portfolio Managers generally
face two types of conflicts of interest:
(1) conflicts between and among the interests of the various
accounts they manage, and (2) conflicts between the interests of the
accounts they manage and their own personal interests. The policies of MetWest Capital require that
portfolio managers treat all accounts they manage equitably and fairly in the
face of such real or potential conflicts.
The management
of multiple funds and other accounts may require the portfolio manager to
devote less than all of his or her time to a fund, particularly if the funds
and 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. In addition, if a portfolio manager
identifies a limited investment opportunity, such as an initial public offering
that may be suitable for more than one fund or other account, a fund 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 funds advisor or sub-advisor will determine that it would
be in the best interest, and consistent with the investment policies, of
another account to sell a security that a fund holds long, potentially
resulting in a decrease in the market value of the security held by the fund.
MetWest Capital
and/or a portfolio manager may have an incentive to allocate favorable or
limited opportunity investments or structure the timing of investments to favor
accounts other than the fund for instance, those that pay a higher advisory
fee. The policies of MetWest Capital,
however, require that portfolio managers treat all accounts they manage
equitably and fairly.
As noted above,
portfolio managers may also experience certain conflicts between the interests
of the accounts they manage and their own personal interests (which may include
interests in advantaging MetWest Capital).
The structure of a portfolio managers compensation may create an
incentive for the 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 a portfolio
manager holds a
37
Table of Contents
larger personal
investment in one fund than he or she does in another, the portfolio manager
may have an incentive to favor the fund in which he or she holds a larger
stake.
In
general, MetWest Capital has policies and procedures to address the various
potential conflicts of interest described above. It has policies and procedures designed to
ensure that portfolio managers have sufficient time and resources to devote to
the various accounts they manage. Similarly,
it 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 a portfolio managers personal
interests. However, there is no
guarantee that such procedures will detect or address each and every situation
where a conflict arises.
Templeton
Investment Counsel, LLC (Templeton)
. The management of multiple funds, including
the International Equity ETF and other accounts may give rise to potential
conflicts of interest if the International Equity ETF and other accounts have
different objectives, benchmarks, time horizons, and fees, as the Portfolio
Manager must allocate his or her time and investment ideas across multiple
funds and accounts. Templeton seeks to manage such competing interests
for the time and attention of Portfolio Managers by having Portfolio Managers
focus on a particular investment discipline.
Most other accounts managed by a Portfolio Manager are managed using the
same investment strategies that are used in connection with the management of
the International Equity ETF.
Accordingly, portfolio holdings, position sizes, and industry and sector
exposures tend to be similar across similar portfolios, which may minimize the
potential for conflicts of interest. The
separate management of the trade execution and valuation functions from the
portfolio management process also helps to reduce potential conflicts of interest. However, securities selected for funds or
accounts other than the International Equity ETF may outperform the securities
selected for the International Equity ETF.
Moreover, if a Portfolio Manager identifies a limited investment
opportunity that may be suitable for more than one fund or other account, the
International Equity ETF may not be able to take full advantage of that
opportunity due to an allocation of that opportunity across all eligible funds
and other accounts. Templeton seeks to
manage such potential conflicts by using procedures intended to provide a fair
allocation of buy and sell opportunities among funds and other accounts.
The
structure of a Portfolio Managers compensation may give rise to potential
conflicts of interest. A Portfolio
Managers base pay and bonus tend to increase with additional and more complex
responsibilities that include increased assets under management. As such, there may be an indirect
relationship between a Portfolio Managers marketing or sales efforts and his
or her bonus.
Finally,
the management of personal accounts by a Portfolio Manager may give rise to
potential conflicts of interest. While
Templeton has adopted a code of ethics which it believes contains provisions
reasonably necessary to prevent a wide range of prohibited activities by
Portfolio Managers and others with respect to their personal trading
activities, there can be no assurance that the code of ethics addresses all
individual conduct that could result in conflicts of interest.
Templeton
has adopted certain compliance procedures that are designed to address these,
and other, types of conflicts. However,
there is no guarantee that such procedures will detect each and every situation
where a conflict arises.
The
Boston Company Asset Management, LLC
. A conflict of interest is generally defined
as a single person or entity having two or more interests that are
inconsistent. The Boston Company Asset
Management, LLC (TBCAM) has implemented various policies and procedures that
are intended to address the conflicts of interest that may exist or be
perceived to exist at TBCAM.
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These
conflicts may include, but are not limited to when a portfolio manager is
responsible for the management of more than one account; the potential arises
for the portfolio manager to favor one account over another. Generally, the risk of such conflicts of
interest could increase if a portfolio manager has a financial incentive to
favor one account over another.
This
disclosure statement is not intended to cover all of the conflicts that exist
within TBCAM, but rather to highlight the general categories of conflicts and
the associated mitigating controls. Other
conflicts are addressed within the policies of TBCAM. Further, the Chief Compliance Officer of
TBCAM shall maintain a Conflicts Matrix that further defines the conflicts
specific to TBCAM.
New Investment Opportunities - Potential Conflict:
A portfolio manager could favor one account
over another in allocating new investment opportunities that have limited
supply, such as initial public offerings and private placements. If, for example, an initial public offering
that was expected to appreciate in value significantly shortly after the
offering was allocated to a single account, that account may be expected to
have better investment performance than other accounts that did not receive an
allocation. TBCAM has policies that
require a portfolio manager to allocate such investment opportunities in an
equitable manner and generally to allocate such investments proportionately
among all accounts with similar investment objectives.
Compensation - Potential Conflict:
A portfolio manager may favor an account if
the portfolio managers compensation is tied to the performance of that account
rather than all accounts managed by the portfolio manager. If, for example, the portfolio manager
receives a bonus based upon the performance of certain accounts relative to a
benchmark while other accounts are disregarded for this purpose, the portfolio
manager will have a financial incentive to seek to have the accounts that
determine the bonus achieve the best possible performance to the possible
detriment of other accounts. Similarly,
if TBCAM receives a performance-based advisory fee, the portfolio manager may
favor that account, regardless of whether the performance of that account
directly determines the portfolio managers compensation. Portfolio managers cash compensation is
comprised primarily of a market-based salary and incentive compensation (annual
and long term retention incentive awards).
Funding for the TBCAM Annual Incentive Plan and Long Term Retention
Incentive Plan is through a pre-determined fixed percentage of overall TBCAM
profitability. In general, bonus awards
are based initially on TBCAMs financial performance. However, awards for select senior portfolio
managers are based initially on their individual investment performance (one,
three, and five-year weighted). In
addition, awards for portfolio managers that manage alternative strategies are
partially based on a portion of the funds realized performance fee.
Investment Objectives - Potential Conflict:
Where different accounts
managed by the same portfolio manager have materially and potentially
conflicting investment objectives or strategies, a conflict of interest may
arise. For example, if a portfolio
manager purchases a security for one account and sells the same security short
for another account, such a trading pattern could potentially disadvantage
either account. To mitigate the conflict
in this scenario TBCAM has in places a restriction in the order management
system and requires a written explanation from the portfolio manager before
determining whether to lift the restriction.
However, where a portfolio manager is responsible for accounts with
differing investment objectives and policies, it is possible that the portfolio
manager will conclude that it is in the best interest of one account to sell a
portfolio security while another account continues to hold or increase the
holding in such security.
Trading - Potential Conflict:
A portfolio manager could favor one account
over another in the allocation of shares or price in a block trade. Particularly in cases when a portfolio
manager buys or sells a security for a group of accounts in an aggregate amount
that may influence the market price of the stock, certain portfolios could
receive a more favorable price on earlier executions than accounts that
participate subsequent fills. The less
liquid the market for the security or the greater the percentage that the
proposed
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aggregate
purchases or sales represent of average daily trading volume, the greater the
potential for accounts that make subsequent purchases or sales to receive a
less favorable price. When a portfolio
manager intends to trade the same security for more than one account, TBCAM
policy generally requires that such orders be bunched, which means that the
trades for the individual accounts are aggregated and each portfolio receives
the same average price. Some accounts may
not be eligible for bunching for contractual reasons (such as directed
brokerage arrangements). Circumstances
may also arise where the trader believes that bunching the orders may not
result in the best possible price. Where
those accounts or circumstances are involved, TBCAM will place the order in a
manner intended to result in as favorable a price as possible for such
client. To ensure that trades are being
allocated in a fair and equitable manner consistent with our policies,
performance dispersion among portfolios in all of TBCAMs investment strategies
is reviewed on a monthly basis. While it
is not practicable to examine each individual trade allocation, this
performance analysis for strategy-specific portfolio groups provides a
reasonable basis to confirm adherence to policy or to highlight potential
outliers.
Personal Interest - Potential Conflict:
A portfolio manager may favor an account if
the portfolio manager has a beneficial interest in the account, in order to
benefit a large client or to compensate a client that had poor returns. For example, if the portfolio manager held an
interest in a mutual fund that was one of the accounts managed by the portfolio
manager, the portfolio manager would have an economic incentive to favor the
account in which the portfolio manager held an interest. All accounts with the same or similar
investment objectives are part of a trading group. All accounts in a particular trading group
are managed and traded identically taking into account client imposed
restrictions or cash flows. As a result
of this management and trading style an account in a trading group cannot be
treated any differently than any other account in that trading group.
Outside
Affiliations and Directorship - Potential Conflict:
Employees may serve as directors, officers or
general partners of certain outside entities after obtaining the appropriate
approvals in compliance with the Code of Conduct and BNY Mellons Corporate
Policy on Outside Directorships and Offices.
However, in view of the potential conflicts of interest and the possible
liability for TBCAM, its affiliates and its employees, employees are urged to
be cautious when considering serving as directors, officers, or general
partners of outside entities. In
addition to completing the reporting requirements set forth in the BNY Mellon
corporate policies, employees should ensure that their service as an outside
director, officer or general partner does not interfere with the discharge of
their job responsibilities and must recognize that their primary obligation is
to complete their assigned responsibilities at TBCAM in a timely manner.
Proxy
Voting - Potential Conflict:
Whenever TBCAM owns the securities of client
or prospective client in fiduciary accounts there is a potential conflict
between the interests of the firm and the interests of the beneficiaries of our
client accounts. Material conflicts of
interest are addressed through the establishment of our parent companys Proxy
Committee structure. It applies
detailed, pre-determined proxy voting guidelines in an objective and consistent
manner across client accounts, based on internal and external research and
recommendations provided by a third party vendor, and without consideration of
any client relationship factors.
Further, we engage a third party as an independent fiduciary to vote all
proxies for BNY Mellon securities and ETF securities.
Personal
Trading -
Potential Conflict:
There is an inherent conflict where a
portfolio manager manages personal accounts alongside client accounts. Further, there is a conflict where other
employees in the firm know of portfolio decisions in advance of trade execution
and could potentially use this information to their advantage and to the
disadvantage of TBCAMs clients. Subject
to the personal Securities Trading Policy, employees of TBCAM may buy and sell
securities which are recommended to its clients; however, no employee is
permitted to do so (a) where such purchase or sale would affect the market
price of such securities, or (b) in anticipation of the effect of such
recommendation on the market price.
Consistent with the Securities Trading Policy relating to Investment
Employees (which includes all
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Access
Persons), approval will be denied for sales/purchases of securities for which
investment transactions are pending and, at minimum, for two business days
after transactions for the security were completed for client accounts. Portfolio managers are prohibited from
trading in a security for seven days before and after transactions in that
security are completed for client accounts managed by that Portfolio Manager.
Client
Commission Arrangements - Potential Conflict:
Use of client commissions to pay for services
that benefit TBCAM and not client accounts.
It is the policy of TBCAM to enter into client commission arrangements
in a manner which will ensure the availability of the safe harbor provided by Section 28(e) of
the Securities Exchange Act of 1934 and which will ensure that the firm meets
its fiduciary obligations for seeking to obtain best execution for its
clients. Client commissions may be used
for services that qualify as research or brokerage. All 3
rd
Party
Commission services are justified in writing by the user specifically noting
how the service will assist in the investment decision making process and
approved by the Brokerage Practices Committee.
Consultant
Business - Potential Conflict:
Many of our clients retain consulting firms
to assist them in selecting investment managers. Some of these consulting firms provide
services to both those who hire investment managers (i.e. clients) and to
investment management firms. TBCAM may
pay to attend conferences sponsored by consulting firms and/or purchase
services from consulting firms where it believes those services will be useful
to it in operating its investment management business. TBCAM does not pay referral fees to
consultants.
Gifts -
Potential Conflict:
Where
investment personnel are offered gifts or entertainment by business associates
that assist them in making or executing portfolio decisions or recommendations
for client accounts a potential conflict exists. The Code of Conduct sets forth broad
requirements for accepting gifts and entertainment. TBCAMs Gift Policy supplements the Code of
Conduct and provides further clarification for TBCAM employees. TBCAM has established a Gift Policy that
supplements the BNY Mellon Code of Conduct and which requires certain reporting
and/or prior approval when accepting gifts and entertainment valued in excess
of predetermined ranges. On a quarterly
basis TBCAM Compliance Personnel review
the gifts and entertainment accepted by TBCAM Employees to ensure
compliance with the BNY Mellon Code of Conduct and the TBCAM Gift Policy.
Affiliated
Brokerage - Potential Conflict:
TBCAM is
affiliated with certain BNY Mellon affiliated broker dealers. TBCAM does not execute brokerage transactions
directly with BNY Mellon affiliated brokers.
An exception to this prohibition is where a client has provided
affirmative written direction to TBCAM to execute trades through a BNY Mellon
affiliated broker as part of a directed brokerage arrangement that the client
has with such affiliated broker. TBCAM
also maintains Affiliated Brokerage and Underwriting Policy and Procedures.
Compensation
The
Portfolio Managers are compensated in various forms by ABA or an investment
sub-adviser. Following is a description
provided by ABA and each investment sub-adviser regarding the structure of and
criteria for determining the compensation of each Portfolio Manager.
ABA
. Compensation of ABAs Portfolio Managers is
comprised of base salary, annual cash bonus, and stock options to purchase
shares of stock in the parent corporation of ABAs parent company. Each Portfolio Managers base annual salary
is fixed. ABA determines base salary
based upon comparison to industry salary data.
In addition, all Portfolio Managers participate in ABAs annual cash
bonus plan. The amount of the total
bonus pool is based primarily upon ABAs profitability. Each Portfolio Manager has a target bonus
award expressed as a percentage of base salary, which is determined by the
Portfolio
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Managers
level of responsibility. Bonus awards
reflect their success in achieving this goal and other individual performance
goals. Additionally, the Portfolio
Managers participate in ABAs stock option plan. Participation in this plan was offered to all
ABA personnel employed as of September 12, 2008 and to certain key
personnel employed after that date.
Brandywine
Global
. All Portfolio Managers receive
a competitive base salary. In addition,
from the firms profits, a bonus is paid quarterly and based on the performance
of their investment strategies relative to a relevant peer-group universe over
one-quarter, one-, three- and five-year time periods. After this performance-based incentive
compensation is allocated, profits associated with individual product groups
are allocated as follows: a majority is
retained within the product group and the remainder is allocated to a pool
shared by all product groups. More
subjective measurements of an individuals contributions to the success of
their product group and to the overall success of the firm are considered as
part of the individual allocation decision.
Finally, all investment professionals are eligible for options on Legg
Mason stock, awarded annually and vested over a five-year period. Brandywine Global believes this system
achieves the goal of retaining top-quality investment professionals, as it
provides extremely competitive compensation with entrepreneurial potential, and
of fostering excellent performance, growth, and teamwork.
Hotchkis.
Hotchkis Portfolio Managers are compensated
with a base salary and are eligible for an annual bonus. Some Portfolio Managers also are involved in
client servicing, marketing and in the general management of Hotchkis and are
evaluated and compensated based on these functions as well as their investment
management activities.
Hotchkis
believes consistent execution of the proprietary research process results in
superior, risk-adjusted portfolio returns.
It is the quality of the investment professionals execution of this
process rather than the performance of particular securities that is evaluated
in determining compensation.
Compensation likewise is not tied to performance of the ETF or separate
accounts, of specific industries within the ETF or separate accounts or to any
type of asset or revenue related objective, other than to the extent that the
overall revenues of Hotchkis attributable to such factors may affect the size
of the Hotchkis overall bonus pool.
Bonuses
and salaries for investment professionals are determined by the Chief Executive
Officer of Hotchkis using annual evaluations, compensation surveys, feedback
from other employees and advice from members of Hotchkis Executive Committee
and Hotchkis Compensation Committee.
The amount of the bonus usually is shaped by the total amount of
Hotchkis bonus pool available for the year, which is generally a function of
net income, but no investment professional receives a bonus that is a
pre-determined percentage of net income.
The majority of the Portfolio Managers own equity in Hotchkis. Hotchkis believes that the ownership structure
of the firm is a significant factor in ensuring a motivated and stable employee
base.
Lazard
. Lazard compensates the Portfolio Managers by
a competitive salary and bonus structure, which is determined both
quantitatively and qualitatively. Salary
and bonus are paid in cash and stock.
Portfolio Managers are compensated on the performance of the aggregate
group of portfolios managed by them rather than for a specific fund or account. Various factors are considered in the
determination of a Portfolio Managers compensation. All of the portfolios managed by a Portfolio
Manager are comprehensively evaluated to determine his or her positive and
consistent performance contribution over time.
Further factors include the amount of assets in the portfolios as well
as qualitative aspects that reinforce Lazards investment philosophy such as
leadership, teamwork and commitment.
Total
compensation is not fixed, but rather is based on the following factors: (i) maintenance
of current knowledge and opinions on companies owned in the portfolio; (ii) generation
and development of new investment ideas, including the quality of security
analysis and identification of appreciation catalysts;
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(iii) ability
and willingness to develop and share ideas on a team basis; and (iv) the
performance results of the portfolios managed by the investment team.
Variable
bonus is based on the Portfolio Managers quantitative performance as measured
by his or her ability to make investment decisions that contribute to the
pre-tax absolute and relative returns of the accounts managed by them, by
comparison of each account to a predetermined benchmark (as set forth in the
prospectus) over the current fiscal year and the longer-term performance (3-,
5- or 10-year, if applicable) of such account, as well as performance of the
account relative to peers. In addition,
the Portfolio Managers bonus can be influenced by subjective measurement of
the managers ability to help others make investment decisions. The benchmark for the International Equity
ETF is the Morgan Stanley Capital International Europe Australasia Far East
Index.
MetWest
Capital.
The
compensation system is designed not only to attract and retain experienced,
highly qualified investment personnel, but also to closely align employees
interests with clients interests.
Compensation for investment professionals consists of a base salary,
bonus and generous benefits. Benefits
include a comprehensive insurance benefits program (medical, vision and dental)
and 401(k) plan. A material portion
of each professionals annual compensation is in the form of a bonus tied to
results relative to clients benchmarks and overall client satisfaction. Bonuses may range from 20% to over 100% of
salary and may include equity incentives.
While Wells Fargo & Company holds a majority ownership interest
in MetWest Capital, certain MetWest Capital professionals still hold ownership
interests in the firm accordingly receive additional payments based on the
profitability of the firm. MetWest
Capital professionals who hold ownership interests in the firm do not receive
investment performance-related bonuses.
Howard Gleicher and Gary Lisenbee are not shown in the chart below since
both hold an ownership interest in the firm and their compensation is tied to
the overall profitability of the firm and not on composite performance relative
to the benchmark.
MetWest
Capitals compensation system is not determined on an account-specific
basis. Rather, bonuses are tied to
overall firm profitability and composite performance relative to the
benchmark. To reinforce long-term focus,
performance is generally measured over three- and five-year periods. Analysts are encouraged to maintain a
long-term focus and are not compensated for the number of their recommendations
that are purchased in the portfolio.
Rather, their bonuses are tied to overall strategy performance.
For calendar
year 2009, the investment performance component of each portfolio managers
bonus will be determined based on comparisons to the benchmarks (either to the
individual benchmark or one or more composites of all or some of such
benchmarks) indicated below. The
benchmarks may change for purposes of calculating bonus compensation for
calendar year 2010.
Portfolio Manager
|
|
Benchmark
|
David
M. Graham
|
|
Lipper
Large-Cap Value Index
MSCI
EAFE Index
MSCI
World Index
Russell
1000 Value Index
S&P
500 Index
|
|
|
|
Jeffrey
Peck
|
|
Lipper
Large-Cap Value Index
MSCI
EAFE Index
MSCI
World Index
Russell
1000 Value Index
S&P
500 Index
|
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Portfolio Manager
|
|
Benchmark
|
Jay
Cunningham
|
|
Lipper
Large-Cap Value Index
MSCI EAFE Index
MSCI World Index
Russell 1000 Value Index
S&P 500 Index
|
In addition,
portfolio managers may participate, at their election, in various benefits
programs, including the following:
·
medical,
dental, vision and prescription benefits,
·
life,
disability and long-term care insurance,
·
before-tax
spending accounts relating to dependent care, health care, transportation and
parking, and
·
various
other services, such as family counseling and employee assistance programs,
prepaid or discounted legal services, health care advisory programs and access
to discount retail services.
These benefits
are broadly available to MetWest Capital employees. Senior level employees, including many portfolio
managers but also including many other senior level executives, may pay more or
less than employees that are not senior level for certain benefits, or be
eligible for, or required to participate in, certain benefits programs not
available to employees who are not senior level.
Templeton
. Templeton seeks to maintain a compensation
program that is competitively positioned to attract, retain and motivate
top-quality investment professionals.
Portfolio managers receive a base salary, a cash incentive bonus
opportunity, an equity compensation opportunity, and a benefits package. Portfolio manager compensation is reviewed
annually and the level of compensation is based
on individual performance, the salary range for a portfolio managers level of
responsibility and Franklin Templeton guidelines. Portfolio managers are provided no financial
incentive to favor one fund or account over another. Each portfolio managers compensation
consists of the following three elements:
Base salary
Each
portfolio manager is paid a base salary.
Annual bonus
Annual
bonuses are structured to align the interests of the portfolio manager with
those of the International Equity ETFs shareholders. Each portfolio manager is eligible to receive
an annual bonus. Bonuses generally are
split between cash (50% to 65%) and restricted shares of Franklin Resources
stock (17.5% to 25%) and mutual fund shares (17.5% to 25%). The deferred equity-based compensation is
intended to build a vested interest of the portfolio manager in the financial
performance of both Franklin Resources and mutual funds advised by the
manager.
The
bonus plan is intended to provide a competitive level of annual bonus
compensation that is tied to the portfolio manager achieving consistently
strong investment performance, which aligns the financial incentives of the
portfolio manager and fund shareholders.
The Chief Investment Officer of the manager
and/or other officers of the manager, with responsibility for managing a
portion of the assets of the International Equity ETF, have discretion in the
granting of annual bonuses to portfolio managers in accordance with Franklin
Templeton guidelines.
The following factors are generally used in
determining bonuses under the plan:
·
Investment performance.
Primary consideration is given to the
historic investment performance over the 1, 3 and 5 preceding years of all
accounts managed by the portfolio manager.
The pre-tax performance of each fund managed is measured relative to a relevant
peer group and/or applicable benchmark as appropriate.
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·
Research.
Where the portfolio management team also has research responsibilities,
each portfolio manager is evaluated on the
number and performance of
recommendations over time, productivity and quality of recommendations, and
peer evaluation.
·
Non-investment performance.
For senior portfolio managers, there is a
qualitative evaluation based on leadership and the mentoring of staff.
·
Responsibilities.
The characteristics and complexity of funds
managed by the portfolio manager are factored in the managers appraisal.
Additional long-term equity-based
compensation
Portfolio
managers may also be awarded restricted shares or units of Franklin Resources
stock or restricted shares or units of one or more mutual funds, and options to
purchase common shares of Franklin Resources stock. Awards of such deferred equity-based
compensation typically vest over time, so as to create incentives to retain key
talent.
Portfolio
managers also participate in benefit plans and programs available generally to
all employees of the manager.
TBCAM.
With the exception of the most senior
portfolio managers in the firm (described separately below), the portfolio
managers cash compensation is comprised primarily of a market-based salary and
incentive compensation, including both annual and long-term retention incentive
awards. Portfolio managers are eligible
to receive annual cash bonus awards from the Annual Incentive Plan, and annual
incentive opportunities are pre-established for each individual based upon
competitive industry compensation benchmarks.
Actual individual awards are determined based on The Boston Companys
financial performance, individual investment performance, individual
contribution and other qualitative factors.
Select
senior portfolio managers participate in a more formal structured compensation
plan. This plan is designed to
compensate our top investment professionals for superior investment performance
and business results. It is a two stage
model: an opportunity range is determined based on level of current business
(AUM, revenue) and an assessment of long term business value (growth,
retention, development). A significant
portion of the opportunity awarded is structured and based upon the one-year,
three-year, and five-year (three-year and five-year weighted more heavily)
pre-tax performance of the portfolio managers accounts relative to the
performance of the appropriate peer groups.
Other factors considered in determining the award are individual
qualitative performance based on seven discretionary factors (e.g. leadership, teamwork,
etc.), and the asset size and revenue growth or retention of the products
managed. In addition, awards for
portfolio managers that manage alternative strategies are partially based on a
portion of the funds realized performance fee.
For
research analysts and other investment professionals, incentive pools are
distributed to the respective product teams (in the aggregate) based upon
product performance relative to firm-wide performance measured on the same
basis as described above. Further
allocations are made to specific team members by the product portfolio manager
based upon sector contribution and other qualitative factors.
All
portfolio managers and analysts are also eligible to participate in The Boston
Company Asset Management Long Term Retention Incentive Plan. This plan provides for an annual award,
payable in cash and/or Bank of New York Mellon restricted stock (three-year
cliff vesting period for both). The
value of the cash portion of the award earns interest during the vesting period
based upon the growth in The Boston Companys net income (capped at 20% and
with a minimum payout of the Bank of New York Mellon 3-year CD rate).
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Incentive
compensation awards are generally subject to management discretion and pool
funding availability. Funding for The
Boston Company Annual Incentive Plan and Long Term Retention Incentive Plan is
through a pre-determined fixed percentage of overall Boston Company
profitability. Awards are paid in cash
on an annual basis. However, some
portfolio managers may receive a portion of their annual incentive award in
deferred vehicles.
Ownership of ETFs
The following table discloses the dollar range of equity securities
beneficially owned by each Portfolio Manager in the Large Cap Value ETF as of December 31,
2009:
Name of Portfolio Manager
|
|
Dollar Range of Equity Securities in the Large Cap Value ETF
|
|
|
|
American Beacon
Advisors, Inc.
|
|
|
Kirk L. Brown
|
|
|
Wyatt Crumpler
|
|
|
Adriana Posada
|
|
|
William Quinn
|
|
|
|
|
|
Brandywine Global Investment Management, LLC
|
|
|
Paul Lesutis
|
|
|
Earl Gaskins
|
|
|
|
|
|
Hotchkis and Wiley Capital
Management, LLC
|
|
|
Patty McKenna
|
|
|
Sheldon Lieberman
|
|
|
George Davis
|
|
|
Judd Peters
|
|
|
Scott McBride
|
|
|
|
|
|
Metropolitan West Capital
Management LLC
|
|
|
Howard Gleicher
|
|
|
David M. Graham
|
|
|
Jeffrey Peck
|
|
|
Jay Cunningham
|
|
|
As of December 31, 2009, the International
Equity ETF had not opened for investment.
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PORTFOLIO
TRANSACTIONS AND BROKERAGE
Portfolio changes will generally be implemented through in-kind transactions
for Creation Units, however, ABA and the investment sub-advisers may execute
brokerage transactions for an ETF and theu ETF may not incur brokerage
commissions. Also, from time to time an
ETF may accept cash as part or all of an In-Kind Creation or Redemption Basket,
in which case ABA or an investment sub-adviser may need to execute brokerage
transactions for an ETF. In these
instances, ABA or each investment sub-adviser will place its own orders to execute
securities transactions that are designed to implement the applicable ETFs
investment objective and policies. In
placing such orders, ABA or each investment sub-adviser will seek the best net
price and most favorable execution, consistent with their obligations under the
Investment Sub-Advisory Agreements. The
full range and quality of services offered by the executing broker or dealer
will be considered when making these determinations.
In
these cases, in selecting brokers or dealers to execute particular
transactions, ABA or the investment sub-advisers are 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 ABA or the investment sub-advisers (or their affiliates), as the
case may be, provided, however, that ABA or the investment sub-adviser
determines that it has received the best net price and execution available. ABA and the investment sub-advisers are 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 of the commission another broker or dealer
would have charged for effecting the same transaction. ABA and the investment sub-adviser, as
appropriate, must determine in good faith, however, that such commission was
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 ABA or the investment sub-adviser exercises investment
discretion. Under these circumstances,
the fees of ABA or the investment sub-advisers are not reduced by reason of
receipt of such brokerage and research services. In addition, with disclosure to and pursuant
to written guidelines approved by the Board, ABA or the investment sub-advisers
(or a broker-dealer affiliated with them) may execute portfolio transactions
and receive usual and customary brokerage commissions (within the meaning of Rule 17e-1
under the Investment Company Act) for doing so.
However, the ETFs do not allow ABA or the investment sub-advisers to
enter into arrangements to direct transactions to broker-dealers as
compensation for the promotion or sale of ETF shares by those broker-dealers.
An ETFs turnover rate, or the frequency of portfolio transactions,
will vary from year to year depending on market conditions and the ETFs cash
flows. The ETFs portfolio turnovier for
the fiscal year ended October 31, 2009 appears in the ETFs
Prospectus. High portfolio activity may
increase an ETFs transaction costs, including brokerage commissions, and
result in a greater number of taxable transactions.
It
is expected that, if ABA or an investment sub-adviser executes brokerage
transactions for an ETF, securities ordinarily will be purchased for the ETF in
the primary markets, and that in assessing the best net price and execution
available, ABA or each investment sub-adviser, as applicable, shall consider
all factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. Transactions involving
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securities
of small and emerging growth companies may involve specialized services on the
part of the broker or dealer and therefore entail higher commissions or spreads
than transactions involving more widely traded securities.
To
the extent that accounts managed by ABA or the investment sub-advisers are
simultaneously engaged in the purchase of the same security as an ETF, then, as
authorized by the Board, available securities may be allocated to the ETF and
other client accounts and may be averaged as to price in a manner determined by
ABA or the investment sub-adviser, as applicable, to be fair and
equitable. Such allocation and pricing
may affect the amount of brokerage commissions paid by an ETF. In some cases, this system might adversely
affect the price paid by an ETF (for example, during periods of rapidly rising
or falling interest rates) or limit the size of the position obtainable for an
ETF (for example, in the case of a small issue).
During the fiscal year ended October 31, 2009,
received brokerage commissions in the amount of
$ .
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
are 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 ETFs.
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, each ETF is authorized to pay an amount up to 0.25% of its average
daily net assets each year for certain distribution-related activities. In addition, if the payment of management
fees by an 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 ABA and the investment sub-advisers, 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 ETFs. The Manager may also make payments to certain
market makers in the ETFs Shares for providing
bona fide
consulting and marketing services regarding the ETFs. 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 an ETFs method of distribution. No fees are currently paid by any ETF under a
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 an ETF.
Under each 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.
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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 ETFs.
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 eight
actively managed, exchange-traded series, although the International Equity ETF
has not 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 shareholders. Shareholders holding two-thirds of Shares
outstanding of all ETFs may remove Trustees from office by votes cast at a
meeting of Trust shareholders or by written consent.
All
Shares are 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 an
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 an 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 an ETFs property for all loss
and expense of an 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 an ETF itself would not be able to meet the Trusts obligations and
this risk should be considered remote.
If an 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.
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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 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.
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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) are governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a street name, and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspects of the
records relating to or notices to beneficial owners, or payments made on
account of beneficial ownership interests in such Shares, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between DTC and the DTC
Participants or the relationship between such DTC Participants and the Indirect
Participants and beneficial owners owning through such DTC Participants.
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
Each 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. No ETF will
issue fractional Creation Units.
To purchase or redeem any
Creation Units from an 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. Whereas most
transactions with respect to ETFs that invest in domestic securities may be effectuated
through the Clearing Process, most transactions with respect to ETFs that
invest in foreign securities may be effectuated 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.
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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 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. 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.
Custom 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. 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. 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 Large Cap Value ETF is
$1,000 and the Maximum Creation/Redemption Transaction Fee for the Large Cap
Value ETF is $4,000. The Standard
Creation/Redemption Transaction Fee for the International Equity ETF is $3,200
and the Maximum Creation/Redemption Transaction Fee for the International
Equity ETF is $12,800.
Purchasing Creation Units
Fund
Deposit.
The consideration for a
Creation Unit of an ETF is the Fund Deposit.
The Fund Deposit generally consists of the In-Kind Creation Basket,
which will often be a replication of the stocks in the ETFs portfolio, 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
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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 each 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.
Each 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 ABA and/or the investment sub-advisers 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 Domestic ETFs
. 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 Domestic ETFs
. 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 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.
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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.
Placement of Creation Orders Outside
Clearing ProcessForeign ETFs
.
Once the Transfer Agent receives an order for
a Creation Unit of an ETF that invests in foreign securities, the Transfer
Agent informs the Distributor, the Manager and the Custodian. The Custodian then provides the information
to the appropriate sub-custodian(s).
The
Custodian causes the sub-custodian(s) to open and/or maintain an account
into which the Authorized Participant must deliver, on behalf of itself or the
party on whose behalf it is acting, the securities included in the Fund Deposit,
with any appropriate adjustments approved by the ETF. Securities in the In-Kind Creation Basket
must then be delivered to such account(s).
Although
orders to purchase Creation Units must be received by the Transfer Agent by the
Closing Time on the relevant Business Day for the purchaser to get that days
NAV, when a relevant local market is closed due to local market holidays, the
local market settlement process is not expected to commence until the end of
the local holiday period. The Authorized
Participant must also make available no later than 12:00 p.m. Eastern
time, on the contractual settlement date, by means approved by the Trust,
immediately available or same day funds sufficient to pay the relevant Cash
Component. Any excess funds made available
to the Trust will be returned following settlement.
Creation
Units will be issued to an Authorized Participant, notwithstanding the fact
that the corresponding Fund Deposits have not been received in part or in
whole, provided that the Authorized Participant undertakes to deliver the
missing securities in the In-Kind Creation Basket as soon as possible, which
undertaking shall be secured by the Authorized Participants delivery and
maintenance of cash collateral
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(denominated
in U.S. dollars) in immediately available funds having a value, as
marked-to-market daily, at least equal to 105% of the value of the missing
securities. Such cash collateral must be delivered no later than 12:00 p.m.,
Eastern time, on the contractual settlement date. The ETF may use the cash collateral to
purchase the missing securities at any time, and in the event that the ETF does
purchase the missing securities, the Authorized Participant effectuating the
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 cash collateral 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 cash collateral once all of the missing securities have been
received by the Trust.
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 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.
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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 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 Domestic ETFs
. 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 Domestic ETFs
. Orders to redeem Creation Units outside the
Clearing Process must state that the DTC Participant is not using the Clearing
Process and that redemption of Creation Units will instead be effected through
transfer of ETF Shares directly through DTC.
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.
Placement of Redemption Orders Outside
Clearing ProcessForeign ETFs
.
In order to effectuate the redemption of any
Creation Units of ETFs that invest in foreign securities, arrangements
satisfactory to the Trust must be established for an Authorized Participant to
transfer Creation Units through DTC on or before the settlement date. Redemptions of Shares for the In-Kind
Redemption Basket will be subject to compliance with applicable U.S. federal
and state securities laws, and the Trust reserves the right to redeem Creation
Units for cash to the extent that an ETF could not lawfully deliver specific
securities in the In-Kind Redemption Basket or could not do so without first
registering securities in the In-Kind Redemption Basket under such laws.
The
delivery of the In-Kind Redemption Basket to redeeming Authorized Participants
generally will be made within three Business Days after the day on which the
redemption request is received in proper form.
However, due to the schedule of holidays in certain countries, the
delivery of in-kind redemption proceeds may take longer. In such cases, the local market settlement
procedures will not commence until the end of the local holiday periods. See Regular
Foreign Holidays below for a list of the local holidays in foreign countries
relevant to the International Equity ETF.
When
taking delivery of the In-Kind Redemption Basket upon redemption of Creation
Units, a redeeming shareholder must maintain appropriate arrangements with a
qualified broker-dealer, bank or other custody
56
Table of Contents
provider
in each jurisdiction in which any of the securities in the In-Kind Redemption
Basket are customarily traded. The securities in the In-Kind Redemption Basket
will be delivered to such account(s).
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.
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.
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
57
Table of Contents
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.
Regular Foreign Holidays
. The International Equity ETF generally
intends to effect deliveries of Creation Units and portfolio securities on a
basis of T plus three Business Days (i.e., days on which the national
securities exchange is open) (T+3).
The International Equity ETF may effect deliveries of Creation Units and
portfolio securities on a basis other than T + 3 in order to accommodate local
holiday schedules, to account for different treatment among foreign and U.S.
markets of dividend record dates and ex-dividend dates or under certain other
circumstances. The ability of the Trust
to effect in-kind creations and redemptions within three Business Days of
receipt of an order in good form is subject, among other things, to the
condition that, within the time period from the date of the order to the date
of delivery of the securities, there are no days that are holidays in the
applicable foreign market. For every
occurrence of one or more intervening holidays in the applicable foreign market
that are not holidays observed in the U.S. equity market, the redemption
settlement cycle will be extended by the number of such intervening
holidays. In addition to holidays, other
unforeseeable closings in a foreign market due to emergencies may also prevent
the Trust from delivering securities within normal settlement periods. The securities delivery cycles currently
practicable for transferring portfolio securities to redeeming Authorized
Participants, coupled with foreign market holiday schedules, will require a
delivery process longer than seven calendar days for the International Equity
ETF, in certain circumstances. The
holidays applicable to the International Equity ETF during such periods are
listed below, as are instances where more than seven days will be needed to
deliver redemption proceeds. Although
certain holidays may occur on different dates in subsequent years, the number
of days required to deliver redemption proceeds in any given year is not
expected to exceed the maximum number of days listed below. The proclamation of new holidays, the treatment
by market participants of certain days as informal holidays (e.g., days on
which no or limited securities transactions occur, as a result of substantially
shortened trading hours), the elimination of existing holidays or changes in
local securities delivery practices could affect the information set forth
herein at some time in the future.
The
dates in calendar year 2010 in which the regular holidays affecting the
relevant securities markets of the below listed countries are as follows:
[TO
BE UPDATED}
AUSTRALIA:
Jan 1
|
|
Apr 13
|
|
Jun 8
|
|
Nov 3
|
|
Jan 26
|
|
Apr 27
|
|
Aug 3
|
|
Dec 25
|
|
Mar 2
|
|
May 4
|
|
Aug 12
|
|
Dec 28
|
|
Mar 9
|
|
May 18
|
|
Sep 28
|
|
|
|
Apr 10
|
|
Jun 1
|
|
Oct 5
|
|
|
|
|
|
|
|
|
|
|
|
AUSTRIA:
Jan 1
|
|
May 1
|
|
Oct 26
|
|
Dec 31
|
|
Jan 6
|
|
May 21
|
|
Dec 8
|
|
|
|
Apr 10
|
|
Jun 1
|
|
Dec 24
|
|
|
|
Apr 13
|
|
Jun 11
|
|
Dec 25
|
|
|
|
58
Table of Contents
BELGIUM:
Jan 1
|
|
May 1
|
|
Jun 1
|
|
Nov 11
|
|
Apr 10
|
|
May 21
|
|
Jul 21
|
|
Dec 25
|
|
Apr 13
|
|
May 22
|
|
Nov 2
|
|
|
|
CANADA:
Jan 1
|
|
May 18
|
|
Sep 7
|
|
Dec 28
|
|
Jan 2
|
|
Jun 24
|
|
Oct 12
|
|
|
|
Feb 16
|
|
Jul 1
|
|
Nov 11
|
|
|
|
Apr 10
|
|
Aug 3
|
|
Dec 25
|
|
|
|
DENMARK:
Jan 1
|
|
May 8
|
|
Dec 24
|
|
|
|
Apr 9
|
|
May 21
|
|
Dec 25
|
|
|
|
Apr 10
|
|
Jun 1
|
|
Dec 31
|
|
|
|
Apr 13
|
|
Jun 5
|
|
|
|
|
|
FINLAND:
Jan 1
|
|
May 1
|
|
Dec 25
|
|
|
|
Jan 6
|
|
May 21
|
|
Dec 31
|
|
|
|
|
|
|
|
|
|
|
|
Apr 10
|
|
Jun 19
|
|
|
|
|
|
Apr 13
|
|
Dec 24
|
|
|
|
|
|
FRANCE:
Jan 1
|
|
May 8
|
|
Dec 25
|
|
|
|
Apr 10
|
|
May 21
|
|
|
|
|
|
Apr 13
|
|
Jul 14
|
|
|
|
|
|
May 1
|
|
Nov 11
|
|
|
|
|
|
GERMANY:
Jan 1
|
|
Apr 13
|
|
Jun 11
|
|
|
|
Jan 6
|
|
May 1
|
|
Dec 24
|
|
|
|
Feb 23
|
|
May 21
|
|
Dec 25
|
|
|
|
Apr 10
|
|
Jun 1
|
|
Dec 31
|
|
|
|
GREECE:
Jan 1
|
|
Apr 10
|
|
May 1
|
|
|
|
Jan 6
|
|
Apr 13
|
|
Jun 8
|
|
|
|
Mar 2
|
|
Apr 17
|
|
Oct 28
|
|
|
|
Mar 25
|
|
Apr 20
|
|
Dec 25
|
|
|
|
HONG
KONG:
Jan 1
|
|
Apr 13
|
|
Oct 26
|
|
|
|
Jan 26
|
|
May 1
|
|
Dec 24
|
|
|
|
Jan 27
|
|
May 28
|
|
Dec 25
|
|
|
|
Jan 28
|
|
Jul 1
|
|
Dec 31
|
|
|
|
Apr 10
|
|
Oct 1
|
|
|
|
|
|
IRELAND:
Jan 1
|
|
May 1
|
|
Oct 26
|
|
Dec 29
|
|
Mar 17
|
|
May 4
|
|
Dec 24
|
|
|
|
Apr 10
|
|
Jun 1
|
|
Dec 25
|
|
|
|
Apr 13
|
|
Aug 3
|
|
Dec 28
|
|
|
|
59
Table of Contents
ITALY:
Jan 1
|
|
May 1
|
|
Dec 24
|
|
|
|
Jan 6
|
|
Jun 2
|
|
Dec 25
|
|
|
|
Apr 10
|
|
Jun 29
|
|
Dec 31
|
|
|
|
Apr 13
|
|
Dec 8
|
|
|
|
|
|
JAPAN:
Jan 1
|
|
Apr 29
|
|
Sep 22
|
|
Dec 23
|
|
Jan 2
|
|
May 4
|
|
Sep 23
|
|
Dec 31
|
|
Jan 12
|
|
May 5
|
|
Oct 12
|
|
|
|
Feb 11
|
|
Jul 20
|
|
Nov 3
|
|
|
|
Mar 20
|
|
Sep 21
|
|
Nov 23
|
|
|
|
NETHERLANDS:
Jan 1
|
|
May 1
|
|
|
|
|
|
Apr 10
|
|
May 21
|
|
|
|
|
|
Apr 13
|
|
Jun 1
|
|
|
|
|
|
Apr 30
|
|
Dec 25
|
|
|
|
|
|
NEW
ZEALAND:
Jan 1
|
|
Feb 6
|
|
Oct 26
|
|
|
|
Jan 2
|
|
Apr 10
|
|
Dec 25
|
|
|
|
Jan 19
|
|
Apr 13
|
|
Dec 28
|
|
|
|
Jan 26
|
|
Jun 1
|
|
|
|
|
|
NORWAY:
Jan 1
|
|
May 1
|
|
Dec 25
|
|
|
|
Apr 9
|
|
May 21
|
|
Dec 31
|
|
|
|
Apr 10
|
|
Jun 1
|
|
|
|
|
|
Apr 13
|
|
Dec 24
|
|
|
|
|
|
PORTUGAL:
Jan 1
|
|
May 1
|
|
Dec 1
|
|
|
|
Feb 24
|
|
Jun 10
|
|
Dec 8
|
|
|
|
Apr 10
|
|
Jun 11
|
|
Dec 24
|
|
|
|
Apr 13
|
|
Oct 5
|
|
Dec 25
|
|
|
|
SINGAPORE:
Jan l
|
|
May 1
|
|
Oct 17
|
|
|
|
Jan 26
|
|
May 9
|
|
Nov 27
|
|
|
|
Jan 27
|
|
Aug 10
|
|
Dec 25
|
|
|
|
Apr 10
|
|
Sep 21
|
|
|
|
|
|
SOUTH
KOREA:
Jan 1
|
|
May 1
|
|
Oct 2
|
|
|
|
Jan 26
|
|
May 5
|
|
Dec 25
|
|
|
|
Jan 27
|
|
Jul 17
|
|
Dec 31
|
|
|
|
SPAIN:
Jan 1
|
|
Apr 10
|
|
Oct 12
|
|
Dec 25
|
|
Jan 6
|
|
Apr 13
|
|
Nov 2
|
|
|
|
Mar 19
|
|
May 1
|
|
Nov 9
|
|
|
|
Apr 9
|
|
May 15
|
|
Dec 8
|
|
|
|
60
Table of Contents
SWEDEN:
Jan 1
|
|
May 1
|
|
Dec 25
|
|
|
|
Jan 6
|
|
May 21
|
|
Dec 31
|
|
|
|
Apr 10
|
|
Jun 19
|
|
|
|
|
|
Apr 13
|
|
Dec 24
|
|
|
|
|
|
SWITZERLAND:
Jan 1
|
|
Apr 10
|
|
Jun 1
|
|
Dec 8
|
|
Jan 2
|
|
Apr 13
|
|
Jun 11
|
|
Dec 24
|
|
Jan 6
|
|
May 1
|
|
Jun 29
|
|
Dec 25
|
|
Mar 19
|
|
May 21
|
|
Sep 10
|
|
Dec 31
|
|
UNITED
KINGDOM:
Jan 1
|
|
May 4
|
|
Dec 25
|
|
|
|
Apr 10
|
|
May 25
|
|
Dec 26
|
|
|
|
Apr 13
|
|
Aug 31
|
|
|
|
|
|
UNITED
STATES:
Jan 1
|
|
Jul 3
|
|
Dec 1
|
|
|
|
Jan 19
|
|
Sep 7
|
|
|
|
|
|
Feb 16
|
|
Oct 12
|
|
|
|
|
|
Apr 10
|
|
Nov 11
|
|
|
|
|
|
May 25
|
|
Nov 26
|
|
|
|
|
|
SETTLEMENT
PERIODS GREATER THAN SEVEN DAYS FOR YEAR 2010*
[TO BE
UPDATED]
|
|
Beginning of
Settlement Period
|
|
End of
Settlement Period
|
|
Days in
Settlement Period
|
|
Denmark
|
|
04/06/09
|
|
04/14/09
|
|
8
|
|
|
|
04/07/09
|
|
04/15/09
|
|
8
|
|
|
|
04/08/09
|
|
04/16/09
|
|
8
|
|
Japan
|
|
04/28/09
|
|
05/07/09
|
|
9
|
|
|
|
04/30/09
|
|
05/08/09
|
|
8
|
|
|
|
05/01/09
|
|
05/11/09
|
|
10
|
|
|
|
09/16/09
|
|
09/24/09
|
|
8
|
|
|
|
09/17/09
|
|
09/25/09
|
|
8
|
|
|
|
09/18/09
|
|
09/28/09
|
|
10
|
|
Norway
|
|
04/06/09
|
|
04/14/09
|
|
8
|
|
|
|
04/07/09
|
|
04/15/09
|
|
8
|
|
|
|
04/08/09
|
|
04/16/09
|
|
8
|
|
* Holidays are
subject to change without further notice.
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.
61
Table of Contents
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.
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
62
Table of Contents
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.
If the ETF holds more than 50% of its assets in
foreign stock and securities at the close of its taxable year, the ETF may
elect to pass through to the ETFs shareholders foreign income taxes
paid. If the ETF so elects, shareholders
will be required to treat their pro rata portion of the foreign income taxes
paid by the ETF as part of the amounts distributed to them and thus includable
in their gross income for federal income tax purposes. Shareholders who itemize deductions would
then be allowed to claim a deduction or credit (but not both) on their federal
income tax returns for such amounts, subject to certain limitations. Shareholders who do not itemize deductions
would (subject to such limitations) be able to claim a credit but not a
deduction. No deduction will be
permitted to individuals in computing their alternative minimum tax
liability. If the ETF does not qualify
or elect to pass through to the ETFs shareholders foreign income taxes paid,
shareholders will not be able to claim any deduction or credit for any part of
the foreign income taxes paid by the ETF.
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 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
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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.
FINANCIAL STATEMENTS
The Financial Statements for the Large Cap Value ETF for the fiscal
year ended October 31, 2009 are incorporated by reference to the Annual
Report to Shareholders of the Large Cap Value ETF for the period ended October 31,
2009. Such Financial Statements have
been incorporated herein in reliance upon such reports and on the authority of
KMPG LLP as experts in accounting and auditing.
The Annual Report is available upon request without charge by contacting
the ETFs at the address or telephone number set forth on the cover page of
this SAI or at www.grailadvisors.com.
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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.
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.
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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.
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.
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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.
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.
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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 ABA and the International Equity ETF Investment Sub-Advisers
AMERICAN
BEACON ADVISORS, INC.
PROXY
VOTING POLICY AND PROCEDURES
FOR
GRAIL AMERICAN BEACON LARGE CAP VALUE ETF
AmBeacon
is the primary sub-advisor to the Grail American Beacon Large Cap Value ETF
(the ETF). The ETFs Board of Trustees
has delegated to AmBeacon the authority to vote proxies for the ETF in accordance
with the policies and procedures set forth below in the sections titled Voting
Policies and Voting Procedures.
VOTING
POLICIES
1.
Routine
Proposals - Routine proxy proposals are most commonly defined as those that do
not change the structure, bylaws, or operations of the corporation to the
detriment of the shareholders. The
proposals are consistent with industry standards as well as the corporate laws
in the state of incorporation.
Traditionally, these include:
·
Location of
annual meeting
·
Employee stock
purchase plan
·
Appointment of
auditors
·
Corporate
strategy
·
Director
indemnification and liability protection
·
Reincorporation
AmBeacons
policy is to support management on these routine proposals.
2.
Social,
Political and Environmental Proposals - Issues which can be characterized as
non-financial or non-business issues involving social, political and
environmental issues will result in voting to support management. Financial interests of the shareholders are
the only consideration for proxy voting decisions.
3.
Shareholder
Equality Proposals - Issues that do not discriminate against certain
shareholders will be supported.
Non-discriminatory proposals include:
A.
Anti-greenmail
- Provisions that require that the price paid to the greenmailer must be
extended to all shareholders of record will be supported.
B.
Fair price
provisions - Provisions that guarantee an equal price to all shareholders will
be supported.
4.
Non-routine
proposals - Issues in this category are more likely to affect the structure and
operation of the corporation and, therefore have a greater impact on the value
of the shareholders investment. All
situations will be viewed individually and independently with the focus on the
financial interest of the shareholders.
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Various
factors will contribute in the decision-making process assessing the financial
interest of the shareholders.
Consideration should be given first and foremost to the board of
directors. The board of directors
oversees the management of the company, makes decisions on the most important
issues and is a representative of the shareholders. To the degree that the
board is independent (defined as at least 75% of members are independent,
having no personal or business relationship with management, as defined by the
relevant exchange), capable and dedicated to the shareholders, support should
be for the boards recommendations.
Managements
record, strategy and tenure will contribute in the decision-making
process. The tendency will be to side
with management if, in the past, it has shown the intent and ability to
maximize shareholder wealth over the long term. Management will not be judged
on a quarter-by-quarter basis, but judged on decisions that are consistent with
the long-term interests of the shareholders of the company.
The
following are specific issues that directly impact the financial interest of
the shareholders.
A.
Board of
Directors
a.
Uncontested
elections - AmBeacon will support managements slate during uncontested
elections if the board is independent.
The company is the best judge of who is able and available to serve, and
who will work well together.
b.
Contested
elections - will be evaluated on a case-by-case basis. Both slates of candidates will be evaluated
based on a thorough analysis of each contesting side.
c.
Independent
compensation committee - an independent committee will best represent
shareholder interests and guards against conflicts of interest in executive pay
decisions. An independent or majority
independent committee will have no financial interest in the outcome. AmBeacon will support proposals for
independent compensation committees.
d.
Independent
nominating committee AmBeacon believes that independent directors selected by
a committee of independent directors will be more likely to question the CEOs
business judgment. Therefore, AmBeacon will support proposals for independent
nominating committees.
e.
Classified
boards - A typical classified board is divided into 3 groups with one group
standing for election every third year.
AmBeacon believes that shareholders benefit from the structure as
classified boards provide stability of leadership and continuity of management
and policy that is crucial when evaluating company issues. Therefore, AmBeacons policy is to support
classified boards, unless an independent board proposes to declassify itself,
in which case AmBeacon will support management.
f.
Cumulative
voting - Under cumulative voting, shareholders are entitled to a number of
votes equal to the number of board seats open for election, times the number of
shares held. The votes can be cast for
one nominee or apportion them, equally or not, amongst the nominees. AmBeacon believes that each director should
act for the benefit of all shareholders and therefore should not be elected by a
special group of shareholders. As a result,
AmBeacon does not support cumulative voting.
Directors have the fiduciary responsibility to protect and enhance the
interests of all shareholders. The
potential disruption caused by a minority director with a special agenda is
potentially damaging to a majority of shareholders. Directors should act in the benefit of the
majority, not the minority.
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g.
Independent
boards AmBeacon believes independent boards will permit clear and independent
decision-making, benefiting shareholders long-term interests. Board members who are independent are more
likely to protect shareholders interests than company executives or other
insiders. An independent director is defined as an individual who has had no
personal or business relationship with management, as defined by the relevant
exchange. While AmBeacons policy is to
generally support independent boards, there is no objection to including up to
25% of insiders or affiliated outsiders on the board. Inside directors have intimate knowledge of
the company that will be beneficial during discussions of the companys
long-term prospects. If the board is
less than 75% independent, AmBeacon will withhold their vote for non-CEO board
members that are not independent.
h.
Separate
chairman, CEO positions - Proponents contend that an individual with both
positions is accountable to no one. The
CEO is a management employee, responsible for day-to-day operations,
implementing corporate strategy, and accountable to the board. The chairman is responsible for the overall
direction of the company, protecting the shareholders interests, evaluating
the performance of the CEO, and is accountable to the shareholders.
Opponents
contend it would dilute the power of the CEO to provide effective leadership,
create a potential rivalry between the two positions leading to compromise
rather than decisive action, insulate the CEO from being held accountable by
the board if the chairman is overprotective, and finally, may cause confusion
by having two public spokesmen. Despite
the widespread use of this structure in Britain, it is relatively revolutionary
in the U.S. If the board is independent,
AmBeacon will support the companys recommendation regarding separate chairman,
CEO positions. Other situations will be
evaluated on a case-by-case basis.
i.
Minimum
director stock / fund ownership - proponents contend that a directors interests
will be more aligned with shareholders if the director has a personal stake in
the company. Additionally, many
companies are providing part of their compensation in the form of stock for
directors.
Opponents
contend that minimum stock/fund ownership requirements will restrict the search
to qualified, wealthy board candidates.
This could eliminate other candidates who may not be able to pay the
price of the required stock.
AmBeacon
will not support proposals for minimum director stock ownership.
j.
Majority vote
to elect directors Shareholder concern about director elections is an
outgrowth of their concern about director accountability in the aftermath of
corporate scandals. Opponents argue that
because of the holdover provision applicable to most directors, a resignation
policy could be more effective in actually effecting the removal of an
unpopular director. Proponents maintain
that a resignation policy approach still leaves such a director technically elected
and puts the onus on other board members to take action against one of their
colleagues.
AmBeacon
will support proposals for a majority vote requirement to elect directors.
k.
Increase/decrease
size of board The board and management
are in the best position to determine the structure for the board. If the board is independent, AmBeacon will
support proposals to increase or decrease the size of the board if the board
will be comprised of at least 5 but no more than 20 members. Outside of this range, AmBeacon will vote
against a change in the size of a board of directors.
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l.
Limit number of
boards served The board and management are in the best position to determine
the structure for the board. AmBeacon
will not support proposals to limit the number of boards a director may serve
on.
m.
Term limits -
Opponents of term limits sustain that the board and management are in the best
position to determine a workable, efficient structure for the board.
Furthermore, shareholders may approve or disapprove of certain directors with
their vote at annual meetings. The board
should be free to identify the individuals who will best serve the shareholders. Supporters of term limits say that limiting
the number of years that a director can serve on the board provides a built-in
mechanism to force turnover. A structure that specifically limits the period of
time a director can serve provides opportunities for recruiting directors with
new ideas and perspectives.
AmBeacon
will not support proposals to institute term limits.
B.
Executive /
Director compensation
a.
Incentive/Stock
option plans (establish, amend, add) - proponents contend that incentive/stock
option plans are designed to attract, hold and motivate management. Shareholders generally favor these plans, as
top managers should have a stake in their company that ties compensation to
performance. By aligning managements
interests with shareholders toward a goal of increasing shareholder value,
better returns usually result.
Opponents
contend that incentive/stock option plans may dilute the shareholders claim on
profits and assets and may lead to a shift in the balance of voting
control. Additionally, easily attainable
incentive goals may not provide the necessary incentive for management.
If
the board is independent and if the company has performed well over the
previous 3- or 5- year period, AmBeacon will generally support these
plans. However, AmBeacon will not
support plans that permit:
·
Dilution in
excess of the companys peer group, unless overall executive compensation
levels (including the value of the options) are at or below the peer group; or
·
Repricing/replacing
underwater options
b.
Discounted
stock options - options that may be exercised at prices below the stocks fair
market value on the award date.
Sometimes called non-qualified options, these options are granted in-the-money
or immediately exercisable for a profit.
AmBeacon does not support discounted stock options, as they do not give
management much incentive to increase share value, while the purpose of
granting stock options is to align executives interests with those of the
shareholders.
c.
Exchange of
underwater options - options with an exercise price higher than the market
price are considered underwater and, needless to say, unattractive. AmBeacon does not support the exchange of
underwater options that result in a financial gain to the participants since
other shareholders have no such protection from falling stock prices and since
executives would bear no risk if management is willing to bail them out when
the stock price falls. AmBeacon will
support the exchange of underwater options that do not result in a financial
gain to the participants.
d.
Cap or limit
executive and director pay - AmBeacon will not support capping or limiting
executive or director pay. Pay
flexibility is necessary to motivate and retain top quality executives and
align shareholder and management interests.
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e.
Link pay to
performance - Proponents contend that by linking pay to performance managements
interests will be aligned with shareholders.
Management with compensation packages containing little volatility or
risk may have a goal other than maximizing shareholder wealth. As a result, AmBeacon will support proposals
to link pay to performance. However,
AmBeacon will not support proposals requiring that an excessive portion (75% or
more) of equity compensation be performance based.
f.
Golden
parachute provisions - provide severance payments to top executives who are
terminated or demoted after a change in control (takeover). They provide some financial security to
executives relieving potential anxiety as they negotiate and impartially
evaluate future takeover bids. This
provision will allow executives to not oppose a merger that might be in the
best interests of the shareholders but may cost them their job. Parachutes may also benefit shareholders as
they aid in the attraction and retention of managers.
However,
opponents contend the existence of these provisions can discourage takeover
attempts, as significant sums may have to be paid to company executives. Executives are already well paid to manage
the company and should not have an extra reward. Additionally, shareholder approval is
generally not necessary for enactment of this provision.
Properly
conceived, golden parachutes can free management to act in the best interests
of shareholders. Often, however, it is
clearly an attempt to raise the cost to a third party of acquiring the
company. Other criteria for analyzing
the actual approval of parachute plans might include necessity, breadth of
participation, payout size, sensitivity of triggers and leveraged buyout
restrictions. If the board is
independent and the company has performed well over the previous 3- or 5-year
period, AmBeacon will support golden parachute provisions.
g.
Executive
incentive bonus plans - Section 162(m) of the Internal Revenue Code
of 1986, as amended, prohibits companies from deducting more than $1 million in
compensation paid to each of the top five executives, unless the compensation
is paid under a performance-based, shareholder approved plan. To maintain compliance, these
performance-based plans require shareholder approval every five years.
Cash
bonus plans can be an important part of an executives overall pay package,
along with stock-based plans tied to long-term total shareholder returns. Over
the long term, stock prices are an excellent indicator of management
performance. However, other factors, such as economic conditions and investor
reaction to the stock market in general, and certain industries in particular,
can greatly impact the companys stock price. As a result, a cash bonus plan
can effectively reward individual performance and the achievement of business
unit objectives that are independent of short-term market share price fluctuations.
Moreover, preservation of the full deductibility of all compensation paid
reduces the companys corporate tax obligation.
Generally,
AmBeacon will support these performance-based plans. However, if the
compensation committee is not 100% independent, the proposal will be decided on
a case-by-case basis.
h.
Supplemental
executive retirement plans (SERPs) - Supplemental executive retirement plans
(SERPs) provide supplemental retirement benefits for executives in excess of
IRS compensation limitations. SERPs are unfunded plans and payable out of the
companys general assets. The ability of
a company to offer a SERP could affect the companys ability to compete for
qualified senior executives, and could place the company at a competitive
disadvantage to its peers.
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Opponents
contend that such benefits are unnecessary given the high levels of executive
compensation at most companies.
Generally,
AmBeacon will support SERPs. However, if the compensation committee is not 100%
independent, the proposal will be decided on a case-by-case basis.
i.
Shareholder
Proposal Regarding Advisory Vote on Executive Compensation - Proponents are
urging boards to adopt a policy to allow shareholders an opportunity to vote on
an advisory management resolution at each annual meeting to ratify compensation
of the named executive officers (NEOs) as set forth in the proxy statements
summary compensation table. The vote
would be non-binding and would not affect any compensation paid or awarded to
any NEO.
If
the board is independent, AmBeacon will support management. All other proposals will be decided on a
case-by-case basis.
C.
RIC Contracts
and Policies
a.
Investment
Advisory Contracts - All proposals regarding new investment advisory contracts
or amendments to existing contracts will be reviewed on a case-by-case
basis. Due to the complex and varied
nature of these proposals, the principal emphasis will be on the financial
ramifications of the proposal for AmBeacons shareholders.
b.
Distribution
Plans - All proposals pertaining to a RICs distribution plan will be reviewed
on a case-by-case basis, weighing any proposed additional fees to be paid by
shareholders against the potential benefits.
The analysis will foremost consider the effects of the proposal on the
shareholders.
c.
Fundamental
Objectives / Policies - All proposals regarding the fundamental investment
objectives or policies of a RIC will be reviewed on a case-by-case basis. Due to the complex and varied nature of these
proposals, the principal emphasis will be on the financial ramifications of the
proposal for the shareholders.
D.
Confidential
voting AmBeacon believes that confidential voting restricts communication
between shareholders and management.
Additionally, the system of free and open proxy voting protects
shareholder interests and ensures that the fiduciary obligations of investment
funds are met. These representatives are
then fully accountable to their constituents.
Confidential voting is also expensive, as voting must be tabulated by a
third party before presentation.
AmBeacon will not support confidential voting. Management cannot address shareholder
concerns if they cannot identify the dissenting voters. Undue pressure will not be condoned but our
concern is that communication might be diminished during a time when
shareholders are considering significant issues. Implementing confidential voting is not an
acceptable tradeoff for the potential loss of open dialogue.
E.
Supermajority-voting
provisions - Proponents contend that a broad agreement should be reached on
issues that may have a significant impact on the company. Supermajority vote requirements usually
require a level of voting approval in excess of a simple majority of the
outstanding shares. Usually this range
is from 66% to 80%, but in some cases even higher.
Opponents
contend that supermajority-voting provisions detract from a simple majoritys
power to enforce its will. In many
cases, the supermajority requirement will make it impossible to repeal or enact
proposals due to the number of votes needed.
Matters of corporate policy, a sale of assets or a sale of the entire
company should ordinarily only require a majority of shareholders.
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AmBeacon
will support supermajority provisions up to 67%. All situations regarding supermajority-voting
provisions larger than 67% will be reviewed on a case-by-case basis.
F.
Right to call a
special meeting Proponents seek to change companys bylaws and other
appropriate governing documents to allow shareholders of between 10% and 25% of
outstanding common stock to call a special meeting. Proponents believe special meetings will
allow shareholders to vote on urgent matters that may arise between regularly
scheduled meetings.
Opponents
contend that typically company regulations allow for majority shareholders to
call special meetings which is a reasonable threshold in order to avoid the
expense of unnecessary meetings.
AmBeacon
will support these proposals if proposed by management and the board is
independent. However, if proposed by
shareholders, AmBeacon will support proposals for the right to call a special
meeting by shareholders of 30% or greater of outstanding common stock.
G.
Anti-takeover
proposals Poison pills, preemptive rights, fair pricing and dual class voting
provisions force potential bidders to deal directly with the board of
directors. The boards role is to
protect shareholders against unfair and unequal treatment and guard against
partial tender offers and other abusive tactics. Fair and equitable offers will not be
prevented and will equally benefit all shareholders.
a.
Poison pills (Shareholder
rights plans) - protect shareholders from coercive and unfair offers. Therefore, all shareholders should receive a
better/fairer offer. If the board is
independent, AmBeacon will support poison pills. If the board is not
independent, each situation involving poison pills will be decided on a
case-by-case basis.
b.
Preemptive
rights - enable shareholders to retain the same percentage of ownership during
additional stock offerings. This
eliminates the effect of dilution on the shareholder. AmBeacon will support preemptive rights.
c.
Fair pricing
provisions - require that if offers are not approved by the board, the bidder
must pay the same fair price for all shares purchased. The fair price is usually defined as the
highest price paid by the bidder for shares acquired before the start of the
tender offer. This provision attempts to
prevent two-tiered offers in which the bidder offers a premium for sufficient
shares to gain control then offers a much lower price to the remaining holders.
AmBeacon will support fair pricing
provisions.
d.
Dual class
voting provisions - create unequal voting rights among different
shareholders. These provisions allow
companies to raise capital and expand while letting management maintain control
without fear of being acquired. However,
these provisions enable management to become entrenched, as it is an
anti-takeover mechanism. With management
controlling the voting power, no one will pay a premium for shares of a company
when there is no way for them to obtain voting control of the company. AmBeacon will not support dual class voting
provisions.
H.
Stock related
proposals
a.
Increase
authorized common/preferred stock - A request for additional shares of stock
was, in the past, considered a routine voting item. Companies usually state it is for a specific
use, such as a stock split, acquisition or for general corporate purposes. However, an abundance of
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authorized
but unissued shares can become an anti-takeover measure, such as implementing a
poison pill or placing a large block of stock with a friendly holder to
maintain control.
If
the board is independent, AmBeacon will support increases in common/preferred
stock. The authorization will give
companies the ability and flexibility to finance corporate growth. If the board is not independent, AmBeacon
will not support increases in common/preferred stock.
b.
Targeted share
placements - the issuance of a specific block of company securities to a
friendly shareholder. These placements
are often used to defend against an unfriendly takeover or to obtain favorable
financing and may be executed using common stock, preferred stock or
convertible securities. Targeted share
placements are often less expensive to execute than issuing stock, they do not
require the high interest rates of traditional debt and a placement can be
structured for the benefit of the limited number of parties. Additionally, share placements can be
executed fairly quickly and shareholder approval is not required.
Opponents
contend targeted placements give selected shareholders an unfair access to
valuable securities while diluting current shareholders proportional ownership
and voting interests. Additionally,
critics contend that not only do targeted share placements serve to entrench
management, but also the holder of the share placement may have a senior claim
or return from company assets.
All
situations regarding targeted share placements will be reviewed on a
case-by-case basis. Since such stock
could be used to dilute the ownership rights of current shareholders,
shareholders should have the opportunity to analyze the proposal to determine
whether it is in their best economic interests.
I.
Mergers,
Acquisitions, Restructurings - These transactions involve fundamental changes
in the structure and allocation of a companys assets. Financial considerations are foremost in
these transactions but ERISA fiduciaries are not obligated to take an offer if
they feel the long-term interests of AmBeacon, as a shareholder will be best
served by the company continuing as is.
All
situations regarding mergers, acquisitions, or restructuring will be reviewed
on a case-by-case basis. Due to the
complexity and company-specific nature of these proposals, the principal
emphasis will be on the financial ramifications of the proposal.
5.
Other Business
AmBeacon will support management with respect to Other Business.
6.
Adjourn Meeting
AmBeacon will support management with respect to proposals to adjourn the
shareholder meeting.
All
other issues will be decided on a case-by-case basis. As with other non-routine proposals,
decisions will be based primarily on management and board responsiveness to
enhancing shareholder wealth.
VOTING
PROCEDURES
1.
Voting
AmBeacon has retained a proxy voting consultant (the Consultant) to provide
assistance regarding the objective review and voting of proxies on any assets
held by the ETF. The Consultant has been
instructed by AmBeacon to vote proxies in accordance with the Voting Policies
set forth above, unless it is notified to vote otherwise by AmBeacon in writing. AmBeacon may decide to instruct the
Consultant to vote in a manner different than specified in the Voting Policies
if it determines that such a variance from the Voting Policies would be in the
best interests of shareholders of the ETF.
In
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making
such a determination, AmBeacon will conduct its analysis of the proxy proposal,
which may include, among other things, discussing the issue with sub-advisors
holding the security to determine their recommended voting position. Issues requiring analysis on a case-by-case
basis will be voted according to the Consultants recommendation when all
accounts for which AmBeacon is voting own in the aggregate less than 1% of the
companys outstanding shares and less than $3 million of the companys market
capitalization.
Except
as otherwise noted, items to be evaluated on a case-by-case basis and proposals
not contemplated by the Voting Policies will be assessed by AmBeacon. In these situations, AmBeacon will use its
judgment in directing the Consultant to vote in the best interests of the
shareholders of the ETF and will adopt changes to the Voting Policies when
appropriate.
2.
Conflicts of
Interest - If AmBeacon knows that a vote presents a material conflict between
the interests of: (a) shareholders of the ETF and (b) an investment
adviser (including AmBeacon) to the ETF or any of its affiliated persons,
AmBeacon will ask the ETFs Board of Trustees to provide voting
instructions. This may result in
AmBeacon voting differently for the ETF than for other accounts.
3.
Securities on
Loan If the ETF engages in securities lending, AmBeacon will implement the
following procedures to determine whether to vote securities on loan. AmBeacon has instructed the Consultant to
provide notification of the occurrence of a future shareholder meeting prior to
the record date. AmBeacon will determine
whether or not to recall shares of the applicable security that are on loan
with the intent of voting such shares in accordance with the Voting Policies,
based on factors including the nature of the meeting (i.e., annual or special),
the percentage of the proxy issuers outstanding securities on loan, any other
information regarding the proxy proposals of which AmBeacon may be aware, and
the loss of securities lending income to the ETF as a result of recalling the
shares on loan.
Lazard Asset Management LLC
Summary of Proxy Voting Policies
A.
Introduction
Lazard
Asset Management LLC and Lazard Asset Management (Canada), Inc. (together,
Lazard) provide investment management services for client accounts, including
proxy voting services. As a fiduciary, Lazard is obligated to vote proxies in
the best interests of its clients. Lazard has developed a structure that is
designed to ensure that proxy voting is conducted in an appropriate manner,
consistent with clients best interests, and within the framework of this Proxy
Voting Policy (the Policy). Lazard has adopted this Policy in order to
satisfy its fiduciary obligation and the requirements of Rule 206(4)-6
under the Investment Advisers Act of 1940, as amended.
Lazard
manages assets for a variety of clients, including individuals, Taft-Hartley
plans, governmental plans, foundations and endowments, corporations, and
investment companies and other collective investment vehicles. To the extent
that proxy voting authority is delegated to Lazard, Lazards general policy is
to vote proxies on a given issue the same for all of its clients. This Policy
is based on the view that Lazard, in its role as investment adviser, must vote
proxies based on what it believes will maximize shareholder value as a
long-term investor, and the votes that it casts on behalf of all its clients
are intended to accomplish that objective. This Policy recognizes that there
may be times when meeting agendas or proposals may create the appearance of a
material conflict of interest for Lazard. When such a conflict may appear,
Lazard will seek to alleviate the potential conflict by voting consistent with
pre-approved guidelines or, in situations where the pre-approved guideline is
to vote case-by-case, with the
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recommendation
of an independent source. More information on how Lazard handles conflicts is
provided in Section F of this Policy.
B.
Responsibility to Vote Proxies
Generally,
Lazard is willing to accept delegation from its clients to vote proxies. Lazard
does not delegate that authority to any other person or entity, but retains
complete authority for voting all proxies on behalf of its clients. Not all
clients delegate proxy-voting authority to Lazard, however, and Lazard will not
vote proxies, or provide advice to clients on how to vote proxies, in the
absence of a specific delegation of authority or an obligation under applicable
law. For example, securities that are held in an investment advisory account for
which Lazard exercises no investment discretion, are not voted by Lazard, nor
are shares that a client has authorized their custodian bank to use in a stock
loan program which passes voting rights to the party with possession of the
shares.
As discussed more fully in Section G of
this Policy, there may be times when Lazard determines that it would be in the
best interests of its clients to abstain from voting proxies.
C.
General Administration
1. Overview
Lazards
proxy voting process is administered by its Proxy Operations Department (ProxyOps),
which reports to Lazards Chief Operations Officer. Oversight of the process is
provided by Lazards Legal and Compliance Department and by a Proxy Committee
currently consisting of Managing Directors, portfolio managers and other
investment personnel of Lazard. The Proxy Committee meets at least
semi-annually to review this Policy and consider changes to it, as well as
specific proxy voting guidelines (the Approved Guidelines), which are
discussed below. Meetings may be convened more frequently (for example, to
discuss a specific proxy agenda or proposal) as requested by the Manager of
ProxyOps, any member of the Proxy Committee, or Lazards General Counsel or
Chief Compliance Officer. A representative of Lazards Legal and Compliance
Department must be present at all Proxy Committee meetings.
2. Role of Third Parties
To
assist it in its proxy-voting responsibilities, Lazard currently subscribes to
several research and other proxy-related services offered by Institutional
Shareholder Services, Inc. (ISS), one of the worlds largest providers
of proxy-voting services. ISS provides Lazard with its independent analysis and
recommendation regarding virtually every proxy proposal that Lazard votes on
behalf of its clients, with respect to both U.S. and non-U.S. securities. ISS provides other proxy-related
administrative services to Lazard. ISS receives on Lazards behalf all proxy
information sent by custodians that hold securities of Lazards clients. ISS
posts all relevant information regarding the proxy on its password-protected
website for Lazard to review, including meeting dates, all agendas and ISS
analysis. ProxyOps reviews this
information on a daily basis and regularly communicates with representatives of
ISS to ensure that all agendas are considered and proxies are voted on a timely
basis. ISS also provides Lazard with vote execution, recordkeeping and
reporting support services.
3. Voting Process
Lazards
Proxy Committee has approved specific proxy voting guidelines regarding various
common proxy proposals (the Approved Guidelines). As discussed more fully
below in Section D of this Policy,
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depending
on the proposal, an Approved Guideline may provide that Lazard should vote for
or against the proposal, or that the proposal should be considered on a
case-by-case basis.
Where
the Approved Guideline for a particular type of proxy proposal is to vote on a
case-by case basis, Lazard believes that input from a portfolio manager or
research analysts with knowledge of the issuer and its securities
(collectively, Portfolio Management) is essential. Portfolio Management is,
in Lazards view, best able to evaluate the impact that the outcome on a
particular proposal will have on the value of the issuers shares.
Consequently, the Manager of ProxyOps seeks Portfolio Managements
recommendation on how to vote all such proposals. Similarly, with respect to
certain Lazard strategies, as discussed more fully in Sections F and G below,
the Manager of ProxyOps will consult with Portfolio Management to determine
when it would be appropriate to abstain from voting.
In
seeking Portfolio Managements recommendation, the Manager of ProxyOps provides
ISS recommendation and analysis. Portfolio Management provides the Manager of
ProxyOps with its recommendation and the reasons behind it. ProxyOps will
generally vote as recommended by Portfolio Management, subject to certain
strategy- specific situations or situations where there may appear to be a
material conflict of interest, in which case an alternative approach may be
followed. (See Sections F and G below.) Depending on the facts surrounding a
particular case-by-case proposal, or Portfolio Managements recommendation on a
case-by-case proposal, the Manager of ProxyOps may consult with Lazards Chief
Compliance Officer or General Counsel, and may seek the final approval of the
Proxy Committee regarding Portfolio Managements recommendation. If necessary,
and in cases where there is a possibility of a split vote among Portfolio
Management teams as described in Section G.1. below, a meeting of the
Proxy Committee will be convened to discuss the proposal and reach a final
decision on Lazards vote.
Subject
to certain strategy-specific situations, ProxyOps generally votes all routine
proposals (described below) according to the Approved Guidelines. For
non-routine proposals where the Approved Guideline is to vote for or against,
ProxyOps will provide Portfolio Management with both the Approved Guideline, as
well as ISS recommendation and analysis. Unless Portfolio Management disagrees
with the Approved Guideline for the specific proposal, ProxyOps will generally
vote the proposal according to the Approved Guideline. If Portfolio Management
disagrees, however, it will provide its reason for doing so. All the relevant
information will be provided to the Proxy Committee members for a final
determination of such non-routine items. It is expected that the final vote
will be cast according to the Approved Guideline, absent a compelling reason
for not doing so, and subject to situations where there may be the appearance
of a material conflict of interest or certain strategy-specific situations, in
which case an alternative approach may be followed. (See Sections F and G,
below.)
D.
Specific Proxy Items
Shareholders
receive proxies involving many different proposals. Many proposals are routine
in nature, such as a non-controversial election of Directors or a change in a
companys name. Others are more complicated, such as items regarding corporate
governance and shareholder rights, changes to capital structure, stock option
plans and other executive compensation issues, mergers and other significant
transactions and social or political issues. Following are the Approved
Guidelines for a significant proportion of the proxy proposals on which Lazard
regularly votes. Of course, other proposals may be presented from time to time.
Those proposals will be discussed with the Proxy Committee to determine how
they should be voted and, if it is anticipated that they may re-occur, to adopt
an Approved Guideline. Certain strategy-specific considerations may result in
Lazard voting proxies other than according to Approved Guidelines, not voting
shares at all, issuing standing instructions to ISS on how to vote certain
proxy matters or other differences from how Lazard votes or handles its proxy
voting. These considerations are discussed in more detail in Section G,
below.
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1.
Routine Items
Lazard
generally votes routine items as recommended by the issuers management and
board of directors, and against any shareholder proposals regarding those
routine matters, based on the view that management is in a better position to
evaluate the need for them. Lazard considers routine items to be those that do
not change the structure, charter, bylaws, or operations of an issuer in any
way that is material to shareholder value. Routine items generally include:
·
routine election or re-election of directors;
·
appointment or election of auditors, in the absence of any controversy
or conflict regarding the auditors;
·
issues relating to the timing or conduct of annual meetings; and
·
name changes.
2.
Corporate Governance
and Shareholder Rights Matters
Many
proposals address issues related to corporate governance and shareholder
rights. These items often relate to a board of directors and its committees,
anti-takeover measures, and the conduct of the companys shareholder meetings.
a.
Board of
Directors and Its Committees
Lazard
votes in favor of provisions that it believes will increase the effectiveness
of an issuers board of directors. Lazard believes that in most instances, a
board and the issuers management are in the best position to make the
determination how to best increase a boards effectiveness. Lazard does not
believe that establishing burdensome requirements regarding a board will
achieve this objective. Lazard has Approved Guidelines to vote:
·
For the establishment of an independent nominating committee, audit
committee or compensation committee of a board of directors;
·
For a requirement that a substantial majority (e.g. 2/3) of a US or UK
companys directors be independent;
·
On a case-by-case basis regarding the election of directors where the
board does not have independent key committees or sufficient independence;
·
For proposals that a boards committees be comprised solely of
independent directors or consist of a majority of independent directors;
·
For proposals to limit directors liability; broaden indemnification
of directors; and approve indemnification agreements for officers and
directors, unless doing so would affect shareholder interests in a specific
pending or threatened litigation; or for indemnification due to negligence in
these cases voting is on a case-by-case basis;
·
For proposals seeking to de-classify a board and Against proposals
seeking to classify a board;
·
On a case-by-case basis on all proposals relating to cumulative
voting;
·
Against shareholder proposals, absent a demonstrable need, proposing
the establishment of additional committees; and on a case-by-case basis
regarding the establishment of shareholder advisory committees.
·
Against shareholder proposals seeking union or special-interest
representation on the board;
·
Against shareholder proposals seeking to establish term limits or age
limits for directors;
·
On a case-by-case basis on shareholder proposals seeking to require
that the issuers chairman and chief executive officer be different
individuals;
·
Against shareholder proposals seeking to establish director
stock-ownership requirements; and
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·
Against shareholder proposals seeking to change the size of a board,
requiring women or minorities to serve on a board, or requiring two candidates
for each board seat.
b. Anti-takeover
Measures
Certain
proposals are intended to deter outside parties from taking control of a
company. Such proposals could entrench management and adversely affect
shareholder rights and the value of the companys shares. Consequently, Lazard
has adopted Approved Guidelines to vote:
·
Against proposals to adopt supermajority vote requirements, or
increase vote requirements, for mergers or for the removal of directors;
·
On a case-by-case basis regarding shareholder rights plans (also known
as poison pill plans) and For proposals seeking to require all poison pill
plans be submitted to shareholder vote;
·
Against proposals seeking to adopt fair price provisions and For
proposals seeking to rescind them;
·
Against blank check preferred stock; and
·
On a case-by-case basis regarding other provisions seeking to amend a
companys by-laws or charter regarding anti-takeover provisions.
c. Conduct of
Shareholder Meetings
Lazard
generally opposes any effort by management to restrict or limit shareholder
participation in shareholder meetings, and is in favor of efforts to enhance
shareholder participation. Lazard has therefore adopted Approved Guidelines to
vote:
·
Against proposals to adjourn meetings;
·
Against proposals seeking to eliminate
or restrict shareholders right to call a special meeting;
·
For proposals providing for confidential
voting;
·
Against efforts to eliminate or restrict
right of shareholders to act by written consent;
·
Against proposals to adopt supermajority
vote requirements, or increase vote requirements, and
·
On a case-by-case basis on changes to
quorum requirements.
3. Changes to Capital Structure
Lazard
receives many proxies that include proposals relating to a companys capital
structure. These proposals vary greatly, as each one is unique to the
circumstances of the company involved, as well as the general economic and
market conditions existing at the time of the proposal. A board and management
may have many legitimate business reasons in seeking to effect changes to the
issuers capital structure, including raising additional capital for
appropriate business reasons, cash flow and market conditions. Lazard generally
believes that these decisions are best left to management, absent apparent
reasons why they should not be. Consequently, Lazard has adopted Approved
Guidelines to vote:
·
For management proposals to increase or
decrease authorized common or preferred stock (unless it is believed that doing
so is intended to serve as an anti-takeover measure);
·
For stock splits and reverse stock
splits;
·
On a case-by-case basis on matters
affecting shareholder rights, such as amending votes-per-share;
·
On a case-by-case basis on management
proposals to issue a new class of common or preferred shares;
·
For management proposals to adopt or
amend dividend reinvestment plans;
·
Against changes in capital structure
designed to be used in poison pill plans; and
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·
On a case-by-case basis on proposals
seeking to approve or amend stock ownership limitations or transfer
restrictions.
4. Stock Option Plans and Other Executive
Compensation Issues
Lazard
supports efforts by companies to adopt compensation and incentive programs to
attract and retain the highest caliber management possible, and to align the
interests of a board, management and employees with those of shareholders.
Lazard favors programs intended to reward management and employees for
positive, long-term performance. However, Lazard will evaluate whether it
believes, under the circumstances, that the level of compensation is appropriate
or excessive. Lazard has Approved Guidelines to vote:
·
On a case-by-case basis regarding all
stock option plans;
·
Against restricted stock plans that do
not involve any performance criteria;
·
For employee stock purchase plans;
·
On a case-by-case basis for stock
appreciation rights plans;
·
For deferred compensation plans;
·
Against proposals to approve executive
loans to exercise options;
·
Against proposals to re-price underwater
options;
·
On a case-by-case basis regarding
shareholder proposals to eliminate or restrict severance agreements, and For
proposals to submit severance agreements to shareholders for approval; and
Against proposals to limit executive compensation or to require executive
compensation to be submitted for shareholder approval, unless, with respect to
the latter submitting compensation plans for shareholder approval is required
by local law or practice.
5. Mergers and Other Significant Transactions
Shareholders
are asked to consider a number of different types of significant transactions,
including mergers, acquisitions, sales of all or substantially all of a companys
assets, reorganizations involving business combinations and liquidations. Each
of these transactions is unique. Therefore, Lazards Approved Guideline is to
vote on each of these transactions on a case-by-case basis.
6. Social and Political Issues
Proposals
involving social and political issues take many forms and cover a wide array of
issues. Some examples are: adoption of principles to limit or eliminate certain
business activities, or limit or eliminate business activities in certain
countries; adoption of certain conservation efforts; reporting of charitable
contributions or political contributions or activities; or the adoption of
certain principles regarding employment practices or discrimination policies.
These items are often presented by shareholders and are often opposed by the
companys management and its board of directors. Lazard generally supports the
notion that corporations should be expected to act as good citizens, but, as
noted above, is obligated to vote on social and political proposals in a way
that it believes will most increase shareholder value. As a result, Lazard has
adopted Approved Guidelines to vote on a case-by-case basis for most social and
political issue proposals. Lazard will generally vote for the approval of
anti-discrimination policies.
E.
Voting Non-U.S. Securities
Lazard
invests in non-U.S. securities on behalf of many clients. Laws and regulations
regarding shareholder rights and voting procedures differ dramatically across
the world. In certain countries, the requirements or restrictions imposed
before proxies may be voted may outweigh any benefit that could be realized by
voting the proxies involved. For example, certain countries restrict a
shareholders ability to
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sell
shares for a certain period of time if the shareholder votes proxies at a
meeting (a practice known as share blocking). In other instances, the costs
of voting a proxy (i.e., by being required to send a representative to the
meeting) may simply outweigh any benefit to the client if the proxy is voted.
Generally, the Manager of ProxyOps will consult with Portfolio Management to
determine whether they believe it is in the interest of the clients to vote the
proxies. In these instances, the Proxy Committee will have the authority to
decide that it is in the best interest of its clients not to vote the proxies.
There
may be other instances where Portfolio Management may wish to refrain from
voting proxies (See Section G.1. below). Due to the nature of the
strategy, a decision to refrain from voting proxies for securities held by the
Korea Corporate Governance strategy managed by Lazard (KCG), certain Japanese
securities or emerging market securities will generally be determined by
Portfolio Management. (See Section G.1. below.)
F.
Conflicts of Interest
1. Overview
Lazard
is required to vote proxies in the best interests of its clients. It is
essential, therefore, that material conflicts of interest or the appearance of
a material conflict be avoided.
Potential
conflicts of interest are inherent in Lazards organizational structure and in
the nature of its business. Following are examples of situations that could
present a conflict of interest or the appearance of a conflict of interest:
·
Lazard Frères & Co. LLC (LF&Co.),
Lazards parent and a registered broker-dealer, or an investment banking
affiliate has a relationship with a company the shares of which are held in
accounts of Lazard clients, and has provided services to the company with
respect to an upcoming significant proxy proposal (i.e., a merger or other
significant transaction);
·
Lazard serves as an investment adviser
for a company the management of which supports a particular proposal, and
shares of the company are held in accounts of Lazard clients;
·
Lazard serves as an investment adviser
for the pension plan of an organization that sponsors a proposal; or
·
A Lazard employee who would otherwise be
involved in the decision-making process regarding a particular proposal has a
material relationship with the issuer or owns shares of the issuer.
2. General Policy and Consequences of Violations
All
proxies must be voted in the best interest of each Lazard client, without any
consideration of the interests of any other Lazard client (unrelated to the
economic effect of the proposal being voted on share price), Lazard, LF&Co.
or any of their Managing Directors, officers, employees or affiliates. ProxyOps
is responsible for all proxy voting in accordance with this Policy after consulting
with the appropriate member or members of Portfolio Management, the Proxy
Committee and/or the Legal and Compliance Department. No other officers or
employees of Lazard, LF&Co. or their affiliates may influence or attempt to
influence the vote on any proposal. Doing so will be a violation of this
Policy. Any communication between an officer or employee of LF&Co. and an
officer or employee of Lazard trying to influence how a proposal should be
voted is prohibited, and is a violation of this Policy. Violations of this
Policy could result in disciplinary action, including letter of censure, fine
or suspension, or termination of employment. Any such conduct may also violate
state and Federal securities and other laws, as well as Lazards client
agreements, which could result in severe civil and criminal penalties being
imposed, including the violator being prohibited from ever working for any
organization engaged in a securities business. Every officer and employee of
Lazard who participates in any way in the decision-
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making
process regarding proxy voting is responsible for considering whether they have
a conflicting interest or the appearance of a conflicting interest on any
proposal. A conflict could arise, for example, if an officer or employee has a
family member who is an officer of the issuer or owns securities of the issuer.
If an officer or employee believes such a conflict exists or may appear to
exist, he or she should notify the Chief Compliance Officer immediately and,
unless determined otherwise, should not continue to participate in the
decision-making process.
3. Monitoring for Conflicts and Voting When a
Material Conflict Exists
Lazard
monitors for potential conflicts of interest when it is possible that a
conflict could be viewed as influencing the outcome of the voting decision.
Consequently, the steps that Lazard takes to monitor conflicts, and voting
proposals when the appearance of a material conflict exists, differ depending
on whether the Approved Guideline for the specific item is to vote for or
against, or is to vote on a case-by-case basis.
a. Where Approved Guideline Is For or Against
Most
proposals on which Lazard votes have an Approved Guideline to vote for or
against. Generally, unless Portfolio Management disagrees with the Approved
Guideline for a specific proposal, ProxyOps votes according to the Approved
Guideline. It is therefore necessary to consider whether an apparent conflict
of interest exists where Portfolio Management disagrees with the Approved
Guideline. When that happens, the Manager of ProxyOps will use its best efforts
to determine whether a conflict of interest or potential conflict of interest
exists by inquiring whether the company itself, or the sponsor of the proposal
is a Lazard client. If either is a Lazard client, the Manager of Proxy Ops will
notify Lazards Chief Compliance Officer, who will determine whether an actual
or potential conflict exists.
If
it appears that a conflict of interest exists, the Manager of ProxyOps will
notify the Proxy Committee, who will review the facts surrounding the conflict
and determine whether the conflict is material. Whether a conflict is material
will depend on the facts and circumstances involved. For purposes of this
Policy, the appearance of a material conflict is one that the Proxy Committee
determines could be expected by a reasonable person in similar circumstances to
influence or potentially influence the voting decision on the particular
proposal involved.
If
the Proxy Committee determines that there is no material conflict, the proxy
will be voted as outlined in this Policy. If the Proxy Committee determines
that a material conflict appears to exist, then the proposal will be voted
according to the Approved Guideline.
b. Where Approved Guideline Is Case-by-Case
In
situations where the Approved Guideline is to vote case-by-case and a material
conflict of interest appears to exist, Lazards policy is to vote the proxy
item according to the recommendation of an independent source, currently ISS.
The Manager of ProxyOps will use his best efforts to determine whether a
conflict of interest or a potential conflict of interest may exist by inquiring
whether the sponsor of the proposal is a Lazard client. If the sponsor is a
Lazard client, the Manager of Proxy Ops will notify Lazards Chief Compliance
Officer, who will determine whether some other conflict or potential conflict
exists.
If
it appears that a conflict of interest exists, the Manager of ProxyOps will
notify the Proxy Committee, who will review the facts surrounding the conflict
and determine whether the conflict is material. There is a presumption that
certain circumstances will give rise to a material conflict of interest or the
appearance of such material conflict, such as LF&Co. having provided
services to a company with
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respect
to an upcoming significant proxy proposal (i.e., a merger or other significant
transaction). If the Proxy Committee determines that there is no material conflict,
the proxy will be voted as outlined in this Policy. If the Proxy Committee
determines that a material conflict appears to exist, then the proposal will
generally be voted according to the recommendation of ISS, however, before
doing so, ProxyOps will obtain a written representation from ISS that it is not
in a position of conflict with respect to the proxy, which could exist if ISS
receives compensation from the proxy issuer on corporate governance issues in
addition to the advice it provides Lazard on proxies. If ISS is in a
conflicting position or if the recommendations of the two services offered by
ISS, the Proxy Advisor Service and the Proxy Voter Service, are not the same,
Lazard will obtain a recommendation from a third independent source that
provides proxy voting advisory services, and will defer to the majority
recommendation. If a recommendation for a third independent source is not
available and ISS is not in a conflicting position, Lazard will follow the
recommendation of ISS Proxy Advisor Service. In addition, in the event of a
conflict that arises in connection with a proposal for a Lazard mutual fund,
Lazard will either follow the procedures described above or vote shares for or
against the proposal in proportion to shares voted by other shareholders.
G.
Other Matters
1. Issues Relating to Management of Specific
Lazard Strategies
Due
to the nature of certain strategies managed by Lazard, specifically its
emerging markets and KCG strategies, there may be times when Lazard believes that
it may not be in the best interests of its clients to vote in accordance with
the Approved Guidelines, or to vote proxies at all. In certain markets, the
fact that Lazard is voting proxies may become public information, and, given
the nature of those markets, may impact the price of the securities involved.
With respect to the KCG strategy, Lazard may simply require more time to fully
understand and address a situation prior to determining what would be in the
best interests of shareholders. In these cases ProxyOps will look to Portfolio
Management to provide guidance on proxy voting rather than vote in accordance
with the Approved Guidelines.
Additionally,
particularly with respect to certain Japanese securities, Lazard may not
receive notice of a shareholder meeting in time to vote proxies for, or may
simply be prevented from voting proxies in connection with, a particular
meeting. Due to the compressed time frame for notification of shareholder
meetings and Lazards obligation to vote proxies on behalf of its clients,
Lazard may issue standing instructions to ISS on how to vote on certain
matters.
Different
strategies managed by Lazard may hold the same securities. However, due to the
differences between the strategies and their related investment objectives
(e.g., the KCG strategy and an emerging-markets strategy), one Portfolio
Management team may desire to vote differently than the other, or one team may
desire to abstain from voting proxies while the other may desire to vote
proxies. In this event, Lazard would generally defer to the recommendation of
the KCG team to determine what action would be in the best interests of its
clients. However, under unusual circumstances, the votes may be split between
the two teams. In such event, a meeting of the Proxy Committee will be held to
determine whether it would be appropriate to split the votes.
2. Stock Lending
As
noted in Section B above, Lazard does not vote proxies for securities that
a client has authorized their custodian bank to use in a stock loan program,
which passes voting rights to the party with possession of the shares. Under
certain circumstances, Lazard may determine to recall loaned stocks in order to
vote the proxies associated with those securities. For example, if Lazard
determines that the entity in possession of the stock has borrowed the stock
solely to be able to obtain control over the issuer of the stock by voting
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proxies,
Lazard may determine to recall the stock and vote the proxies itself. However,
it is expected that this will be done only in exceptional circumstances. In
such event, Portfolio Management will make this determination and ProxyOps will
vote the proxies in accordance with the Approved Guidelines.
H.
Review of Policy
The
Proxy Committee will review this Policy at least semi-annually to consider
whether any changes should be made to it or to any of the Approved Guidelines.
Questions or concerns regarding the Policy should be raised with Lazards
General Counsel or Chief Compliance Officer.
The
Bank of New York Mellon Corporation (parent company of The Boston Company Asset
Management, LLC)
Summary
of Proxy Voting Policy and Procedures
Adviser,
through its participation on BNY Mellons Proxy Policy Committee (PPC), has
adopted a Proxy Voting Policy, related procedures, and voting guidelines which
are applied to those client accounts over which it has been delegated the
authority to vote proxies. In voting proxies, Adviser seeks to act solely in
the best financial and economic interest of the applicable client. Adviser will carefully review proposals that
would limit shareholder control or could affect the value of a clients
investment. Adviser generally will
oppose proposals designed to insulate an issuers management unnecessarily from
the wishes of a majority of shareholders.
Adviser will generally support proposals designed to provide management
with short-term insulation from outside influences so as to enable them to
bargain effectively with potential suitors and otherwise achieve long-term
goals. On questions of social responsibility where economic performance does
not appear to be an issue, Adviser will attempt to ensure that management
reasonably responds to the social issues.
Responsiveness will be measured by managements efforts to address the
proposal including, where appropriate, assessment of the implications of the
proposal to the ongoing operations of the company. The PPC will pay particular attention to
repeat issues where management has failed in its commitment in the intervening
period to take actions on issues.
Adviser
recognizes its duty to vote proxies in the best interests of its clients. Adviser seeks to avoid material conflicts of
interest through its participation in the PPC, which applies detailed,
pre-determined proxy voting guidelines (the Voting Guidelines) in an
objective and consistent manner across client accounts, based on internal and
external research and recommendations provided by a third party vendor, and
without consideration of any client relationship factors. Further, Adviser and its affiliates engage a
third party as an independent fiduciary to vote all proxies for BNY Mellon
securities and affiliated mutual fund securities.
All proxy
voting proposals are reviewed, categorized, analyzed and voted in accordance
with the Voting Guidelines. These
guidelines are reviewed periodically and updated as necessary to reflect new
issues and any changes in our policies on specific issues. Items that can be categorized under the
Voting Guidelines will be voted in accordance with any applicable guidelines or
referred to the PPC, if the applicable guidelines so require. Proposals that
cannot be categorized under the Voting Guidelines will be referred to the PPC
for discussion and vote. Additionally,
the PPC may review any proposal where it has identified a particular company,
industry or issue for special scrutiny.
With regard to voting proxies of foreign companies, Adviser weighs the
cost of voting, and potential inability to sell the securities (which may occur
during the voting process) against the benefit of voting the proxies to
determine whether or not to vote.
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In evaluating
proposals regarding incentive plans and restricted stock plans, the PPC
typically employs a shareholder value transfer model. This model seeks to assess the amount of
shareholder equity flowing out of the company to executives as options are
exercised. After determining the cost of
the plan, the PPC evaluates whether the cost is reasonable based on a number of
factors, including industry classification and historical performance
information. The PPC generally votes
against proposals that permit the repricing or replacement of stock options
without shareholder approval or that are silent on repricing and the company
has a history of repricing stock options in a manner that the PPC believes is
detrimental to shareholders.
Adviser will
furnish a copy of its Proxy Voting Policy, any related procedures, and its
Voting Guidelines to each advisory client upon request. Upon request, Adviser will also disclose to
an advisory client the proxy voting history for its account after the
shareholder meeting has concluded.
Templeton Investment
Counsel, LLC
Proxy Voting Policies & Procedures
RESPONSIBILITY
OF INVESTMENT MANAGER TO VOTE PROXIES
Templeton Investment
Counsel, LLC (hereinafter Investment Manager) has delegated its
administrative duties with respect to voting proxies to the Proxy Group within
Franklin Templeton Companies, LLC (the Proxy Group), a wholly-owned
subsidiary of Franklin Resources, Inc. Franklin Templeton Companies, LLC
provides a variety of general corporate services to its affiliates, including
but not limited to legal and compliance activities. Proxy duties consist of
analyzing proxy statements of issuers whose stock is owned by any client
(including both investment companies and any separate accounts managed by
Investment Manager) that has either delegated proxy voting administrative
responsibility to Investment Manager or has asked for information and/or
recommendations on the issues to be voted. The Proxy Group will process proxy
votes on behalf of, and Investment Manager votes proxies solely in the
interests of, separate account clients, Investment Manager-managed mutual fund
shareholders, or, where employee benefit plan assets are involved, in the
interests of the plan participants and beneficiaries (collectively, Advisory
Clients) that have properly delegated such responsibility or will inform
Advisory Clients that have not delegated the voting responsibility but that
have requested voting advice about Investment Managers views on such proxy
votes. The Proxy Group also provides these services to other advisory
affiliates of Investment Manager.
HOW
INVESTMENT MANAGER VOTES PROXIES
Fiduciary Considerations
All
proxies received by the Proxy Group will be voted based upon Investment Managers
instructions and/or policies. To assist it in analyzing proxies, Investment
Manager subscribes to RiskMetrics Group (RiskMetrics), an unaffiliated third
party corporate governance research service that provides in-depth analyses of
shareholder meeting agendas, vote recommendations, record keeping and vote
disclosure services. In addition, Investment Manager subscribes to Glass Lewis &
Co., LLC (Glass Lewis), an unaffiliated third party analytical research firm,
to receive analyses and vote recommendations on the shareholder meetings of
publicly held U.S. companies. Although RiskMetrics and/or Glass Lewiss
analyses are thoroughly reviewed and considered in making a final voting
decision, Investment Manager does not consider recommendations from
RiskMetrics, Glass Lewis, or any other third party to be determinative of
Investment Managers ultimate decision. As a matter of policy, the officers,
directors and employees of Investment Manager and the Proxy Group will not be
influenced by outside sources whose interests conflict with the interests of
Advisory Clients.
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Conflicts of Interest
All
conflicts of interest will be resolved in the interests of the Advisory
Clients. Investment Manager is an affiliate of a large, diverse financial
services firm with many affiliates and makes its best efforts to avoid
conflicts of interest. However, conflicts of interest can arise in situations
where:
1.
The issuer is a client
(1)
of Investment Manager or its affiliates;
2.
The issuer is a vendor whose
products or services are material or significant to the business of Investment
Manager or its affiliates;
3.
The issuer is an entity
participating to a material extent in the distribution of investment products
advised, administered or sponsored by Investment Manager or its affiliates
(e.g., a broker, dealer or bank);
(2)
4.
The issuer is a significant
executing broker dealer;
(3)
5.
An Access Person
(4)
of Investment Manager or its affiliates also serves
as a director or officer of the issuer;
6.
A director or trustee of
Franklin Resources, Inc. or any of its subsidiaries or of a Franklin
Templeton investment product, or an immediate family member
(5)
of such director or trustee, also serves as an
officer or director of the issuer; or
7.
The issuer is Franklin
Resources, Inc. or any of its proprietary investment products.
Nonetheless, even though a potential conflict
of interest exists, the Investment Manager may vote in opposition to the
recommendations of an issuers management.
Material conflicts of interest are identified
by the Proxy Group based upon analyses of client, distributor, broker dealer
and vendor lists, information periodically gathered from directors and
officers, and information derived from other sources, including public filings. The Proxy Group gathers and analyzes this
information on a best efforts basis, as much of this information is provided
directly by individuals and groups other than the Proxy Group, and the Proxy
Group relies on the accuracy of the information it receives from such parties.
In situations where a material conflict of
interest is identified between the Investment Manager or one of its affiliates
and an issuer, the Proxy Group may defer to the voting recommendation of
RiskMetrics, Glass Lewis, or those of another independent third party provider
of proxy services or send the proxy directly to the relevant Advisory Clients
with the Investment Managers recommendation regarding the vote for
approval. If the conflict is not
resolved by the Advisory Client, the Proxy Group may refer the
(1)
For purposes of this section, a client does not include underlying investors
in a commingled trust, Canadian pooled fund, or other pooled investment vehicle
managed by the Investment Manager or its affiliates. Sponsors of funds sub-advised by Investment
Manager or its affiliates will be considered a client.
(2) The
top 40 distributors (based on aggregate 12b-1 distribution fees) will be
considered to present a potential conflict of interest. In addition, any insurance company that has
entered into a participation agreement with a Franklin Templeton entity to
distribute the Franklin Templeton Variable Insurance Products Trust or other
variable products will be considered to present a potential conflict of
interest.
(3) The
top 40 executing broker-dealers (based on gross brokerage commissions and
client commissions).
(4)
Access Person shall have the meaning provided under the current Code of
Ethics of Franklin Resources, Inc.
(5)
The term immediate family member means a persons spouse; child residing in
the persons household (including step and adoptive children); and any
dependent of the person, as defined in Section 152 of the Internal Revenue
Code (26 U.S.C. 152).
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matter, along with the recommended course of
action by the Investment Manager, if any, to a Proxy Review Committee comprised
of representatives from the Portfolio Management (which may include portfolio
managers and/or research analysts employed by Investment Manager), Fund
Administration, Legal and Compliance Departments within Franklin Templeton for
evaluation and voting instructions. The
Proxy Review Committee may defer to the voting recommendation of RiskMetrics,
Glass Lewis, or those of another independent third party provider of proxy
services or send the proxy directly to the relevant Advisory Clients.
Where
the Proxy Group or the Proxy Review Committee refer a matter to an Advisory
Client, it may rely upon the instructions of a representative of the Advisory
Client, such as the board of directors or trustees, a committee of the board,
or an appointed delegate in the case of a U. S. registered mutual fund, the
conducting officer in the case of
an
open-ended collective investment scheme formed as a Société dinvestissement à
capital variable
(SICAV), the Independent Review Committee for
Canadian investment funds, or a plan administrator in the case of an employee
benefit plan. The Proxy Group or the
Proxy Review Committee may determine to vote all shares held by Advisory
Clients in accordance with the instructions of one or more of the Advisory
Clients.
The
Proxy Review Committee may independently review proxies that are identified as
presenting material conflicts of interest; determine the appropriate action to
be taken in such situations (including whether to defer to an independent third
party or refer a matter to an Advisory Client); report the results of such
votes to Investment Managers clients as may be requested; and recommend
changes to the Proxy Voting Policies and Procedures as appropriate.
The
Proxy Review Committee will also decide whether to vote proxies for securities
deemed to present conflicts of interest that are sold following a record date,
but before a shareholder meeting date.
The Proxy Review Committee may consider various factors in deciding
whether to vote such proxies, including Investment Managers long-term view of
the issuers securities for investment, or it may defer the decision to vote to
the applicable Advisory Client.
Where
a material conflict of interest has been identified, but the items on which the
Investment Managers vote recommendations differ from Glass Lewis, RiskMetrics,
or another independent third party provider of proxy services relate
specifically to (1) shareholder proposals regarding social or
environmental issues or political contributions, (2) Other Business
without describing the matters that might be considered, or (3) items the
Investment Manager wishes to vote in opposition to the recommendations of an
issuers management, the Proxy Group may defer to the vote recommendations of
the Investment Manager rather than sending the proxy directly to the relevant
Advisory Clients for approval.
To
avoid certain potential conflicts of interest, the Investment Manager will
employ echo voting, if possible, in the following instances: (1) when a Franklin Templeton investment
company invests in an underlying fund in reliance on any one of Sections
12(d)(1)(E), (F), or (G) of the Investment Company Act of 1940, as
amended, or pursuant to an SEC exemptive order; (2) when a Franklin
Templeton investment company invests uninvested cash in affiliated money market
funds pursuant to an SEC exemptive order (cash sweep arrangement); or (3) when
required pursuant to an accounts governing documents or applicable law. Echo voting means that the Investment Manager
will vote the shares in the same proportion as the vote of all of the other
holders of the funds shares.
Weight Given Management
Recommendations
One
of the primary factors Investment Manager considers when determining the
desirability of investing in a particular company is the quality and depth of
that companys management. Accordingly, the recommendation of management on any
issue is a factor that Investment Manager considers in determining how proxies
should be voted. However, Investment Manager does not consider
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recommendations
from management to be determinative of Investment Managers ultimate decision.
As a matter of practice, the votes with respect to most issues are cast in
accordance with the position of the companys management. Each issue, however,
is considered on its own merits, and Investment Manager will not support the
position of a companys management in any situation where it determines that
the ratification of managements position would adversely affect the investment
merits of owning that companys shares.
THE PROXY GROUP
The
Proxy Group is part of the Franklin Templeton Companies, LLC Legal Department
and is overseen by legal counsel. Full-time staff members are devoted to proxy
voting administration and providing support and assistance where needed. On a
daily basis, the Proxy Group will review each proxy upon receipt as well as any
agendas, materials and recommendations that they receive from RiskMetrics,
Glass Lewis, or other sources. The Proxy Group maintains a log of all
shareholder meetings that are scheduled for companies whose securities are held
by Investment Managers managed funds and accounts. For each shareholder
meeting, a member of the Proxy Group will consult with the research analyst
that follows the security and provide the analyst with the meeting notice,
agenda, RiskMetrics and/or Glass Lewis analyses, recommendations and any other
available information. Except in situations identified as presenting material
conflicts of interest, Investment Managers research analyst and relevant
portfolio manager(s) are responsible for making the final voting decision
based on their review of the agenda, RiskMetrics and/or Glass Lewis analyses,
their knowledge of the company and any other information readily available. In
situations where the Investment Manager has not responded with vote
recommendations to the Proxy Group by the deadline date, the Proxy Group may
defer to the vote recommendations of an independent third party provider of
proxy services. Except in cases where
the Proxy Group is deferring to the voting recommendation of an independent
third party service provider, the Proxy Group must obtain voting instructions
from Investment Managers research analyst, relevant portfolio manager(s),
legal counsel and/or the Advisory Client or Proxy Review Committee prior to
submitting the vote. In the event that
an account holds a security that the Investment Manager did not purchase on its
behalf, and the Investment Manager does not normally consider the security as a
potential investment for other accounts, the Proxy Group may defer to the
voting recommendations of an independent third party service provider.
GENERAL
PROXY VOTING GUIDELINES
Investment
Manager has adopted general guidelines for voting proxies as summarized below.
In keeping with its fiduciary obligations to its Advisory Clients, Investment
Manager reviews all proposals, even those that may be considered to be routine
matters. Although these guidelines are to be followed as a general policy, in
all cases each proxy and proposal will be considered based on the relevant
facts and circumstances. Investment Manager may deviate from the general
policies and procedures when it determines that the particular facts and
circumstances warrant such deviation to protect the interests of the Advisory
Clients. These guidelines cannot provide
an exhaustive list of all the issues that may arise nor can Investment Manager
anticipate all future situations. Corporate governance issues are diverse and
continually evolving and Investment Manager devotes significant time and
resources to monitor these changes.
INVESTMENT
MANAGERS PROXY VOTING POLICIES AND PRINCIPLES
Investment
Managers proxy voting positions have been developed based on years of
experience with proxy voting and corporate governance issues. These principles
have been reviewed by various members of Investment Managers organization,
including portfolio management, legal counsel, and Investment
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Managers
officers. The Board of Directors of Franklin Templetons U.S.-registered mutual
funds will approve the proxy voting policies and procedures annually.
The
following guidelines reflect what Investment Manager believes to be good
corporate governance and behavior:
Board of Directors
:
The election
of directors and an independent board are key to good corporate governance.
Directors are expected to be competent individuals and they should be
accountable and responsive to shareholders. Investment Manager supports an
independent board of directors, and prefers that key committees such as audit,
nominating, and compensation committees be comprised of independent directors.
Investment Manager will generally vote against management efforts to classify a
board and will generally support proposals to declassify the board of
directors. Investment Manager will consider withholding votes from directors
who have attended less than 75% of meetings without a valid reason. While
generally in favor of separating Chairman and CEO positions, Investment Manager
will review this issue on a case-by-case basis taking into consideration other
factors including the companys corporate governance guidelines and
performance. Investment Manager evaluates proposals to restore or provide for
cumulative voting on a case-by-case basis and considers such factors as
corporate governance provisions as well as relative performance. The Investment Manager generally will support
non-binding shareholder proposals to require a majority vote standard for the
election of directors; however, if these proposals are binding, the Investment
Manager will give careful review on a case-by-case basis of the potential
ramifications of such implementation.
Ratification of Auditors
:
Investment
Manager will closely scrutinize the role and performance of auditors. On a
case-by-case basis, Investment Manager will examine proposals relating to
non-audit relationships and non-audit fees. Investment Manager will also
consider, on a case-by-case basis, proposals to rotate auditors, and will vote
against the ratification of auditors when there is clear and compelling
evidence of accounting irregularities or negligence attributable to the
auditors.
Management & Director
Compensation
:
A companys equity-based compensation plan
should be in alignment with the shareholders long-term interests. Investment Manager believes that executive
compensation should be directly linked to the performance of the company. Investment Manager evaluates plans on a
case-by-case basis by considering several factors to determine whether the plan
is fair and reasonable. Investment Manager reviews the RiskMetrics quantitative
model utilized to assess such plans and/or the Glass Lewis evaluation of the
plan. Investment Manager will generally oppose plans that have the potential to
be excessively dilutive, and will almost always oppose plans that are structured
to allow the repricing of underwater options, or plans that have an automatic
share replenishment evergreen feature. Investment Manager will generally
support employee stock option plans in which the purchase price is at least 85%
of fair market value, and when potential dilution is 10% or less.
Severance
compensation arrangements will be reviewed on a case-by-case basis, although
Investment Manager will generally oppose golden parachutes that are
considered excessive. Investment Manager will normally support proposals that
require that a percentage of directors compensation be in the form of common
stock, as it aligns their interests with those of the shareholders.
Anti-Takeover Mechanisms and
Related Issues
:
Investment Manager
generally opposes anti-takeover measures since they tend to reduce shareholder
rights. However, as with all proxy issues, Investment Manager conducts an
independent review of each anti-takeover proposal. On occasion, Investment
Manager may vote with management when the research analyst has concluded that
the proposal is not onerous and would not harm Advisory Clients interests as
stockholders. Investment Manager generally supports proposals that require
shareholder rights plans (poison pills) to be subject to a shareholder vote.
Investment Manager will closely evaluate shareholder rights plans on a
case-by-case basis to
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determine
whether or not they warrant support. Investment Manager will generally vote
against any proposal to issue stock that has unequal or subordinate voting
rights. In addition, Investment Manager generally opposes any supermajority
voting requirements as well as the payment of greenmail. Investment Manager
usually supports fair price provisions and confidential voting.
Changes to Capital Structure
:
Investment
Manager realizes that a companys financing decisions have a significant impact
on its shareholders, particularly when they involve the issuance of additional
shares of common or preferred stock or the assumption of additional debt.
Investment Manager will carefully review, on a case-by-case basis, proposals by
companies to increase authorized shares and the purpose for the increase.
Investment Manager will generally not vote in favor of dual-class capital
structures to increase the number of authorized shares where that class of
stock would have superior voting rights. Investment Manager will generally vote
in favor of the issuance of preferred stock in cases where the company
specifies the voting, dividend, conversion and other rights of such stock and
the terms of the preferred stock issuance are deemed reasonable. Investment
Manager will review proposals seeking preemptive rights on a case-by-case
basis.
Mergers and Corporate Restructuring
:
Mergers and acquisitions will be subject to
careful review by the research analyst to determine whether they would be
beneficial to shareholders. Investment Manager will analyze various economic
and strategic factors in making the final decision on a merger or acquisition.
Corporate restructuring proposals are also subject to a thorough examination on
a case-by-case basis.
Social and Corporate Policy Issues
:
As a
fiduciary, Investment Manager is primarily concerned about the financial
interests of its Advisory Clients. Investment Manager will generally give
management discretion with regard to social, environmental and ethical issues
although Investment Manager may vote in favor of those issues that are believed
to have significant economic benefits or implications.
Global Corporate Governance
:
Investment
Manager manages investments in countries worldwide. Many of the tenets
discussed above are applied to Investment Managers proxy voting decisions for
international investments. However, Investment Manager must be flexible in
these worldwide markets and must be mindful of the varied market practices of
each region. As experienced money managers, Investment Managers analysts are
skilled in understanding the complexities of the regions in which they
specialize and are trained to analyze proxy issues germane to their regions.
PROXY
PROCEDURES
The Proxy Group is fully cognizant of its
responsibility to process proxies and maintain proxy records pursuant to SEC rules and
regulations. In addition, Investment Manager understands its fiduciary duty to
vote proxies and that proxy voting decisions may affect the value of
shareholdings. Therefore, Investment Manager will generally attempt to
process every proxy it receives for all domestic and foreign securities.
However, there may be situations in which Investment Manager may be unable to
vote a proxy, or may chose not to vote a proxy, such as where: (i) a
meeting notice was received too late; (ii) there are fees imposed upon the
exercise of a vote and it is determined that such fees outweigh the benefit of
voting; (iii) there are legal encumbrances to voting, including blocking
restrictions in certain markets that preclude the ability to dispose of a
security if Investment Manager votes a proxy or where Investment Manager is
prohibited from voting by applicable law or other regulatory or market
requirements, including but not limited to, effective Powers of Attorney; (iv) the
Investment Manager held shares on the record date but has sold them prior to
the meeting date; (v) proxy voting service is not offered by the custodian
in the market; (vi) the Investment Manager believes it is not in the best
interest of the Advisory Client to vote the proxy for any other reason not
enumerated herein; or (vii) a security is subject to a securities lending
or similar program that has transferred legal title to the security to another
person.
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Investment Manager or its affiliates may, on behalf
of one or more of the registered investment companies advised by Investment
Manager or its affiliates, determine to use its best efforts to recall any
security on loan where Investment Manager or its affiliates (a) learn of a
vote on a material event that may affect a security on loan and (b) determine
that it is in the best interests of such registered investment companies to
recall the security for voting purposes. Investment Managers will not
generally make such efforts on behalf of other Advisory Clients, or notify such
Advisory Clients or their custodians that Investment Manager or its affiliates
has learned of such a vote.
Investment
Manager may vote against an agenda item where no further information is
provided, particularly in non-U.S. markets. For example, if Other Business is
listed on the agenda with no further information included in the proxy
materials, Investment Manager may vote against the item to send a message to
the company that if it had provided additional information, Investment Manager
may have voted in favor of that item. Investment Manager may also enter a withhold
vote on the election of certain directors from time to time based on individual
situations, particularly where Investment Manager is not in favor of electing a
director and there is no provision for voting against such director.
The
following describes the standard procedures that are to be followed with
respect to carrying out Investment Managers proxy policy:
1.
The Proxy Group will
identify all Advisory Clients, maintain a list of those clients, and indicate
those Advisory Clients who have delegated proxy voting authority to the
Investment Manager. The Proxy Group will
periodically review and update this list.
2.
All relevant information in
the proxy materials received (e.g., the record date of the meeting) will be
recorded immediately by the Proxy Group in a database to maintain control over
such materials.
3.
The Proxy Group will review
and compile information on each proxy upon receipt of any agendas, materials,
reports, recommendations from RiskMetrics and/or Glass Lewis, or other
information. The Proxy Group will then forward this information to the
appropriate research analyst and/or legal counsel for review and voting
instructions.
4.
In determining how to vote,
Investment Managers analysts and relevant portfolio manager(s) will
consider the General Proxy Voting Guidelines set forth above, their in-depth
knowledge of the company, any readily available information and research about
the company and its agenda items, and the recommendations put forth by
RiskMetrics, Glass Lewis, or other independent third party providers of proxy
services.
5.
The Proxy Group is
responsible for maintaining the documentation that supports Investment Managers
voting position. Such documentation may include, but is not limited to, any
information provided by RiskMetrics, Glass Lewis, or other proxy service
providers, and, especially as to non-routine, materially significant or
controversial matters, memoranda describing the position it has taken.
Additionally, the Proxy Group may include documentation obtained from the research
analyst, portfolio manager, legal counsel and/or the Proxy Review Committee.
6.
After the proxy is completed
but before it is returned to the issuer and/or its agent, the Proxy Group may
review those situations including special or unique documentation to determine
that the appropriate documentation has been created, including conflict of
interest screening.
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7.
The Proxy Group will attempt
to submit Investment Managers vote on all proxies to RiskMetrics for
processing at least three days prior to the meeting for U.S. securities and 10
days prior to the meeting for foreign securities. However, in certain foreign
jurisdictions it may be impossible to return the proxy 10 days in advance of
the meeting. In these situations, the Proxy Group will use its best efforts to
send the proxy vote to RiskMetrics in sufficient time for the vote to be
processed.
8.
The Proxy Group will file
Powers of Attorney in all jurisdictions that require such documentation on a
best efforts basis.
9.
The Proxy Group prepares
reports for each Advisory Client that has requested a record of votes cast. The
report specifies the proxy issues that have been voted for the Advisory Client
during the requested period and the position taken with respect to each issue.
The Proxy Group sends one copy to the Advisory Client, retains a copy in the
Proxy Groups files and forwards a copy to either the appropriate portfolio
manager or the client service representative. While many Advisory Clients
prefer quarterly or annual reports, the Proxy Group will provide reports for
any timeframe requested by an Advisory Client.
10.
If the Franklin Templeton Services,
LLC Fund Treasury Department learns of a vote on a material event that will
affect a security on loan from a proprietary registered investment company, the
Fund Treasury Department will notify Investment Manager and obtain instructions
regarding whether Investment Manager desires the Fund Treasury Department to
contact the custodian bank in an effort to retrieve the securities. If so
requested by Investment Manager, the Fund Treasury Department shall use its
best efforts to recall any security on loan and will use other practicable and
legally enforceable means to ensure that Investment Manager is able to fulfill
its fiduciary duty to vote proxies for Advisory Clients with respect to such
loaned securities. The Fund Treasury Department will advise the Proxy Group of
all recalled securities.
11.
The Proxy Group, in
conjunction with Legal Staff responsible for coordinating Fund disclosure, on a
timely basis, will file all required Form N-PXs, with respect to
proprietary registered investment company clients, disclose that its proxy
voting record is available on the web site, and will make available the
information disclosed in its Form N-PX as soon as is reasonably
practicable after filing Form N-PX with the SEC.
12.
The Proxy Group, in
conjunction with Legal Staff responsible for coordinating Fund disclosure, will
ensure that all required disclosure about proxy voting of the proprietary
registered investment company clients is made in such clients disclosure
documents.
13.
The Proxy Group will review
the guidelines of RiskMetrics and Glass Lewis, with special emphasis on the
factors they use with respect to proxy voting recommendations.
14.
The Proxy Group will
familiarize itself with the procedures of RiskMetrics that govern the
transmission of proxy voting information from the Proxy Group to RiskMetrics
and periodically review how well this process is functioning.
15.
The Proxy Group will
investigate, or cause others to investigate, any and all instances where these
Procedures have been violated or there is evidence that they are not being
followed. Based upon the findings of
these investigations, the Proxy Group, if practicable, will recommend
amendments to these Procedures to minimize the likelihood of the reoccurrence
of non-compliance.
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16.
At least annually, the Proxy
Group will verify that:
·
Each proxy or a sample of proxies received
has been voted in a manner consistent with these Procedures and the Proxy
Voting Guidelines;
·
Each proxy or sample of proxies received has
been voted in accordance with the instructions of the Investment Manager;
·
Adequate disclosure has been made to clients
and fund shareholders about the procedures and how proxies were voted; and
·
Timely filings were made with applicable
regulators related to proxy voting.
The
Proxy Group is responsible for maintaining appropriate proxy voting records.
Such records will include, but are not limited to, a copy of all materials
returned to the issuer and/or its agent, the documentation described above,
listings of proxies voted by issuer and by client, and any other relevant
information. The Proxy Group may use an outside service such as RiskMetrics to
support this function. All records will be retained for at least five years,
the first two of which will be on-site. Advisory Clients may request copies of
their proxy voting records by calling the Proxy Group collect at 1-954-527-7678,
or by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Advisory Clients may review Investment Managers proxy voting policies
and procedures on-line at www.franklintempleton.com and may request additional
copies by calling the number above. For
U.S. proprietary registered investment companies, an annual proxy voting record
for the period ending June 30 of each year will be posted to
www.franklintempleton.com no later than August 31 of each year. For proprietary Canadian mutual fund
products, an annual proxy voting record for the period ending June 30 of
each year will be posted to www.franklintempleton.ca no later than August 31
of each year. The Proxy Group will
periodically review web site posting and update the posting when
necessary. In addition, the Proxy Group
is responsible for ensuring that the proxy voting policies, procedures and
records of the Investment Manager are available as required by law and is
responsible for overseeing the filing of such policies, procedures and mutual
fund voting records with the SEC, the CSA and other applicable regulators.
As
of January 15, 2009
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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.
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
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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. 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.
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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:
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.
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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:
·
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.)
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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.
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
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debt
instruments. Such obligations generally have an original maturity not exceeding
thirteen months, unless explicitly noted.
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.
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
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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
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
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within the CCC category,
whereas issuers are only rated CCC without the use of modifiers.)
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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
Table of Contents
(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
(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 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*
(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 is incorporated by
reference from Post-Effective Amendment No. 4 to Registrants registration
statement filed on October 7, 2009
(3)
Form of Amended and Restated
Schedule II to the Custody Agreement*
2
Table of Contents
(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
(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 is incorporated by
reference from Post-Effective Amendment No. 4 to Registrants registration
statement filed on October 7, 2009
(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 is incorporated
by reference from Post-Effective Amendment No. 4 to Registrants registration
statement filed on October 7, 2009
(9)
Expense Limit Agreement for 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*
(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
3
Table of Contents
(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*
* 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
4
Table of Contents
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
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.
5
Table of Contents
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 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.
6
Table of Contents
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 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.
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.,
AQR Funds, BLDRS Index Fund Trust, Caldwell & Orkin Funds, Inc.,
Campbell Multi-Strategy Trust, Cook & Bynum Funds Trust, CornerCap
Group of Funds, Cullen Funds, DIAMONDS Trust, EGA Global Shares Trust,
Financial Investors Trust, Financial Investors Variable Insurance Trust,
Firsthand Funds, Forward Funds, Heartland Group, Inc., Henssler Funds, Inc.,
Holland Balanced Fund, IndexIQ Trust, Index IQ ETF Trust, Laudus Trust, Milestone Funds, MTB Group of
Funds, OOK, Inc., Pax World Funds, PowerShares QQQ 100 Trust Series 1,
SPDR Trust, MidCap SPDR Trust, Select Sector SPDR Trust, Stonebridge Funds, Inc.,
Stone Harbor Investment Funds, TDX Independence Funds, Inc., TXF Funds, Inc.,
Wasatch Funds, WesMark 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:
7
Table of Contents
Edmund J. Burke
|
Director
|
Spencer Hoffman
|
Director
|
Thomas A. Carter
|
President, Director
|
Jeremy O. May
|
Executive Vice President, Director
|
John C. Donaldson
|
Executive Vice President, Chief Financial Officer
|
Richard Hetzer
|
Executive Vice President
|
Diana M. Adams
|
Senior Vice President, Controller, Treasurer
|
Kevin J. Ireland
|
Senior Vice President, Director of Institutional
Sales
|
Mark R. Kiniry
|
Senior Vice President, National Sales
Director-Investments
|
Bradley J. Swenson
|
Senior Vice President, Chief Compliance Officer
|
Robert J. Szydlowski
|
Senior Vice President, Chief Technology Officer
|
Tané T. Tyler
|
Senior Vice President, Secretary, General Counsel
|
Erin Douglas
|
Vice President, Senior Associate Counsel
|
JoEllen Legg
|
Vice President, Associate Counsel
|
Steven Price
|
Vice President, Deputy Chief Compliance Officer
|
James Stegall
|
Vice President,
Institutional Sales Manager
|
* 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
(c)
Primary Subadvisers
American Beacon Advisors, Inc.
4151 Amon Carter Boulevard
Fort Worth, TX 76155
RiverPark Advisors, LLC
156 West 56th Street,
17th Floor
New York, NY 10019
McDonnell Investment Management, LLC
1515 W. 22nd Street, 11th Floor
8
Table of Contents
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
One Wall Street
New York, New York 10286
Item 34.
Management Services
Not Applicable.
Item 35.
Undertakings
None.
9
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 29th day of December 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
|
|
December 29, 2009
|
William M. Thomas
|
|
|
|
|
|
|
|
|
|
/s/ Bryan M. Hiser
|
|
Principal Financial Officer
|
|
December 29, 2009
|
Bryan M. Hiser
|
|
|
|
|
|
|
|
|
|
/s/ Bradford K. Gallagher*
|
|
Trustee
|
|
December 29, 2009
|
Bradford K. Gallagher
|
|
|
|
|
|
|
|
|
|
/s/ Charles H. Salisbury*
|
|
Trustee
|
|
December 29, 2009
|
Charles H. Salisbury
|
|
|
|
|
|
|
|
|
|
/s/ Dennis G. Schmal*
|
|
Trustee
|
|
December 29, 2009
|
Dennis G. Schmal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* By:
|
/s/ Kurt J. Decko
|
|
|
|
December 29, 2009
|
|
Kurt J. Decko
|
|
|
|
|
Pursuant to Power of Attorney
|
|
|
|
|
10
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