As filed with the Securities and Exchange Commission on October 16, 2015
Securities Act Registration No. 333-187668
Investment Company Act Reg. No. 811-22819
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 T
Pre-Effective Amendment No. __ £
Post-Effective Amendment No. 70 T
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 T
Amendment No. 71 T
(Check appropriate box or boxes.)
___________________________________
ETFis Series Trust I
(Exact Name of Registrant as Specified in Charter)
1540 Broadway, New York, NY 10036
(Address of Principal Executive Offices) (Zip Code)
(212) 593-4383
(Registrant’s Telephone Number, including Area Code)
ETFis Series Trust I
c/o Corporation Service Company
2711 Centerville Road, Suite 400
Wilmington, DE 19808
(Name and Address of Agent for Service)
with a copy to:
Jeffrey T. Skinner, Esq.
Kilpatrick Townsend & Stockton LLP
1001 W. Fourth Street
Winston-Salem, NC 27101
Phone: (336) 607-7512
Fax: (336) 734-2608
It is proposed that this filing will become effective (check appropriate box):
[X] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on _______________ pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on _______________ pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on _______________ pursuant to paragraph (a)(2) of Rule 485
PROSPECTUS | October 16, 2015
ActiveAlts Contrarian ETF
( Ticker: SQZZ )
a series of the
ETFis Series Trust I
The ActiveAlts Contrarian ETF (the “ Fund ”) is an actively managed exchange-traded fund (“ ETF ”). Shares of the Fund are listed on The NASDAQ Stock Market and trade at market prices, which may be different from the Fund’s net asset value per share.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
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Table of Contents
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ActiveAlts Contrarian ETF (Ticker: SqZZ)
The investment objective of the ActiveAlts Contrarian ETF (the “ Fund ”) is to seek current income and capital appreciation.
This table describes the fees and expenses that you may pay if you buy and hold shares (“ Shares ”) of the Fund. Most investors will incur customary brokerage commissions when buying or selling Shares of the Fund, which are not reflected in the table set forth below.
| Shareholder Fees (fees paid directly from your investment): | None |
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
| Management Fee | 1.55% | ||
| Distribution and/or Service (12b-1) Fees | 0.00% | ||
| Other Expenses 1 | 1.53% | ||
| Total Annual Fund Operating Expenses | 3.08% | ||
| Management Fee Waivers and Reimbursements 2 | -1.13% | ||
| Total Annual Fund Operating Expenses After Management Fee Waivers and Expense Reimbursements 2 | 1.95% |
| (1) | Expenses are based on estimated amounts for the current fiscal year. |
| (2) | The Fund’s sub-adviser, Active Alts Inc. (the “ Sub-Adviser ”), has entered into an Expense Limitation Agreement to limit the Fund’s total operating expenses (excluding dividend and interest expenses; taxes; brokerage commissions and other transaction-related expenses; extraordinary expenses; acquired fund fees and expenses; and payments, if any, under a Rule 12b-1 Distribution Plan) so that such expenses do not exceed 1.95% of the Fund’s average daily net assets through December 31, 2016. While the Sub-Adviser or the Fund may discontinue the Expense Limitation Agreement after the contractual period, it may only be terminated during its term with the approval of the Fund’s Board of Trustees (the “ Board ”). Pursuant to the Expense Limitation Agreement, the Adviser may recapture fees waived and operating expenses reimbursed for a period of three years following the fiscal year in which such reimbursement occurred; provided that such recapture may not cause the Fund’s total operating expenses to exceed the expense cap in place at the time of such waiver or reimbursement. |
Example. This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.
The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain at current levels. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
| 1 Year | 3 Years |
|
$204.75 |
$876.53 |
The Fund pays transaction costs, such as commissions, when it buys and sells securities or other instruments (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund Shares are held in a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the example, affect the Fund’s performance. The Fund is newly organized and, as of the date of the Prospectus, has not had any portfolio turnover.
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The Fund seeks to achieve its investment objective by primarily investing in exchange-traded U.S. equity securities (“ Equities ”) that the Sub-Adviser believes may be subject to a “short squeeze” (as described below). The Fund may also lend portfolio securities that the Sub-Adviser believes may become, based on its analysis, subject to a short squeeze.
In selecting securities for the Fund’s portfolio, the Sub-Adviser uses a proprietary investment process (described in more detail below) to identify Equities that it believes have a higher potential for capital appreciation as a result of a short squeeze. A “short squeeze” occurs when investors who have sold short shares of an equity security seek to rapidly cover or buy back the short position due to actual or perceived appreciation in the security, which may occur because of positive news or events related to the company, its market sector or the market generally. Often, the additional buying momentum created by short sellers covering their short positions escalates the increase in the price of the shares.
The Sub-Adviser’s process for identifying short squeeze opportunities involves analysis of both fundamental factors (e.g., quality of earnings, fundamental stability of business, etc.) and technical factors (e.g., price and volume characteristics, relative strength, etc.). Using this analysis, the Sub-Adviser seeks to identify securities where, in the opinion of the Sub-Adviser, short interest is significant, is increasing or is expected to increase, but is unjustified based on the Sub-Adviser’s analysis. The Sub-Adviser may also determine to lend out portfolio securities that the Sub-Adviser believes to be strong candidates for a short squeeze to short sellers and other market participants. The Fund will receive premium income in exchange for the securities it lends.
The Fund’s portfolio may be more heavily focused in different sectors or industries at different times depending on market conditions, and/or company, sector and industry outlooks. While the Fund is not limited with respect to its investments in any sector or industry, the Fund limits investments in a single issuer to no more than five percent (5%) of the total assets of the Fund and to no more than five percent (5%) of the security’s public float. In addition, the Fund will limit its stock investments to companies with a market capitalization of $250 million or more.
In general, the Fund will acquire positions that the Sub-Adviser believes, based on its analysis of markets, companies and sectors, offer substantial potential for capital appreciation or the opportunity for income. Conversely, the Fund will generally sell positions when the Sub-Adviser believes the security has met its target price, the Sub-Adviser’s outlook for a market, company or sector has changed, or the Sub-Adviser believes better opportunities are available. To the extent that the Sub-Adviser has not identified Equities suitable for investment, the Fund will be invested in cash or cash equivalents, such as money market funds, and at times the Fund’s investment in such investments may be significant.
The Fund is an actively managed ETF and thus does not seek to replicate the performance of a specific index. Instead, the Fund uses an active investment strategy in an effort to meet its investment objective. As a result of its trading strategy, the Fund expects to engage in frequent portfolio transactions that will likely result in higher portfolio turnover than many investment companies. Portfolio turnover is a ratio that indicates how often the securities in an investment company’s portfolio change during a year. A higher portfolio turnover rate indicates a greater number of changes, and a lower portfolio turnover rate indicates a smaller number of changes. Under normal circumstances, the anticipated annual portfolio turnover rate for the Fund is expected to be greater than 100%.
An investment in the Fund is subject to investment risks; therefore you may lose money by investing in the Fund. There can be no assurance that the Fund will be successful in meeting its investment objective. Generally, the Fund will be subject to the following risks:
Market Risk. Market risk refers to the risk that the value of securities in the Fund’s portfolio may decline due to daily fluctuations in the securities markets that are generally beyond the Sub-Adviser’s control, including economic conditions, adverse investor sentiment, poor management decisions, lower demand for a company’s goods and services and general equity market conditions. In a declining stock market, stock prices for all companies (including those in the Fund’s portfolio) may decline, regardless of their long-term prospects. Stocks tend to move in cycles, with periods when stock prices generally rise and periods when they generally decline. Exogenous forces may affect the Fund in ways that the Sub-Adviser may not be able to anticipate and/or create a trading strategy that will protect the underlying principal of the Fund.
Management Style Risk. The NAV of the Fund’s Shares changes daily based on the performance of the securities in which it invests. The ability of the Fund to meet its investment objective is directly related to the ability of the Sub-Adviser to accurately evaluate portfolio investments, measure market risk and appropriately react to current and developing market trends. There is no guarantee that the Sub-Adviser’s judgments about the attractiveness, value, and potential appreciation of particular investments in
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which the Fund invests will be correct or produce the desired results. If the Sub-Adviser fails to accurately evaluate portfolio investments, evaluate market risk or appropriately react to current and developing market conditions, the Fund’s share price may be adversely affected.
Risks Related to Investments in Significantly Shorted Stocks. The Fund’s investment strategy seeks to invest in stocks in which a significant amount of market participants have taken short positions. Market participants take short positions in stocks when they believe the value of these stocks will decline in the future. If these market participants are correct, the value of stocks in which the Fund invests will decrease, and the Fund will lose money on its investments.
Risk of Securities Lending. The Fund may lend portfolio securities to broker-dealers and other financial institutions provided that such loans are at all times secured by collateral that is at least equal to the market value, plus accrued interest, determined daily, of the loaned securities and such loans are callable at any time by the Fund. The advantage of such loans is that the Fund continues to receive the interest or dividends on the loaned securities, while at the same time earning interest on the collateral which is invested in short-term obligations. The Fund may pay reasonable finders’, administrative and custodial fees in connection with loans of its securities. There is no assurance as to the extent to which securities loans can be effected.
If the borrower fails to maintain the requisite amount of collateral, the loan automatically terminates, and the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. On termination of the loan, the borrower is required to return the securities to the Fund; any gains or loss in the market price during the loan would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loan, in whole or in part as may be appropriate, to permit the exercise of such rights if the matters involved would have a material effect on the Fund’s investment in the securities which are the subject of the loan.
Default and Counterparty Risk. Securities lending exposes the Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Fund to suffer a loss. In addition, in the case of a default, the Fund could become subject to adverse market movements while replacement transactions are executed. Such “counterparty risk” is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Fund has concentrated its transactions with a single or small group of counterparties. The Fund does not have an internal credit function which evaluates the creditworthiness of its counterparties. The ability of the Fund to transact business with any one or number of counterparties, the lack of any meaningful and independent evaluation of such counterparties’ financial capabilities and the absence of a regulated market to facilitate settlement may increase the potential for losses by the Fund.
Medium Capitalization and Small Capitalization Companies Risk. The Fund may invest a significant portion of its assets in medium capitalization companies (which the Sub-Adviser defines as companies having a market capitalization of between $1 billion and $6 billion that are not in the top ten percent of the securities in their primary market when ranked in order of market capital) and also may invest a significant portion of its assets in small capitalization companies (which the Sub-Adviser defines as companies having a market capitalization of less than $1 billion). Investing in the securities of small and medium capitalization companies generally involves greater risk than investing in larger, more established companies. The securities of small and medium companies usually have more limited marketability and therefore may be more volatile and less liquid than securities of larger, more established companies or the market averages in general. Such companies also typically are subject to a greater degree of changes in earnings and prospects.
Large Capitalization Companies Risk. The Fund may invest in large capitalization companies (defined by the Sub-Adviser as companies with more than $6 billion in capitalization). Large capitalization companies may be unable to respond quickly to new competitive challenges, such as changes in technology and consumer tastes, and may not be able to attain the high growth rate of successful smaller companies, especially during extended periods of economic expansion.
Money Market Risk . In order to maintain sufficient liquidity, to implement investment strategies or for temporary defensive purposes, the Fund may invest a significant portion of its assets in shares of one or more money market funds. Generally, money market mutual funds are registered investment companies that seek to earn income consistent with the preservation of capital and maintenance of liquidity by investing primarily in high quality money market instruments, including, without limitation, U.S. government obligations, bank obligations and high-grade corporate instruments. An investment in a money market mutual fund is not insured or guaranteed by the Federal Deposit Insurance Company or any other governmental agency, entity or person. While investor losses in money market mutual funds have been rare, they are possible. In addition, the Fund will incur additional indirect expenses due to acquired fund fees and other costs to the extent it invests in shares of money market mutual funds.
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Equity Risk. Holders of common stock, or common stock equivalents, of any given issuer, are generally exposed to greater risk than holders of preferred stocks and debt obligations of the issuer because preferred stocks and debt obligations are typically entitled to receive payments and distributions in advance of common stock.
Limited Experience Risk. Although the executives and members of the Sub-Adviser have extensive experience in managing investments for clients, including corporations, non-taxable entities, investment companies and other business and private accounts, the Sub-Adviser has not managed this particular strategy before, which may limit the Sub-Adviser’s effectiveness.
Absence of Prior Active Market Risk. Although the Shares in the Fund are approved for listing on the NASDAQ Stock Market (the “ Exchange ”), there can be no assurance that an active trading market will develop and be maintained for the Shares of the Fund. As a new fund, there can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Fund may ultimately liquidate.
Fluctuation of NAV; Unit Premiums and Discounts. The NAV of the Fund’s Shares will generally fluctuate with changes in the market value of the Fund’s securities holdings. The market prices of Shares will generally fluctuate in accordance with changes in the Fund’s NAV and supply and demand of Shares on the Exchange or any other exchange on which Shares are traded. It cannot be predicted whether Shares will trade below, at or above their NAV. If an investor purchases Shares at a time when the market price is at a premium to the NAV of the Shares or sells at a time when the market price is at a discount to the NAV of the Shares, then the investor may sustain losses that are in addition to any losses caused by a decrease in NAV.
Costs of Buying or Selling Shares. Investors buying or selling Shares in the secondary market will pay brokerage commissions or other charges imposed by brokers as determined by that broker. Brokerage commissions are often a fixed amount and may be a significant proportional cost for investors seeking to buy or sell relatively small amounts of Shares. In addition, secondary market investors will also incur the cost of the difference between the price that an investor is willing to pay for Shares (the “bid” price) and the price at which an investor is willing to sell Shares (the “ask” price). Due to the costs of buying or selling Shares, including bid/ask spreads, frequent trading of Shares may significantly reduce investment results and an investment in Shares may not be advisable for investors who anticipate regularly making small investments.
Risks Related to Portfolio Turnover. As a result of its trading strategy, the Fund may sell portfolio securities without regard to the length of time they have been held and will likely have a higher portfolio turnover rate than other registered investment companies. Since portfolio turnover may involve paying brokerage commissions and other transaction costs, higher turnover generally results in additional Fund expenses. High rates of portfolio turnover may lower the performance of the Fund due to these increased costs and may also result in the realization of short-term capital gains. If the Fund realizes capital gains when portfolio investments are sold, the Fund must generally distribute those gains to shareholders, increasing the Fund’s taxable distributions. High rates of portfolio turnover in a given year would likely result in short-term capital gains that are taxed to shareholders at ordinary income tax rates. See “Federal Income Tax Matters”.
The Fund is new and therefore does not have a performance history for a full calendar year. Performance information for the Fund will be provided once it has annual returns for a full calendar year.
Virtus ETF Advisers LLC, is the Fund’s investment adviser. ETFis Series Trust I (the “ Trust ”) and the Adviser have engaged Active Alts Inc. as the Fund’s sub-adviser to manage the Fund’s investments, subject to the oversight and supervision of the Adviser and the Board of Trustees of the Trust (the “ Board ”).
The Fund’s portfolio manager is Brad Lamensdorf, founder and President of the Sub-Adviser.
PURCHASE AND SALE OF FUND SHARES
Unlike conventional investment companies, the Fund issues and redeems Shares on a continuous basis, at NAV, only in blocks of 25,000 Shares or whole multiples thereof (“ Creation Units ”). The Fund’s Creation Units may be issued and redeemed, principally in-kind for securities included in the Fund, only by certain large institutions, referred to as “ Authorized Participants ”, that enter into agreements with the Fund’s principal underwriter. Retail investors may acquire Shares on the Exchange through a broker-dealer.
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Shares of the Fund will trade on the Exchange at market price rather than NAV. As such, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
The Fund’s distributions are generally taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an IRA. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund, the Adviser or the Sub-Adviser may pay the intermediary for the sale of Fund Shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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ADDITIONAL INFORMATION REGARDING THE FUND’S INVESTMENT STRATEGIES AND RISKS
Additional Information Regarding the Fund’s Objective and Policies. The investment objective of the Fund may be changed by the Board without shareholder approval upon 60 days’ notice to the Fund’s shareholders. Certain fundamental and non-fundamental policies of the Fund are set forth in the Fund’s Statement of Additional Information (the “ SAI ”) under “Investment Restrictions”.
Additional Investments. In addition to the Fund’s principal investments, the Fund may also invest in exchange-traded American Depository Receipts (“ ADRs ”) and shares of other investment companies (e.g., mutual funds and ETFs).
Additional Information Regarding the Fund’s Investment Risks. In addition to the Fund’s principal investment risks, an investment in the Fund is also subject to the following risks:
ETF and other Investment Company Risk. The Fund may invest in actively managed or index-based ETFs or other investment companies. Through its positions in ETFs and other investment companies, the Fund will be subject to the risks associated with such vehicles’ investments, including the possibility that the value of the securities or instruments held by an ETF or other investment company could decrease (or increase). Investments in ETFs and other investment companies are also subject to the following additional risks:
Market Value Risk. The market value of an ETF’s shares may differ from its NAV. This difference in price may be due to the fact that the supply and demand in the market for ETF shares at any point in time is not always identical to the supply and demand in the market for the underlying basket of securities. Accordingly, there may be times when an ETF trades at a premium (creating the risk that the Fund pays more than NAV for an ETF when making a purchase) or discount (creating the risks that the Fund’s NAV is reduced for undervalued ETFs it holds, and that the Fund receives less than NAV when selling an ETF).
Tracking Risk. Index-based ETFs and other investment companies in which the Fund invests may not be able to replicate exactly the performance of the indices they track because the total return generated by the securities will be reduced by transaction costs incurred in adjusting the actual balance of the securities. In addition, index-based ETFs and other investment companies in which the Fund invests may incur expenses not incurred by their applicable indices. Certain securities comprising the indices may, from time to time, temporarily be unavailable, which may further impede an ETF’s or other investment company’s ability to track its applicable index or match its performance.
Investment Limitation. Under the Investment Company Act of 1940 Act, as amended (“ 1940 Act ”) the Fund may not acquire shares of an ETF or other investment company if, immediately after such acquisition, the Fund and its affiliated persons would hold more than 3% of the ETF’s or investment company’s total outstanding shares unless (i) the ETF or the Fund has received an order for exemptive relief from the 3% limitation from the Securities and Exchange Commission that is applicable to the Fund; and (ii) the ETF and the Fund take appropriate steps to comply with any conditions in such order. Accordingly, the 3% limitation may prevent the Fund from allocating its investments in the manner the Sub-Adviser considers optimal, or cause the Sub-Adviser to select an investment other than that which the Sub-Adviser considers optimal.
Expenses. To the extent the Fund invests in ETFs or other investment companies, your cost of investing in that Fund will generally be higher than the cost of investing directly in ETFs or other investment companies, because you will indirectly bear fees and expenses charged by the underlying ETFs and investment companies in which the Fund invests in addition to the Fund’s direct fees and expenses. Furthermore, the Fund’s investments in ETFs or other investment companies could affect the timing, amount, and character of the Fund’s distributions and therefore may increase the amount of your tax liability.
Sampling Risk . The index-based ETFs in which the Fund invests may utilize a representative sampling approach to track their respective underlying indices. ETFs that utilize a representative sampling approach are subject to an increased risk of tracking error because the securities selected for the ETF in the aggregate may vary from the investment profile of the underlying index. Additionally, if using a representative sampling approach, an ETF will typically hold a smaller number of securities than the underlying index, and as a result, an adverse development to an issuer of securities that the ETF holds could result in a greater decline in NAV than would be the case if the ETF held all of the securities in the underlying index.
American Depository Receipts Risk. ADRs are receipts typically issued by an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. Generally, ADRs are designed for use in the U.S. securities markets. Separate receipt registers are maintained in the United States and home country. In most cases, purchases occurring on a U.S. exchange would be reflected on the U.S. register. ADRs are denominated in U.S. dollars. The underlying securities of the ADRs in which the Fund may invest are usually denominated or quoted in currencies other than the U.S. dollar. Changes in foreign currency
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exchange rates affect the value of the ADR and, therefore, the value of the Fund’s portfolio, either positively or negatively (i.e., foreign currency risk). In addition to foreign currency risk, because an ADRs underlying securities are foreign securities, ADRs present certain risks not ordinarily associated with investments in securities of U.S. issuers (i.e., foreign security risks). These risks include social, political, economic or legal instability or other developments in the company’s home country (including war or other instability, expropriation of assets, nationalization and confiscatory taxation), withholding taxes on dividend or interest payments or capital transactions or other restrictions. Although the ADRs in which the Fund invests are listed on major U.S. exchanges, there can be no assurance that a market for these securities will be made or maintained or that any such market will be or remain liquid. If that happens, the Fund may have difficulty selling securities, or selling them quickly and efficiently at the prices at which they have been valued.
Redeeming Risk. Shares in the Fund may be redeemed only in Creation Units. Shares may not be redeemed in fractional Creation Units. Only certain large institutions that enter into agreements with the Distributor are authorized to transact in Creation Units with the Fund. These entities are referred to as “Authorized Participants”. All other persons or entities transacting in the Fund’s Shares must do so in the secondary market.
Early Closing Risk. An unanticipated early closing of the Exchange may result in a shareholder’s inability to buy or sell the Fund’s Shares on that day.
Liquidity Risk. Trading in Shares of the Fund may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Fund’s Shares inadvisable. In addition, trading in the Fund’s Shares is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules. There can be no assurance that the requirements necessary to maintain the listing of the Fund’s Shares will continue to be met or will remain unchanged.
Temporary Defensive Positions. In certain adverse market, economic, political or other conditions, the Fund may temporarily depart from its normal investment policies and strategy, provided that the alternative is determined by the Sub-Adviser to be in the best interest of the Fund. At such times, the Fund may invest in cash or cash equivalents, such as money market instruments, and, to the extent permitted by applicable law and the Fund’s investment restrictions, shares of other investment companies. Under such circumstances, the Fund may invest up to 100% of its assets in these investments and may do so for extended periods of time. To the extent that the Fund invests in money market instruments or other investment companies, shareholders of the Fund would indirectly pay both the Fund’s expenses and the expenses relating to those other investment companies with respect to the Fund’s assets invested in such investment companies. Under normal circumstances, however, the Fund may also hold money market instruments and/or shares of other investment companies for various reasons including to provide for funds awaiting investment, to accumulate cash for anticipated purchases of portfolio securities, to allow for shareholder redemptions and to provide for the Fund’s operating expenses. When the Fund takes a temporary defensive position, the Fund may not be able to achieve its investment objective.
Disclosure of Portfolio Holdings. The Fund’s portfolio holdings will be disclosed on the Trust’s website daily after the close of trading on the Exchange and prior to the opening of trading on the Exchange the following day.
The Fund’s investment adviser is Virtus ETF Advisers LLC, located at 1540 Broadway, New York, NY 10036. The Adviser was organized as a Delaware limited liability company in August 2013 and, since April 2015, has been a majority-owned subsidiary of Virtus Partners, Inc., which is a wholly-owned subsidiary of Virtus Investment Partners, Inc. (Ticker: VRTS) (together with its affiliates, “ Virtus ”). Virtus is a public company that operates a multi-manager asset management business and has substantial experience in the investment management and investment company industries. As of April 2015, on a collective basis, Virtus-affiliated registered investment advisers manage over $56.7 billion in assets (including over $43.9 billion in registered investment company assets).
The Adviser has served as the Fund’s investment adviser since the inception of the Fund’s operations pursuant to an investment advisory agreement with the Trust on behalf of the Fund. The Adviser also serves as investment adviser to the other series of the Trust.
Adviser Compensation. The Adviser is entitled to receive a monthly advisory fee at the annual rate of 0.06% of the Fund’s average daily net assets. The Adviser has not been paid any fees as of the date of this Prospectus.
The Adviser has engaged the Sub-Adviser to manage the Fund’s investments in accordance with the stated investment objective and policies of the Fund, subject to the oversight and supervision of the Adviser and the Board.
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INVESTMENT SUB-ADVISER
The Fund’s Sub-Adviser is Active Alts Inc., located at 6 Old Hill Road, Westport, CT 06880. The Sub-Adviser serves in that capacity pursuant to a sub-advisory contract (the “ Sub-Advisory Agreement ”) with the Adviser and the Trust, on behalf of the Fund, as approved by the Board. The Sub-Adviser makes day-to-day investment decisions for the Fund and selects broker-dealers for executing portfolio transactions, subject to the brokerage policies established by the Board.
The Sub-Adviser was organized as a Connecticut corporation in March 2015. The Sub-Adviser has served as the sub-adviser of the Fund since the inception of the Fund’s operations. The Sub-Adviser is owned by Brad Lamensdorf, its founder and President. Although the Fund is the first registered investment company managed by the Sub-Adviser, Mr. Lamensdorf has experience in portfolio management for registered investment companies, private investment funds and separate accounts.
Sub-Adviser Compensation. As full compensation for its services to the Fund, the Sub-Adviser receives monthly compensation from the Fund at the annual rate of 1.49% of the Fund’s average daily net assets.
Expense Limitation Agreement. The Sub-Adviser has entered into an Expense Limitation Agreement to limit the Fund’s total operating expenses (excluding dividend and interest expenses; taxes; brokerage commissions and other transaction-related expenses; extraordinary expenses; acquired fund fees and expenses; and payments, if any, under a Rule 12b-1 Distribution Plan) so that such expenses do not exceed 1.95% of the Fund’s average daily net assets through December 31, 2016. While the Sub-Adviser or the Fund may discontinue the Expense Limitation Agreement after the contractual period, it may only be terminated during its term with the approval of the Fund’s Board of Trustees (the “Board”). Pursuant to the Expense Limitation Agreement, the Adviser may recapture fees waived and operating expenses reimbursed for a period of three years following the fiscal year in which such reimbursement occurred; provided that such recapture may not cause the Fund’s total operating expenses to exceed the expense cap in place at the time of such waiver or reimbursement.
Disclosure Regarding Advisory Agreement Approval. A discussion regarding the basis for the Board’s most recent approval of the investment advisory agreements and investment sub-advisory agreements for the Fund will be available in the Fund’s first semi-annual report. You may obtain a copy of the Fund’s annual and semi-annual reports, without charge, upon request to the Fund.
The Fund’s portfolio manager is Brad Lamensdorf, who has managed the Fund since the inception of the Fund’s operations. The portfolio manager is primarily responsible for the day-to-day management of the Fund.
Mr. Lamensdorf is the founder and President of the Sub-Adviser. Mr. Lamensdorf also founded BHL Advisors, LLC in 2006 to, among other things, provide investment advice to a commodity-oriented hedge fund (BHL Partners, LP) primarily focused on gold equities. Since January 2013, Mr. Lamensdorf has also led the production of The Lamensdorf Market Timing Report, a newsletter which provides subscribers with technical analysis, and since 2009, Mr. Lamensdorf has been a portfolio manager and principal of Ranger Alternative Management, L.P., a registered investment adviser which provides trading and marketing strategy for short-only portfolios. From November 2007 to December 2012, Mr. Lamensdorf served as a principal of Precisian GP, LLC and a portfolio manager of Precisian Partners L.P., an options volatility manager. From 1998 to 2005, Mr. Lamensdorf served as a principal of Tarpon Capital Management, L.P. and the portfolio manager for Tarpon Partners, L.P., an un-leveraged long/short strategy that focused on relative strength. From 1992 to 1997, Mr. Lamensdorf worked on the equity trading desk for Taylor & Company, the trading unit of Bass Brothers Enterprises, in Fort Worth, Texas, where he co-managed an equity portfolio focused solely on short selling and derivatives strategies. Mr. Lamensdorf received a B.A. in Psychology from the University of Texas at Austin in 1992.
Additional Information. Additional information about the portfolio manager’s compensation, other accounts managed by the portfolio manager and the portfolio manager’s ownership of Shares of the Fund is available in the SAI.
The Fund is a diversified series of the Trust, an open-end management investment company organized as a Delaware statutory trust on September 20, 2012. The Board supervises the operations of the Trust and the Fund according to applicable state and federal law, and is responsible for the overall management of the Fund’s business affairs.
Virtus ETF Solutions LLC (the “ Administrator ”), located at 1540 Broadway, New York, NY 10036, serves as the Fund’s operational administrator. The Administrator supervises the overall administration of the Trust and the Fund including, among other
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responsibilities, the coordination and day-to-day oversight of the Fund’s operations, the service providers' communications with the Fund and each other and assistance with Trust, Board and contractual matters related to the Fund and other series of the Trust. The Administrator also provides persons satisfactory to the Board to serve as officers of the Trust.
accounting services administrator, Custodian and Transfer Agent
The Bank of New York Mellon (“ BNY Mellon ”), located at One Wall Street, New York, NY 10286, directly and through its subsidiary companies, provides necessary administrative, accounting, tax and financial reporting for the maintenance and operations of the Trust as the Fund’s accounting services administrator. BNY Mellon also serves as the custodian for the Fund’s assets, and serves as transfer agent and dividend paying agent for the Fund.
ETF Distributors LLC (the “ Distributor ”), located at 1540 Broadway, New York, NY 10036, serves as the principal underwriter of Creation Units for the Fund on an agency basis. The Distributor does not maintain a secondary market in the Fund’s Shares.
Independent Registered Public Accounting Firm
BBD, LLP, located at 1835 Market Street, Philadelphia, PA 19103, serves as the independent registered public accounting firm for the Trust and the Fund.
Kilpatrick Townsend & Stockton LLP, located at 1001 W. Fourth Street, Winston-Salem, NC, 27101, serves as counsel to the Trust.
The Fund pays all of its expenses not assumed by the Sub-Adviser. General Trust expenses that are allocated among and charged to the assets of the Fund and other series of the Trust are done so on a basis that the Board deems fair and equitable, which may be on a basis of relative net assets of the Fund and other series of the Trust or the nature of the services performed and relative applicability to the Fund and other series of the Trust.
DISTRIBUTION AND SERVICE PLANS
The Board has adopted on behalf of the Fund a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to finance activities primarily intended to result in the sale of Creation Units of the Fund or the provision of investor services. No Rule 12b-1 fees are currently paid by the Fund, and there are no current plans to impose these fees. However, in the event Rule 12b-1 fees are charged in the future, they will be paid out of the Fund’s assets, and over time these fees will increase the cost of your investment and may cost you more than certain other types of sales charges.
The Adviser and its affiliates may, out of their own resources, pay amounts to third parties for distribution or marketing services on behalf of the Fund. The making of these payments could create a conflict of interest for a financial intermediary receiving such payments.
DETERMINATION OF NET ASSET VALUE
The NAV of the Shares for the Fund is equal to the Fund’s total assets minus the Fund’s total liabilities divided by the total number of Shares outstanding. Interest and investment income on the Trust’s assets accrue daily and are included in the Fund’s total assets. Expenses and fees (including investment advisory, management, administration and distribution fees, if any) accrue daily and are included in the Fund’s total liabilities. The NAV that is published is rounded to the nearest cent; however, for purposes of determining the price of Creation Units, the NAV is calculated to five decimal places.
The pricing and valuation of portfolio securities is determined in good faith in accordance with procedures approved by, and under the direction of, the Board. In determining the value of the Fund’s assets, portfolio securities are generally valued at market using quotations from the primary market in which they are traded. The Fund normally uses third party pricing services to obtain market quotations.
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Securities and assets for which market quotations are not readily available or which cannot be accurately valued using the Fund’s normal pricing procedures are valued by the Trust’s Fair Value Pricing Committee at fair value as determined in good faith under policies approved by the Board. Fair value pricing may be used, for example, in situations where (i) portfolio securities, such as securities with small capitalizations, are so thinly traded that there have been no transactions for that security over an extended period of time; (ii) an event occurs after the close of the exchange on which a portfolio security is principally traded that is likely to change the value of the portfolio security prior to the Fund’s NAV calculation; (iii) the exchange on which the portfolio security is principally traded closes early; or (iv) trading of the particular portfolio security is halted during the day and does not resume prior to the Fund’s NAV calculation. Pursuant to policies adopted by the Board, the Adviser consults with BNY Mellon and the Sub-Adviser on a regular basis regarding the need for fair value pricing. The Fund’s policies regarding fair value pricing are intended to result in a calculation of the Fund’s NAV that fairly reflects portfolio security values as of the time of pricing. A portfolio security’s “fair value” price may differ from the price next available for that portfolio security using the Fund’s normal pricing procedures, and the fair value price may differ substantially from the price at which the security may ultimately be traded or sold. If the fair value price differs from the price that would have been determined using the Fund’s normal pricing procedures, you may receive more or less proceeds or Shares from redemptions or purchases of the Fund’s Shares, respectively, than you would have otherwise received if the portfolio security were priced using the Fund’s normal pricing procedures and the prices used to determine the Fund’s Indicative Intra-Day Value (“ IIV ”), which could result in the market prices for Shares deviating from NAV. The performance of the Fund may also be affected if a portfolio security’s fair value price were to differ from the security’s price using the Fund’s normal pricing procedures. The Board monitors and evaluates the Fund’s use of fair value pricing, and periodically reviews the results of any fair valuation under the Trust’s policies.
To the extent the assets of the Fund are invested in other open-end investment companies that are registered under the 1940 Act, the Fund’s NAV is calculated based upon the NAVs reported by such registered open-end investment companies, and the prospectuses for these companies explain the circumstances under which they will use fair value pricing and the effects of using fair value pricing.
The NAV is determined as of the close of regular trading on the Exchange, normally 4:00 p.m. Eastern time, on each day that the Exchange is open for business. Currently, the Exchange is closed on weekends and in recognition of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The approximate value of the Fund’s investments on a per-Share basis, the Indicative Intra-Day Value, or IIV, is disseminated by the Exchange every 15 seconds during hours of trading on the Exchange The IIV should not be viewed as a “real-time” update of NAV because the IIV may not be calculated in the same manner as NAV, which is computed once per day.
The IIV for the Fund is calculated during hours of trading on the Exchange by dividing the “Estimated Fund Value” as of the time of the calculation by the total number of outstanding Shares of that Fund. “ Estimated Fund Value ” is the sum of the estimated amount of cash held in the Fund’s portfolio, the estimated amount of accrued interest owed to the Fund and the estimated value of the securities held in the Fund’s portfolio, minus the estimated amount of the Fund’s liabilities. The IIV will be calculated based on the same portfolio holdings disclosed on the Fund’s website.
Although the Trust provides information used to calculate the IIV, the Trust is not involved in the actual calculation of the IIV and is not responsible for the calculation or dissemination of the IIV. The Trust makes no warranty as to the accuracy of the IIV.
Information regarding the extent and frequency with which market prices of the Fund’s Shares have tracked the Fund’s NAV for the most recently completed calendar year and the most recently completed calendar quarters since that year will be available without charge on the Fund’s website at www.ActiveAlts.com.
The Board has not adopted policies and procedures with respect to frequent purchases and redemptions of the Fund’s Shares by the Fund’s shareholders (“ market timing ”). In determining not to adopt market timing policies and procedures, the Board noted that, unlike traditional mutual funds, the Fund’s Shares can only be purchased and redeemed directly from the Fund in Creation Units by
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Authorized Participants, and that the vast majority of trading in the Fund’s Shares occurs on the secondary market. Because secondary market trades do not involve the Fund directly, it is unlikely those trades would cause many of the harmful effects of market timing, including dilution, disruption of portfolio management, increases in the Fund’s trading costs and the realization of capital gains. With respect to trades directly with the Fund, to the extent effected in-kind (namely, for securities), those trades do not cause any of the harmful effects that may result from frequent cash trades. To the extent trades are effected in whole or in part in cash, the Board noted that those trades could result in dilution to the Fund and increased transaction costs (and the Fund may impose higher transaction fees to offset these increased costs), which could negatively impact the Fund’s ability to achieve its investment objective. However, the Board noted that direct trading on a short-term basis by Authorized Participants is critical to ensuring that the Fund’s Shares trade at or close to NAV. The Fund also imposes transaction fees on purchases and redemptions of Creation Units that are designed to offset the Fund’s transfer and other transaction costs associated with the issuance and redemption of Creation Units. Given this structure, the Board determined that it is not necessary to adopt market timing policies and procedures. The Fund reserves the right to reject any purchase order at any time and reserves the right to impose restrictions on disruptive or excessive trading in Creation Units.
The Board has instructed the officers of the Trust to review reports of purchases and redemptions of Creation Units on a regular basis to determine if there is any unusual trading in the Fund’s Shares. The officers of the Trust will report to the Board any such unusual trading in Creation Units that is disruptive to the Fund. In such event, the Board may reconsider its decision not to adopt market timing policies and procedures.
The Fund expects to distribute substantially all of its net investment income to its shareholders quarterly and its net realized capital gains at least annually. As a shareholder, you are entitled to your share of the Fund’s distributions of net investment income and net realized capital gains on its investments. The Fund pays out substantially all of its net earnings to its shareholders as “distributions”.
The Fund typically earns investment income in the form of dividends from stocks and interest from debt securities. These amounts, net of expenses, are typically passed along to the Fund’s shareholders as dividends from net investment income. The Fund realizes capital gains or losses whenever it sells securities. Net capital gains are distributed to shareholders as “capital gain distributions”.
Net investment income and net capital gains are typically distributed to shareholders at least annually . Dividends may be declared and paid more frequently to comply with the distribution requirements of the Internal Revenue Code of 1986, as amended (the “ Code ”). In addition, the Fund may determine to distribute at least annually amounts representing the full dividend yield net of expenses on the underlying investment securities, as if the Fund owned the underlying investment securities for the entire dividend period, in which case some portion of each distribution may result in a return of capital. You will be notified regarding the portion of the distribution that represents a return of capital.
Distributions in cash may be reinvested automatically in additional Shares of the Fund only if the broker through which you purchased Shares makes such option available.
The following is a summary of the material U.S. federal income tax considerations applicable to an investment in Shares of the Fund. The summary is based on the laws in effect on the date of this Prospectus and existing judicial and administrative interpretations thereof, all of which are subject to change, possibly with retroactive effect. In addition, this summary assumes that the Fund shareholder holds Shares as capital assets within the meaning of the Code and does not hold Shares in connection with a trade or business. This summary does not address all potential U.S. federal income tax considerations possibly applicable to an investment in Shares of the Fund, to the Fund’s shareholders holding Shares through a partnership (or other pass-through entity) or to Fund shareholders subject to special tax rules.
The Fund has not requested and will not request an advance ruling from the Internal Revenue Service (the “ IRS ”) as to the federal income tax matters described below. The IRS could adopt positions contrary to those discussed below and such positions could be sustained. Shareholders should consult their own tax advisors with regard to the federal tax consequences of the purchase, ownership or disposition of the Fund’s Shares, as well as the tax consequences arising under the laws of any state, foreign country or other taxing jurisdiction.
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The Fund is treated as a separate corporate entity under the Code, and intends to qualify and remain qualified as a regulated investment company under Subchapter M of the Code. In order to so qualify, the Fund must elect to be a regulated investment company or have made such an election for a previous year and must satisfy certain requirements relating to the amount of distributions and source of its income for a taxable year. At least 90% of the gross income of the Fund must be derived from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stocks, securities or foreign currencies, and other income derived with respect to the Fund’s business of investing in such stock, securities or currencies. Any income derived by the Fund from a partnership or trust is treated as derived with respect to the Fund’s business of investing in stock, securities or currencies only to the extent that such income is attributable to items of income that would have been qualifying income if realized by the Fund in the same manner as by the partnership or trust.
The Fund will not qualify as a regulated investment company for any taxable year unless it satisfies certain requirements with respect to the diversification of its investments at the close of each quarter of the taxable year. In general, at least 50% of the value of the Fund’s total assets must be represented by cash, cash items, government securities, securities of other regulated investment companies and other securities which, with respect to any one issuer, do not represent more than 5% of the total assets of the Fund nor more than 10% of the outstanding voting securities of such issuer. In addition, not more than 25% of the value of the Fund’s total assets may be invested in the securities (other than government securities or the securities of other regulated investment companies) of any one issuer. The Fund intends to satisfy all requirements on an ongoing basis for continued qualification as a regulated investment company.
There is a remedy for failure of the Subchapter M asset diversification test, if the failure was due to reasonable cause and not willful neglect, subject to certain divestiture and procedural requirements and the payment of a tax. There is also a de minimis exception to a potential failure of the Subchapter M asset diversification test, which would require corrective action but no tax. In addition, a remedy of a failure of the source-of-income requirement exists, if the failure was due to reasonable cause and not willful neglect, subject to certain procedural requirements and the payment of a tax.
Tax Treatment of Fund Shareholders
The following information is meant as a general summary for U.S. taxpayers. Additional tax information appears in the Fund’s SAI. Shareholders should rely on their own tax advisors for advice about the particular federal, state, and local tax consequences of investing in the Fund.
Dividends from net investment income or capital gains distributions, if any, will be distributed in cash. Although the Fund will not be taxed on amounts it distributes, shareholders will generally be taxed on distributions paid by the Fund. Distributions attributable to net investment income and short-term capital gains are generally taxed as ordinary income, although certain income dividends may be taxed to non-corporate shareholders at long-term capital gains rates. Distributions of long-term capital gains are generally taxed as long-term capital gains, regardless of how long a shareholder has held the Fund’s Shares. Distributions may be subject to state and local taxes, as well as federal taxes.
Distributions resulting from the sale of foreign currencies and foreign securities by the Fund, to the extent of foreign exchange gains, are generally taxed as ordinary income or loss. If the Fund pays non-refundable taxes to foreign governments during the year, these taxes will reduce the Fund’s net investment income but still may be included in your taxable income. However, you may be able to claim an offsetting tax credit or itemized deduction on your return for your portion of foreign taxes paid by the Fund. Shareholders should consult with their own tax advisors to ensure that distributions with respect to the Fund’s Shares are treated appropriately on their income tax returns.
Regulated investment companies must report cost basis information to the IRS on Form 1099-B for any sale of regulated investment company shares acquired after January 1, 2012 (“ Covered Shares ”). Regulated investment companies must select a default cost basis calculation method and apply that method to the sale of Covered Shares unless an alternate IRS approved method is specifically elected in writing by the shareholder. Average Cost, which is the investment company industry standard, has been selected as the Fund’s default cost basis calculation method. If a shareholder determines that an IRS approved cost basis calculation method other than the Fund’s default method of Average Cost is more appropriate, the shareholder must contact the Fund at the time of or in advance of the sale of Covered Shares that are to be subject to that alternate election. IRS regulations do not permit the change of a cost basis election on previously executed trades.
All Fund Shares purchased in non-retirement accounts are subject to the new cost basis reporting legislation.
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An additional 3.8% Medicare tax will be imposed on certain net investment income (including ordinary dividends received from the Fund and net gains from redemptions or other taxable dispositions of the Fund’s Shares) of U.S. individuals, estates and trusts to the extent that such persons’ “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds certain threshold amounts.
Any capital gain or loss realized upon a sale of the Fund’s Shares is treated generally as a long-term gain or loss if the Shares have been held for more than one year. Any capital gain or loss realized upon a sale of the Fund’s Shares held for one year or less is generally treated as a short-term gain or loss, except that any capital loss on the sale of Shares held for six months or less is treated as long-term capital loss to the extent that capital gain dividends were paid with respect to the Shares. Shareholders should consult with their own tax advisors to ensure that sales of the Fund’s Shares are treated appropriately on their income tax returns.
Federal regulations generally require the Fund to withhold and remit to the U.S. Treasury a “backup withholding” tax with respect to dividends and the proceeds of any redemption paid to you if you fail to furnish the Fund or the Fund’s paying agent with a properly completed and executed IRS Form W-9, Form W-8BEN or other applicable form. Furthermore, the IRS may notify the Fund to institute backup withholding if the IRS determines that your taxpayer identification number (“ TIN ”) is incorrect or if you have failed to properly report taxable dividends or interest on a federal tax return. A TIN is either the Social Security number or employer identification number of the record owner of the account. Any tax withheld as a result of backup withholding does not constitute an additional tax imposed on the record owner of the account and may be claimed as a credit on the record owner’s federal income tax return. The backup withholding rate is currently 28%. The ability to deduct capital losses may be limited.
The Fund will be required to withhold U.S. tax (at a 30% rate) on payments of dividends and (effective January 1, 2017) redemption proceeds made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. You may be requested to provide additional information to enable the Fund to determine whether withholding is required.
Creation Unit ISSUANCES and Redemptions
On an issuance of the Fund’s Shares as part of a Creation Unit, an Authorized Participant recognizes capital gain or loss equal to the difference between (i) the fair market value (at issue) of the issued Shares (plus any cash received by the Authorized Participant as part of the issue) and (ii) the Authorized Participant’s aggregate basis in the exchanged securities (plus any cash paid by the Authorized Participant as part of the issue). On a redemption of the Fund’s Shares as part of a Creation Unit, an Authorized Participant recognizes capital gain or loss equal to the difference between: (i) the fair market value (at redemption) of the securities received (plus any cash received by the Authorized Participant as part of the redemption); and (ii) the Authorized Participant’s basis in the redeemed Shares (plus any cash paid by the Authorized Participant as part of the redemption). However, the IRS might assert, under the “wash sale” rules or on the basis that there has been no significant change in the Authorized Participant’s economic position, that any loss on creation or redemption of Creation Units cannot be deducted currently.
In general, any capital gain or loss recognized upon the issue or redemption of the Fund’s Shares (as components of a Creation Unit) is treated either as long-term capital gain or loss, if the deposited securities (in the case of an issue) or the Shares (in the case of a redemption) have been held for more than one year, or otherwise as short-term capital gain or loss. However, any capital loss on a redemption of the Fund’s Shares held for six months or less is treated as long-term capital loss to the extent that capital gain dividends were paid with respect to such Shares.
For additional discussion regarding an investment in the Fund, please see the section of the SAI entitled “Taxation” .
The foregoing discussion summarizes some of the possible consequences under current federal tax law of an investment in the Fund. It is not a substitute for personal tax advice. You may also be subject to state and local taxation on Fund distributions, and sales of the Fund’s Shares. Consult your personal tax advisor about the potential tax consequences of an investment in the Fund’s Shares under all applicable tax laws.
WEBSITE AND DISCLOSURE OF PORTFOLIO HOLDINGS
The Trust maintains a website for the Fund at www.ActiveAlts.com. The website for the Fund contains the following information, on a per-Share basis, for the Fund: (i) the prior Business Day’s NAV; (ii) the reported midpoint of the bid-ask spread at the time of NAV calculation (the “ Bid-Ask Price ”); (iii) a calculation of the premium or discount of the Bid-Ask Price against such NAV; and (iv) data in chart format displaying the frequency distribution of discounts and premiums of the Bid-Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters (or for the life of the Fund if, shorter). In addition, on each
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Business Day, before the commencement of trading in the Fund’s Shares on the Exchange, the Trust will disclose on the Fund’s website the identities and quantities of the portfolio securities and other assets held by the Fund that will form the basis for the calculation of the Fund’s NAV at the end of the Business Day.
A description of the Trust’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the SAI.
The Fund is not sponsored, endorsed, sold or promoted by the Exchange. The Exchange makes no representation or warranty, express or implied, to the owners of the Fund’s Shares or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Fund to achieve its objective. The Exchange has no obligation or liability in connection with the administration, marketing or trading of the Fund.
For purposes of the 1940 Act, the Fund is a registered investment company, and the acquisition of the Fund’s Shares by other registered investment companies and companies relying on exemption from registration as investment companies under Section 3(c)(1) or 3(c)(7) of the 1940 Act is subject to the restrictions of Section 12(d)(1) of the 1940 Act, except as permitted by an exemptive order that permits registered investment companies to invest in the Fund beyond those limitations.
The Fund is newly organized and therefore has not yet had any operations as of the date of this Prospectus.
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| FACTS | WHAT DOES ETFIS SERIES TRUST I DO WITH YOUR PERSONAL INFORMATION? | |||
| Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share and protect your personal information. Please read this notice carefully to understand what we do. | |||
| What? |
The types of personal information we collect and share depend on the product or service you have with us. This information can include: § Social Security number § Assets § Retirement Assets § Transaction History § Checking Account Information § Purchase History § Account Balances § Account Transactions § Wire Transfer Instructions When you are no longer our customer, we continue to share your information as described in this notice. |
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| How? | All financial companies need to share your personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons ETFis Series Trust I chooses to share; and whether you can limit this sharing. | |||
| Reasons we can share your personal information | Does ETFis Series Trust I share? | Can you limit this sharing? | ||
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For our everyday business purposes – Such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus |
Yes | No | ||
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For our marketing purposes – to offer our products and services to you |
No | We don’t share | ||
| For joint marketing with other financial companies | No | We don’t share | ||
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For our affiliates’ everyday business purposes – information about your transactions and experiences |
No | We don’t share | ||
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For our affiliates’ everyday business purposes – information about your creditworthiness |
No | We don’t share | ||
| For non-affiliates to market to you | No | We don’t share | ||
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| Questions? | Call (212) 593-4383 | |||
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| Page 2 | ||
| Who we are | ||
| Who is providing this notice? | ETFis Series Trust I | |
| What we do | ||
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How does ETFis Series Trust I protect my personal information? |
To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings.
Our service providers are held accountable for adhering to strict policies and procedures to prevent any misuse of your nonpublic personal information. |
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How does ETFis Series Trust I collect my personal information? |
We collect your personal information, for example, when you: § Open an account § Provide account information § Give us your contact information § Make deposits or withdrawals from your account § Make a wire transfer § Tell us where to send the money § Show your government-issued ID § Show your driver’s license
We also collect your personal information from other companies. |
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| Why can’t I limit all sharing? |
Federal law gives you the right to limit only: § Sharing for affiliates’ everyday business purposes – information about your creditworthiness § Affiliates from using your information to market to you § Sharing for non-affiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
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| Definitions | ||
| Affiliates |
Companies related by common ownership or control. They can be financial and nonfinancial companies. § Virtus ETF Advisers LLC, the Fund’s investment adviser, ETF Distributors LLC, the Fund’s principal underwriter, and Virtus ETF Solutions LLC, the Fund’s operational administrator, could each be deemed to be an affiliate. |
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| Non-affiliates |
Companies not related by common ownership or control. They can be financial and nonfinancial companies § ETFis Series Trust I does not share with non-affiliates so they can market to you. |
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| Joint marketing |
A formal agreement between nonaffiliated financial companies that together market financial products or services to you. § ETFis Series Trust I does not jointly market. |
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If you would like more information about the Trust, the Fund and the Shares, the following documents are available free upon request:
Annual and Semi-Annual Reports
Additional information about the Fund’s investments is available in the Fund’s annual and semi-annual reports to shareholders. Once available, you will find in the Fund’s annual report a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during the prior fiscal year.
Statement of Additional Information
Additional information about the Fund and its policies is also available in the Fund’s SAI. The SAI is incorporated by reference into this Prospectus (and is legally considered part of this Prospectus).
The Fund’s annual and semi-annual reports and the SAI will be available free upon request by calling the Adviser at (212) 593-4383. You can also access and download the annual and semi-annual reports and the SAI without charge at the Fund’s website: www.ActiveAlts.com.
To obtain other information and for shareholder inquiries :
| By telephone : | (212) 593-4383 | |
| By mail : | ActiveAlts Contrarian ETF | |
| c/o ETFis Series Trust I | ||
| 1540 Broadway | ||
| New York, NY 10036 | ||
| On the Internet : | SEC Edgar database: http://www.sec.gov; or www.ActiveAlts.com |
Only one copy of a Prospectus or an annual or semi-annual report will be sent to each household address. This process, known as “householding”, is used for most required shareholder mailings. (It does not apply to confirmations of transactions and account statements, however.) You may, of course, request an additional copy of a Prospectus or an annual or semi-annual report at any time by calling or writing the Fund. You may also request that householding be eliminated from all your required mailings.
You may review and obtain copies of the Fund’s documents (including the SAI) by visiting the SEC’s public reference room in Washington, D.C. You may also obtain copies of Fund documents, after paying a duplicating fee, by writing to the SEC’s Public Reference Section, Washington, D.C. 20549-0102 or by electronic request to: publicinfo@sec.gov. Information on the operation of the public reference room may be obtained by calling the SEC at (202) 942-8090. Reports and other information about the Fund are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov.
No person is authorized to give any information or to make any representations about the Fund or its Shares not contained in this Prospectus, and you should not rely on any other information. Read and keep this Prospectus for future reference.
Dealers effecting transactions in the Fund’s Shares, whether or not participating in this distribution, may be generally required to deliver a Prospectus. This is in addition to any obligation dealers have to deliver a Prospectus when acting as underwriters.
ETFis Series Trust I: Investment Company Act file number 811-22819
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STATEMENT OF ADDITIONAL INFORMATION
ACTIVEALTS CONTRARIAN ETF (SQZZ)
October 16, 2015
a series of the
ETFis Series Trust I
1540 Broadway
New York, NY 10036
Telephone: (212) 593-4383
TABLE OF CONTENTS
This Statement of Additional Information (“ SAI ”) is meant to be read in conjunction with the prospectus (“ Prospectus ”) for the ActiveAlts Contrarian ETF (Ticker: SQZZ) (the “ Fund ”) dated the same date as this SAI, which incorporates this SAI by reference in its entirety. Because this SAI is not itself a prospectus, no investment in Shares of the Fund should be made solely upon the information contained herein. Copies of the Prospectus for the Fund may be obtained at no charge by writing or calling the Fund at the address or phone number shown above. Capitalized terms used but not defined herein have the same meanings as in the Prospectus. 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.
Audited financial statements are not presented for the Fund since the Fund is newly formed and had not yet commenced operations as of the date of this SAI. Once available, you may obtain a copy of the Fund’s annual report at no charge by request to the Fund at the address or phone number noted below.
A copy of the Prospectus for the Fund may be obtained, without charge, by calling (212) 593-4383 or visiting www.ActiveAlts.com, or writing to the Trust, c/o ETF Distributors LLC, 1540 Broadway, New York, NY 10036.
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GENERAL DESCRIPTION OF THE TRUST AND THE FUND
The ETFis Series Trust I (the “ Trust ”) was organized as a Delaware statutory trust on September 20, 2012 and is registered with the Securities and Exchange Commission (the “ SEC ”) as an open-end management investment company under the Investment Company Act of 1940, as amended (the “ 1940 Act ”). The Trust currently consists of ten investment portfolios: the Fund, InfraCap MLP ETF (Ticker: AMZA); InfraCap REIT Preferred ETF (Ticker: PFFR); BioShares Biotechnology Products Fund (Ticker: BBP); BioShares Biotechnology Clinical Trials Fund (Ticker: BBC); Tuttle Tactical Management U.S. Core ETF (Ticker: TUTT); Tuttle Tactical Management Multi-Strategy Income ETF (Ticker: TUTI); Virtus Newfleet Multi-Sector Unconstrained Bond ETF (Ticker: NFLT); Reaves Utilities ETF (Ticker: UTES) and The Credit Strategist High Yield Opportunities Fund (Ticker: TCSY). The shares of the Fund are referred to herein as “ Fund Shares ” or “ Shares ”. The offering of Shares is registered under the Securities Act of 1933, as amended (the “ Securities Act ”).
The Fund’s investment adviser is Virtus ETF Advisers LLC (the “ Adviser ”). The Adviser has been registered as an investment adviser with the SEC since October 2013. The Fund’s sub-adviser is Active Alts Inc. (the “ Sub-Adviser ”).
The Fund offers and issues Shares at net asset value (the “ NAV ”) only in aggregations of a specified number of Shares (each, a “ Creation Unit ”), generally in exchange for cash or a basket of equity securities included in the Fund’s portfolio (the “ Deposit Securities ”), together with the deposit of a specified cash payment (the “ Cash Component ”). Shares are redeemable only in Creation Units and, generally, in exchange for Deposit Securities and a Cash Component. Creation Units are aggregations of 25,000 Shares of the Fund and are available only to certain large institutions, referred to as “ Authorized Participants ”, that enter into agreements with the Distributor. In the event of the liquidation of the Fund, the Trust may lower the number of Shares in a Creation Unit.
EXCHANGE LISTING AND TRADING
Fund Shares trade on The NASDAQ Stock Market (the “ Exchange ”) at market prices that may be below, at or above NAV. There can be no assurance that the requirements of the Exchange necessary for the Fund to maintain the listing of its Shares will continue to be met. The Exchange will consider the suspension of trading and delisting of the Shares of the Fund from listing if (i) following the initial 12-month period beginning upon the commencement of trading of Fund Shares, there are fewer than 50 beneficial owners of Shares of the Fund for 30 or more consecutive trading days, (ii) the intra-day net asset value of the Fund is no longer calculated or available, or (iii) any other event occurs or condition exists that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange will remove the Shares of the Fund from listing and trading upon termination of the Fund.
As in the case of other stocks traded on the Exchange, brokers’ commissions on transactions will be based on negotiated commission rates at customary levels.
The following policies supplement the Fund’s investment objective and policies as described in the Prospectus for the Fund.
GENERAL INVESTMENT RISKS. All investments in securities and other financial instruments involve a risk of financial loss. No assurance can be given that the Fund’s investment program will be successful. Investors should carefully review the descriptions of the Fund’s investments and its risks in this SAI and the Prospectus.
EQUITY SECURITIES. The Fund may invest in equity securities, both directly and indirectly through investment in shares of ETFs, other investment companies, and other types of securities and instruments described in this SAI and in the Prospectus. The equity portion of the Fund’s portfolio may include common stocks traded on securities exchanges or on the over-the-counter market. In addition to common stocks, the equity portion of the Fund’s portfolio may also include preferred stocks, convertible preferred stocks, convertible bonds or other equity securities. Prices of equity securities in which the Fund invests may fluctuate in response to many factors, including, but not limited to, the activities of the individual companies whose securities the Fund owns, general market and economic conditions, interest rates and specific industry changes. Such price fluctuations subject the Fund to potential losses. In addition, regardless of any one company’s particular prospects, a declining stock market may produce a decline in prices for all equity securities, which could also result in losses for the Fund. Market declines may continue for an indefinite period of time, and investors should understand that during temporary or extended bear markets, the value of equity securities will decline.
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EXCHANGE TRADED FUNDS AND INVESTMENTS IN OTHER INVESTMENT COMPANIES.
Exchange Traded Funds (“ETFs”). The Fund may invest in or sell short ETFs. The shares of an ETF may be assembled in a block known as a creation unit and redeemed in kind for a portfolio of the underlying securities (based on the ETF’s net asset value) together with a cash payment generally equal to accumulated dividends as of the date of redemption. Conversely, a creation unit may be purchased from the ETF by depositing a specified portfolio of the ETF’s underlying securities, as well as a cash payment generally equal to accumulated dividends of the securities (net of expenses) up to the time of deposit. The Fund may redeem creation units for the underlying securities (and any applicable cash), and may assemble a portfolio of the underlying securities and use it (and any required cash) to purchase creation units, if the Sub-Adviser believes it is in the Fund’s interest to do so. The Fund’s ability to redeem creation units may be limited by the 1940 Act, which provides that the ETFs will not be obligated to redeem shares held by the Fund in an amount exceeding one percent of their total outstanding securities during any period of less than 30 days.
There is a risk that the underlying ETFs in which the Fund invests may terminate due to extraordinary events that may cause any of the service providers to the ETFs, such as the trustees or sponsors, to close or otherwise fail to perform their obligations to the ETFs. Also, because the ETFs in which the Fund intends to principally invest may be granted licenses by agreement to use various indices as a basis for determining their compositions and/or otherwise to use certain trade names, the ETFs may terminate if such license agreements are terminated. In addition, an ETF may terminate if its net assets fall below a certain amount. Although the Fund believes that, in the event of the termination of an underlying ETF, it will be able to invest instead in shares of an alternate ETF tracking the same market index or another market index within the same general market, there is no guarantee that shares of an alternate ETF would be available for investment at that time.
Investments in ETFs and similar securities involve certain inherent risks generally associated with investments in a broadly based portfolio of stocks including: (1) risks that the general level of stock prices may decline, thereby adversely affecting the value of each unit of the ETF or other security; (2) an ETF may not fully replicate the performance of its benchmark index because of the temporary unavailability of certain index securities in the secondary market or discrepancies between the ETF and the index with respect to the weighting of securities or number of stocks held; (3) an ETF may also be adversely affected by the performance of the specific index, market sector or group of industries on which it is based; and (4) an ETF may not track an index as well as a traditional index mutual fund because ETFs are valued by the market and, therefore, there may be a difference between the market value and the ETF’s net asset value.
An investment in an ETF generally presents the same primary risks as an investment in a conventional fund (i.e., one that is not exchange traded), including, without limitation, the risk that the general level of stock prices, or that the prices of stocks within a particular sector, may increase or decline, thereby affecting the value of the shares of an ETF. In addition, ETFs are subject to the following risks that do not apply to conventional funds: (1) the market price of an ETF’s shares may trade at a discount to its net asset value; (2) an active trading market for an ETF’s shares may not develop or be maintained; (3) trading of an ETF’s shares may be halted if the listing exchange deems such action appropriate; and (4) ETF shares may be delisted from the exchange on which they trade, or activation of “ circuit breakers ” (which are tied to large decreases in stock prices) may halt trading temporarily. ETFs are also subject to the risks of the underlying securities or sectors the ETF is designed to track.
Other Investment Companies. Under the 1940 Act, the Fund may not acquire shares of another investment company (ETFs or other investment companies) if, immediately after such acquisition, the Fund and its affiliated persons would hold more than 3% of the ETF’s or investment company’s total outstanding stock (“ 3% Limitation ”). Accordingly, the Fund is subject to the 3% Limitation unless (i) the ETF or the Fund has received an order for exemptive relief from the 3% Limitation from the SEC that is applicable to the Fund; and (ii) the ETF and the Fund take appropriate steps to comply with any conditions in such order. The SEC has issued such exemptive orders to numerous ETFs and their investment advisers, which permit investment companies to invest in such ETFs (“ Exempted ETFs ”) beyond the 3% Limitation, subject to certain terms and conditions, including, without limitation, that such investment companies enter into an agreement with the Exempted ETF.
To the extent the 3% Limitation applies to certain ETFs, that limitation may prevent the Fund from allocating its investments in the manner that the Sub-Adviser considers optimal, or cause the Sub-Adviser to select a similar basket of stocks (pre-selected groups of securities related by index or sector made available through certain brokers at a discount brokerage rate) (“ Stock Baskets ”) or a similar index-based mutual fund or other investment company as an alternative. The Fund’s investments in other investment companies will be subject to the same 3% Limitation described above.
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Under the 1940 Act, to the extent that the Fund relies upon Section 12(d)(1)(F) in purchasing securities issued by another investment company, the Fund must either seek instructions from its shareholders with regard to the voting of all proxies with respect to its investment in such securities (ETFs and other investment companies) and vote such proxies only in accordance with the instructions, or vote the shares held by it in the same proportion as the vote of all other holders of the securities. In the event that there is a vote of ETF or other investment company shares held by the Fund, the Fund intend to vote such shares in the same proportion as the vote of all other holders of such securities.
CONVERTIBLE SECURITIES. In addition to common and preferred stocks, the Fund may invest directly or indirectly in securities convertible into common stock. Convertible securities eligible for purchase by the Fund include, without limitation, convertible bonds, convertible preferred stocks and warrants. A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specific amount of the corporation’s capital stock at a set price for a specified period of time. Warrants do not represent ownership of the securities, but only the right to buy the securities. The price of warrants do not necessarily move parallel to the prices of their underlying securities. Warrants may be considered speculative in that they have no voting rights, pay no dividends and have no rights with respect to the assets of their issuing corporation. Warrant positions will not be used to increase the leverage of the Fund; consequently, warrant positions are generally accompanied by cash positions equivalent to the required exercise amount. The Fund’s ability to invest in warrants is limited by its investment restrictions.
FOREIGN SECURITIES. The Fund may invest directly or indirectly in foreign debt or equity securities traded on U.S. exchanges, in over-the-counter markets or in the form of American Depositary receipts (“ ADRs ”) described below. The Fund may also invest in foreign currency and foreign currency-denominated securities. Investing in securities issued by companies whose principal business activities are outside the United States may involve significant risks not present in domestic investments. The value of securities denominated in or indexed to foreign currencies, and of dividends and interest from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets and prices on some foreign markets can be highly volatile. Many foreign countries lack uniform accounting and disclosure standards comparable to those applicable to U.S. companies, and it may be more difficult to obtain reliable information regarding an issuer’s financial condition and operations. Some foreign countries impose conditions and restrictions on foreigners’ ownership of interests in local issuers, including, without limitation, restring ownership to certain classes of investment in an issuer, which may reduce potential investment returns and impair disposition of those investments. Additional costs associated with an investment in foreign securities may include higher custodial fees than those applicable to domestic custodial arrangements and transaction costs of foreign currency conversions.
Foreign markets may offer less protection to investors than U.S. markets. Foreign issuers, brokers and securities markets may be subject to less government supervision. Foreign securities trading practices, including, without limitation, those involving the release of assets in advance of payment, may involve increased risks in the event of a failed trade or the insolvency of a broker-dealer, and may involve substantial delays. It may also be difficult to enforce legal rights in foreign countries because of inconsistent legal interpretations or less defined legal and regulatory provisions or because of corruption or influence on local courts.
Investing abroad also involves different political and economic risks. Foreign investments may be affected by actions of foreign governments adverse to the interests of U.S. investors, including, without limitation, the possibility of expropriation or nationalization of assets, confiscatory taxation, restrictions on U.S. investment or on the ability to repatriate assets or convert currency into U.S. dollars or other governmental intervention. There may be a greater possibility of default by foreign governments or foreign government-sponsored enterprises and securities issued or guaranteed by foreign governments, their agencies, instrumentalities or political subdivisions, may or may not be supported by the full faith and credit and taxing power of the foreign government. Investments in foreign countries also involve a risk of local political, economic or social instability, military action or unrest or adverse diplomatic developments. There is no assurance that the Sub-Adviser will be able to anticipate these potential events or counter their effects.
American Depositary Receipts (ADRs). ADRs provide a method whereby the Fund may invest in securities issued by companies whose principal business activities are outside the United States. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities, and may be issued as sponsored or unsponsored programs. In sponsored programs, an issuer has made arrangements to have its securities trade in the form of ADRs. In unsponsored programs, the issuer may not be directly involved in the creation of the program. Although regulatory requirements with respect to sponsored and unsponsored programs are generally similar, in some cases it may be easier to obtain financial information from an issuer that participates in a sponsored program.
Emerging Market Securities. The Fund may invest a portion of its assets in emerging markets. An “emerging market” is any country that the World Bank, the International Finance Corporation or the United Nations or its authorities has determined to have a low or middle income economy. Investing in emerging markets involves exposure to potentially unstable governments, the risk of nationalization of business, restrictions on foreign ownership, prohibitions on repatriation of assets and a system of laws that may
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offer less protection of property rights. Emerging market economies may be based on only a few industries, may be highly vulnerable to changes in local and global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates. The securities markets in emerging markets are substantially smaller, less liquid and more volatile than the major securities markets in the United States and other developed countries. A high proportion of the shares of many issuers may be held by a limited number of persons and financial institutions, which may limit the number of shares available for investment by the Fund. A limited number of issuers in emerging markets may represent a disproportionately large percentage of market capitalization and trading value. The limited liquidity of securities markets in these countries may also affect the Fund’s ability to acquire or dispose of securities at the price and time it wishes to do so. The inability of the Fund to dispose fully and promptly of positions in declining markets would cause the Fund’s net asset value to decline as the values of the unsold positions are marked to lower prices. In addition, these securities markets are susceptible to being influenced by large investors trading significant blocks of securities.
REAL ESTATE SECURITIES. The Fund will not invest directly in real estate, but may invest in readily marketable securities issued by companies that invest in real estate or interests therein. The Fund may also invest in readily marketable interests in real estate investment trusts (“ REITs ”). REITs are generally publicly traded on national stock exchanges and in the over-the-counter market and have varying degrees of liquidity. Investments in real estate securities are subject to risks inherent in the real estate market, including, without limitation, risks related to changes in interest rates, possible declines in the value of and demand for real estate, adverse general and local economic conditions, possible lack of availability of mortgage funds, overbuilding in a given market and environmental problems.
The Fund may invest in global real estate companies outside the U.S. These companies include, but are not limited to, companies with similar characteristics to a REIT structure, in which revenue consists primarily of rent derived from owned, income producing real estate properties, dividend distributions as a percentage of taxable net income are high (generally greater than 80%), debt levels are generally conservative and income derived from development activities is generally limited.
MONEY MARKET INSTRUMENTS. The Fund may invest directly and indirectly in money market instruments including, without limitation, U.S. Government obligations or corporate debt obligations (including, without limitation, those subject to repurchase agreements). Money market instruments also may include, without limitation, Banker’s Acceptances and Certificates of Deposit of domestic branches of banks, Commercial Paper, and Master Notes. Banker’s Acceptances are time drafts drawn on and “accepted” by a bank. When a bank “accepts” such a time draft, it assumes liability for its payment. When the Fund acquires a Banker’s Acceptance, the bank that “accepted” the time draft is liable for payment of interest and principal when due. The Banker’s Acceptance carries the full faith and credit of such bank. A Certificate of Deposit is an unsecured, interest bearing debt obligation of a bank. Commercial Paper is an unsecured, short-term debt obligation of a bank, corporation, or other borrower. Commercial Paper maturity generally ranges from two to 270 days and is usually sold on a discounted basis rather than as an interest-bearing instrument. The Fund will invest directly in Commercial Paper only if it is rated in one of the top two rating categories by Moody’s, S&P or Fitch or, if not rated, is of equivalent quality in the Sub-Adviser’s opinion. Commercial Paper may include Master Notes of the same quality. Master Notes are unsecured obligations which are redeemable upon demand of the holder and which permit the investment of fluctuating amounts at varying rates of interest. Master Notes may be acquired by the Fund through the Master Note program of the Fund’s custodian bank, acting as administrator thereof. The Sub-Adviser will monitor, on a continuous basis, the earnings power, cash flow and other liquidity ratios of the issuer of a Master Note held by the Fund.
MONEY MARKET FUNDS . In order to maintain sufficient liquidity, to implement investment strategies or for temporary defensive purposes, the Fund may invest a significant portion of its assets in shares of one or more money market funds. Generally, money market mutual funds are registered investment companies that seek to earn income consistent with the preservation of capital and maintenance of liquidity by investing primarily in high quality money market instruments, including, without limitation, U.S. government obligations, bank obligations and high-grade corporate instruments. An investment in a money market mutual fund is not insured or guaranteed by the Federal Deposit Insurance Company or any other governmental agency, entity or person. While investor losses in money market mutual funds have been rare, they are possible. In addition, the Fund will incur additional indirect expenses due to acquired fund fees and other costs to the extent it invests in shares of money market mutual funds.
INVESTMENTS IN COMPANIES WITH BUSINESS RELATED TO COMMODITIES. As explained under “Fundamental Restrictions” below, the Fund does not invest directly in commodities. However, the Fund may from time to time invest in securities of companies whose business is related to commodities, or in registered investment companies or other companies that invest directly or indirectly in commodities. Investments in equity securities of companies involved in producing commodities, and the value of the investment companies and other companies that invest in commodities, are subject to a number of risks. For example, the prices of commodities can make sharp movement, up or down, in response to cyclical economic conditions, political events or the monetary policies of various countries, any of which may adversely affect the value of companies who business is related to such commodities, or the value of investment companies and other companies investing in such business or commodities. Furthermore, such companies are subject to risks related to fluctuations of prices and perceptions of value in commodities markets generally.
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ILLIQUID INVESTMENTS. The Fund may invest up to 15% of its net assets in illiquid securities, which are investments that cannot be sold or disposed of in the ordinary course of business within seven days at approximately the prices at which they are valued. Under the supervision of the Board of Trustees of the Trust (the “ Board ”), the Sub-Adviser determines the liquidity of the Fund’s investments, and through reports from the Sub-Adviser, the Board monitors investments in illiquid instruments. In determining the liquidity of the Fund’s investments, the Sub-Adviser may consider various factors including, without limitation: (i) the frequency of trades and quotations; (ii) the number of dealers and prospective purchasers in the marketplace; (iii) dealer undertakings to make a market; (iv) the nature of the security (including, without limitation, any demand or tender features); and (v) the nature of the marketplace for trades (including, without limitation, the ability to assign or offset the Fund’s rights and obligations relating to the investment). If through a change in values, net assets or other circumstances, the Fund were in a position where more than 15% of its net assets were invested in illiquid securities, it would seek to take appropriate steps to protect liquidity. An investment in illiquid securities poses risks of potential delays in resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and the Fund may be unable to dispose of illiquid securities promptly or at reasonable prices.
RESTRICTED SECURITIES. Within its limitations on investment in illiquid securities, the Fund may purchase restricted securities that generally can be sold in privately negotiated transactions, pursuant to an exemption from registration under the federal securities laws or in a registered public offering. Where registration is required for a restricted security held by the Fund, the Fund may be obligated to pay all or part of the registration expense, and a considerable period may elapse between the time it decides to seek registration and the time the Fund may be permitted to sell a security under an effective registration statement. If during such a period adverse market conditions were to develop, the Fund might obtain a less favorable price than prevailed when it decided to seek registration of the security.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the Fund may lend portfolio securities in an amount up to 33⅓% of its total assets to broker-dealers, major banks or other recognized domestic institutional borrowers of securities which the Sub-Adviser has determined are creditworthy under guidelines established by the Board. In determining whether the Fund will lend securities, the Sub-Adviser will consider all relevant facts and circumstances. The Fund may not lend securities to any company affiliated with the Sub-Adviser. Each loan of securities will be collateralized by cash, securities or letters of credit. The Fund might experience a loss if the borrower defaults on the loan.
The borrower at all times during the loan must maintain with the Fund cash or cash equivalent collateral, or provide to the Fund an irrevocable letter of credit equal in value to at least 100% of the value of the securities loaned. While the loan is outstanding, the borrower will pay the Fund any interest paid on the loaned securities, and the Fund may invest the cash collateral to earn additional income. Alternatively, the Fund may receive an agreed-upon amount of interest income from the borrower who has delivered equivalent collateral or a letter of credit. It is anticipated that the Fund may share with the borrower some of the income received on the collateral for the loan or the Fund will be paid a premium for the loan. Loans are subject to termination at the option of the Fund or the borrower at any time. The Fund may pay reasonable administrative and custodial fees in connection with a loan, and may pay a negotiated portion of the income earned on the cash to the borrower or placing broker. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower fail financially.
TEMPORARY DEFENSIVE POSITIONS. The Fund may, from time to time, take temporary defensive positions that are inconsistent with its principal investment strategies in an attempt to respond to adverse market, economic, political or other conditions. In such circumstances, the Fund may also hold up to 100% of its portfolio in cash and cash equivalent positions. When the Fund takes a temporary defensive position, the Fund may not be able to achieve its investment objective.
Borrowing. The Fund may, subject to the restrictions of the 1940 Act, borrow money from banks as a temporary measure. For example, the Fund may borrow money to meet redemption requests or for extraordinary or emergency purposes. In the event the Fund should ever borrow money under these conditions, such borrowing could increase the Fund’s costs and thus reduce the value of the Fund’s assets. The 1940 Act presently allows the Fund to borrow from any bank (including, without limitation, pledging, mortgaging or hypothecating assets) provided that, immediately after any such borrowing, there is an asset coverage of at least 300% for all such borrowings, and provided further that, in the event that the Fund’s asset coverage at any time falls below 300%, the Fund reduce its existing borrowings (within three days, excluding Sundays and holidays) to the extent necessary to comply with the foregoing limitation.
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FUNDAMENTAL RESTRICTIONS. The Fund has adopted the following investment limitations, which cannot be changed without approval by holders of a majority of its outstanding voting Shares. A “majority” for this purpose means the lesser of (i) 67% or more of the Fund’s outstanding Shares represented in person or by proxy at a meeting at which more than 50% of its outstanding Shares are represented; or (ii) more than 50% of the Fund’s outstanding Shares. Unless otherwise indicated, percentage limitations apply at the time of purchase of the applicable securities. As a matter of fundamental policy, the Fund may not:
| (1) | issue senior securities, except as permitted by the 1940 Act; |
| (2) | borrow money (including, without limitation, borrowing to meet redemptions), except to the extent permitted under the 1940 Act; |
| (3) | pledge, mortgage or hypothecate its assets; |
| (4) | act as underwriter except to the extent that, in connection with the disposition of portfolio securities, the Fund may be deemed to be an underwriter under certain federal securities laws; |
| (5) | make loans, provided that the Fund may lend its portfolio securities in an amount up to 33⅓% of total Fund assets; |
| (6) | purchase or sell real estate or interests in real estate; provided, however, that the Fund may purchase and sell securities which are secured by real estate and securities of companies which invest or deal in real estate (including, without limitation, investments in REITs and mortgage-backed securities); |
| (7) | invest more than 25% of its total assets in any particular industry; or |
| (8) | invest in commodities. |
NON-FUNDAMENTAL RESTRICTIONS. The following investment limitations are not fundamental and may be changed by the Board without shareholder approval. As a matter of non-fundamental policy, the Fund may not:
| (1) | purchase securities on margin (but the Fund may obtain such short-term credits as may be necessary for the clearance of transactions); |
| (2) | make investments for the purpose of exercising control or management over a portfolio company; |
| (3) | invest in securities of other registered investment companies, except as permitted under the 1940 Act; |
| (4) | invest in interests in oil, gas or other mineral exploration or development programs, although the Fund may invest in the common stock of companies that invest in or sponsor such programs; |
| (5) | purchase warrants if as a result the Fund would then have more than 5% of its total net assets (taken at the lower of cost or current value) invested in warrants; or |
| (6) | invest more than 15% of its net assets in illiquid securities. |
With respect to the fundamental and non-fundamental investment restrictions above, if a percentage limitation is adhered to at the time of investment, a later increase or decrease in percentage resulting from any change in value or net assets will not result in a violation of such restriction (i.e., percentage limitations are determined at the time of purchase); provided, however, that the treatment of the fundamental restrictions related to borrowing money and issuing senior securities are exceptions to this general rule.
With respect to the above fundamental investment restriction on borrowing money, the entry into options, forward contracts, futures contracts, including, without limitation, those relating to indices, and options on futures contracts or indices will not constitute borrowing.
With respect to the above fundamental investment restriction on pledging, mortgaging or hypothecating assets, any such activity to the
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extent necessary to secure permitted borrowings and to the extent related to the deposit of assets in escrow in connection with (i) writing covered put or call options, (ii) the purchase of securities on a when-issued or forward commitment basis, or (iii) collateral or initial or variation margin arrangements with respect to options, forward contracts, futures contracts (including, without limitation, those relating to indices), or options on futures contracts or indices will not be considered pledging, mortgaging or hypothecating assets.
With respect to the above fundamental investment restriction on making loans, investment in U.S. government obligations, short-term commercial paper, certificates of deposit, bankers’ acceptances and repurchase agreements will not be deemed to be the making of a loan.
With respect to the above fundamental investment restriction regarding industry concentration, securities of the U.S. Government (including, without limitation, its agencies and instrumentalities), securities of state or municipal governments and their political subdivisions and investments in other registered investment companies are not considered to be issued by members of any industry; and, if the Fund invests in a revenue bond tied to a particular industry, the Fund will consider such investment to be issued by a member of the industry to which the revenue bond is tied.
With respect to the above fundamental investment restriction on investments in commodities, the purchase or sale by the Fund of options, forward contracts, futures contracts (including, without limitation, those relating to indices), options on futures contracts or indices or interests in equity securities issued by companies (including, without limitation, investment companies) that hold or invest in one or more commodities as their sole or principal business activity will not be considered an investment in commodities.
With respect to the above non-fundamental investment restriction on purchasing securities on margin, short sales of securities and futures trades, forward contracts or similar trades requiring margin deposits or other use of a margin account will not be considered purchasing securities on margin.
The 1940 Act allows the Fund to borrow from any bank (including, without limitation, pledging, mortgaging or hypothecating assets) in an amount up to 33⅓% of its total assets and the Fund will, to the extent necessary, reduce its existing borrowings (within three days, excluding Sundays and holidays) to comply with the provisions of the 1940 Act.
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MANAGEMENT AND OTHER SERVICE PROVIDERS
The Board is responsible for the supervision and oversight of the Fund. The Board approves all significant agreements between the Trust, on behalf of the Fund, and those companies that furnish services to the Fund; reviews the performance of the Fund; and oversees the business activities of the Fund. This section of the SAI provides information about the persons who serve as trustees (“ Trustees ”) and executive officers to the Trust, as well as the entities that provide services to the Trust.
TRUSTEES AND OFFICERS. Following are the Trustees and executive officers of the Trust, their ages and addresses, their present positions with the Trust, and their principal occupations during the past five years. Those Trustees who are “interested persons” as defined in the 1940 Act (“ Interested Trustees ”) and those Trustees who are not “interested persons” as defined in the 1940 Act (“ Independent Trustees ”), are identified in the table. The address of each Trustee and executive officer of the Trust, unless otherwise indicated, is 1540 Broadway, New York, NY 10036.
| Name and Age | Position(s) held with Trust | Length of Time Served |
Principal
Occupation(s)
During Past Five Years |
Number of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held by Trustee During Past Five Years |
| Independent Trustees | |||||
| James Simpson (44) | Trustee | Since Inception | President, ETP Resources, LLC (2009-present) (a financial services consulting company); Vice President, Northern Trust Securities, Inc. and Vice President, Northern Trust Global Investments (2008-2009) | Ten | None |
| Robert S. Tull (61) | Trustee | Since Inception | Independent Consultant (2013-present); Chief Operating Officer, Factor Advisors, LLC (2010-2013); Chief Operating Officer, GlobalShares (2009-2010) | Ten | None |
| Stephen O’Grady (66) | Trustee | Since September 2014 | Lead Market Maker, GFI Group (2011-2012); Partner, Kellogg Capital Markets (2004-2011) | Ten | None |
| Interested Trustee* | |||||
| William J. Smalley (31) | Trustee, President, Chief Executive Officer and Secretary | Since Inception | President, Virtus ETF Solutions LLC (2012-present); Managing Principal, ETF Distributors LLC (2012-present); Vice President, Factor Advisors, LLC (2010-2012); Vice President, MacroMarkets, LLC (2006-2010) | Ten | None |
| * Mr. Smalley is an Interested Trustee because he is an employee of the Adviser. | |||||
| OTHER EXECUTIVE OFFICERS | |||||
| Brinton W. Frith (44) | Treasurer and Chief Financial Officer | Since Inception | Managing Director, Virtus ETF Solutions LLC (2013-present); President, Javelin Investment Management, LLC (2008-2013) | N/A | N/A |
| Nancy J. Engberg (59) | Chief Compliance Officer | Since 2015 | Vice President (since 2008) and Chief Compliance Officer (2008 to 2011), Virtus Investment Partners, Inc. and/or certain of its subsidiaries; various officer positions (since 2003) with Virtus affiliates; Vice President and Chief Compliance Officer (since 2011), Virtus Mutual Fund Complex; Vice President (since 2010), Chief Compliance Officer (since 2011), Virtus Variable Insurance Trust; Vice President and Chief Compliance Officer (since 2011), Virtus Closed-End Funds; Vice President and Chief Compliance Officer (since 2012), The Zweig Closed-End Funds; Vice President and Chief Compliance Officer (since 2013), Virtus Alternative Solutions Trust. | N/A | N/A |
Board Structure. The Trust’s Board includes three Independent Trustees and one Interested Trustee, Mr. Smalley, who is Chairman of the Board. The Board has not appointed an Independent Trustee to serve as lead Independent Trustee because, among other things, the Board’s current small size and the small number of funds in the Trust permit Trust management to communicate with each Independent Trustee as and when needed, and permit each Independent Trustee to be involved in each committee of the Board (each a “ Committee ”) as well as each Board function. The Board may consider appointing an independent Chairman or a lead Independent Trustee in the future, particularly if the Board’s size or the Trust’s complexity materially increases.
With respect to risk oversight, the Board holds four regular meetings each year to consider and address matters involving the Trust and the Fund. During these meetings, the Board receives reports from the Adviser, the Sub-Adviser, Trust management, the Fund’s administrator, transfer agent and distributor, and the Trust’s Chief Compliance Officer (the “ CCO ”), on regular quarterly items and, where appropriate and as needed, on specific issues. As part of its oversight function, the Board also may hold special meetings or communicate directly with Trust management or the CCO to address matters arising between regular meetings. The Board has established a committee structure that includes an Audit Committee and Nominating Committee (discussed in more detail below). Each Committee is comprised entirely of Independent Trustees. The Independent Trustees have engaged independent legal counsel to assist them in performing their oversight responsibilities.
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Qualification of Trustees. The Board has considered each Trustee’s experience, qualifications, attributes and skills in light of the Board’s function and the Trust’s business and structure, and has determined that each Trustee possesses experience, qualifications, attributes and skills that enable the Trustee to be an effective member of the Board. In this regard, the Board has considered the following specific experience, qualifications, attributes and/or skills for each Trustee:
| James Simpson | Mr. Simpson has experience as President of ETP Resources, a financial information services company that provides detailed reference data on U.S.-listed exchange-traded products. He also has experience working for financial institutions and securities exchanges and has consulted with respect to the development of exchange-traded products. |
| Robert S. Tull | Mr. Tull has experience as a consultant to financial companies and as chief operating officer to financial services companies. Mr. Tull has also assisted with the development of exchange-traded products. |
| Stephen O’Grady | Mr. O’Grady has experience in the development and operation of ETF trading systems and futures exchanges and has served as president of an options brokerage firm. |
| William J. Smalley | Mr. Smalley has experience in the financial industry, including the development of exchange-traded products, and is a founder of the Adviser and the Distributor. |
The Board has determined that each of the Trustees’ careers and background, combined with their interpersonal skills and general understanding of financial and other matters, enable the Trustees to effectively participate in and contribute to the Board’s functions and oversight of the Trust. References to the qualifications, attributes and skills of Trustees are pursuant to requirements of the SEC, do not constitute holding out the Board or any Trustee as having any special expertise or experience, and shall not impose any greater responsibility on any such person or on the Board by reason thereof.
Trustee Standing Committees. The Board has established the following standing committees:
Audit Committee: The Independent Trustees are the current members of the Audit Committee. The Audit Committee oversees the Fund’s accounting and financial reporting policies and practices, reviews the results of the annual audits of the Fund’s financial statements and interacts with the Fund’s independent auditors on behalf of the Board. The Audit Committee also serves in the role of the Trust’s qualified legal compliance committee and, as such, receives, investigates and makes recommendations as to appropriate remedial action in connection with any report of evidence of a material violation of securities laws or breach of fiduciary duty or similar violation by the Trust, its officers, Trustees or agents. The Audit Committee operates pursuant to an Audit Committee Charter and meets periodically as necessary. The Audit Committee met once during the past fiscal year.
Nominating Committee: The Independent Trustees are the current members of the Nominating Committee. The Nominating Committee nominates, selects and appoints Independent Trustees to fill vacancies on the Board and to stand for election at appropriate meetings of the shareholders of the Trust. The Nominating Committee meets only as necessary. The Nominating Committee met once during the past fiscal year. The Nominating Committee generally will not consider nominees recommended by shareholders of the Trust.
Beneficial Ownership of Shares of the Fund. Because the Fund is newly organized, none of the Trustees own Shares of the Fund as of the date of this SAI.
Ownership In Fund Affiliates . As of the date of this SAI, none of the Independent Trustees, nor members of their immediate families, owned, beneficially or of record, securities of the Adviser, the Fund’s principal underwriter or any affiliate of the Adviser or the principal underwriter.
Compensation. Officers of the Trust and the Trustees who are interested persons of the Trust or the Adviser receive no salary from the Trust. Each Independent Trustee receives $2,000 per year plus $2,000 per series of the Trust. The Trust reimburses each Trustee and officer of the Trust for his or her travel and other expenses relating to attendance at Board or committee meetings. For the fiscal year ended October 31, 2014, the Trustees received the following compensation:
| Name of Trustee | Aggregate Compensation From the Fund | Pension or Retirement Benefits Accrued As Part of Fund Expenses | Estimated Annual Benefits Upon Retirement | Total Compensation From Fund Complex Paid to Trustees |
| Independent Trustees | ||||
| James Simpson | None | None | None | $169.86 |
| Robert S. Tull | None | None | None | $169.86 |
| Stephen O’Grady | None | None | None | $169.86 |
| Interested Trustee | ||||
| William J. Smalley | None | None | None | None |
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CODES OF ETHICS. The Trust, the Adviser, the Sub-Adviser and the Fund’s principal underwriter have each adopted a code of ethics, as required by Rule 17j-1 under the 1940 Act, that is designed to prevent personnel of the Trust, the Adviser, the Sub-Adviser and the Fund’s principal underwriter subject to the codes from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to be acquired by the Fund (which securities may also be held by persons subject to the codes). The codes of ethics permit personnel of the Trust, the Adviser, the Sub-Adviser and the principal underwriter subject to the codes to invest in securities, including, without limitation, securities that may be purchased or held by the Fund, subject to certain restrictions and pre-approval requirements. In addition, the codes of ethics of the Trust, the Adviser, the Sub-Adviser and the principal underwriter require that access persons of such entities report their personal securities transactions and holdings, which are reviewed for compliance with the code of ethics.
Anti-Money Laundering Program . The Trust has adopted an anti-money laundering (“ AML ”) program, as required by applicable law, that is designed to prevent the Fund from being used for money laundering or the financing of terrorist activities. The Trust’s AML Compliance Officer is responsible for implementing and monitoring the operations and internal controls of the program. Compliance officers at certain of the Fund’s service providers are also responsible for monitoring aspects of the AML program. The AML program is subject to the continuing oversight of the Board.
PROXY VOTING POLICIES. The Trust has adopted a proxy voting and disclosure policy that delegates to each Fund’s Proxy Voting Manager the authority to vote proxies for the Fund, subject to oversight of the Board. The Sub-Adviser serves as the proxy Voting Manager for the Fund. Copies of the Trust’s Proxy Voting Policies and Procedures and the Proxy Voting Manager’s Policies and Procedures are included as Appendix A and Appendix B , respectively, to this SAI.
No later than August 31 of each year, the Trust files Form N-PX with the SEC. Form N-PX states how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30. The Fund’s proxy voting records, as set forth in its most recent Form N-PX filing, are available upon request, without charge, by calling the Fund at (866) 383-7636. This information is also available on the SEC’s website at http://www.sec.gov.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of the date of this SAI, the Fund had no Shares outstanding.
MANAGEMENT SERVICES
The following information supplements and should be read in conjunction with the section in the Prospectus entitled “Management of the Fund”.
Adviser. Virtus ETF Advisers LLC, a Delaware limited liability company, serves as investment adviser to the Fund and has overall responsibility for the general management and administration of the Trust, pursuant to an investment advisory agreement between the Trust and the Adviser (the “ Advisory Agreement ”). The Adviser, located at 1540 Broadway, New York, New York 10036, was organized as a Delaware limited liability company in August 2013 and, since April 2015, has been a majority-owned subsidiary of Virtus Partners, Inc. (Ticker: VRTS) (together with its affiliates, “ Virtus ”). Virtus is a public company that operates a multi-manager asset management business and has substantial experience in the investment management and investment company industries. As of April 2015, on a collective basis, Virtus-affiliated registered investment advisers manage over $56.7 billion in assets (including over $43.9 billion in registered investment company assets). The Adviser has served as the investment adviser of the Fund since the inception of the Fund’s operations. The Adviser also serves as investment adviser to the other series of the Trust.
The Advisory Agreement is effective for an initial two-year period and will remain in effect thereafter only so long as such renewal and continuance is specifically approved at least annually by the Board or by vote of a majority of the Fund’s outstanding voting securities, provided the continuance is also approved by a majority of the Independent Trustees. The Advisory Agreement is
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terminable without penalty on 60 days’ notice by the Board or by vote of a majority of the outstanding voting securities of the Fund. The Advisory Agreement provides that it will terminate automatically in the event of its “assignment,” as such term is defined in the 1940 Act.
Under the Advisory Agreement, the Adviser is not liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which the Advisory Agreement relates, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services; or a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser in the performance of its duties; or from the reckless disregard of its duties and obligations under the Advisory Agreement.
Adviser Compensation . The Adviser receives a monthly fee at the annual rate of 0.06% of the Fund’s average daily net assets. The Adviser has not been paid any fees as of the date of this Prospectus.
The Adviser has engaged the Sub-Adviser to manage the Fund’s investments in accordance with the stated investment objective and policies of the Fund, subject to the oversight and supervision of the Adviser and the Board.
Sub-Adviser . The Fund’s Sub-Adviser is Active Alts Inc., 6 Old Hill Road, Westport, CT 06880. The Sub-Adviser serves in that capacity pursuant to a sub-advisory contract (the “ Sub-Advisory Agreement ”) with the Adviser and the Trust, on behalf of the Fund, as approved by the Board. The Sub-Adviser makes day-to-day investment decisions for the Fund and selects broker-dealers for executing portfolio transactions, subject to the brokerage policies established by the Board.
The Sub-Adviser was organized as a Connecticut corporation in March 2015. The Sub-Adviser has served as the sub-adviser of the Fund since the inception of the Fund’s operations. The Sub-Adviser is owned by Brad Lamensdorf, its founder and manager. Mr. Lamensdorf has experience in portfolio management for other registered investment companies, private investment funds and separate accounts.
Sub-Adviser Compensation. As full compensation for its services to the Fund, the Sub-Adviser receives monthly compensation from the Fund at the annual rate of 1.49% of the Fund’s average daily net assets. The Sub-Adviser has not been paid any fees as of the date of this Prospectus.
Expense Limitation Agreement. The Sub-Adviser has entered into an Expense Limitation Agreement to limit the Fund’s total operating expenses (excluding dividend and interest expenses; taxes; brokerage commissions and other transaction-related expenses; extraordinary expenses; acquired fund fees and expenses; and payments, if any, under a Rule 12b-1 Distribution Plan) so that such expenses do not exceed 1.95% of the Fund’s average daily net assets through December 31, 2016. While the Sub-Adviser or the Fund may discontinue the expense reimbursement arrangement after the contractual period, the Expense Limitation Agreement may only be terminated during its term with the approval of the Trust’s Board of Trustees. Under certain conditions, the Sub-Adviser may recapture fees waived or and operating expenses reimbursed under this arrangement for a period of three years following the fiscal year in which such reimbursement occurred.
Portfolio Manager. The Fund’s portfolio manager is Brad Lamensdorf, who has managed the Fund since the inception of the Fund’s operations. The portfolio manager is primarily responsible for the day-to-day management of the Fund.
Mr. Lamensdorf is the founder of the Sub-Adviser. Mr. Lamensdorf also founded BHL Advisors, LLC in 2006 to, among other things, provide investment advice to a commodity-oriented hedge fund (BHL Partners, LP) primarily focused on gold equities. Since January 2013, Mr. Lamensdorf has also led the production of The Lamensdorf Market Timing Report, a newsletter which provides subscribers with technical analysis, and since 2009, Mr. Lamensdorf has been a portfolio manager and principal of Ranger Alternative Management, L.P., a registered investment adviser which provides trading and marketing strategy for short-only portfolios. From November 2007 to December 2012, Mr. Lamensdorf served as a principal of Precisian GP, LLC and a portfolio manager of Precisian Partners L.P., an options volatility manager. From 1998 to 2005, Mr. Lamensdorf served as a principal of Tarpon Capital Management, L.P. and the portfolio manager for Tarpon Partners, L.P., an un-leveraged long/short strategy that focused on relative strength. From 1992 to 1997, Mr. Lamensdorf worked on the equity trading desk for Taylor & Company, the trading unit of Bass Brothers Enterprises, in Fort Worth, Texas, where he co-managed an equity portfolio focused solely on short selling and derivatives strategies. Mr. Lamensdorf received a B.A. in Psychology from the University of Texas at Austin in 1992.
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Ownership of Fund Shares. The portfolio managers did not own any Shares of the Fund as of the date of this SAI because the Fund had not yet commenced operations.
Other Accounts. In addition to the Fund, Mr. Lamensdorf is responsible for the day-to-day management of certain other accounts. The table below shows the number of, and total assets in, such other accounts as of July 31, 2015.
| Portfolio Manager | Type of Accounts |
Total Number of
Accounts
|
Total Assets of
Accounts
|
Number
of Accounts where
Advisory Fee is Based upon Account Performance |
Total
Assets where
Advisory Fee is Based upon Account Performance |
| Brad Lamensdorf |
Registered Investment Companies:
Other Pooled Investment Vehicles:
Other Accounts:
|
1
1
0 |
$127.02 million
$0.50 million
$0 |
0
1
0 |
$0
$0.50 million
$0 |
Material Conflicts of Interest. Because the portfolio manager may at times manage multiple portfolios for multiple clients, the potential for conflicts of interest exists. The portfolio manager may manage portfolios having substantially the same investment style as the Fund. However, the portfolios managed by the portfolio manager may not have portfolio compositions identical to those of the Fund due, for example, to specific investment limitations or guidelines present in some portfolios or accounts, but not others. The portfolio manager may purchase securities for one portfolio and not another portfolio, and the performance of securities purchased for one portfolio may vary from the performance of securities purchased for other portfolios. The portfolio manager may place transactions on behalf of other accounts that are directly or indirectly contrary to investment decisions made on behalf of the Fund, or make investment decisions that are similar to those made for the Fund, both of which have the potential to adversely impact the Fund depending on market conditions. For example, the portfolio manager may purchase a security in one portfolio while appropriately selling that same security in another portfolio. In addition, some of these portfolios may have fee structures that are or have the potential to be higher than the advisory fees paid by the Fund, which can cause potential conflicts in the allocation of investment opportunities between the Fund and the other accounts. In addition, current trading practices would not allow the Sub-Adviser to intentionally favor one portfolio over another as trades are executed as trade orders are received.
Compensation . Mr. Lamensdorf, as portfolio manager, is not compensated directly by the Fund, but rather by the Sub-Adviser, of which he has an ownership interest and is thus entitled to profits from the Sub-Adviser on account of such ownership. Since the Sub-Adviser’s profits are expected to increase as Fund assets increase, Mr. Lamensdorf is expected to receive increased profits as an owner of the Sub-Adviser as assets of the Fund increase.
ADMINISTRATOR. Under the Administrative Services Agreement, Virtus ETF Solutions LLC (the “ Administrator ”) serves as the operational administrator of the Trust. The Administrator’s address is 1540 Broadway, New York, NY 10036. Under the Administrative Services Agreement, the Administrator supervises the overall administration of the Trust and the Fund including, among other responsibilities, the coordination and day-to-day oversight of the Fund’s operations, the service providers’ communications with the Fund and each other and assistance with Trust, Board and contractual matters related to the Fund and other series of the Trust. The Administrator also provides persons satisfactory to the Board to serve as officers of the Trust. The Administrator will be indemnified in connection with or arising out of performance of its obligations and duties under this Agreement, except for losses resulting from the willful malfeasance, bad faith or gross negligence of Administrator in the performance of such obligations and duties. The Fund is newly formed and has not paid any fees for administration services as of the date of this SAI.
ACCOUNTING, Custodian and Transfer Agent. Under the Fund Administration and Accounting Agreement (the “ Accounting Services Agreement ”), The Bank of New York Mellon (“ BNY Mellon ” or the “ Accounting Services Administrator ”) serves as accounting administrator for the Fund. BNY Mellon’s principal address is One Wall Street, New York, New York 10286. Under the Administration Agreement, BNY Mellon provides necessary administrative, legal, tax, accounting services and financial reporting for the maintenance and operations of the Trust and the Fund. In addition, BNY Mellon makes available the office space, equipment, personnel and facilities required to provide such services.
BNY Mellon provides accounting and administration services to the Trust, including, among other responsibilities, assisting in the preparation and filing of documents required for compliance by the Fund with applicable laws and regulations and arranging for the maintenance of books and records of the Fund. BNY Mellon may also provide persons satisfactory to the Board to serve as officers of the Trust.
The Fund is newly formed and has not paid any fees for accounting administration services as of the date of this SAI.
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BNY Mellon serves as custodian of the Fund’s assets (the “ Custodian ”). The Custodian has agreed to (1) make receipts and disbursements of money on behalf of the Fund; (2) collect and receive all income and other payments and distributions on account of the Fund’s portfolio investments; (3) respond to correspondence from Fund shareholders and others relating to its duties; and (4) make periodic reports to the Fund concerning the Fund’s operations. The Custodian does not exercise any supervisory function over the purchase and sale of securities. The Fund is newly formed and has not paid any fees for the Custodian’s services as of the date of this SAI.
BNY Mellon serves as transfer agent and dividend paying agent for the Fund (the “ Transfer Agent ”). The Transfer Agent has agreed to (1) issue and redeem Shares of the Fund; (2) make dividend and other distributions to shareholders of the Fund; (3) respond to correspondence by Fund shareholders and others relating to its duties; (4) maintain shareholder accounts; and (5) make periodic reports to the Fund. The Fund is newly formed and has not paid any fees for the Transfer Agent’s services as of the date of this SAI.
BNY Mellon is the principal operating subsidiary of The Bank of New York Mellon Corporation.
Distributor. ETF Distributors LLC, the Distributor, is located at 1540 Broadway, New York, NY 10036. The Distributor is a broker-dealer registered under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and a member of the Financial Industry Regulatory Authority, Inc. (“ FINRA ”).
Shares will be continuously offered for sale by the Trust through the Distributor only in whole Creation Units, as described in the section of this SAI entitled “Purchase and Redemption of Creation Units”. The Distributor also 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 investment policies of the Fund or which securities are to be purchased or sold by the Fund. The Fund is newly formed and has not paid any fees for the Distributor’s services as of the date of this SAI.
The Board of Trustees of the Trust has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to finance activities primarily intended to result in the sale of Creation Units of the Fund or the provision of investor services. No Rule 12b-1 fees are currently paid by the Fund, and there are no current plans to impose these fees. However, in the event Rule 12b-1 fees are charged in the future, they will be paid out of the Fund’s assets, and over time these fees will increase the cost of your investment and may cost you more than certain other types of sales charges.
Under the Service and Distribution Plan, and as required by Rule 12b-1, the Trustees will receive and review after the end of each calendar quarter a written report provided by the Distributor of the amounts expended under the Plan and the purpose for which such expenditures were made.
ADDITIONAL SERVICE ARRANGEMENTS. The Adviser, the Sub-Adviser or their respective affiliates may, out of their own resources, pay amounts to third parties for distribution or marketing services on behalf of the Fund. Additionally, the Adviser, the Sub-Adviser or their respective affiliates may pay, out of their own resources, amounts to financial intermediaries for assistance with communication, distribution of materials and other services for their clients that are shareholders of the Fund, or for other services in connection with the organization or operation of the Fund. The making of these payments could create a conflict of interest for a financial intermediary receiving such payments.
Independent Registered Public Accounting Firm. The Board has selected the firm of BBD, LLP, located at 1835 Market Street, 26th Floor, Philadelphia, Pennsylvania 19103, to serve as the independent registered public accounting firm for the Fund for the current fiscal year and to audit the annual financial statements of the Fund and prepare the Fund’s federal, state and excise tax returns. Such firm will audit the financial statements of the Fund at least once each year. A copy of the most recent annual report containing the audit report will accompany this SAI whenever a shareholder or a prospective investor requests it.
LEGAL COUNSEL. Kilpatrick Townsend & Stockton LLP, located at 1001 West Fourth Street, Winston-Salem, North Carolina 27101, serves as legal counsel to the Trust.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision of the Board and the Adviser, the Sub-Adviser is responsible for, makes decisions with respect to and places orders for all purchases and sales of portfolio securities for, the Fund. The Sub-Adviser manages the Fund’s portfolio in accordance with the terms of the Sub-Advisory Agreement by and among the Trust on behalf of the Fund, the Sub-Adviser and the Adviser, which is described in detail under “Management Services – Sub-Adviser”. The Sub-Adviser may serve as investment adviser for other client accounts, in addition to the Fund.
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Brokerage Selection. The Fund has adopted, and the Board has approved, policies and procedures relating to the direction of portfolio securities transactions to brokers. In accordance with these policies and procedures, in selecting brokers to be used in portfolio transactions, the Sub-Adviser’s general guiding principle is to obtain the best overall execution for each trade, which is a combination of price and execution. With respect to execution, the Sub-Adviser considers a number of factors, including, without limitation, the actual handling of the order, the ability of the broker to settle the trade promptly and accurately, the financial standing of the broker, the ability of the broker to position securities to facilitate execution, the Sub-Adviser’s past experience with similar trades and other factors that may be unique to a particular order. Recognizing the value of these judgmental factors, the Sub-Adviser may select brokers that charge a brokerage commission that is higher than the lowest commission that might otherwise be available for any given trade. The Sub-Adviser may not give consideration to sales of Shares of the Fund as a factor in selecting brokers to execute portfolio transactions. The Sub-Adviser may, however, place portfolio transactions with brokers that are affiliated with the Adviser or the Sub-Adviser or that promote or sell the Fund’s Shares, so long as such transactions are done in accordance with the policies and procedures established by the Board that are designed to ensure that the selection is consistent with the Sub-Adviser’s obligation to seek best execution and not based upon the broker’s sales efforts.
Under Section 28(e) of the Exchange Act and the Sub-Advisory Agreement, the Sub-Adviser may, in its discretion, purchase and sell portfolio securities from and to brokers and dealers who provide the Sub-Adviser with brokerage, research, analysis, advice and similar services, and the Sub-Adviser may pay to these brokers and dealers, in return for such services, a higher commission or spread than may be charged by other brokers and dealers, provided that the Sub-Adviser determines in good faith that such commission is reasonable in terms either of that particular transaction or of the overall responsibility of the Sub-Adviser to the Fund and its other clients and that the total commission paid by the Fund will be reasonable in relation to the benefits to the Fund and its other clients over the long-term. The research received by the Sub-Adviser may include, without limitation: information on the United States and other world economies; information on specific industries, sectors, groups of securities, individual companies, and political and other relevant news developments affecting markets and specific securities; technical and quantitative information about markets; analysis of proxy proposals affecting specific companies; accounting and performance systems that allow the Sub-Adviser to determine and track investment results; and trading systems that allow the Sub-Adviser to interface electronically with brokerage firms, custodians and other providers. Research is received in the form of written reports, telephone contacts, personal meetings, research seminars, software programs and access to computer databases. In some instances, research products or services received by the Sub-Adviser may also be used by the Sub-Adviser for functions that are not research related (i.e. not related to the making of investment decisions). Where a research product or service has a mixed use, the Sub-Adviser will make a reasonable allocation according to its use and will pay for the non-research function in cash using its own funds.
The research and investment information services described above make available to the Sub-Adviser for its analysis and consideration the views and information of individuals and research staffs of other securities firms. These services may be useful to the Sub-Adviser in connection with advisory clients other than the Fund, and not all such services may be useful to the Sub-Adviser in connection with the Fund. Although such information may be a useful supplement to the Sub-Adviser’s own investment research in rendering services to the Fund, the value of such research and services is not expected to materially reduce the expenses of the Sub-Adviser in the performance of its services under the Sub-Advisory Agreement and will not reduce the management fees payable to the Sub-Adviser by the Fund.
The Fund may invest in securities traded in the over-the-counter market. In these cases, the Fund may initiate trades through brokers on an agency basis and pays a commission in connection with the transaction. The Fund may also effect these transactions by dealing directly with the dealers that make a market in the securities involved, in which case the costs of such transactions would involve dealer spreads rather than brokerage commissions.
Aggregated Trades. While investment decisions for the Fund are made independently from those for any other investment companies and accounts advised or managed by the Sub-Adviser, such other advisory clients may invest in the same securities as the Fund. To the extent permitted by law, the Sub-Adviser may aggregate the securities to be sold or purchased for the Fund with those to be sold or purchased for other investment companies or accounts advised or managed by the Sub-Adviser in executing transactions. When a purchase or sale of the same security is made as part of an aggregated trade, the transaction will be averaged as to price and available investments allocated as to amount in a manner which the Sub-Adviser believes to be equitable to the Fund and other participating investment companies or accounts. In some instances, this investment procedure may adversely affect the price paid or received by the Fund or the size of the position obtained or sold by the Fund.
Portfolio Turnover. The portfolio turnover rate for the Fund is calculated by dividing the lesser of purchases or sales of portfolio securities for the reporting period by the monthly average value of the portfolio securities owned during the reporting period. The calculation excludes all securities whose maturities or expiration dates at the time of acquisition are one year or less. Portfolio turnover of the Fund may vary greatly from year to year as well as within a particular year, and may be affected by cash requirements for redemption of Shares and by requirements that enable the Fund to receive favorable tax treatment. Portfolio turnover will not be a
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limiting factor in making investment decisions, and the Fund may engage in short-term trading to achieve its investment objectives. High rates of portfolio turnover could lower performance of the Fund due to increased transaction costs and may also result in the realization of short-term capital gains taxed at ordinary income tax rates.
DISCLOSURE OF PORTFOLIO HOLDINGS
Portfolio Disclosure Policy. The Trust has adopted a Portfolio Holdings Policy (the “ Policy ”) designed to govern the disclosure of Fund portfolio holdings and the use of material non-public information about Fund holdings. The Policy applies to all officers, employees and agents of the Fund. The Policy is designed to ensure that the disclosure of information about the Fund’s portfolio holdings is consistent with applicable legal requirements and otherwise in the best interest of the Fund.
As an ETF, information about the Fund’s portfolio holdings is made available on a daily basis in accordance with the provisions of any order of the SEC applicable to the Fund, the regulations of the Exchange and other applicable SEC regulations, orders and no-action relief. Such information typically reflects all or a portion of the Fund’s anticipated portfolio holdings as of the next Business Day (as defined below). This information is used in connection with the creation and redemption process and is disseminated on a daily basis through the facilities of the Exchange, the National Securities Clearing Corporation (the “ NSCC ”) and/or third party service providers.
A “Business Day” with respect to the Fund is any day on which the Exchange is open for business. As of the date of the Prospectus, the Exchange observes the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday, Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Trust will disclose on the Fund’s website at the start of each Business Day the identities and quantities of the securities and other assets held by the Fund that will form the basis of the Fund’s calculation of its NAV on that Business Day. The portfolio holdings so disclosed will be based on information as of the close of business on the prior Business Day and/or trades that have been completed prior to the opening of business on that Business Day and that are expected to settle on the Business Day. Online disclosure of such holdings is publicly available at no charge. The website for the Fund is www.ActiveAlts.com.
The Fund may also send a portion or all of this information to shareholders of the Fund and to investment company analysts and rating and trading entities. However, the Fund will not send this information to shareholders of the Fund or to analysts or rating and/or trading entities until such information is at least 30 days old or until one Business Day after the information has been posted to the Fund’s website.
The officers of the Trust, the Adviser and/or the Sub-Adviser may share non-public portfolio holdings information with the Fund’s service providers that require such information for legitimate business and Fund oversight purposes, such as the Fund’s operating administrator, fund accounting administrator, transfer agent, distributor, custodian, independent registered public accounting firm, and legal counsel as identified in the Fund’s Prospectus and this SAI and Doremus FP (a financial EDGARizing, typesetting and printing firm). The Fund, the Adviser and/or the Sub-Adviser may also provide non-public portfolio holdings information to appropriate regulatory agencies as required by applicable laws and regulations. The Fund’s service providers receiving such non-public information are subject to confidentiality obligations requiring such service providers to keep non-public portfolio holdings information confidential. Certain of the service providers have codes of ethics that prohibit trading based on, among other things, non-public portfolio holdings information.
The Fund, the Adviser and/or the Sub-Adviser may, from time to time, provide additional portfolio holdings information in the form of quarterly or monthly management letters; provided, however, that the Fund, the Adviser and/or the Sub-Adviser will not send such quarterly or monthly management letters to shareholders until such information is either filed with the SEC or publicly disclosed on the Fund’s website. In addition, non-public portfolio holdings information and other information regarding the investment activities of the Fund may also be disclosed to rating and ranking organizations for use in connection with their rating or ranking of the Fund.
The Fund currently does not provide non-public portfolio holdings information to any other third parties. In the future, the Fund may elect to disclose such information to other third parties if the appropriate officers of the Trust determine that the Fund has a legitimate business purpose for doing so and the recipient is subject to a duty of confidentiality. The Adviser and the Sub-Adviser, through their respective officers, are responsible for determining which other third parties have a legitimate business purpose for receiving the Fund’s portfolio holdings information.
The Fund’s policies regarding disclosure of portfolio holdings are subject to the continuing oversight and direction of the Board. The Adviser, the Sub-Adviser and the Administrator are required to report to the Board any known disclosure of the Fund’s portfolio holdings to unauthorized third parties. The Fund has not entered (and does not currently intend to enter) into any arrangement providing for the receipt of compensation or other consideration in exchange for the disclosure of non-public portfolio holdings
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information, other than the benefits that result to the Fund and its shareholders from providing such information, which include the publication of Fund ratings and rankings.
The Fund will make available to the public a complete schedule of its portfolio holdings, as reported on a fiscal quarter basis. This information is generally available within 60 days of the Fund’s fiscal quarter end and will remain available until the next fiscal quarter’s portfolio holdings report becomes available. You may obtain a copy of these quarterly portfolio holdings reports by calling the Fund at (212) 593-4383. The Fund will also file these quarterly portfolio holdings reports with the SEC on Form N-CSR or Form N-Q, as applicable. The Fund’s Form N-CSR and Form N-Q are available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. The first and third quarter portfolio holdings reports will be filed with the SEC on Form N-Q, and the second and fourth fiscal quarter portfolio holdings reports will be included with the semi-annual and annual reports, respectively, which are sent to shareholders and filed with the SEC on Form N-CSR.
No person is authorized to disclose the Fund’s portfolio holdings or other investment positions except in accordance with the Policy.
The approximate value of the Fund’s investments on a per-Share basis, the Indicative Intra-Day Value (“ IIV ”), is disseminated by the Exchange every 15 seconds during hours of trading on the Exchange. The IIV should not be viewed as a “real-time” update of NAV because the IIV will be calculated by an independent third party and may not be calculated in the exact same manner as NAV, which is computed daily.
The IIV for the Fund is calculated during hours of trading on the Exchange by dividing the “Estimated Fund Value” as of the time of the calculation by the total number of outstanding Shares. “Estimated Fund Value” is the sum of the estimated amount of cash held in the Fund’s portfolio, the estimated amount of accrued interest owing to the Fund and the estimated value of the securities held in the Fund’s portfolio, minus the estimated amount of the Fund’s liabilities. The IIV will be calculated based on the same portfolio holdings disclosed on the Fund’s website. In determining the estimated value for each of the component securities, the IIV will use last sale, market prices or other methods that would be considered appropriate for pricing equity securities held by registered investment companies.
Although the Trust provides the information used to calculate the IIV, the Trust is not involved in the actual calculation of the IIV and is not responsible for the calculation or dissemination of the IIV. The Trust makes no warranty as to the accuracy of the IIV.
ADDITIONAL INFORMATION CONCERNING SHARES
Organization and Description of Shares of Beneficial Interest. The Trust is a Delaware statutory trust and a registered investment company. The Trust was organized on September 20, 2012, and it has authorized capital of an unlimited number of Shares of beneficial interest of no par value, which may be issued in more than one class or series.
Under Delaware law, the Trust is not required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. If requested by shareholders of at least one-third of the outstanding Shares of the Trust or any series thereof, the Trust will call a meeting of the shareholders of the Trust or the series, as applicable. Shareholders holding two-thirds of Shares outstanding may remove Trustees from office by votes cast at a meeting of Trust shareholders or by written consent.
All Shares will be freely transferable; provided, however, that Shares may not be redeemed individually, but only in Creation Units. The 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, if the Trust creates additional funds, only Shares of that fund may be entitled to vote on a matter affecting that particular fund. Trust shareholders are entitled to require the Trust to redeem Creation Units if such shareholders are Authorized Participants. The Declaration of Trust confers upon the Board the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust may be individually redeemable. The Trust reserves the right to adjust the prices of Shares to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through splits or reverse splits, which would have no effect on the net assets of the Fund. If the Fund does not grow to a size to permit it to be economically viable, the Fund may cease operations. In such an event, you may be required to liquidate or transfer your Shares at an inopportune time and you may lose money on your investment.
Book Entry Only System . Depository Trust Company (“ DTC ”) acts as securities depository for the Fund’s Shares. Shares of the Fund are represented by securities registered in the name of DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
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DTC, a limited-purpose trust company, was created to hold securities of its participants (the “ DTC Participants ”) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of which (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the New York Stock Exchange, LLC and FINRA. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (the “ Indirect Participants ”).
Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as “ Beneficial Owners ”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares.
Conveyance of all notices, statements and other communications to Beneficial Owners is effected as follows. Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the Shares of the Fund held by each DTC Participant. The Trust will inquire of each DTC Participant as to the number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust will provide each 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 the DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust will pay to each DTC Participants a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions will be made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, will credit immediately with respect to the DTC Participants’ accounts with payments in amounts proportionate to their respective beneficial interests in Shares of the Fund as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial Owners with respect to the Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspect of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in 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 the DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants.
DTC may decide 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 will take action to find a replacement for DTC to perform its functions at a comparable cost. The DTC Participants’ rules and policies are made publicly available through DTC’s website at: www.dtcc.com.
PURCHASE AND REDEMPTION OF CREATION UNITS
Creation. The Trust issues and sells Shares of the Fund only in Creation Units on a continuous basis through the Distributor, at their NAV next determined after receipt, on any Business Day, for an order received in proper form.
Fund Deposit. The consideration for purchase of a Creation Unit of the Fund generally consists of cash or an in-kind deposit of Deposit Securities for each Creation Unit constituting a substantial replication, or a representation, of the securities included in the Fund’s portfolio and a Cash Component computed as described below. Together, the Deposit Securities and the Cash Component constitute the “ Fund Deposit ”, which represents the minimum initial and subsequent investment amount for a Creation Unit of the Fund. The Cash Component is an amount equal to the difference between the NAV of the Shares (per Creation Unit) and the market value of the Deposit Securities. If the Cash Component is a positive number (i.e., the NAV per Creation Unit exceeds the market value of the Deposit Securities), the Cash Component will be such positive amount. If the Cash Component is a negative number (i.e., the NAV per Creation Unit is less than the market value of the Deposit Securities), the Cash Component will be such negative amount, and the creator will be entitled to receive cash from the Fund in an amount equal to the Cash Component. The Cash Component serves the function of compensating for any differences between the NAV per Creation Unit and the market value of the Deposit Securities.
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The Fund, through the National Securities Clearing Corporation (“ NSCC ”), makes available on each Business Day, immediately prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern Time), the list of the names and the required number of Shares of each Deposit Security to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for the Fund. Such Fund Deposit is applicable, subject to any adjustments as described below, in order to effect creations of Creation Units of the Fund until such time as the next-announced composition of the Deposit Securities is made available.
The identity and number of Shares of the Deposit Securities required for the Fund Deposit for the Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by the Sub-Adviser with a view to the investment objective of the Fund. In addition, the Trust reserves the right to permit or require the substitution of an amount of cash - i.e., a “cash in lieu” amount - to be added to the Cash Component to replace any Deposit Security that may not be available in sufficient quantity for delivery, that may not be eligible for transfer through the Clearing Process (discussed below) or that may not be eligible for trading by an Authorized Participant or the investor for which it is acting.
In addition to the list of names and numbers of securities constituting the current Deposit Securities of the Fund Deposit, the Fund, through NSCC, also makes available on each Business Day the estimated Cash Component, effective through and including the previous Business Day, per outstanding Creation Unit of the Fund.
Procedures for Creation of Creation Units. To be eligible to place orders to create a Creation Unit of the Fund, an entity must be (i) a “ Participating Party ”, i.e., a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of NSCC (the “ Clearing Process ”) or a clearing agency that is registered with the SEC, or (ii) a DTC Participant (see “Book Entry Only System”) and, in each case, must have executed an agreement with the Trust, the Distributor and the Transfer Agent with respect to creations and redemptions of Creation Units (“ Participant Agreement ”). A Participating Party and DTC Participant are collectively referred to as an “Authorized Participant”. Investors should contact the Distributor for the names of Authorized Participants that have signed a Participant Agreement with the Fund. All Shares of the Fund, however created, will be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant.
All orders to create Creation Units must be placed for one or more Creation Unit size aggregations of Shares (25,000 in the case of the Fund). All orders to create Creation Units, whether through the Clearing Process (through a Participating Party) or outside the Clearing Process (through a DTC Participant), must be received by the Distributor no later than one hour prior to the close of the regular trading session on the Exchange (“ Closing Time ”) (i.e., typically 3:00 p.m. Eastern Time) on the date such order is placed in order for the creation of Creation Units to be effected based on the NAV of Shares of the Fund as next determined on such date after receipt of the order in proper form. The date on which an order to create Creation Units (or an order to redeem Creation Units as discussed below) is placed is referred to as the “ Transmittal Date ”. 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 (see “Placement of Creation Orders Using the Clearing Process” and “Placement of Creation Orders Outside the Clearing Process”). Severe economic or market disruptions or changes, or telephone or other communication failure, may impede the ability to reach the Distributor or an Authorized Participant.
Orders to create Creation Units of the Fund will be placed with an Authorized Participant in the form required by such Authorized Participant. In addition, an Authorized Participant may request the investor to make certain representations or enter into agreements with respect to the order, i.e., to provide for payments of cash, when required. Investors should be aware that their particular broker may not have executed a Participant Agreement, and that, therefore, orders to create Creation Units of the Fund will need to be placed by the investor’s broker through an Authorized Participant that has executed a Participant Agreement. At any given time there may be only a limited number of broker-dealers that have executed a Participant Agreement. Those placing orders for Creation Units through the Clearing Process should afford sufficient time to permit proper submission of the order to the Distributor prior to the Closing Time on the Transmittal Date.
Orders for creation that are effected outside the Clearing Process are likely to require transmittal by the DTC Participant earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside the Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating the transfer of Deposit Securities and the Cash Component.
Placement of Creation Orders Using the Clearing Process. The Clearing Process is the process of creating or redeeming Creation Units through the Continuous Net Settlement System of NSCC. Fund Deposits made through the Clearing Process must be delivered through a Participating Party that has executed a Participant Agreement. The Participant Agreement authorizes the Distributor to transmit through the Transfer Agent to NSCC, on behalf of the Participating Party, such trade instructions as are necessary to effect the Participating Party’s creation order. Pursuant to such trade instructions to NSCC, the Participating Party agrees to deliver the
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requisite Deposit Securities and the Cash Component 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 Transmittal Date if (i) such order is received by the Distributor not later than 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 the Clearing Process. Fund Deposits made outside the Clearing Process must be delivered through a DTC Participant that has executed a Participant Agreement. A DTC Participant that wishes to place an order creating Creation Units to be effected outside the Clearing Process need not be a Participating Party, but such orders 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. A 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 Deposit Securities through DTC to the account of the Trust by no later than 11:00 a.m., Eastern Time, of the next Business Day immediately following the Transmittal Date. All questions as to the number of Deposit Securities to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities, will be determined by the Trust, whose determination will be final and binding. Cash equal to the Cash Component must be transferred directly to the Trust through the Federal Reserve wire system in a timely manner so as to be received by the Trust no later than 2:00 p.m., Eastern Time, on the next Business Day immediately following such 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 not later than the Closing Time on such Transmittal Date, and (ii) all other procedures set forth in the Participant Agreement are properly followed. However, if the Trust does not receive both the requisite Deposit Securities and the Cash Component by 11:00 a.m. and 2:00 p.m., respectively, on the next Business Day immediately following the Transmittal Date, such order will be cancelled. Upon written notice to the Distributor, such cancelled order may be resubmitted the following Business Day using the Fund Deposit as newly constituted to reflect the then current NAV of the Fund. The delivery of Creation Units of the Fund 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.
Creation Units may be created in advance of receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a value greater than the NAV of the Shares on the date the order is placed in proper form since, in addition to available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Cash Component plus (ii) 115% of the market value of the undelivered Deposit Securities (the “ Additional Cash Deposit ”). The order will be deemed to be received on the Business Day on which the order is placed, provided that the order is placed in proper form prior to 3:00 p.m., Eastern Time, on such date and federal funds in the appropriate amount are deposited with the Trust by 11:00 a.m., Eastern Time, the following Business Day. If the order is not placed in proper form by 3:00 p.m., or federal funds in the appropriate amount are not received by 11:00 a.m. the next Business Day, then the order may be deemed to be rejected and the investor will be liable to the Trust for losses, if any, resulting therefrom. An additional amount of cash will be required to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to 115% of the daily mark-to-market value of the missing Deposit Securities. To the extent that missing Deposit Securities are 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 in the event a mark-to-market payment is not made within one Business Day following notification by the Distributor that such a payment is required, the Trust may use the cash on deposit to purchase the missing Deposit Securities. Authorized Participants will be liable to the Trust for the costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Trust or purchased by the Trust and deposited into the Trust. In addition, a transaction fee will be charged in all cases. The delivery of Creation Units of the Fund 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 Distributor in respect of the Fund if (a) the order is not in proper form; (b) the investor(s), upon obtaining the Shares ordered, would own 80% or more of the currently outstanding Shares of the Fund; (c) the Deposit Securities delivered are not as disseminated through the facilities of the Exchange for that date by the Trust, as described above; (d) acceptance of the Deposit Securities would have certain adverse tax consequences to the Fund; (e) the acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; (f) the acceptance of the Fund Deposit would otherwise, in the discretion of the Trust or the Adviser, have an adverse effect on the Trust or the rights of Beneficial Owners; or (g) as a result of circumstances outside the control of the Trust, the Distributor and the Adviser make it for all practical purposes impossible to process creation orders. Examples of such circumstances include acts of God or public service or utility problems such as fires, floods, extreme weather conditions and power outages resulting in telephone, facsimile or computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the Trust, the Adviser, the Distributor, DTC, NSCC or any other participant in the creation process; and similar extraordinary events. The Distributor will notify a prospective creator of a Creation Unit and/or the Authorized Participant acting on
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behalf of the creator of a Creation Unit of its rejection of the order of such person. The Trust, the Transfer Agent and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits nor will any of them incur any liability for the failure to give any such notification.
All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered will be determined by the Trust, and the Trust’s determination will be final and binding.
Creation Transaction Fee. To compensate the Trust for transfer and other transaction costs involved in creation transactions through the Clearing Process, investors will be required to pay a minimum creation transaction fee, assessed per transaction, as follows:
| Fund Name | Creation Transaction Fee |
| ActiveAlts Contrarian ETF (Ticker: SQZZ) | $500 |
The Trust, subject to approval by the Board, may adjust the fee from time to time based upon actual experience. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a creation of a Creation Unit may be charged a fee for such services.
Redemption. Shares may be redeemed only in Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Distributor and the Fund and only on a Business Day. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial Owners must accumulate enough Shares in the secondary market to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
With respect to the Fund, the Trust, through NSCC, makes available immediately prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern Time) on each Business Day, the Deposit Securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day. Deposit Securities received on redemption may not be identical to Deposit Securities that are applicable to creations of Creation Units.
Unless cash redemptions are available or specified for the Fund, the redemption proceeds for a Creation Unit generally consist of Deposit Securities, as announced by the Trust on the Business Day of the request for redemption received in proper form, plus cash in an amount equal to the difference between the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Deposit Securities (the “ Cash Redemption Amount ”), less a redemption transaction fee described below in the section entitled “Redemption Transaction Fee”. In the event that the Deposit Securities have a value greater than the NAV of the Shares, a compensating cash payment equal to the differential is required to be made by or through an Authorized Participant by the redeeming shareholder.
Placement of Redemption Orders Using Clearing Process. Orders to redeem Creation Units through the Clearing Process must be delivered through a Participating Party that has executed the Participant Agreement. An order to redeem Creation Units using the Clearing Process is deemed received on the Transmittal Date if (i) such order is received by the Trust not later than 3:00 p.m., Eastern Time, on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed; such order will be effected based on the NAV of the Fund as next determined. An order to redeem Creation Units using the Clearing Process made in proper form but received by the Fund after 3:00 p.m., Eastern Time, will be deemed received on the next Business Day immediately following the Transmittal Date and will be effected at the NAV next determined on such Business Day. The requisite Deposit Securities and the Cash Redemption Amount will be transferred by the third 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 be delivered through a DTC Participant that has executed the Participant Agreement. A DTC Participant that wishes to place an order for redemption of Creation Units to be effected outside the Clearing Process need not be a Participating Party, but such orders 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 Shares directly through DTC. An order to redeem Creation Units outside the Clearing Process is deemed received by the Trust on the Transmittal Date if (i) such order is received by the Trust not later than 3:00 p.m., Eastern Time, if transmitted by mail, or by 2:00 p.m. Eastern Time, if transmitted by other means, on such Transmittal Date; (ii) such order is accompanied or proceeded by the requisite number of Shares of the Fund and the Cash Redemption Amount specified in such order, which delivery must be made through DTC to the Trust not later than 11:00 a.m. and 2:00 p.m., respectively, Eastern Time, on the next Business Day following such Transmittal Date (the “ DTC Cut-Off-Time ”); and (iii) all other procedures set forth in the Participant Agreement are properly followed.
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After the Trust has deemed an order for redemption outside the Clearing Process received, the Trust will initiate procedures to transfer the requisite Deposit Securities, which are expected to be delivered within three Business Days, and the Cash Redemption Amount to the Authorized Participant on behalf of the redeeming Beneficial Owner by the third Business Day following the Transmittal Date on which such redemption order is deemed received by the Trust. The Trust 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 Deposit Securities but does not differ in NAV.
The calculation of the value of the Deposit Securities and the Cash Redemption Amount to be delivered upon redemption will be made by the Trust according to the procedures set forth under “Determination of Net Asset Value” computed on the Business Day on which a redemption order is deemed received by the Trust. Therefore, if a redemption order in proper form is submitted to the Trust by a DTC Participant not later than the Closing Time on the Transmittal Date, and the requisite number of Shares of the Fund are delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the Deposit Securities and the Cash Redemption Amount to be delivered will be determined by the Trust on such Transmittal Date. If, however, a redemption order is submitted to the Trust by a DTC Participant not later than the Closing Time on the Transmittal Date but either (1) the requisite number of Shares of the Fund are not delivered by the DTC Cut-Off-Time as described above on the next Business Day following the Transmittal Date or (2) 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 Deposit Securities and the Cash Redemption Amount to be delivered will be computed on the Business Day that such order is deemed received by the Trust, i.e., the Business Day on which the Shares of the Fund are delivered through DTC to the Trust by the DTC Cut-Off-Time on such Business Day pursuant to a properly submitted redemption order.
If it is not possible to effect deliveries of the Deposit Securities, the Trust may in its discretion exercise its option to redeem such 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 which the Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the NAV of its shares based on the NAV of shares of the Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charge for requested cash redemptions specified above, to offset the Trust’s brokerage and other transaction costs associated with the disposition of Deposit Securities). The Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities which differs from the exact composition of the Deposit Securities but does not differ in NAV.
Redemptions of Shares for Deposit Securities will be subject to compliance with applicable federal and state securities laws, and the Trust (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 Deposit Securities upon redemptions or could not do so without first registering the offering and sale of the Deposit Securities under such laws. An Authorized Participant or an investor for which it is acting that is subject to a legal restriction with respect to a particular security included in the Deposit Securities 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 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.
The right of redemption may be suspended or the date of payment postponed with respect to the Fund (1) for any period during which the Exchange is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the Exchange is suspended or restricted; (3) for any period during which an emergency exists as a result of which disposal of the Shares of the Fund or determination of the Shares’ NAV is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.
Redemption Transaction Fee. To compensate the Trust for transfer and other transaction costs involved in redemption transactions through the Clearing Process, investors will be required to pay a minimum redemption transaction fee, assessed per transaction as follows:
| Fund Name | Redemption Transaction Fee |
| ActiveAlts Contrarian ETF (Ticker: SQZZ) | $500 |
Where Shares are redeemed for cash, the redemption transaction fee will be deducted from such redemption proceeds. The Trust, subject to approval by the Board, may adjust the fee from time to time based upon actual experience. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may be charged a fee for such services.
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SECURITIES SETTLEMENTS FOR CREATIONS AND REDEMPTIONS
The Trust generally intends to effect deliveries of Creation Units and Deposit Securities on a basis of “T” plus three business days. The Trust may effect deliveries of Creation Units and Deposit Securities on a basis other than T plus three in order to accommodate holiday schedules, to account for treatment by U.S. markets of dividend record dates and ex-dividend dates, or under certain other circumstances. In addition to holidays, other unforeseeable closings in a market due to emergencies may also prevent the Trust from delivering securities within the normal settlement period. In the event that a delay in a redemption settlement cycle will extend to more than 12 calendar days, the Trust will effect a cash-in-lieu redemption to the extent necessary.
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 securities delivery practices, could affect the information set forth herein at some time in the future and longer (worse) redemption periods are possible.
The method by which Creation Units are created and traded may raise certain issues under applicable securities laws. Because new Creation Units are issued and sold by the Trust on an ongoing basis, at any point a “distribution,” as such term is used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an order with the Distributor, breaks them down into constituent Shares, and sells such Shares directly to customers, or if it chooses to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. A determination of whether one is an underwriter for purposes of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter.
Broker-dealers who are not “underwriters” but are participating in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares that are part of an “unsold allotment” within the meaning of Section 4(a)(3)(C) of the Securities Act, would be unable to take advantage of the prospectus-delivery exemption provided by Section 4(a)(3) of the Securities Act. This is because the prospectus delivery exemption in Section 4(a)(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. As a result, broker-dealer firms should note that dealers who are not underwriters but are participating in a distribution (as contrasted with ordinary secondary market transactions) and thus dealing with the Shares that are part of an over-allotment within the meaning of Section 4(a)(3)(A) of the Securities Act would be unable to take advantage of the prospectus delivery exemption provided by Section 4(a)(3) of the Securities Act. Firms that incur a prospectus delivery obligation with respect to Shares are reminded that, under Rule 153 of the Securities Act, a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to an exchange member in connection with a sale on the Exchange is satisfied by the fact that the prospectus is available at the Exchange upon request. The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on a national securities exchange.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction with the section in the Prospectus entitled “Investing in the Fund – Determination of Net Asset Value”.
The NAV per Share for the Fund is computed by dividing the value of the net assets of the Fund (i.e., the value of its total assets less total liabilities) by the total number of Shares outstanding, rounded to the nearest cent. Expenses and fees, including, without limitation, the management fee and the sub-advisory fee, are accrued daily and taken into account for purposes of determining NAV. The NAV of the Fund is determined as of the close of the regular trading session on the Exchange (ordinarily 4:00 p.m., Eastern time) on each day that the Exchange is open. Any assets or liabilities denominated in currencies other than the U.S. dollar are converted into U.S. dollars at the current market rates on the date of valuation as quoted by one or more sources.
In computing the Fund’s NAV, the Fund’s portfolio securities are valued based on market quotations. When market quotations are not readily available for a portfolio security, the Trust must use such security’s fair value as determined in good faith in accordance with the Trust’s valuation policies and procedures approved by the Board.
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The value of the Fund’s portfolio securities is based on such securities’ closing price on local markets when available. If a portfolio security’s market price is not readily available or does not otherwise accurately reflect the fair value of such security, the portfolio security will be valued by another method that the Adviser believes will better reflect fair value in accordance with the Trust’s valuation policies and procedures approved by the Board. The Trust may use fair value pricing in a variety of circumstances, including but not limited to, situations when the value of the Fund’s portfolio security has been materially affected by events occurring after the close of the market on which such security is principally traded (such as a corporate action or other news that may materially affect the price of such security) or trading in such security has been suspended or halted. In addition, the Trust may fair value foreign equity portfolio securities each day the Trust calculates the Fund’s NAV. Accordingly, the Fund’s NAV may reflect certain portfolio securities’ fair values rather than their market prices. Fair value pricing involves subjective judgments, and it is possible that a fair value determination for a portfolio security will be materially different than the value that could be realized upon the sale of such security. With respect to securities that are primarily listed on foreign exchanges, the value of the Fund’s portfolio securities may change on days when you will not be able to purchase or sell your Shares.
General Policies . The Fund intends to declare and pay dividends from net investment income quarterly. Distributions of net realized capital gains, if any, generally are declared and paid once a year, but the Trust may make distributions on a more frequent basis for the Fund to comply with the distribution requirements of the Code, in all events in a manner consistent with the provisions of the 1940 Act. In addition, the Trust may distribute at least annually amounts representing the full dividend yield on the underlying portfolio securities of the Fund, net of expenses of the Fund, as if the Fund owned such underlying portfolio securities for the entire dividend period in which case some portion of each distribution may result in a return of capital for tax purposes for certain shareholders.
Dividends and other distributions on Shares are distributed, as described below, on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are made through DTC Participants and Indirect Participants to Beneficial Owners then of record with proceeds received from the Trust. The Trust makes additional distributions to the minimum extent necessary (i) to distribute the entire annual taxable income of the Trust, plus any net capital gains and (ii) to avoid imposition of the excise tax imposed by Section 4982 of the Code. Management of the Trust reserves the right to declare special dividends if, in its reasonable discretion, such action is necessary or advisable to preserve the status of the Fund as a “regulated investment company” (a “ RIC ”) or to avoid imposition of income or excise taxes on undistributed income.
Dividend Reinvestment Service. No reinvestment service is provided by the Trust. Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by Beneficial Owners of Shares through DTC Participants for reinvestment of their dividend distributions. If this service is used, dividend distributions of both income and realized gains will be automatically reinvested in additional whole Shares of the Fund. Beneficial Owners should contact their broker to determine the availability and costs of the service and the details of participation therein. Brokers may require Beneficial Owners to adhere to specific procedures and timetables.
Set forth below is a discussion of certain U.S. federal income tax considerations affecting the Fund and the purchase, ownership and disposition of Shares. It is based upon the Internal Revenue Code of 1986, as amended (the “ Code ”), the regulations promulgated thereunder, judicial authorities, and administrative rulings and practices as in effect as of the date of this SAI, all of which are subject to change, including, without limitation, the following information which also supplements and should be read in conjunction with the sections in the Prospectus entitled “Distributions” and “Federal Income Taxes”.
The following is a summary of the material U.S. federal income tax considerations applicable to an investment in Fund Shares. The summary is based on the laws in effect on the date of this SAI and existing judicial and administrative interpretations thereof, all of which are subject to change, possibly with retroactive effect. In addition, this summary assumes that the Fund shareholder holds Fund Shares as capital assets within the meaning of the Code, and does not hold Fund Shares in connection with a trade or business. This summary does not address all potential U.S. federal income tax considerations possibly applicable to an investment in Fund Shares, to Fund shareholders holding Fund Shares through a partnership (or other pass-through entity) or to Fund shareholders subject to special tax rules. Prospective Fund shareholders are urged to consult their own tax advisers with respect to the specific federal, state, local and foreign tax consequences of investing in Fund Shares.
The Fund has not requested and will not request an advance ruling from the Internal Revenue Service (the “ IRS ”) as to the federal income tax matters described below. The IRS could adopt positions contrary to those discussed below and such positions could be sustained. Prospective investors should consult their own tax advisors with regard to the federal tax consequences of the purchase, ownership or disposition of Shares, as well as the tax consequences arising under the laws of any state, foreign country or other taxing jurisdiction.
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Tax Treatment of the Fund. The Fund, as well as any future series of the Trust, is treated as a separate corporate entity under the Code, and intends to qualify and remain qualified as a regulated investment company under Subchapter M of the Code. In order to so qualify, the Fund must elect to be a regulated investment company or have made such an election for a previous year and must satisfy certain requirements relating to the amount of distributions and source of its income for a taxable year. At least 90% of the gross income of the Fund must be derived from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stocks or other securities, and other income derived with respect to the Fund’s business of investing in such stock or other securities. Any income derived by the Fund from a partnership or trust is treated as derived with respect to the Fund’s business of investing in stock, securities or currencies only to the extent that such income is attributable to items of income that would have been qualifying income if realized by the series in the same manner as by the partnership or trust.
The Fund will not qualify as a regulated investment company for any taxable year unless it satisfies certain requirements with respect to the diversification of its investments at the close of each quarter of the taxable year. In general, at least 50% of the value of the Fund’s total assets must be represented by cash, cash items, government securities, securities of other regulated investment companies and other securities which, with respect to any one issuer, do not represent more than 5% of the total assets of the Fund nor more than 10% of the outstanding voting securities of such issuer. In addition, not more than 25% of the value of the Fund’s total assets may be invested in the securities (other than government securities or the securities of other regulated investment companies) of any one issuer. The Fund intends to satisfy all requirements on an ongoing basis for continued qualification as a regulated investment company.
There is a remedy for failure of the Subchapter M asset diversification test, if the failure was due to reasonable cause and not willful neglect, subject to certain divestiture and procedural requirements and the payment of a tax. There is also a de minimis exception to a potential failure of the Subchapter M asset diversification test, which would require corrective action but no tax. In addition, a remedy of a failure of the source-of-income requirement exists, if the failure was due to reasonable cause and not willful neglect, subject to certain procedural requirements and the payment of a tax.
A 4% nondeductible excise tax is imposed on regulated investment companies that fail to currently distribute an amount equal to specified percentages of their ordinary taxable income and capital gains net income (excess of realized capital gains over realized capital losses). The Fund intends to make sufficient distributions or deemed distributions of its ordinary taxable income and any capital gains net income prior to the end of each calendar year to avoid liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to the U.S. Treasury a percentage (28% for 2013) of taxable dividends or gross proceeds realized upon a sale to shareholders who: (i) have failed to provide a correct tax identification number in the manner required, (ii) are subject to withholding by the Internal Revenue Service for failure to properly include on their return payments of taxable interest or dividends, (iii) have failed to certify to the Fund that they are not subject to backup withholding when required to do so, or (iv) are “exempt recipients”.
Depending upon the extent of the Fund’s activities in states and localities in which its offices are maintained, in which its agents or independent contractors are located, or in which it is otherwise deemed to be conducting business, the Fund may be subject to the tax laws of such states or localities. In addition, in those states and localities that have income tax laws, the treatment of the Fund and its shareholders under such laws may differ from their treatment under federal income tax laws.
Dividends paid by the Fund to non-U.S. shareholders may be subject to U.S. withholding tax at the rate of 30% unless reduced by treaty (and the shareholder files a valid Internal Revenue Service Form W-8BEN, or other applicable form, with the Fund certifying foreign status and treaty eligibility) or the non-U.S. shareholder files an Internal Revenue Service Form W-8ECI, or other applicable form, with the Fund certifying that the investment to which the distribution relates is effectively connected to a United States trade or business of such non-U.S. shareholder (and, if certain tax treaties apply, is attributable to a United States permanent establishment maintained by such non-U.S. shareholder). The Fund may elect not to withhold the applicable withholding tax on any distribution representing a capital gains dividend to a non-U.S. shareholder.
The Fund will send shareholders information each year on the tax status of dividends and distributions. A dividend or capital gains distribution paid shortly after shares have been purchased, although in effect a return of investment, is subject to federal income taxation. Dividends from net investment income and distributions of capital gains will be taxable to shareholders, whether received in cash or reinvested in Fund shares and no matter how long the shareholder has held Fund shares, even if they reduce the net asset value of shares below the shareholder’s cost and thus, in effect, result in a return of a part of the shareholder’s investment.
Tax Treatment of Fund Shareholders. The following information is meant as a general summary for U.S. taxpayers. Shareholders should rely on their own tax advisors for advice about the particular federal, state, and local tax consequences of
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investing in the Fund. Although the Fund will not be taxed on amounts it distributes, shareholders will generally be taxed on distributions paid by the Fund.
Distributions attributable to net investment income and short-term capital gains are generally taxed as ordinary income, although certain income dividends may be taxed to non-corporate shareholders at long-term capital gains rates. Distributions of long-term capital gains are generally taxed as long-term capital gains, regardless of how long a shareholder has held Fund shares. Distributions may be subject to state and local taxes, as well as federal taxes.
Distributions resulting from the sale of foreign currencies and foreign securities by the Fund, to the extent of foreign exchange gains, are generally taxed as ordinary income or loss. If the Fund pays non-refundable taxes to foreign governments during the year, these taxes will reduce the Fund’s net investment income but still may be included in your taxable income. However, you may be able to claim an offsetting tax credit or itemized deduction on your return for your portion of foreign taxes paid by the Fund.
In general, a shareholder who sells or redeems Fund shares will realize a capital gain or loss, which will be long-term or short-term, depending upon the shareholder’s holding period for the Fund shares. An exchange of shares is treated as a sale and any gain may be subject to tax.
Registered investment companies must report cost basis information to the IRS on Form 1099-B for any sale of fund shares acquired after January 1, 2012 (“ Covered Shares ”). Registered investment companies must select a default cost basis calculation method and apply that method to the sale of Covered Shares unless an alternate IRS approved method is specifically elected in writing by the shareholder. Average Cost, which is the investment company industry standard, has been selected as the Fund’s default cost basis calculation method. If a shareholder determines that an IRS approved cost basis calculation method other than the Fund’s default method of Average Cost is more appropriate, he must contact the Fund at the time of or in advance of the sale of Covered Shares that are to be subject to that alternate election. IRS regulations do not permit the change of a cost basis election on previously executed trades.
All Covered Shares purchased in non-retirement accounts are subject to the new cost basis reporting legislation. Non-covered shares are registered investment company shares that were acquired prior to the effective date of January 1, 2012. Cost basis information will not be reported to the IRS or shareholder upon the sale of any non-covered registered investment company shares. Non-covered shares will be redeemed first.
As with all investment companies, the Fund may be required to withhold U.S. federal income tax (presently at the rate of 28%) for all distributions payable to shareholders who fail to provide the Fund with their correct taxpayer identification numbers or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. Backup withholding is not an additional tax; rather, it is a way in which the IRS ensures it will collect taxes otherwise due. Any amounts withheld may be credited against a shareholder’s U.S. federal income tax liability.
Shareholders should consult with their own tax advisors to ensure that distributions and sale of the Fund shares are treated appropriately on their income tax returns.
Certain qualifying corporate dividends are taxable at long-term capital gains tax rates to individuals. For tax years beginning after December 31, 2002, the long-term capital gains rate for individual taxpayers at a rate of 15% for individuals who are subject to the 25% (or greater) tax bracket on their ordinary income and whose taxable income is less than $400,000 ($450,000 for married filing jointly) and at 20% for most individuals whose taxable income is more than $400,000.
All or a portion of the dividends paid by the Fund may be taxable at the reduced long-term capital gains tax rate for individual shareholders. If the Fund designates a dividend as qualified dividend income, it generally will be taxable to individual shareholders at the long-term capital gains tax rate, provided certain holding period requirements are met.
Taxable dividends paid by the Fund to corporate shareholders will be taxed at corporate income tax rates. Corporate shareholders may be entitled to a dividends received deduction (“ DRD ”) for a portion of the dividends paid and designated by the Fund as qualifying for the DRD.
If the Fund designates a dividend as a capital gains distribution, it generally will be taxable to shareholders as long-term capital gains, regardless of how long the shareholders have held their Fund shares or whether the dividend was received in cash or reinvested in additional shares. All taxable dividends paid by the Fund other than those designated as qualified dividend income or capital gains distributions will be taxable as ordinary income to shareholders, whether received in cash or reinvested in additional shares. To the extent the Fund engages in increased portfolio turnover, short-term capital gains may be realized, and any distribution resulting from such gains will be considered ordinary income for federal tax purposes.
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Certain individuals, estates and trusts must pay a 3.8% Medicare surtax on “net investment income” including, among other things, dividends and proceeds of sale in respect of securities like the shares, subject to certain exceptions. Prospective investors should consult with their own tax advisors regarding the effect, if any, of this surtax on their ownership and disposition of the shares.
Shareholders who hold Fund shares in a tax-deferred account, such as a retirement plan, generally will not have to pay tax on Fund distributions until they receive distributions from their account.
The Fund will designate: (i) any dividend of qualified dividend income as qualified dividend income; (ii) any tax-exempt dividend as an exempt-interest dividend; (iii) any distribution of long-term capital gains as a capital gains dividend; and (iv) any dividend eligible for the corporate dividends received deduction as such in a written notice provided to shareholders after the close of the Fund’s taxable year. Shareholders should note that, upon the sale or exchange of Fund shares, if the shareholder has not held such shares for at least six months, any loss on the sale or exchange of those shares will be treated as a long-term capital loss to the extent of the capital gains dividends received with respect to the shares.
If the Fund declares a dividend in October, November, or December, but pays it in January, it will be taxable to shareholders as if the dividend was received in the year it was declared. Every year, each shareholder will receive a statement detailing the tax status of any Fund distributions for that year.
If for any taxable year the Fund does not qualify for the special federal income tax treatment afforded regulated investment companies, all of its taxable income will be subject to federal income tax at regular corporate rates (without any deduction for distributions to its shareholders). In such event, dividend distributions (whether or not derived from interest on tax-exempt securities) would be taxable as qualified dividends to individual shareholders in taxable years beginning after December 31, 2002, to the extent of the Fund’s current and accumulated earnings and profits, and would be eligible for the DRD for corporations, provided in each case that certain holding period and other requirements are met.
The Fund’s net realized capital gains from securities transactions will be distributed only after reducing such gains by the amount of any available capital loss carryforwards. Capital losses may be utilized indefinitely to offset net realized capital gains, if any, prior to distributing such gains to shareholders.
Under sections 1471 through 1474 to the Code, also known as the “Foreign Account Tax Compliance Act of 2009” or “FATCA”, foreign financial institutions (which include hedge funds, private equity funds, registered investment companies, securitization vehicles and any other investment vehicles regardless of their size) and other foreign entities must comply with new information reporting rules with respect to their U.S. account holders and investors or confront a new withholding tax on U.S. source payments made to them. A foreign financial institution or other foreign entity that does not comply with the FATCA reporting requirements will be subject to a new 30% withholding tax with respect to any “withholdable payments” made after December 31, 2012, other than such payments that are made on “obligations” that were outstanding on March 18, 2012. For this purpose, withholdable payments are U.S. source payments otherwise subject to nonresident withholding tax and also include the entire gross proceeds from the sale of any equity or debt instruments of U.S. issuers. The new FATCA withholding tax will apply regardless of whether the payment would otherwise be exempt from U.S. nonresident withholding tax ( e.g ., under the portfolio interest exemption or as capital gain). Treasury is authorized to provide rules for implementing the FATCA withholding regime with the existing nonresident withholding tax rules. The FATCA provisions also impose new information reporting requirements and increase related penalties for U.S. persons.
FATCA withholding will not apply to withholdable payments made directly to foreign governments, international organizations, foreign central banks or issue and individuals. Treasury is authorized to provide additional exceptions to the application of the FATCA provisions. Prospective investors should consult with their own tax advisors regarding these new provisions.
The foregoing discussion summarizes some of the possible consequences under current federal tax law of an investment in the Fund. It is not a substitute for personal tax advice. You may also be subject to state and local taxation on Fund distributions, and sales of Fund Shares. Consult your personal tax advisor about the potential tax consequences of an investment in Fund Shares under all applicable tax laws.
Shareholder inquiries may be made by writing to the Trust, c/o Virtus ETF Advisers LLC, 1540 Broadway, New York, NY 10036.
The Fund is newly organized and therefore has not yet had any operations as of the date of this SAI.
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TRUST PROXY VOTING POLICY AND PROCEDURES
1. Purpose; Delegation . The purpose of this memorandum is to describe the policies and procedures for voting proxies received from issuers whose securities are held by each series (individually, a “Fund” and collectively, the “Funds”) of ETFis Series Trust I (the “Trust”). The board of Trustees of the Trust (the “Board”) believes that while typically each Fund’s Sub-Adviser is in the best position to make individual voting decisions for such Fund, there may also be times when the Board determines that the Adviser or another person or group of persons is in the best position to make such voting decisions (such person or group of persons, the “Proxy Voting Manager”). Therefore, subject to the oversight of the Board, each Fund’s Proxy Voting Manager is hereby delegated the duty to make proxy voting decisions for such Fund, and to implement and undertake such other duties as set forth in, and consistent with, these Policies and Procedures.
2. Definitions
(a) Proxy . A proxy permits a shareholder to vote without being present at annual or special meetings. A proxy is the form whereby a person who is eligible to vote on corporate matters transmits written instructions for voting or transfers the right to vote to another person in place of the eligible voter. Proxies are generally solicited by management, but may be solicited by dissident shareholders opposed to management’s policies or strategies.
(b) Proxy Voting Manager . Proxy Voting Manager, as used herein, refers to the individual, individuals or committee of individuals appointed by the Board as being responsible for supervising and implementing these Policies and Procedures with respect to a particular Fund.
3. Policy for Voting Proxies Related to Exchange Traded Funds and other Investment Companies . Pursuant to Section 12(d)(1)(E)(iii) of the Investment Company Act of 1940, all proxies from exchange traded funds (“ETFs”) or other investment companies voted by a Fund, registered in the name of the Fund, will have the following voting instructions typed on the proxy form: “Vote these shares in the same proportion as the vote of all other holders of such shares. The beneficial owner of these shares is a registered investment company.”
4. Policy for Voting Proxies Related to Other Portfolio Securities .
(a) Fiduciary Considerations . Proxies with respect to securities other than ETFs or other investment companies are voted solely in the interests of the shareholders of the Trust. Any conflict of interest must be resolved in the way that will most benefit the shareholders.
(b) Management Recommendations . Since the quality and depth of management is a primary factor considered when investing in a company, the recommendation of management on any issue should be given substantial weight. The vote with respect to most issues presented in proxy statements should be cast in accordance with the position of the company’s management, unless it is determined that supporting management’s position would adversely affect the investment merits of owning the stock. However, each issue should be considered on its own merits, and the position of the company’s management should not be supported in any situation where it is found not to be in the best interests of the Fund’s shareholders.
5. Conflicts of Interest . The Trust recognizes that under certain circumstances a Proxy Voting Manager may have a conflict of interest in voting proxies on behalf of a Fund. Such circumstances may include, but are not limited to, situations where a Proxy Voting Manager or one or more of its affiliates, including, without limitation, officers, directors or employees, has or is seeking a client relationship with the issuer of the security that is the subject of the proxy vote. The Proxy Voting Manager shall periodically inform its employees that they are under an obligation to be aware of the potential for conflicts of interest on the part of the Proxy Voting Manager with respect to voting proxies on behalf of a Fund, both as a result of the employee’s personal relationships and due to circumstances that may arise during the conduct of the Proxy Voting Manager’s business, and to bring any conflict of interest of which they become aware to the attention of the proxy manager. With respect to securities other than ETFs or other investment companies, the Proxy Voting Manager shall not vote proxies relating to such issuers on behalf of a Fund until it has determined that the conflict of interest is not material or a method of resolving such conflict of interest has been determined in the manner described below. A conflict of interest will be considered material to the extent that it is determined that such conflict has the potential to influence the Proxy Voting Manager’s decision-making in voting a proxy. Materiality determinations will be based upon an assessment of the particular facts and circumstances. If the proxy manager determines that a conflict of interest is not material, the
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Proxy Voting Manager may vote proxies notwithstanding the existence of a conflict. If the conflict of interest is determined to be material, either (i) the conflict shall be disclosed to the Board and the Proxy Voting Manager shall follow the instructions of the Board or (ii) the Proxy Voting Manager shall vote the issue in question based upon the recommendation of an independent third party under a contractual arrangement approved by the Board. The proxy manager shall keep a record of all materiality decisions and report them to the Board on an annual basis.
6. Routine Proposals . Proxies for routine proposals (such as election of directors, selection of independent public accountants, stock splits and increases in capital stock) with respect to securities other than ETFs or other investment companies should generally be voted in favor of management.
7. Non-Routine Proposals . Votes on non-routine matters and votes against a management’s recommendations with respect to securities other than ETFs or other investment companies are voted as determined by the Proxy Voting Manager to be in the best interests of the Fund’s shareholders.
8. Proxy Voting Procedures . Proxy voting will be conducted in compliance with the policies and practices described herein and is subject to the Proxy Voting Manager’s supervision. A reasonable effort should be made to obtain proxy material and to vote in a timely fashion. Each Proxy Voting Manager shall maintain records regarding the voting of proxies under these Policies and Procedures.
9. Form N-PX . A record of each proxy vote will be entered on Form N-PX. A copy of each Form N-PX will be signed by the President of the Trust. The Form is to be filed by August 31 each year. Each reporting period covered by the Form N-PX runs from July 1 to June 30. The Trust will disclose in its annual and semi-annual reports to shareholders and in its registration statement (in the SAI) filed with the SEC on or after August 31 that each Fund’s proxy voting record for the most recent twelve-month period ended June 30 is available without charge upon request at (212) 593-4383 (collect) and is also available on the SEC’s Website at www.sec.gov.
10. Proxy Voting Managers’ Voting Procedures . The Trust acknowledges that certain of the Proxy Voting Managers to the various Funds have adopted voting policies and procedures for their clients that have been delivered to the Trust. To the extent that a proxy Voting Manager has not adopted such policies and procedures, it shall adopt the policies and procedures provided herein as its own and shall otherwise vote all proxies in what it believes is the best interests of the Fund’s shareholders. To the extent that a Proxy Voting Manager’s policies and procedures are consistent with these Policies and Procedures, the Proxy Voting Manager may implement them with respect to voting proxies on behalf of each Fund managed by such Proxy Voting Manager. However, the provisions of paragraph 5 of these Policies and Procedures relating to conflicts of interest shall supersede any comparable provisions of any Proxy Voting Manager’s policies and procedures.
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Sub-Adviser PROXY VOTING POLICY AND PROCEDURES
ACTIVE ALTS INC. PROXY POLICY
INTRODUCTION
Individuals and institutions that hold stock on behalf of others have a fiduciary responsibility to act in the interest of those beneficiaries. The basic fiduciary duties are loyalty and care. Under common law, the duty of loyalty means that proxy voting should be based exclusively on what the fiduciary believes to be in the best interest of the beneficiary while the duty of care means that the fiduciary must carefully analyze the implications of proxy proposals before voting.
Active Alts Inc. ("Active Alts") has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 204(4)-6 under the Investment Advisers Act of 1940. Our authority to vote the proxies of our clients is established by our advisory contracts or comparable documents, and our proxy voting guidelines have been tailored to reflect these specific contractual obligations.
PROXY POLICY
It is Active Alts’ policy, where proxy voting authority has been delegated to Active Alts by its clients that all proxies are voted in the best interest of the clients without regard to the interests of Active Alts or any other related parties. For purposes of the Policy, the "best interests of clients" shall mean seeing the value of a common investment increase over time. All voting records will be maintained and be made available to its clients.
PROCEDURES
Active Alts will maintain responsibility for reviewing all proxies and making final decisions based on the merits of each case. Proxy votes for investments will be cast in accordance with the policy statement above.
| A. | Use of Third Party Proxy Service Provider . In connection with its responsibilities expressed herein, Active Alts has examined third-party services to assist it in researching and voting proxies and development of proxy voting guidelines. Active Alts will utilize an unaffiliated third party proxy research and voting service, Broadridge Financial Solutions Inc.-Proxy Services ("Service Provider"), to assist it in this regard. The Service Provider helps institutional investors research the financial implications of proxy proposals and cast votes that will protect and enhance shareholder returns. Active Alts will utilize the research and analytical services, operational implementation and recordkeeping and reporting services provided by this Service Provider. The Service Provider will research each proxy and provide a recommendation to Active Alts as to how to vote on each issue based on its research of the individual facts and circumstances of the proxy issue and its application of its research findings to the Guidelines. The Service Provider |
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will cast votes in accordance with its recommendations unless instructed otherwise by the portfolio manager as set forth below.
| B. | Review of Recommendations . Active Alts’ portfolio manager has the ultimate responsibility to accept or reject any Service Provider voting recommendation ("Recommendation"). Consequently, the portfolio manager is responsible for understanding and reviewing how proxies are voted for their clients, taking into account the Policy, the Guidelines and the best interest of the clients. The portfolio manager shall override the recommendation should he not believe that such a Recommendation, based on all facts and circumstances, is in the best interests of the clients. Active Alts will memorialize the basis for any decision to override a Recommendation including the resolution of any conflicts, as further discussed below. Active Alts may choose not to vote proxies under the following circumstances: |
| · | if the effect on the client's economic interests or the value of the portfolio holding is indeterminable or insignificant; or |
| · | if the cost of voting the proxy outweighs the possible benefit. |
| C. | Addressing Material Conflicts of Interest. Prior to overriding a Recommendation, the portfolio manager must memorialize the determination and submit it to the chief compliance officer ("CCO") for determination as to whether a potential material conflict of interest exists between Active Alts and the client on whose behalf the proxy is to be voted ("Material Conflict"). The portfolio manager has an affirmative duty to disclose any potential Material Conflicts known to him related to a proxy vote. |
In the event the Service Provider itself has a conflict and thus, is unable to provide a Recommendation, the portfolio manager will make a voting recommendation. The CCO will review the portfolio manager's recommendation to determine that there is no potential Material Conflict, the portfolio manager may instruct the Service Provider to vote the proxy issue as he determines is in the best interest of the client(s). If the CCO determines that there exists or may exist a Material Conflict, He will make a determination based on a consideration of the factors provided. The CCO will periodically review Service Provider reports of the portfolio manager overrides to confirm that proper override and conflict checking procedures were followed.
| D. | Availability of Policies and Procedures . Active Alts provides its clients with a copy of its proxy voting policies and procedures upon request, with the provision that these policies and procedures may be updated from time to time. |
| E. | Disclosure of Vote. Active Alts will send a written report upon a client’s request that will disclose how the client’s proxy was voted. Reports will be available for securities voted. |
B- 2
| F. | Record Keeping . Either Active Alts or its Service Provider, or both, as indicated below, will maintain the following records: |
| i. | a copy of the Policy and Guidelines (both); |
| ii. | a copy of each proxy statement received by Active Alts regarding client securities (Service Provider). |
| iii. | whether an objective decision to vote in a certain way will still create a strong appearance of a conflict. |
B- 3
PART C
OTHER INFORMATION
ETFis Series Trust I
Item 28. Exhibits
| (a) | (1) | Certificate of Trust of ETFis Series Trust I dated September 20, 2012, incorporated by reference to Registrant’s Registration Statement on Form N-1A, filed April 2, 2013 |
| (2) | Declaration of Trust of ETFis Series Trust I dated September 20, 2012, incorporated by reference to Registrant’s Registration Statement on Form N-1A, filed April 2, 2013 | |
| (3) | Certificate of Amendment to Certificate of Trust dated September 19, 2013, incorporated by reference to Registrant’s Pre-Effective Amendment No. 1, filed December 24, 2013 | |
| (b) | Bylaws of ETFis Series Trust I, incorporated by reference to Registrant’s Registration Statement on Form N-1A, filed April 2, 2013 | |
| (c) | Not Applicable | |
| (d) | (1) | Investment Advisory Agreement between ETFis Series Trust I, on behalf of InfraCap MLP ETF, BioShares Biotechnology Products Fund, BioShares Biotechnology Clinical Trials Fund and Tuttle Tactical Management U.S. Core ETF, and Virtus ETF Advisers LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 48, filed June 8, 2015 |
| (2) | Investment Advisory Agreement between ETFis Series Trust I, on behalf of InfraCap REIT Preferred ETF, Tuttle Tactical Management Multi-Strategy Income ETF, Virtus Newfleet Multi-Sector Unconstrained Bond ETF and Reaves Utilities ETF, and Virtus ETF Advisers LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 58, filed August 21, 2015 | |
| (3) | First Amendment to Investment Advisory Agreement between ETFis Series Trust I and Virtus ETF Advisers LLC, on behalf of The Credit Strategist High Yield Opportunities Fund, incorporated by reference to Registrant’s Post-Effective Amendment No. 65, filed September 18, 2015 | |
| (4) | Second Amendment to Investment Advisory Agreement between ETFis Series Trust I and Virtus ETF Advisers LLC, on behalf of ActiveAlts Contrarian ETF, filed herewith | |
| (5) | Sub-Advisory Agreement among ETFis Series Trust I, Virtus ETF Advisers LLC and Tuttle Tactical Management, LLC, on behalf of Tuttle Tactical Management U.S. Core ETF, incorporated by reference to Registrant’s Post-Effective Amendment No. 11, filed October 10, 2014 | |
| (6) | Sub-Advisory Agreement among ETFis Series Trust I, Virtus ETF Advisers LLC and Infrastructure Capital Advisors, LLC, on behalf of InfraCap MLP ETF, incorporated by reference to Registrant’s Post-Effective Amendment No. 13, filed October 17, 2014 | |
| (7) | Sub-Advisory Agreement among ETFis Series Trust I, Virtus ETF Advisers LLC and LifeSci Index Partners, LLC, on behalf of BioShares Biotechnology Products Fund, incorporated by reference to Registrant’s Post-Effective Amendment No. 18, filed December 19, 2014 | |
| (8) | Sub-Advisory Agreement among ETFis Series Trust I, Virtus ETF Advisers LLC and LifeSci Index Partners, LLC, on behalf of BioShares Biotechnology Clinical Trials Fund, incorporated by reference to Registrant’s Post-Effective Amendment No. 18, filed December 19, 2014 | |
| (9) | Sub-Advisory Agreement among ETFis Series Trust I, Virtus ETF Advisers LLC and Infrastructure Capital Advisors, LLC, on behalf of InfraCap REIT Preferred ETF, incorporated by reference to Registrant’s Post-Effective Amendment No. 27, filed February 6, 2015 | |
| (10) | Sub-Advisory Agreement among ETFis Series Trust I, Virtus ETF Advisers LLC and Tuttle Tactical Management, LLC, on behalf of Tuttle Tactical Management Multi-Strategy Income ETF, incorporated by reference to Registrant’s Post-Effective Amendment No. 39, filed May 4, 2015 | |
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| (11) | Sub-Advisory Agreement among ETFis Series Trust I, Virtus ETF Advisers LLC and Newfleet Asset Management, LLC, on behalf of Virtus Newfleet Multi-Sector Unconstrained Bond ETF, incorporated by reference to Registrant’s Post-Effective Amendment No 41, filed May 8, 2015 | |
| (12) | Sub-Advisory Agreement among ETFis Series Trust I, Virtus ETF Advisers LLC and W. H. Reaves & Co., Inc. d/b/a Reaves Asset Management, on behalf of Reaves Utilities ETF, incorporated by reference to Registrant’s Post-Effective Amendment No 58, filed August 21, 2015 | |
| (13) | Sub-Advisory Agreement among ETFis Series Trust I, Virtus ETF Advisers LLC and The Credit Strategist Group, LLC, on behalf of The Credit Strategist High Yield Opportunities Fund, incorporated by reference to Registrant’s Post-Effective Amendment No. 65, filed September 18, 2015 | |
| (14) | Sub-Advisory Agreement among ETFis Series Trust I, Virtus ETF Advisers LLC and Active Alts Inc., on behalf of ActiveAlts Contrarian ETF, filed herewith | |
| (e) | (1) | Distribution Agreement between ETFis Series Trust I and ETF Distributors LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 41, filed May 8, 2015 |
| (2) | First Amendment to the Distribution Agreement between ETFis Series Trust I and ETF Distributors LLC, on behalf of Reaves Utilities ETF, incorporated by reference to Registrant’s Post-Effective Amendment No 58, filed August 21, 2015 | |
| (3) | Second Amendment to the Distribution Agreement between ETFis Series Trust I and ETF Distributors LLC, on behalf of The Credit Strategist High Yield Opportunities Fund, incorporated by reference to Registrant’s Post-Effective Amendment No. 65, filed September 18, 2015 | |
| (4) | Third Amendment to the Distribution Agreement between ETFis Series Trust I and ETF Distributors LLC, on behalf of ActiveAlts Contrarian ETF, filed herewith | |
| (f) | Not Applicable | |
| (g) | (1) | Custody Agreement between ETFis Series Trust I and The Bank of New York Mellon, incorporated by reference to Registrant’s Post-Effective Amendment No 58, filed August 21, 2015 |
| (2) | Amendment dated September 21, 2015 to the Custody Agreement between ETFis Series Trust I and The Bank of New York Mellon, filed herewith. | |
| (3) | Amendment to the Custody Agreement between ETFis Series Trust I and The Bank of New York Mellon, on behalf of ActiveAlts Contrarian ETF* | |
| (h) | (1) | Fund Administration and Accounting Agreement between ETFis Series Trust I and The Bank of New York Mellon, incorporated by reference to Registrant’s Post-Effective Amendment No 58, filed August 21, 2015 |
| (2) | Amendment dated September 21, 2015 to the Fund Administration and Accounting Agreement between ETFis Series Trust I and The Bank of New York Mellon, filed herewith. | |
| (3) | Amendment to the Fund Administration and Accounting Agreement between ETFis Series Trust I and The Bank of New York Mellon, on behalf of ActiveAlts Contrarian ETF* | |
| (4) | Transfer Agency and Service Agreement between ETFis Series Trust I and The Bank of New York Mellon, incorporated by reference to Registrant’s Post-Effective Amendment No 58, filed August 21, 2015 | |
| (5) | Amendment dated September 21, 2015 to the Transfer Agency and Service Agreement between ETFis Series Trust I and The Bank of New York Mellon, filed herewith. | |
| (6) | Amendment to the Transfer Agency and Service Agreement between ETFis Series Trust I and The Bank of New York Mellon, on behalf of ActiveAlts Contrarian ETF* | |
| (7) | Form of Authorized Participant Agreement between ETF Distributors LLC, The Bank of New York Mellon and Authorized Participants, incorporated by reference to Registrant’s Pre-Effective Amendment No. 1, filed December 24, 2013 | |
| (8) | Administration Services Agreement between ETFis Series Trust I and Virtus ETF Solutions LLC, incorporated by reference to Registrant’s Post-Effective Amendment No 41, filed May 8, 2015 | |
| (9) | First Amendment to the Administration Services Agreement between ETFis Series Trust I and Virtus ETF Solutions LLC, on behalf of Reaves Utilities ETF, incorporated by reference to Registrant’s Post-Effective Amendment No 58, filed August 21, 2015 | |
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| (10) | Second Amendment to the Administration Services Agreement between ETFis Series Trust I and Virtus ETF Solutions LLC, on behalf of The Credit Strategist High Yield Opportunities Fund, incorporated by reference to Registrant’s Post-Effective Amendment No. 65, filed September 18, 2015 | |
| (11) | Third Amendment to the Administration Services Agreement between ETFis Series Trust I and Virtus ETF Solutions LLC, on behalf of ActiveAlts Contrarian ETF, filed herewith | |
| (12) | Expense Limitation Agreement between ETFis Series Trust I, on behalf of Virtus Newfleet Multi-Sector Unconstrained Bond ETF, and Etfis Capital LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 41, filed May 8, 2015 | |
| (13) | Expense Limitation Agreement between ETFis Series Trust I, on behalf of ActiveAlts Contrarian ETF, and Active Alts Inc., filed herewith | |
| (i) | Legal Opinion of Kilpatrick Townsend & Stockton LLP, incorporated by reference to Registrant’s Pre-Effective Amendment No. 1, filed December 24, 2013 | |
| (j) | Not applicable | |
| (k) | Not applicable | |
| (l) | Form of Initial Share Purchase Agreement, incorporated by reference to Registrant’s Pre-Effective Amendment No. 1, filed December 24, 2013 | |
| (m) | Distribution and Service Plan for ETFis Series Trust I, filed herewith | |
| (n) | Not applicable | |
| (o) | Reserved | |
| (p) | (1) | Code of Ethics of the ETFis Series Trust I and Virtus ETF Advisers LLC, incorporated by reference to Registrant’s Pre-Effective Amendment No. 1, filed December 24, 2013 |
| (2) | Code of Ethics of ETF Distributors LLC, incorporated by reference to Registrant’s Pre-Effective Amendment No. 1, filed December 24, 2013 | |
| (3) | Code of Ethics of Infrastructure Capital Advisors, LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 6, filed August 1, 2014 | |
| (4) | Code of Ethics of Tuttle Tactical Management, LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 11, filed October 10, 2014 | |
| (5) | Code of Ethics of LifeSci Index Partners, LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 15, filed November 28, 2014 | |
| (6) | Code of Ethics of Newfleet Asset Management, LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 41, filed May 8, 2015 | |
| (7) | Code of Ethics of W. H. Reaves & Co., Inc. d/b/a Reaves Asset Management, incorporated by reference to Registrant’s Post-Effective Amendment No. 31, filed March 12, 2015 | |
| (8) | Code of Ethics of The Credit Strategist Group, LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 65, filed September 18, 2015 | |
| (9) | Code of Ethics of Active Alts Inc., filed herewith | |
| (q) | Powers of Attorney, incorporated by reference to Registrant’s Post-Effective Amendment No. 11, filed October 10, 2014 | |
* To be filed by subsequent amendment.
Item 29. Persons Controlled By or Under Common Control with Registrant
No person is controlled by or under common control with the Registrant.
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Item 30. Indemnification
Under Delaware law, Section 3817 of the Treatment of Delaware Statutory Trusts empowers Delaware business trusts to indemnify and hold harmless any Trustee or beneficial owner or other person from and against any and all claims and demands whatsoever, subject to such standards and restrictions as may be set forth in the governing instrument of the business trust.
Reference is made to Article IX of the Registrant’s Agreement and Declaration of Trust, which is incorporated by reference herein. The general effect of the indemnification available to an officer or Trustee may be to reduce the circumstances under which the officer or Trustee is required to bear the economic burden of liabilities and expenses related to actions taken by the individual in his or her capacity as an officer or Trustee.
The Registrant (sometimes referred to as the “ Trust ”) is organized as a Delaware statutory trust and is operated pursuant to a Declaration of Trust that permits the Registrant to indemnify every person who is, or has been, a Trustee, officer or employee of the Trust, including, without limitation, persons who serve 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 (each, a “ Covered Person ”). Each Covered Person is indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him or her in connection with any claim, action, suit or proceeding in which he or she becomes involved as a party or otherwise by virtue of his or her being or having been such a director, Trustee, officer, employee or agent and against amounts paid or incurred by him in settlement thereof. This indemnification is subject to the following conditions:
No indemnification is provided to a Covered Person to the extent such indemnification is prohibited by applicable federal law.
The rights of indemnification under the Declaration of Trust may be insured against by policies maintained by the Trust; are severable; will not affect any other rights to which any Covered Person is entitled; will continue as to a person who has ceased to be a Covered Person; and will inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained in the Declaration of Trust will affect any rights to indemnification to which Trust personnel other than Covered Persons may be entitled by contract or otherwise under law.
The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such a Covered Person and shall inure to the benefit of the heirs, executors and administrators of such a person.
Subject to applicable federal law, expenses of preparation and presentation of a defense to any claim, action, suit or proceeding subject to a claim for indemnification shall be advanced by the Trust or the applicable Series prior to final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount if it is ultimately determined that he or she is not entitled to indemnification.
To the extent that any determination is required to be made as to whether a Covered Person engaged in conduct for which indemnification is not provided as described herein, or as to whether there is reason to believe that a Covered Person ultimately will be found entitled to indemnification, the Person or Persons making the determination shall afford the Covered Person a rebuttable presumption that the Covered Person has not engaged in such conduct and that there is reason to believe that the Covered Person ultimately will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to Trustees, officers and controlling persons of the Registrant by the Registrant pursuant to the Declaration of Trust or otherwise, the Registrant is aware that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act, and therefore, is 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 Trustees, officers or controlling persons of the Registrant in connection with the successful defense of any act, suit or proceeding) is asserted by such Trustees, officers or controlling persons in connection with the Shares being registered, the Registrant will, 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 issues.
Item 31. Business and Other Connections of the Investment Adviser and Sub-Adviser
The description of the Adviser and Sub-Adviser is found under the captions “Management of the Fund - Investment Adviser” and “Management of the Fund - Investment Sub-Adviser” in the Prospectus and under the captions “Management Services - Adviser”
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and “Management Services - Sub-Adviser” in the Statement of Additional Information constituting Parts A and B, respectively, of this Registration Statement, which are incorporated by reference herein. The Adviser and Sub-Adviser may provide investment advisory services to other persons or entities other than the Registrant.
The information as to the directors and officers of Virtus ETF Advisers LLC set forth in the Virtus ETF Advisers LLC’s Form ADV filed with the SEC (Reference No. 801-78585) and amended through the date hereof is incorporated herein by reference.
The information as to the directors and officers of Infrastructure Capital Advisors, LLC set forth in Infrastructure Capital Advisors, LLC’s Form ADV filed with the SEC (Reference No. 801-79940) and amended through the date hereof is incorporated herein by reference.
The information as to the directors and officers of Tuttle Tactical Management, LLC set forth in Tuttle Tactical Management, LLC’s Form ADV filed with the SEC (Reference No. 801-76982) and amended through the date hereof is incorporated herein by reference.
The information as to the directors and officers of LifeSci Index Partners, LLC set forth in LifeSci Index Partners, LLC’s Form ADV filed with the SEC (Reference No. 801-80539) and amended through the date hereof is incorporated herein by reference.
The information as to the directors and officers of Newfleet Asset Management, LLC set forth in Newfleet Asset Management, LLC’s Form ADV filed with the SEC (Reference No. 801-51559) and amended through the date hereof is incorporated herein by reference.
The information as to the directors and officers of W. H. Reaves & Co. set forth in W. H. Reaves & Co.’s Form ADV filed with the SEC (Reference No. 801-13457) and amended through the date hereof is incorporated herein by reference.
The information as to the directors and officers of The Credit Strategist Group, LLC set forth in The Credit Strategist Group, LLC’s Form ADV filed with the SEC (Reference No. 801-81158) and amended through the date hereof is incorporated herein by reference.
The information as to the directors and officers of Active Alts Inc. set forth in Active Alts Inc.’s Form ADV filed with the SEC (Reference No. 801-96315) and amended through the date hereof is incorporated herein by reference.
Item 32. Principal Underwriters
(a) Not applicable.
(b) The directors and officers of the Distributor are as follows:
| Name* | Positions with the Distributor | Positions with Trust | |
| William J. Smalley | Managing Principal | President, Chief Executive Officer, Secretary | |
| David Martin | Chief Compliance Officer | n/a | |
| David Hanley | Financial Operations Principal | n/a |
* The principal business address for each of the above directors and executive officers is: 1540 Broadway, New York, NY 10036.
(c) During the Registrant’s most recent fiscal year, the Distributor did not receive any net underwriting discounts or commissions, compensation on redemptions and repurchases, brokerage commissions or other compensation.
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Item 33. Location of Accounts and Records
All accounts, books and other documents required by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules thereunder are maintained at the following locations:
Virtus ETF Advisers LLC
1540 Broadway
New York, NY 10036
The Bank of New York Mellon
One Wall Street
New York, NY 10286
ETF Distributors LLC
1540 Broadway
New York, NY 10036
Infrastructure Capital Advisors, LLC
1325 Avenue of the Americas
New York, NY 10019
Tuttle Tactical Management, LLC
155 Lockwood Road
Riverside, Connecticut 06878
LifeSci Index Partners, LLC
250 West 55th Street, Suite 16B
New York, NY 10019
Newfleet Asset Management, LLC
100 Pearl Street
Hartford, Connecticut 06103
W. H. Reaves & Co., Inc.
10 Exchange Place, 18 th Floor
Jersey City, NJ 07302
The Credit Strategist Group, LLC
6024 Le Lac Road
Boca Raton, Florida 33496
Active Alts Inc.
6 Old Hill Road
Westport, CT 06880
Item 34. Management Services
Not applicable.
Item 35. Undertakings
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant certifies that it meets all the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933, as amended, and has duly caused this Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the City of New York and State of New York on the 16th day of October, 2015.
ETFIS SERIES TRUST I
(Registrant)
By: /s/ William J. Smalley
William J. Smalley, President
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following person(s) in the capacities and on the date(s) indicated.
| Name | Title | Date |
|
/s/ William J. Smalley William J. Smalley |
Trustee, President (Principal Executive Officer) |
October 16, 2015 |
|
/s/ Brinton Frith Brinton Frith |
Treasurer (Principal Financial Officer) |
October 16, 2015 |
|
/s/ Stephen G. O’Grady* Stephen G. O’Grady |
Trustee | October 16, 2015 |
|
/s/ James Simpson* James Simpson |
Trustee | October 16, 2015 |
|
/s/ Robert S. Tull* Robert S. Tull |
Trustee | October 16, 2015 |
|
* By: /s/ William J. Smalley William J. Smalley, Attorney-in-fact |
October 16, 2015 |
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Exhibit Index
| (d) | (4) | Second Amendment to Investment Advisory Agreement between ETFis Series Trust I and Virtus ETF Advisers LLC, on behalf of ActiveAlts Contrarian ETF |
| (14) | Sub-Advisory Agreement among ETFis Series Trust I, Virtus ETF Advisers LLC and Active Alts Inc., on behalf of ActiveAlts Contrarian ETF | |
| (e) | (4) | Third Amendment to the Distribution Agreement between ETFis Series Trust I and ETF Distributors LLC, on behalf of ActiveAlts Contrarian ETF |
| (g) | (2) | Amendment dated September 21, 2015 to the Custody Agreement between ETFis Series Trust I and The Bank of New York Mellon |
| (h) | (2) | Amendment dated September 21, 2015 to the Fund Administration and Accounting Agreement between ETFis Series Trust I and The Bank of New York Mellon |
| (5) | Amendment dated September 21, 2015 to the Transfer Agency and Service Agreement between ETFis Series Trust I and The Bank of New York Mellon | |
| (11) | Third Amendment to the Administration Services Agreement between ETFis Series Trust I and Virtus ETF Solutions LLC, on behalf of ActiveAlts Contrarian ETF | |
| (13) | Expense Limitation Agreement between ETFis Series Trust I, on behalf of ActiveAlts Contrarian ETF, and Active Alts Inc. | |
| (m) | Distribution and Service Plan for ETFis Series Trust I | |
| (p) | (9) | Code of Ethics of Active Alts Inc. |
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Exhibit (d)(4)
ETFIS SERIES TRUST I
SECOND AMENDMENT TO THE
ADVISORY AGREEMENT
THIS SECOND AMENDMENT dated as of the 16th day of October, 2015, to the Advisory Agreement, dated as of June 4, 2015 (the “ Advisory Agreement ”), is entered into by and between ETFIS SERIES TRUST I (the “ Trust ”), a Delaware statutory trust registered as an investment company under the Investment Company Act of 1940, as amended (the “ 1940 Act ”), and Virtus ETF Advisers LLC (formerly Etfis Capital LLC), a Delaware limited liability company with its principal place of business at 1540 Broadway, New York, NY 10036 (the “ Adviser ”).
WHEREAS, each of the Trust and the Adviser is a party to the Advisory Agreement; and
WHEREAS, each of the Trust and the Adviser desires to amend Schedule A to the Advisory Agreement to reflect the addition of ActiveAlts Contrarian ETF (the “ Fund ”) as a new series of the Trust and the engagement of the Adviser to act as investment adviser for the Fund;
NOW, THEREFORE, the parties agree as follows:
1. Exhibit A to the Advisory Agreement is hereby deleted in its entirety and replaced with Exhibit A attached hereto.
2. Except to the extent amended hereby, the Advisory Agreement shall remain in full force and effect.
IN WITNESS WHEREOF , the parties hereto have caused this First Amendment to be executed by a duly authorized officer on one or more counterparts as of the date and year first written above.
| ETFIS SERIES TRUST I | VIRTUS ETF ADVISERS LLC | ||
| By: | /s/ William J. Smalley | By: | /s/ Brinton W. Frith |
| William J. Smalley, President | Brinton W. Frith, President | ||
Exhibit A
SCHEDULE A
to the
ADVISORY AGREEMENT
between
ETFIS SERIES TRUST I
and
ETFIS CAPITAL LLC
(As of October 16, 2015)
As compensation for the Adviser’s services rendered, the Adviser shall be entitled to a fee, computed daily at an annual rate based on the greater of (1) the minimum fee or (2) the average daily net assets of the respective Fund in accordance with the following fee schedule:
| Fund | Minimum Fee | Rate | ||||||
| InfraCap REIT Preferred ETF | $ | 25,000 | 0.075 | % | ||||
| Tuttle Tactical Management Multi-Strategy Income ETF | $ | 15,000 | 0.075 | % | ||||
| Newfleet Multi-Sector Unconstrained Bond ETF | $ | 0 | 0.700 | % | ||||
| Reaves Utilities ETF | $ | 30,000 | 0.075 | % | ||||
| The Credit Strategist High Yield Opportunities Fund | $ | 25,000 | 0.075 | % | ||||
| ActiveAlts Contrarian ETF | $ | 0 | 0.060 | % | ||||
Exhibit (d)(14)
ETFIS SERIES TRUST I
SUB-ADVISORY AGREEMENT
October 16, 2015
Active Alts Inc.
6 Old Hill Road
Westport, CT 06880
RE: Sub-Advisory Agreement
Ladies and Gentlemen:
ETFis Series Trust I (the “Trust”) is an open-end investment company of the series type registered under the Investment Company Act of 1940 (the “Act”), and is subject to the rules and regulations promulgated thereunder. The shares of the Trust are offered or may be offered in several series of shares, including the Active Alts Contrarian ETF (sometimes hereafter referred to as the “Fund”).
Virtus ETF Advisers LLC (the “Adviser”) evaluates, recommends, selects and retains sub-advisers for the Fund and the other series of the Trust and is responsible for the day-to-day management of the Fund.
| 1. | Engagement as a Sub-Adviser . The Adviser, being duly authorized, hereby engages Active Alts Inc. (the “Sub-Adviser”) as the discretionary sub-adviser to invest and reinvest the assets of the Fund on the terms and conditions set forth herein. |
| 2. | Acceptance of Engagement; Standard of Performance . The Sub-Adviser accepts its engagement as the discretionary sub-adviser for the Fund and agrees to use its best professional judgment to make investment decisions for the Fund in accordance with the provisions of this Agreement and as set forth in Schedule A attached hereto and made a part hereof. |
| 3. | Services of Sub-Adviser . In providing management services to the Fund, the Sub-Adviser will be subject to the investment objectives, policies and restrictions of the Trust as they apply to the Fund and as set forth in the Fund’s then current prospectus (“Prospectus”), statement of additional information (“Statement of Additional Information”) filed with the Securities and Exchange Commission (the “SEC”) as part of the Trust’s Registration Statement and Form 19b-4 application filed with the SEC, as the same may be periodically amended and provided to the Sub-Adviser by the Adviser, and to the investment restrictions set forth in the Act and the Rules thereunder, the supervision and control of the Trustees of the Trust (the “Trustees”), and instructions from the Adviser. The Sub-Adviser will not, without the Trust’s prior written approval, effect any transactions that would cause the Fund at the time of the transaction to be out of compliance with any of such restrictions or policies. The Sub-Adviser also will assist the Adviser and the Fund with certain operational services for the Fund including, without limitation, the following: (i) the preparation of tax returns; (ii) the preparation and submission of reports to existing shareholders; (iii) the periodic updating of the prospectus and statement of additional information; and (iv) the preparation of reports to be filed with the SEC and other regulatory authorities. |
| 4. | Transaction Procedures . All transactions for the Fund will be consummated by payment to, or delivery by, the Custodian(s) from time to time designated by the Trust (the “Custodian”), or such depositories or agents as may be designated by the Custodian in writing, of all cash and/or securities due to or from the Fund. The Sub-Adviser will not have possession or custody of such cash and/or securities or any responsibility or liability with respect to such custody. The Sub-Adviser will advise the Custodian and confirm in writing to the Trust all investment orders for the Fund placed by it with brokers and dealers at the time and in the manner set forth in the Custody Agreement by and between the Trust, on behalf of the Fund, and the Custodian (as amended from time to time). The Trust will issue to the Custodian such instructions as may be appropriate in connection with the settlement of any transaction initiated by the Sub-Adviser. The Trust |
will be responsible for all custodial arrangements and the payment of all custodial charges and fees and, upon giving proper instructions to the Custodian, the Sub-Adviser will have no responsibility or liability with respect to custodial arrangements or the act, omissions or other conduct of the Custodian.
| 5. | Allocation of Brokerage . The Sub-Adviser will have authority and discretion to select brokers and dealers to execute Fund transactions initiated by the Sub-Adviser, and to select the markets on or in which the transactions will be executed. |
| A. | In placing orders for the sale and purchase of securities for the Fund, the Sub-Adviser’s primary responsibility will be to seek the best execution of orders at the most favorable prices. However, this responsibility will not obligate the Sub-Adviser to solicit competitive bids for each transaction or to seek the lowest available commission cost to the Fund, so long as the Sub-Adviser reasonably believes that the broker or dealer selected by it can be expected to obtain a “best execution” market price on the particular transaction and determines in good faith that the commission cost is reasonable in relation to the value of the brokerage and research services (as defined in Section 28(e)(3) of the Securities Exchange Act of 1934) provided by such broker or dealer to the Sub-Adviser, viewed in terms of either that particular transaction or of the Sub-Adviser’s overall responsibilities with respect to its clients, including the Fund, as to which the Sub-Adviser exercises investment discretion, notwithstanding that the Fund may not be the direct or exclusive beneficiary of any such services or that another broker may be willing to charge the Fund a lower commission on the particular transaction. |
| B. | The Sub-Adviser may manage other portfolios and expects that the Fund and other portfolios the Sub-Adviser manages will, from time to time, purchase or sell the same securities. The Sub-Adviser may aggregate orders for the purchase or sale of securities on behalf of the Fund with orders on behalf of other portfolios the Sub-Adviser manages. Securities purchased or proceeds of securities sold through aggregated orders, as well as expenses incurred in the transaction, will be allocated to the account of each portfolio managed by the Sub-Adviser that bought or sold such securities in a manner considered by the Sub-Adviser to be equitable and consistent with the Sub-Adviser’s fiduciary obligations in respect of the Fund and to such other accounts. |
| C. | The Sub-Adviser will not execute any transactions for the Fund with a broker or dealer that is (i) an “affiliated person” (as defined in the Act) of the Trust, the Sub-Adviser, any sub-adviser to any other series of the Trust, or the Adviser; (ii) a principal underwriter of the Trust’s shares; or (iii) an affiliated person of such an affiliated person or principal underwriter; in each case, unless such transactions are permitted by applicable law or regulation and carried out in compliance with any applicable policies and procedures of the Trust. The Trust will provide the Sub-Adviser with a list of brokers and dealers that are “affiliated persons” of the Trust or the Adviser, and applicable policies and procedures. |
| D. | Consistent with its fiduciary obligations to the Trust in respect of the Fund and the requirements of best price and execution, the Sub-Adviser may, under certain circumstances, arrange to have purchase and sale transactions effected directly between the Fund and another account managed by the Sub-Adviser (“cross transactions”), provided that such transactions are carried out in accordance with applicable law or regulation and any applicable policies and procedures of the Trust adopted on behalf of the Fund. |
| 6. | Proxies . |
| A. | Unless the Adviser or the Trust gives the Sub-Adviser written instructions to the contrary, the Sub-Adviser, or a third party designee acting under the authority and supervision of the Sub-Adviser, will review all proxy solicitation materials and be responsible for voting and handling all proxies in relation to the assets of the Fund. Unless the Adviser or the Trust gives the Sub-Adviser written instructions to the contrary, the Sub-Adviser will, in compliance with the proxy voting procedures of the Fund then in effect, vote or abstain from voting, all proxies solicited by or with respect to the issuers of securities in which assets of the Fund may be invested. The Adviser will cause the Custodian to forward promptly to the Sub-Adviser all proxies upon receipt, so as to afford the Sub-Adviser a reasonable amount of time in which to determine how to vote such proxies. The |
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Sub-Adviser agrees to provide the Adviser in a timely manner with a record of votes cast containing all of the voting information required by Form N-PX in an electronic format to enable the Trust to file Form N-PX as required by Rule 30b1-4 under the Act.
| B. | The Sub-Adviser is authorized to deal with reorganizations, exchange offers and other voluntary corporate actions with respect to securities held in the Fund in such manner as the Sub-Adviser deems advisable, unless the Trust or the Adviser otherwise specifically directs in writing. With the Adviser’s approval, the Sub-Adviser will also have the authority to: (i) identify, evaluate and pursue legal claims, including commencing or defending suits, affecting the securities held at any time in the Fund, including claims in bankruptcy, class action securities litigation and other litigation; (ii) participate in such litigation or related proceedings with respect to such securities as the Sub-Adviser deems appropriate to preserve or enhance the value of the Fund, including filing proofs of claim and related documents and serving as “lead plaintiff” in class action lawsuits; (iii) exercise generally any of the powers of an owner with respect to the supervision and management of such rights or claims, including the settlement, compromise or submission to arbitration of any claims, the exercise of which the Sub-Adviser deems to be in the best interest of the Fund or required by applicable law, and (iv) engage suitable agents, including legal counsel, and to pay their reasonable fees, expenses and related costs from the Fund. |
| 7. | Prohibited Conduct . In providing the services described in this Agreement, the Sub-Adviser’s responsibility regarding investment advice hereunder is limited to the Fund, and the Sub-Adviser will not consult with any other investment advisory firm that provides investment advisory services to the Trust or any other investment company sponsored by the Adviser or its affiliates regarding transactions for the Trust in securities or other assets. The Trust will provide the Sub-Adviser with a list of investment companies sponsored by the Adviser and the Sub-Adviser will be in breach of the foregoing provision only if the investment company is included in such a list provided to the Sub-Adviser prior to such prohibited action. In addition, the Sub-Adviser will not (i) without the prior written consent of the Trust and the Adviser, delegate any obligation assumed pursuant to this Agreement to any unaffiliated third party, and (ii) will not delegate under any circumstances its obligation hereunder to provide investment advisory services to the Fund. |
| 8. | Information and Reports . |
| A. | The Sub-Adviser will keep the Trust and the Adviser informed of developments relating to its duties as Sub-Adviser of which the Sub-Adviser has, or should have, knowledge that would materially affect the Fund or the Trust. In this regard, the Sub-Adviser will provide the Trust, the Adviser and their respective officers with such periodic reports concerning the obligations the Sub-Adviser has assumed under this Agreement as the Trust and the Adviser may from time to time reasonably request. In addition, prior to each meeting of the Trustees, the Sub-Adviser will provide the Adviser and the Trustees with reports regarding the Sub-Adviser’s management of the Fund during the most recently completed quarter, which reports: (i) will include Sub-Adviser’s representation that its performance of its investment management duties hereunder is in compliance with the Fund’s investment objectives and practices, the Act and applicable rules and regulations under the Act, and the diversification and minimum “good income” requirements of Subchapter M under the Internal Revenue Code of 1986, as amended, and (ii) otherwise will be in such form as may be mutually agreed upon by the Sub-Adviser and the Adviser. |
| B. | Each of the Adviser and the Sub-Adviser will provide the other party with a list, to the best of the Adviser’s or the Sub-Adviser’s respective knowledge, of each affiliated person (and any affiliated person of such an affiliated person) of the Adviser or the Sub-Adviser, as the case may be, and each of the Adviser and Sub-Adviser agrees promptly to update such list whenever the Adviser or the Sub-Adviser becomes aware of any changes that should be added to or deleted from the list of affiliated persons. |
| C. | The Sub-Adviser will also provide the Adviser with any information reasonably requested by the Adviser regarding its management of the Fund required for any shareholder report, amended registration statement, or Prospectus supplement to be filed by the Trust with the SEC. |
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| 9. | Fees for Services. The Fund shall pay to the Sub-Adviser from the Fund’s assets an annualized fee equal to the amount of the daily average net assets of such Fund shown on Schedule B attached hereto, payable on a monthly basis. The Sub-Adviser shall look exclusively to the assets of the Fund for payment of the Sub-Adviser’s fee. The Sub-Adviser acknowledges and agrees that the Adviser may direct the Trust and/or the Fund’s administrator to pay the Adviser’s fee directly from the Fund’s assets and such amount shall be netted against the fee payable to the Sub-Adviser hereunder. |
| 10. | Limitation of Liability . Except as otherwise stated in this Agreement, the Sub-Adviser will not be liable for any action taken, omitted or suffered to be taken by it in its best professional judgment, in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Agreement, or in accordance with specific directions or instructions from the Trust; provided, however, that such acts or omissions will not have constituted a material breach of the investment objectives, policies and restrictions applicable to the Fund as defined in the Prospectus and Statement of Additional Information, or a material breach of any laws, rules, regulations or orders applicable to the Fund, and that such acts or omissions will not have resulted from the Sub-Adviser’s willful misfeasance, bad faith or gross negligence, or reckless disregard of its obligations and duties hereunder. |
| 11. | Confidentiality . Subject to the duty of the Sub-Adviser and the Trust to comply with applicable law, including any demand of any regulatory or taxing authority having jurisdiction, the parties hereto will treat as confidential all information pertaining to the Fund and the actions of the Sub-Adviser and the Trust in respect thereof. Notwithstanding the foregoing, the Trust and the Adviser agree that the Sub-Adviser may (i) disclose in marketing materials and similar communications that the Sub-Adviser has been engaged to manage assets of the Fund pursuant to this Agreement, and (ii) include performance statistics regarding the Fund in composite performance statistics regarding one or more groups of Sub-Adviser's clients published or included in any of the foregoing communications, provided that the Sub-Adviser does not identify any performance statistics as relating specifically to the Fund. |
| 12. | Assignment . This Agreement will terminate automatically in the event of its assignment, as that term is defined in Section 2(a)(4) of the Act. The Sub-Adviser will notify the Trust and the Adviser in writing sufficiently in advance of any proposed change of control, as defined in Section 2(a)(9) of the Act, as will enable the Trust to consider whether an assignment as defined in Section 2(a)(4) of the Act will occur, and to take the steps necessary to enter into a new contract with the Sub-Adviser. |
| 13. | Representations, Warranties and Agreements |
| A. | The Sub-Adviser represents, warrants and agrees that: |
| 1. | It is registered with the SEC as an “investment adviser” under the Investment Advisers Act of 1940, as amended (“Advisers Act”). |
| 2. | It will maintain, keep current and preserve such records on behalf of the Trust, in the manner required or permitted by the Act and the Rules thereunder as are required of an investment adviser of a registered investment company (to the extent applicable), which shall include, without limitation, those records set forth on Schedule C . The Sub-Adviser agrees that such records are the property of the Trust, and will be surrendered to the Trust or to the Adviser as agent of the Trust promptly upon request of either. The Trust acknowledges that Sub-Adviser may retain copies of all records required to meet the record retention requirements imposed by law and regulation. |
| 3. | It will maintain a written code of ethics (the “Code of Ethics”) complying with the requirements of Rule 204A-1 under the Advisers Act and Rule 17j-l under the Act and will provide the Trust and the Adviser with a copy of the Code of Ethics and evidence of its adoption. It will institute procedures reasonably necessary to prevent Access Persons (as defined in Rule 17j-1) from violating its Code of Ethics. The Sub-Adviser acknowledges receipt of the written code of ethics adopted by and on behalf of the Trust. Each calendar quarter while this Agreement is in effect, a duly authorized compliance officer of the Sub-Adviser will certify to the Trust and to the Adviser that the Sub-Adviser has complied with the requirements of Rules 204A-1 and 17j-l during the |
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previous calendar quarter and that there has been no material violation of its Code of Ethics, or of Rule 17j-1(b), or that any persons covered under its Code of Ethics has divulged or acted upon any material, non-public information, as such term is defined under relevant securities laws, and if such a violation has occurred, that appropriate action was taken in response to such violation. Annually, the Sub-Adviser will furnish to the Trust and the Adviser a written report which complies with the requirements of Rule 17j-1 concerning the Sub-Adviser’s Code of Ethics. The Sub-Adviser will permit the Trust and the Adviser to examine the reports required to be made by the Sub-Adviser under Rules 204A-1(b) and 17j-l(d)(1) and this subparagraph.
| 4. | It has adopted and implemented, and throughout the term of this Agreement will maintain in effect and implement, written policies and procedures reasonably designed to prevent violation, by it and its supervised persons, of the Advisers Act and the rules that the SEC has adopted under the Advisers Act. Throughout the term of this Agreement, the Sub-Adviser will provide the Adviser with any certifications, information and access to personnel and resources (including those resources that will permit testing of Sub-Adviser’s compliance policies by the Adviser) that the Adviser may reasonably request to enable the Trust to comply with Rule 38a-1 under the Act. The Sub-Adviser has provided the Trust with true and complete copies of its policies and procedures (or summaries thereof) and related information reasonably requested by the Trust and/or the Adviser. The Sub-Adviser agrees to cooperate with periodic reviews by the Trust’s and/or the Adviser’s compliance personnel of the Sub-Adviser’s policies and procedures, their operation and implementation and other compliance matters and to provide to the Trust and/or the Adviser from time to time such additional information and certifications in respect of the Sub-Adviser’s policies and procedures, compliance by the Sub-Adviser with federal securities laws and related matters as the Trust’s and/or the Adviser’s compliance personnel may reasonably request. The Sub-Adviser agrees to promptly notify the Adviser of any compliance violations which affect the Fund. |
| 5. | The Sub-Adviser will immediately notify the Trust and the Adviser of the occurrence of any event which would disqualify the Sub-Adviser from serving as an investment adviser of an investment company pursuant to Section 9 of the Act or otherwise. The Sub-Adviser will also immediately notify the Trust and the Adviser if it is served or otherwise receives notice of any action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, public board or body, involving the affairs of the Fund. |
| B. | The Trust represents, warrants and agrees that: |
| 1. | The Trust is a statutory trust established pursuant to the laws of State of Delaware; |
| 2. | The Trust is duly registered with the SEC as an investment company under the 1940 Act; |
| 3. | The execution, delivery and performance of this Agreement are within the Trust’s powers, have been and remain duly authorized by all necessary action (including without limitation all necessary approvals and other actions required under the 1940 Act) and will not violate or constitute a default under any applicable law or regulation or of any decree, order, judgment, agreement or instrument binding on the Trust; |
| 4. | No consent of any applicable governmental authority or body is necessary, except for such consents as have been obtained and are in full force and effect, and all conditions of which have been duly complied with; and |
| 5. | This Agreement constitutes a legal, valid and binding obligation enforceable against the Trust in accordance with its terms. |
| C. | The Adviser represents, warrants and agrees that: |
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| 1. | The Adviser is a limited liability company duly established and validly existing under the laws of the State of Delaware and is duly qualified to do business and is in good standing under the laws of each jurisdiction where the failure to so qualify would have a material adverse effect on its business; |
| 2. | The Adviser is duly registered with the SEC as an “investment adviser” under the Advisers Act; |
| 3. | The Adviser has been duly appointed by the Trustees and shareholders of the Trust to provide investment services to the Trust as contemplated by the advisory contract; |
| 4. | The execution, delivery and performance of this Agreement are within Adviser’s powers, have been and remain duly authorized by all necessary corporate action and will not violate or constitute a default under any applicable law or regulation or of any decree, order, judgment, agreement or instrument binding on Adviser; |
| 5. | No consent of any applicable governmental authority or body is necessary, except for such consents as have been obtained and are in full force and effect, and all conditions of which have been duly complied with; and |
| 6. | This Agreement constitutes a legal, valid and binding obligation enforceable against Adviser. |
| 14. | No Personal Liability . Reference is hereby made to the Declaration of Trust establishing the Trust, a copy of which has been filed with the Secretary of the State of Delaware and elsewhere as required by law, and to any and all amendments thereto so filed with the Secretary of the State of Delaware and elsewhere as required by law, and to any and all amendments thereto so filed or hereafter filed. The name “ETFis Series Trust I” refers to the Trustees under said Declaration of Trust as Trustees, and not personally, and no Trustee, shareholder, officer, agent or employee of the Trust will be held to any personal liability in connection with the affairs of the Trust; only the trust estate under said Declaration of Trust is liable. Without limiting the generality of the foregoing, neither the Sub-Adviser nor any of its officers, directors, partners, shareholders or employees will, under any circumstances, have recourse or cause or willingly permit recourse to be had directly or indirectly to any personal, statutory, or other liability of any shareholder, Trustee, officer, agent or employee of the Trust or of any successor of the Trust, whether such liability now exists or is hereafter incurred for claims against the trust estate. |
| 15. | Entire Agreement; Amendment . This Agreement, together with the Schedules attached hereto, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes any prior written or oral agreements pertaining to the subject matter of this Agreement. This Agreement may be amended at any time, but only by written agreement among the Sub-Adviser, the Adviser and the Trust, which amendment, other than amendments to Schedules A, C and D, is subject to the approval of the Trustees and the shareholders of the Fund as and to the extent required by the Act, subject to any applicable orders of exemption issued by the SEC. |
| 16. | Effective Date; Term . This Agreement will become effective on the date set forth on the first page of this Agreement (the “Effective Date”), and will continue in effect until the date that is two years from the Effective Date. The Agreement will continue from year to year thereafter only so long as its continuance has been specifically approved at least annually by the Trustees in accordance with Section 15(a) of the Act, and by the majority vote of the disinterested Trustees in accordance with the requirements of Section 15(c) thereof. |
| 17. | Termination . This Agreement may be terminated at any time without payment of any penalty (i) by the Board, or by a vote of a majority of the outstanding voting securities of the Trust (as defined in the Act), upon 30 days’ prior written notice to the Adviser and the Sub-Adviser, (ii) by the Sub-Adviser upon 30 days’ prior written notice to the Adviser and the Trust, or (iii) by the Adviser upon 30 days’ written notice to the Sub-Adviser. This Agreement may also be terminated, without the payment of any penalty, by the Adviser or the Board immediately upon the material breach by the Sub-Adviser of this Agreement or by |
6
the Sub-Adviser immediately upon the material breach by the Adviser of this Agreement. This Agreement will terminate automatically and immediately upon termination of the Advisory Agreement. This Agreement will terminate automatically and immediately in the event of its “assignment”, as such term is defined in and interpreted under the terms of the Act and the rules promulgated thereunder. Provisions of this Agreement relating to indemnification will survive any termination of this Agreement.
| 18. | Applicable Law . To the extent that state law is not preempted by the provisions of any law of the United States heretofore or hereafter enacted, as the same may be amended from time to time, this Agreement will be administered, construed and enforced according to the laws of the State of Delaware. |
| 19. | Severability . If any term or condition of this Agreement will be invalid or unenforceable to any extent or in any application, then the remainder of this Agreement will not be affected thereby, and each and every term and condition of this Agreement will be valid and enforced to the fullest extent permitted by law. |
| 20. | Notices. Any notice or other communication required to be given pursuant to this Agreement will be deemed duly given if delivered personally or by overnight delivery service or mailed by certified or registered mail, return receipt requested and postage prepaid, or sent by facsimile addressed to the parties at their respective addresses set forth below, or at such other address as will be designated by any party in a written notice to the other party. |
| (a) | To the Trust at: |
ETFis Series Trust I
1540 Broadway
New York, NY 10036
Attention: William J. Smalley
| (b) | To the Adviser at: |
Virtus ETF Advisers LLC
1540 Broadway
New York, NY 10036
Attention: William J. Smalley
| (c) | To the Sub-Adviser at: |
Active Alts Inc.
6 Old Hill Road
Westport, CT 06880
Attention: Brad Lamensdorf
| 21. | Certifications. The Sub-Adviser hereby warrants and represents that it will provide the requisite certifications reasonably requested by the chief executive officer and chief financial officer of the Trust necessary for those named officers to fulfill their reporting and certification obligations on Form N-CSR and Form N-Q as required under the Sarbanes-Oxley Act of 2002 to the extent that such reporting and certifications relate to the Sub-Adviser’s duties and responsibilities under this Agreement. Sub-Adviser will provide a quarterly certification in a form substantially similar to that attached as Schedule D . |
| 22. | Indemnification . The Sub-Adviser will indemnify and hold harmless the Adviser and the Trust from and against any and all claims, losses, liabilities, or damages (including reasonable attorney’s fees and other related expenses) (collectively, “Losses”) arising from the Sub-Adviser’s willful misfeasance, bad faith, gross negligence, or reckless disregard of its duties under this Agreement in the performance of its obligations under this Agreement; provided, however, that the Sub-Adviser’s obligation under this Paragraph will be reduced to the extent that the claim against, or the loss, liability, or damage experienced by the Adviser or the Trust (as applicable), is caused by or is otherwise directly related to (i) any breach by the Adviser or Trust (as applicable) of its representations or warranties made herein, (ii) any willful misconduct, bad faith, reckless disregard or negligence of the Adviser or Trust (as applicable) in the performance of any of its duties or obligations hereunder, or (iii) any untrue statement of a material fact |
7
contained in the Prospectus or SAI, proxy materials, reports, advertisements, sales literature, or other materials pertaining to the Trust or the Fund or the omission to state therein a material fact known to the Adviser or Trust (as applicable) that 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 Sub-Adviser or the Trust, or the omission of such information, by the Adviser or Trust (as applicable) for use therein.
The Trust will indemnify and hold harmless the Sub-Adviser from and against any and all Losses arising from the Trust’s willful misfeasance, bad faith, gross negligence, or reckless disregard of its duties under this Agreement in the performance of its obligations under this Agreement; provided, however, that the Trust’s obligation under this Paragraph will be reduced to the extent that the claim against, or the loss, liability, or damage experienced by the Sub-Adviser, is caused by or is otherwise directly related to (i) any breach by the Sub-Adviser of its representations or warranties made herein, (ii) any willful misconduct, bad faith, reckless disregard or negligence of the Sub-Adviser in the performance of any of its duties or obligations hereunder, or (iii) any untrue statement of a material fact contained in the Prospectus or SAI, proxy materials, reports, advertisements, sales literature, or other materials pertaining to the Trust or the Fund or the omission to state therein a material fact known to the Sub-Adviser that 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 Adviser or the Trust, or the omission of such information, by the Sub-Adviser for use therein.
A party seeking indemnification hereunder (the “Indemnified Party”) will (i) provide prompt notice to the other of any claim (“Claim”) for which it intends to seek indemnification, (ii) grant control of the defense and /or settlement of the Claim to the other party, and (iii) cooperate with the other party in the defense thereof. The Indemnified Party will have the right at its own expense to participate in the defense of any Claim, but will not have the right to control the defense, consent to judgment or agree to the settlement of any Claim without the written consent of the other party. The party providing the indemnification will not consent to the entry of any judgment or enter any settlement which (i) does not include, as an unconditional term, the release by the claimant of all liabilities for Claims against the Indemnified Party or (ii) which otherwise adversely affects the rights of the Indemnified Party.
No party will be liable to another party for consequential damages under any provision of this Agreement.
| 23. | Relationship of Parties . The Adviser, the Trust and Sub-Adviser are not partners or joint venturers with each other and nothing in this Agreement will be construed so as to make them partners or joint venturers or impose any liability as such on either of them. Sub-Adviser will perform its duties under this Agreement as an independent contractor and not as an agent of the Trust, the Trustees or the Adviser. |
| 24. | Receipt of Disclosure Document . The Trust and the Adviser acknowledge receipt, at least 48 hours prior to entering into this Agreement, of a copy of Part 2A of the Sub-Adviser’s Form ADV containing certain information concerning the Sub-Adviser and the nature of its business. |
| 25. | Counterparts; Fax Signatures . This Agreement may be executed in any number of counterparts (including executed counterparts delivered and exchanged by facsimile transmission) with the same effect as if all signing parties had originally signed the same document, and all counterparts will be construed together and will constitute the same instrument. For all purposes, signatures delivered and exchanged by facsimile transmission will be binding and effective to the same extent as original signatures. |
(Signature page follows.)
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| ETFis SERIES Trust I | |||
| By: | /s/ William J. Smalley | ||
| Name: | William J. Smalley | ||
| Title: | President | ||
| VIRTUS ETF ADVISERS LLC | |||
| By: | /s/ Brinton W. Frith | ||
| Name: | Brinton W. Frith | ||
| Title: | President | ||
ACCEPTED:
ACTIVE ALTS INC.
| By: | /s/ Brad H. Lamensdorf | ||
| Name: | Brad H. Lamensdorf | ||
| Title: | President | ||
| SCHEDULES: | A. | Sub-Adviser Functions |
| B. | Sub-Advisory Fee | |
| C. | Records to be Maintained by the Sub-Adviser | |
| D. | Form of Sub-Certification |
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SCHEDULE A
SUB-ADVISER FUNCTIONS
With respect to managing the investment and reinvestment of the Fund’s assets, the Sub-Adviser will provide, at its own expense:
| (a) | An investment program for the Fund consistent with its investment objectives based upon the development, review and adjustment of buy/sell strategies approved from time to time by the Board of Trustees and the Adviser in paragraph 3 of this Sub-Advisory Agreement and implementation of that program; |
| (b) | Periodic reports, on at least a quarterly basis, in form and substance acceptable to the Adviser, with respect to: i) compliance with the Code of Ethics and the Trust’s code of ethics; ii) compliance with procedures adopted from time to time by the Trustees of the Trust relative to securities eligible for resale under Rule 144A under the Securities Act of 1933, as amended; iii) diversification of Fund assets in accordance with the then prevailing Prospectus and Statement of Additional Information pertaining to the Fund and governing laws, regulations, rules and orders; iv) compliance with governing restrictions relating to the fair valuation of securities for which market quotations are not readily available or considered "illiquid" for the purposes of complying with the Fund’s limitation on acquisition of illiquid securities; v) any and all other reports reasonably requested in accordance with or described in this Agreement; and vi) the implementation of the Fund’s investment program, including, without limitation, analysis of Fund performance; |
| (c) | Promptly after filing with the SEC an amendment to its Form ADV, a copy of such amendment to the Adviser and the Trustees; |
| (d) | Attendance by appropriate representatives of the Sub-Adviser at meetings requested by the Adviser or Trustees at such time(s) and location(s) as reasonably requested by the Adviser or Trustees; and |
| (e) | Notice to the Trustees and the Adviser of the occurrence of any event which would disqualify the Sub-Adviser from serving as an investment adviser of an investment company pursuant to Section 9(a) of the 1940 Act or otherwise. |
| (f) | Provide reasonable assistance in the valuation of securities including the participation of appropriate representatives at fair valuation committee meetings. |
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SCHEDULE B
SUB-ADVISORY FEE
For services provided to the Trust, the Fund will pay the Sub-Adviser a fee, payable monthly in arrears, equal to an annualized rate of 149 basis points (1.49%) of the Fund’s average daily net assets.
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SCHEDULE C
RECORDS TO BE MAINTAINED BY THE SUB-ADVISER
| 1. | (Rule 31a-1(b)(5) and (6)) A record of each brokerage order, and all other Fund purchases and sales, given by the Sub-Adviser on behalf of the Trust for, or in connection with, the purchase or sale of securities, whether executed or unexecuted. Such records will include: |
| A. | The name of the broker; |
| B. | The terms and conditions of the order and of any modifications or cancellations thereof; |
| C. | The time of entry or cancellation; |
| D. | The price at which executed; |
| E. | The time of receipt of a report of execution; and |
| F. | The name of the person who placed the order on behalf of the Trust. |
| 2. | (Rule 31a-1(b)(9)) A record for each fiscal quarter, completed within ten (10) days after the end of the quarter, showing specifically the basis or bases upon which the allocation of orders for the purchase and sale of Fund securities to named brokers or dealers was effected, and the division of brokerage commissions or other compensation on such purchase and sale orders. Such record: |
| A. | Will include the consideration given to: |
| (i) | The sale of shares of the Trust by brokers or dealers. |
| (ii) | The supplying of services or benefits by brokers or dealers to: |
(a) The Trust,
(b) The Adviser,
(c) The Sub-Adviser, and
(d) Any person other than the foregoing.
| (iii) | Any other consideration other than the technical qualifications of the brokers and dealers as such. |
| B. | Will show the nature of the services or benefits made available. |
| C. | Will describe in detail the application of any general or specific formula or other determinant used in arriving at such allocation of purchase and sale orders and such division of brokerage commissions or other compensation. |
| D. | Will show the name of the person responsible for making the determination of such allocation and such division of brokerage commissions or other compensation. |
| 3. | (Rule 31a-1(b)(10)) A record in the form of an appropriate memorandum identifying the person or persons, committees or groups authorizing the purchase or sale of Fund securities. Where a committee or group makes an authorization, a record will be kept of the names of its members who participate in the authorization. There will be retained as part of this record: any memorandum, recommendation or instruction supporting or authorizing the purchase or sale of Fund securities and such other information as is appropriate to support the authorization.* |
| 4. | (Rule 31a-1(f)) Such accounts, books and other documents as are required to be maintained by registered investment advisers by rule adopted under Section 204 of the Advisers Act, to the extent such records are necessary or appropriate to record the Sub-Adviser’s transactions for the Trust. |
| 5. | Records as necessary under Trust policies and procedures, including without limitation those related to valuation determinations. |
* Such information might include: current financial information, annual and quarterly reports, press releases, reports by analysts and from brokerage firms (including their recommendations, i.e., buy, sell, hold) or any internal reports or subadviser review.
12
SCHEDULE D
FORM OF SUB-CERTIFICATION
| To: | |
| Re: | Sub-Adviser’s Form N-CSR and Form N-Q Certification for the [Name of Fund]. |
| From: | [Name of Sub-Adviser] |
| Representations in support of Investment Company Act Rule 30a-2 certifications of Form N-CSR and Form N-Q. | |
| [Name of Fund]. | |
| In connection with your certification responsibility under Rule 30a-2 and Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, I have reviewed the following information presented in the schedule of investments for the period ended [Date of Reporting Period] (the “Report”) which forms part of the N-CSR or N-Q, as applicable, for the Trust. |
Schedule of Investments
Our organization has designed, implemented and maintained internal controls and procedures, designed for the purpose of ensuring the accuracy and completeness of relevant portfolio trade data transmitted to those responsible for the preparation of the Schedule of Investments. As of the date of this certification there have been no material modifications to these internal controls and procedures.
In addition, our organization has:
| a. | Designed such internal controls and procedures to ensure that material information is made known to the appropriate groups responsible for servicing the above-mentioned mutual Trust. |
| b. | Evaluated the effectiveness of our internal controls and procedures, as of a date within 90 days prior to the date of this certification and we have concluded that such controls and procedures are effective. |
| c. | In addition, to the best of my knowledge, there has been no fraud, whether or not material, that involves our organization’s management or other employees who have a significant role in our organization’s control and procedures as they relate to our duties as Sub-Adviser to the Fund. |
I have read the draft of the Report which I understand to be current as of [Date of Reporting Period] and based on my knowledge, such draft of the Report does not, with respect to the Fund, contain any untrue statement of a material fact or omit to state a material fact necessary to make the information contained therein, in light of the circumstances under which such information is presented, not misleading with respect to the period covered by such draft Report.
I have disclosed, based on my most recent evaluation, to the Fund’s Chief Accounting Officer:
| a. | All significant changes, deficiencies and material weakness, if any, in the design or operation of the Sub-Adviser’s internal controls and procedures which could adversely affect the Registrant’s ability to record, process, summarize and report financial data with respect to the Fund in a timely fashion; |
| b. | Any fraud, whether or not material, that involves the Sub-Adviser’s management or other employees who have a significant role in the Sub-Adviser’s internal controls and procedures for financial reporting. |
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I certify that to the best of my knowledge:
| a. | The Sub-Adviser’s Portfolio Manager(s) has/have complied with the restrictions and reporting requirements of the Sub-Adviser’s and Trust’s Code of Ethics (the “Code”). The term Portfolio Manager is as defined in the Code. |
| b. | The Sub-Adviser has complied with the Prospectus and Statement of Additional Information of the Fund and the Policies and Procedures of the Fund as adopted by the Fund Board of Trustees. |
| c. | I have no knowledge of any compliance violations except as disclosed in writing to the Virtus Compliance Department by me or by the Sub-Adviser’s compliance administrator. |
| d. | The Sub-Adviser has complied with the rules and regulations of the 33 Act and 40 Act, and such other regulations as may apply to the extent those rules and regulations pertain to the responsibilities of the Sub-Adviser with respect to the Fund as outlined above. |
| e. | Since the submission of our most recent certification there have not been any divestments of securities of issuers that conduct or have direct investments in business operations in Sudan. |
This certification relates solely to the Fund named above and may not be relied upon by any other Trust or entity.
The Sub-Adviser does not maintain the official books and records of the above Fund. The Sub-Adviser’s records are based on its own portfolio management system, a record-keeping system that is not intended to serve as the Fund official accounting system. The Sub-Adviser is not responsible for the preparation of the Report.
| _______________________________ | __________________________ |
| [Name of Sub-Adviser] | Date |
| [Name of Authorized Signer] | |
| [Title of Authorized Signer] |
14
Exhibit (e)(4)
ETFIS SERIES TRUST I
THIRD AMENDMENT TO THE
DISTRIBUTION AGREEMENT
THIS THIRD AMENDMENT dated as of the 16th day of October, 2015, to the Distribution Agreement, dated as of December 6, 2013 (the “ Distribution Agreement ”), is entered into by and between ETFIS SERIES TRUST I, a Delaware statutory trust (the “ Trust ”), and ETF Distributors LLC , a Delaware limited liability company (the “ Distributor ”).
WHEREAS, each of the Trust and the Distributor is a party to the Distribution Agreement; and
WHEREAS, each of the Trust and the Distributor desires to amend each of Exhibit A and Schedule I to the Distribution Agreement to reflect the addition of ActiveAlts Contrarian ETF (the “ Fund ”) as a new series of the Trust and the appointment of the Distributor as the exclusive distributor for the Fund;
NOW, THEREFORE, the parties agree as follows:
1. Exhibit A to the Distribution Agreement is hereby deleted in its entirety and replaced with Exhibit A attached hereto.
2. Schedule I to the Distribution Agreement is hereby deleted in its entirety and replaced with Schedule I attached hereto.
3. Except to the extent amended hereby, the Distribution Agreement shall remain in full force and effect.
IN WITNESS WHEREOF , the parties hereto have caused this Third Amendment to be executed by a duly authorized officer on one or more counterparts as of the date and year first written above.
| ETFIS SERIES TRUST I | ETF DISTRIBUTORS LLC | ||
| By: | /s/ William J. Smalley | By: | /s/ William J. Smalley |
| William J. Smalley, President | William J. Smalley, Managing Principal | ||
EXHIBIT A
(As of October 16, 2015)
InfraCap MLP ETF
Tuttle Tactical Management U.S. Core ETF
BioShares Biotechnology Products Fund
BioShares Biotechnology Clinical Trials Fund
InfraCap REIT Preferred ETF
Tuttle Tactical Management Multi-Strategy Income ETF
Virtus Newfleet Multi-Sector Unconstrained Bond ETF
Reaves Utilities ETF
The Credit Strategist High Yield Opportunities Fund
ActiveAlts Contrarian ETF
Schedule I
(As of October 16, 2015)
FEES
| InfraCap MLP ETF | The greater of $30,000 or 1 BP on average AUM |
| BioShares Biotechnology Products ETF | The greater of $30,000 or 4 BP on average AUM |
| BioShares Biotechnology Clinical Trials ETF | The greater of $30,000 or 4 BP on average AUM |
| Tuttle Tactical Management U.S. Core ETF | The greater of $30,000 or 4 BP on average AUM |
| InfraCap REIT Preferred ETF | The greater of $15,000 or 4 BP on average AUM |
| Tuttle Tactical Management Multi-Strategy Income ETF | The greater of $30,000 or 4 BP on average AUM |
| Virtus Newfleet Multi-Sector Unconstrained Bond ETF | 1 BP on average AUM |
| Reaves Utilities ETF | The greater of $30,000 or 4 BP on average AUM |
| The Credit Strategist High Yield Opportunities Fund | The greater of $30,000 or 4 BP on average AUM |
| ActiveAlts Contrarian ETF | The greater of $30,000 or 1 BP on average AUM |
|
|
Exhibit (g)(2)
SCHEDULE II
TO THE CUSTODY AGREEMENT, dated as of December 6, 2013 between ETFIS SERIES TRUST I (the “Trust”) and The Bank of New York Mellon (“Custodian”). As REVISED September 21, 2015
SERIES
MANNA CORE EQUITY DIVIDEND INCOME FUND
INFRACAP MLP ETF
BIOSHARES BIOTECHNOLOGY CLINICAL TRIALS FUND
BIOSHARES BIOTECHNOLOGY PRODUCTS FUND
INFRACAP REIT PREFERRED ETF
TUTTLE TACTICAL MANAGEMENT US CORE ETF
TUTTLE TACTICAL MANAGEMENT MULTI-STRATEGY INCOME ETF
VIRTUS NEWFLEET MULTI-SECTOR UNCONSTRAINED BOND ETF
REAVES UTILITIES ETF
ALTSHARES LONG/SHORT HIGH YIELD FUND
THE CREDIT STRATEGIST HIGH YIELD OPPORTUNITIES FUND
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers designated below on the date and year first above written. As of September 21, 2015.
ETFIS SERIES TRUST I
On behalf of each Fund identified on Schedule II attached to the Agreement
By: /s/ William J. Smalley
Name: William J. Smalley
Title: President
THE BANK OF NEW YORK MELLON
By: /s/ Stephen Cook
Name: Stephen Cook
Title: Managing Director
Exhibit (h)(2)
EXHIBIT A
TO THE FUND ADMINISTRATION AND ACCOUNTING AGREEMENT,
dated as of December 6, 2013 between ETFIS SERIES TRUST I (the “Trust”) and
The Bank of New York Mellon (“BNYM”).
AS REVISED September 21, 2015.
Name of Fund
MANNA CORE EQUITY DIVIDEND INCOME FUND
INFRACAP MLP ETF
BIOSHARES BIOTECHNOLOGY CLINICAL TRIALS FUND
BIOSHARES BIOTECHNOLOGY PRODUCTS FUND
INFRACAP REIT PREFERRED ETF
TUTTLE TACTICAL MANAGEMENT US CORE ETF
TUTTLE TACTICAL MANAGEMENT MULTI-STRATEGY INCOME ETF
VIRTUS NEWFLEET MULTI-SECTOR UNCONSTRAINED BOND ETF
REAVES UTILITIES ETF
ALTSHARES LONG/SHORT HIGH YIELD FUND
THE CREDIT STRATEGIST HIGH YIELD OPPORTUNITIES FUND
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers designated below on the date and year first above written. As of September 21, 2015.
ETFIS SERIES TRUST I
On behalf of each Fund identified on Exhibit A attached to the Agreement
By: /s/ William J. Smalley
Name: William J. Smalley
Title: President
THE BANK OF NEW YORK MELLON
By: /s/ Stephen Cook
Name: Stephen Cook
Title: Managing Director
Exhibit (h)(5)
APPENDIX I
TO THE TRANSFER AGENCY AND SERVICES AGREEMENT, dated as of December 6, 2013 between ETFIS SERIES TRUST I (the “Trust”) and The Bank of New York Mellon (“Bank”).
AS REVISED September 21,2015
SERIES
MANNA CORE EQUITY DIVIDEND INCOME FUND
INFRACAP MLP ETF
BIOSHARES BIOTECHNOLOGY CLINICAL TRIALS FUND
BIOSHARES BIOTECHNOLOGY PRODUCTS FUND
INFRACAP REIT PREFERRED ETF
TUTTLE TACTICAL MANAGEMENT US CORE ETF
TUTTLE TACTICAL MANAGEMENT MULTI-STRATEGY INCOME ETF
VIRTUS NEWFLEET MULTI-SECTOR UNCONSTRAINED BOND ETF
REAVES UTILITIES ETF
ALTSHARES LONG/SHORT HIGH YIELD FUND
THE CREDIT STRATEGIST HIGH YIELD OPPORTUNITIES FUND
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers designated below on the date and year first above written. As of September 21, 2015.
ETFIS SERIES TRUST I
On behalf of each Series identified on Appendix I attached to the Agreement
By: /s/ William J. Smalley
Name: William J. Smalley
Title: President
THE BANK OF NEW YORK MELLON
By: /s/ Stephen Cook
Name: Stephen Cook
Title: Managing Director
Exhibit (h)(11)
ETFIS SERIES TRUST I
THIRD AMENDMENT TO THE
ADMINISTRATIVE SERVICES AGREEMENT
THIS THIRD AMENDMENT dated as of the 16th day of October, 2015, to the Administrative Services Agreement, dated as of August 6, 2013 (the “ Administrative Services Agreement ”), is entered into by and between ETFIS SERIES TRUST I, a Delaware statutory trust (the “ Trust ”) and VIRTUS ETF SOLUTIONS LLC (formerly ETF issuer Solutions, LLC), a Delaware limited liability company (the “ Administrator ”).
WHEREAS, each of the Trust and the Administrator is a party to the Administrative Services Agreement; and
WHEREAS, each of the Trust and the Administrator desires to amend Exhibit A to the Administrative Services Agreement to reflect the addition of ActiveAlts Contrarian ETF (the “ Fund ”) as a new series of the Trust and the appointment of the Administrator as an administration agent for the Fund;
NOW, THEREFORE, the parties agree as follows:
1. Exhibit A to the Administrative Services Agreement is hereby deleted in its entirety and replaced with Exhibit A attached hereto.
2. Except to the extent amended hereby, the Administrative Services Agreement shall remain in full force and effect.
IN WITNESS WHEREOF , the parties hereto have caused this Third Amendment to be executed by a duly authorized officer on one or more counterparts as of the date and year first written above.
| ETFIS SERIES TRUST I | VIRTUS ETF SOLUTIONS LLC | ||
| By: | /s/ William J. Smalley | By: | /s/ William J. Smalley |
| William J. Smalley, President | William J. Smalley, President | ||
Exhibit A
Series of the Trust
(As of October 16, 2015)
The following Funds are covered under this agreement:
InfraCap MLP ETF
Tuttle Tactical Management U.S. Core ETF
BioShares Biotechnology Products Fund
BioShares Biotechnology Clinical Trials Fund
InfraCap REIT Preferred ETF
Tuttle Tactical Management Multi-Strategy Income ETF
Virtus Newfleet Multi-Sector Unconstrained Bond ETF
Reaves Utilities ETF
The Credit Strategist High Yield Opportunities Fund
ActiveAlts Contrarian ETF
Exhibit (h)(13)
EXPENSE LIMITATION AGREEMENT
ETFis Series Trust I
This Agreement is into effective as of October 16, 2015 by and between the ActiveAlts Contrarian ETF (the “Fund”), a series of shares of ETFis Series Trust I , a Delaware statutory trust (the “Trust”), VIRTUS ETF ADVISERS ETFIS CAPITAL LLC, a Delaware limited liability company (the “Adviser”) and Active Alts Inc. (the “Sub-Adviser”).
WHEREAS, the Trust is a Delaware statutory trust organized under the Certificate of Trust (“Trust Instrument”), dated September 20, 2012, and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management company of the series type; and
WHEREAS, the Fund is a series of the Trust; and
WHEREAS, the Trust, on behalf of the Fund, the Adviser and the Sub-Adviser have entered into an Investment Sub-Advisory Agreement dated October 16, 2015, (“Sub-Advisory Agreement”), pursuant to which the Sub-Adviser provides investment advisory services to the Fund; and
WHEREAS, the Fund, the Adviser and the Sub-Adviser have determined that it is appropriate and in the best interests of the Fund and its shareholders to limit the expenses of the Fund, and, therefore, have entered into this Agreement, in order to maintain the Fund’s expense ratios within the Operating Expense Limit, as defined below.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
1. Expense Limitation.
(a) Applicable Expense Limit . To the extent that the aggregate expenses of every character, including but not limited to investment advisory fees of the Adviser and Sub-Adviser (but excluding interest, taxes, brokerage fees and commissions, other expenditures that are capitalized in accordance with generally accepted accounting principles, acquired fund fees and expenses, other extraordinary expenses not incurred in the ordinary course of the Fund’s business, and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b-1 under the 1940 Act) incurred by the Fund in any fiscal year (“Fund Operating Expenses”), exceed the Operating Expense Limit, as defined in Section 1(b) below, such excess amount (the “Excess Amount”) shall be the liability of the Sub-Adviser.
(b) Operating Expense Limit . The Fund’s maximum Operating Expense Limit in any year shall be 1.95% of the average daily net assets of the Fund.
(c) Method of Computation . To determine the Sub-Adviser’s liability with respect to the Excess Amount, each month the Fund Operating Expenses for the Fund shall be annualized
as of the last day of the month. If the annualized Fund Operating Expenses for any month exceeds the Operating Expense Limit of the Fund, the Sub-Adviser shall first waive or reduce its investment advisory fee for such month by an amount sufficient to reduce the annualized Fund Operating Expenses to an amount no higher than the Operating Expense Limit. If the amount of the waived or reduced investment advisory fee for any such month is insufficient to pay the Excess Amount, the Sub-Adviser may also remit to the Fund an amount that, together with the waived or reduced investment advisory fee, is sufficient to pay the Excess Amount.
(d) Year-End Adjustment . If necessary, on or before the last day of the first month of each fiscal year, an adjustment payment shall be made by the appropriate party in order that the amount of the investment advisory fees waived or reduced and other payments remitted by the Sub-Adviser to the Fund with respect to the previous fiscal year shall equal the Excess Amount.
(e) Recapture . If the Sub-Adviser so requests, an amount equal to any Fund Operating Expenses waived or reimbursed by the Sub-Adviser pursuant to this Agreement shall be paid to the Sub-Adviser by the Fund in the first, second and third fiscal year following the fiscal year in which any such reimbursement or waiver occurs, if the total annual Fund Operating Expenses for the applicable following year, after giving effect to the repayment, do not exceed 1.95% of the average daily net assets of the Fund (or any lower expense limitation or limitations to which the parties may otherwise agree).
2. Term and Termination of Agreement.
This Agreement with respect to the Fund shall continue in effect until the first day of December 31, 2016, and from year to year thereafter provided each such continuance is specifically approved by a majority of the Trustees of the Trust who (i) are not “interested persons” of the Trust or any other party to this Agreement, as defined in the 1940 Act, and (ii) have no direct or indirect financial interest in the operation of this Agreement (“Non-Interested Trustees”). Nevertheless, this Agreement may be terminated by either party hereto, without payment of any penalty, upon written notice ninety (90) days prior to the end of the then-current term of the Agreement to the other party at its principal place of business; provided that, in the case of termination by the Trust, such action shall be authorized by resolution of a majority of the Non-Interested Trustees of the Trust or by a vote of a majority of the outstanding voting securities of the Trust. Any termination pursuant to this paragraph 2 shall become effective, unless otherwise specifically agreed upon, on the last day of the then-current term of the Agreement.
3. Miscellaneous.
(a) Captions . The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect.
(b) Interpretation . Nothing herein contained shall be deemed to require the Trust or the Fund to take any action contrary to the Trust’s Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to
2
relieve or deprive the Trust’s Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Funds.
(c) Definitions . Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Sub-Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Sub-Advisory Agreement or the 1940 Act.
IN WITNESS WHEREOF, the parties have caused this Agreement to be effective as of the day and year first above written.
| ETFIS SERIES TRUST I, on behalf of ActiveAlts Contrarian ETF | |
| By: | /s/ William J. Smalley |
| William J. Smalley, President | |
| VIRTUS ETF ADVISERS | |
| By: | /s/ Brinton W. Frith |
| Brinton W. Frith, President | |
| Active Alts Inc. | |
| By: | /s/ Brad H. Lamensdorf |
| Brad H. Lamensdorf, President | |
3
Exhibit (m)
DISTRIBUTION AND SERVICE PLAN
ETFis Series Trust I
1. The Trust . ETFis Series Trust I (the “ Trust ”) is an open-end investment company, registered under the Investment Company Act of 1940 (the “ 1940 Act ”), and organized as a series trust.
2. The Plan . The Trust desires to adopt a plan of distribution pursuant to Rule 12b-1 under the 1940 Act with respect to the shares of beneficial interest (“ Shares ”) of certain series of the Trust which are identified on Exhibit A hereof (each such series, a “ Fund ” and together, the “ Funds ”), and the Board of Trustees of the Trust (the “ Board ”) has determined that there is a reasonable likelihood that adoption of this Plan will benefit each such Fund and its holders of Shares (“ Shareholders ”). Accordingly, the Trust has adopted this Plan in accordance with Rule 12b-1 under the 1940 Act on behalf of each Fund to enable such Fund to directly or indirectly bear expenses relating to the distribution of Shares of the Fund.
3. The Distributor . The Trust has entered into a written Distribution Agreement with ETF Distributors, LLC (the “ Distributor ”), pursuant to which the Distributor will act as the exclusive distributor with respect to the creation and distribution of creation unit size aggregations of shares described in the Funds’ registration statement (“ Creation Units ”).
4. Payments . The Trust may pay the Distributor a monthly fee not exceed .25% (twenty-five basis points) of the Fund’s average daily net assets to reimburse the Distributor for actual amounts expended to finance any activity primarily intended to result in the sale of Shares of a Fund or the provision of investor services. The Trust also may pay other service providers for services rendered in connection with the sale and promotion of Shares and the furnishing of services to Shareholders. Such services include, but are not limited to: (i) marketing and promotional services, including advertising; (ii) printing and distributing to persons other than current Shareholders the reports, prospectuses, notices and similar materials that are prepared by the Trust for current Shareholders; (iii) preparing, printing and distributing any sales literature used in connection with the offering of the Shares which is not covered by (ii) above; (iv) the promotion and sale of the Shares, including travel, communications and the compensation of sales personnel; and (v) distribution and Shareholder support assistance. The Distributor may use all or any portion of the amount received pursuant to this Plan to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services, pursuant to agreements with the Distributor, or to pay any of the expenses associated with other activities authorized hereunder.
As of the end of a Fund’s fiscal year, the expenses incurred in connection with the sale and promotion of the Shares and the furnishing of services to Shareholders, as described above, may exceed .25% of the Fund’s average daily net assets. Although the Fund is not permitted to pay any such excess expenses during that same fiscal year, such excess expenses may be reimbursed during any of the Fund’s subsequent three fiscal years, provided and to the extent that the current expenses plus the excess expenses do not exceed the .25% limitation for that subsequent year. Such reimbursement must be approved by a majority of the Board of Trustees, including a majority of the Independent Trustees (defined below in paragraph 8). All or any portion of such excess expenses may be reimbursed by the Fund during any one or more of the three subsequent fiscal years.
5. Effective Date . This Plan shall not take effect with respect to any Fund until it has been approved (a) by a vote of at least a majority of the outstanding voting securities of the Shares of such Fund, if adopted after the public offering of such Shares; and (b) together with any related agreements, by votes of the majority of both (i) the Trustees of the Trust and (ii) the Qualified Trustees (as defined in
paragraph 8 below), cast in person at a Board of Trustees meeting called for the purpose of voting on this Plan or such agreement.
6. Term . This Plan shall continue in effect for a period of more than one year after it takes effect, only for so long as such continuance is specifically approved at least annually in the manner provided in paragraph 5 above for the approval of this Plan.
7. Agreements Relating to the Plan . All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide (a) that such agreement may be terminated at any time, without payment of any penalty, by the vote of a majority of the Independent Trustees or by the vote of a majority of the outstanding voting securities of the Shares of the Funds, on not more than 60 days written notice to any other party to the agreement; and (b) that such agreement shall terminate automatically in the event of its assignment. This Plan shall not obligate the Trust or any other party to enter into an agreement with any particular person.
8. Independent Trustees . As used in this Plan, (a) the term “ Independent Trustees ” shall mean those Trustees of the Trust who are not interested persons of the Trust, and have no direct or indirect financial interest in the operation of this Plan or any agreements related to it, and (b) the terms “assignment” and “interested person” shall have the respective meanings specified in the 1940 Act and the rules and regulations thereunder, subject to such exemptions as may be granted by the Securities and Exchange Commission.
9. Reports . Any person authorized to direct the disposition of monies paid or payable by the Trust pursuant to this Plan or any related agreement shall provide to the Trustees of the Trust, at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made. Such report shall include any division or allocation of expenses between or among Funds.
10. Records . The Trust shall preserve copies of this Plan, each agreement related hereto and each report referred to in paragraph 9 hereof for a period of at least six years from the date of the Plan, agreement and report, the first two years in an easily accessible place.
11. Severability . If any provision of the Plan shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Plan shall not be affected thereby.
12. Amendments . This Plan may be amended at any time by the Board of Trustees, provided that (a) any amendment to increase materially the amount to be spent for the services provided for in paragraph 4 hereof shall be effective only upon approval by a vote of a majority of the outstanding voting securities (as such term is defined in the 1940 Act) of the applicable Fund(s), and (b) any material amendment of this Plan shall be effective only upon approval by a vote of both a majority of the Board of Trustees and a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on such amendment.
13. Termination . This Plan may be terminated at any time, without payment of any penalty, by the vote of a majority of the Independent Trustees or by vote of a majority of the outstanding voting securities (as such term is defined in the 1940 Act) of the applicable Fund(s). In the event of termination or non-continuance of this Plan, the Trust may reimburse any expense which it incurred prior to such termination or non-continuance, provided that such reimbursement is specifically approved by both a majority of the Board of Trustees and a majority of the Independent Trustees.
2
14. Independent Trustees . While this Plan is in effect, the selection and nomination of those Trustees who are not interested persons of the Trust within the meaning of Section 2(a)(19) of the 1940 Act shall be committed to the discretion of the Independent Trustees.
This Plan was adopted unanimously by the Board of Trustees of the Trust, including a majority of the Independent Trustees, at a meeting held on August 5, 2015.
/s/ William J. Smalley
Secretary
3
Exhibit A
InfraCap MLP ETF
Tuttle Tactical Management U.S. Core ETF
BioShares Biotechnology Products Fund
BioShares Biotechnology Clinical Trials Fund
InfraCap REIT Preferred ETF
Tuttle Tactical Management Multi-Strategy Income ETF
Virtus Newfleet Multi-Sector Unconstrained Bond ETF
Reaves Utilities ETF
The Credit Strategist High Yield Opportunities Fund
ActiveAlts Contrarian ETF
4
Exhibit (p)(9)
Active Alts Inc.
CODE OF ETHICS, pOLICY ON INSIDER TRADING AND
GIFTS AND ENTERTAINMENT POLICY
Statement of General Policy
This Code of Ethics (“Code”) has been adopted by Active Alts Inc. (the “Adviser” or "Active Alts"), and is designed to comply with Rule 204A-1 under the Investment Advisers Act of 1940 (“Advisers Act”).
This Code establishes rules of conduct for all managers, officers and employees of Active Alts, and is designed to, among other things; govern personal securities trading activities in the accounts of employees. The Code is based upon the principle that Active Alts and its employees owe a fiduciary duty to Active Alts’ clients to conduct their affairs, including their personal securities transactions, in such a manner as to avoid (i) serving their own personal interests ahead of clients, (ii) taking inappropriate advantage of their position with the firm and (iii) any actual or potential conflicts of interest or any abuse of their position of trust and responsibility.
The purpose of the Code is to preclude activities which may lead to or give the appearance of conflicts of interest and other forms of prohibited or unethical business conduct.
Pursuant to Section 206 of the Advisers Act, both Active Alts and its employees are prohibited from engaging in fraudulent, deceptive or manipulative conduct. Compliance with this section involves more than acting with honesty and good faith alone. It means that Active Alts has an affirmative duty of utmost good faith to act solely in the best interest of its clients.
In meeting its fiduciary responsibilities to its clients, Active Alts expects every employee to demonstrate the highest standards of ethical conduct for continued employment with Active Alts. Strict compliance with the provisions of the Code shall be considered a basic condition of employment with Active Alts. Employees are urged to seek the advice of the CCO for any questions about the Code or the application of the Code to their individual circumstances. Employees should also understand that a material breach of the provisions of the Code may constitute grounds for disciplinary action, including termination of employment with Active Alts.
The provisions of the Code are not all-inclusive. Rather, they are intended as a guide for employees of Active Alts in their conduct. In those situations where an employee may be uncertain as to the intent or purpose of the Code, he/she is advised to consult with the CCO. A member of senior management may grant exceptions to certain provisions contained in the Code. All questions arising in connection with personal securities trading should be resolved in favor of the fund even at the expense of the interests of employees.
The CCO will periodically report to the CEO of Active Alts any non-compliance with this Code that has come to his or her attention.
Definitions
For the purposes of this Code, the following definitions shall apply:
| · | “Access person” means any supervised person who: has access to nonpublic information regarding any clients’ purchase or sale of securities, or nonpublic information regarding the portfolio holdings |
of any fund that that Active Alts or its control affiliates manage; or is involved in making securities recommendations to clients that are nonpublic.
| · | “Account” means accounts of any employee and includes accounts of the employee’s immediate family members (any relative by blood or marriage living in the employee’s household), and any account in which he or she has a direct or indirect beneficial interest, such as trusts and custodial accounts or other accounts in which the employee has a beneficial interest or exercises investment discretion. |
| · | “Beneficial ownership” shall be interpreted in the same manner as it would be under Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 in determining whether a person is the beneficial owner of a security for purposes of Section 16 of such Act and the rules and regulations thereunder. |
| · | “Reportable security” means any security as defined in Section 202(a)(18) of the Advisers Act, except that it does not include: (i) Transactions and holdings in direct obligations of the Government of the United States; (ii) Bankers’ acceptances, bank certificates of deposit, commercial paper and other high quality short-term debt instruments, including repurchase agreements; (iii) Shares issued by money market funds; (iv) Transactions and holdings in shares of other types of open-end registered mutual funds, unless Active Alts or a control affiliate acts as the investment adviser or principal underwriter for the fund; and (v) Transactions in units of a unit investment trust if the unit investment trust is invested exclusively in mutual funds, unless Active Alts or a control affiliate acts as the investment adviser or principal underwriter for the fund. |
| · | “Supervised person” means directors, officers and partners of Active Alts (or other persons occupying a similar status or performing similar functions); employees of Active Alts; and any other person who provides advice on behalf of Active Alts and is subject to Active Alts’ supervision and control. |
Personal Securities Transactions
General Policy
Active Alts has adopted the following principles governing personal investment activities by Active Alts’ access persons:
| · | All personal securities transactions will be conducted in such manner as to avoid any conflict of interest or any abuse of an individual’s position of trust and responsibility; and |
| · | Supervised persons must not take inappropriate advantage of their positions. |
Pre-Clearance Required for Participation in IPOs
No access person shall acquire any beneficial ownership in any securities in an Initial Public Offering for his or her account, as defined herein without the prior written approval of the CCO (or his or her designee) who has been provided with full details of the proposed transaction (including written certification that the investment opportunity did not arise by virtue of the access person’s activities on behalf of a client) and, if approved, will be subject to continuous monitoring for possible future conflicts.
Pre-Clearance Required for Private or Limited Offerings
No access person shall acquire beneficial ownership of any securities in a limited offering or private placement without the prior written approval of the CCO (or his or her designee) who has been provided with full details of the proposed transaction (including written certification that the investment opportunity did not arise by virtue of the access person’s activities on behalf of a client) and, if approved, will be subject to continuous monitoring for possible future conflicts.
Interested Transactions
No supervised person shall recommend any securities transactions for a client without having disclosed his or her interest, if any, in such securities or the issuer thereof, including without limitation:
| · | any direct or indirect beneficial ownership of any securities of such issuer; |
| · | any contemplated transaction by such person in such securities; |
| · | any position with such issuer or its affiliates; and |
| · | any present or proposed business relationship between such issuer or its affiliates and such person or any party in which such person has a significant interest. |
Service as a Director
No supervised person shall serve on the board of directors of any publicly traded company without prior authorization from the CCO.
Reporting Requirements
Every access person shall provide initial and annual holdings reports and quarterly transaction reports to the CCO (or his or her designee) which must contain the information described below. It is the policy of Active Alts that each access person must arrange to provide brokerage account statements and trade confirmations of all securities transactions to the CCO (or his or her designee).
The CCO will review all transaction reports and report any instance of noncompliance discovered.
Initial Holdings Report
Every access person shall, no later than ten (10) days after the person becomes an access person, file an initial holdings report containing the following information:
| · | The title and exchange ticker symbol or CUSIP number, type of security, number of shares and principal amount (if applicable) of each reportable security in which the supervised person had any direct or indirect beneficial interest ownership when the person becomes a supervised person; |
| · | The name of any broker, dealer or bank, account name, number and location with whom the supervised person maintained an account in which any securities were held for the direct or indirect benefit of the supervised person; and |
| · | The date that the report is submitted by the supervised person. |
The information submitted must be current as of a date no more than forty-five (45) days before the person became a supervised person.
Annual Holdings Report
Every supervised person shall, no later than January 30 each year, file an annual holdings report containing the same information required in the initial holdings report as described above. The information submitted must be current as of a date no more than forty-five (45) days before the annual report is submitted.
Quarterly Transaction Reports
Every supervised person must, no later than thirty (30) days after the end of each calendar quarter, file a quarterly transaction report containing the following information:
With respect to any transaction during the quarter in a reportable security in which the supervised persons had any direct or indirect beneficial ownership:
| · | The date of the transaction, the title and exchange ticker symbol or CUSIP number, the interest rate and maturity date (if applicable), the number of shares and the principal amount (if applicable) of each covered security; |
| · | The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); |
| · | The price of the reportable security at which the transaction was effected; |
| · | The name of the broker, dealer or bank with or through whom the transaction was effected; and |
| · | The date the report is submitted by the supervised person. |
Exempt Transactions
An access person need not submit a report with respect to:
| · | Transactions effected for, securities held in, any account over which the person has no direct or indirect influence or control; |
| · | Transactions effected pursuant to an automatic investment plan; |
| · | A quarterly transaction report if the report would duplicate information contained in securities transaction confirmations or brokerage account statements that Active Alts holds in its records so long as the firm receives the confirmations or statements no later than 30 days after the end of the applicable calendar quarter; |
| · | Any transaction or holding report if Active Alts has only one access person, so long as the firm maintains records of the information otherwise required to be reported |
Monitoring and Review of Personal Securities Transactions
The CCO (or his or her designee) may also initiate inquiries of supervised persons regarding personal securities trading. Access persons are required to cooperate with such inquiries and any monitoring or review procedures employed by Active Alts. Any transactions for any accounts of the CCO will be reviewed by a designated person of Active Alts. The CCO shall at least annually identify all access persons who are required to file reports pursuant to the Code and will inform such access persons of their reporting obligations.
Certification
Initial Certification
All access persons will be provided with a copy of the Code and must initially certify in writing to the CCO (or his or her designee) that they have: (i) received a copy of the Code; (ii) read and understand all provisions of the Code; (iii) agreed to abide by the Code; and (iv) reported all account holdings as required by the Code.
Acknowledgement of Amendments
All access persons shall receive any amendments to the Code and must certify to the CCO (or his or her designee) in writing that they have: (i) received a copy of the amendment; (ii) read and understood the amendment; and (iii) agreed to abide by the Code as amended.
Annual Certification
All access persons must annually certify in writing to the CCO (or his or her designee) that they have: (i) read and understood all provisions of the Code; (ii) complied with all requirements of the Code; and (iii) submitted all holdings and transaction reports as required by the Code.
Further Information
Access persons should contact the CCO regarding any inquiries pertaining to the Code or the policies established herein.
Records
The CCO (or his or her designee) shall maintain and cause to be maintained in a readily accessible place the following records:
| · | A copy of any code of ethics adopted by the firm pursuant to the Advisers Act Rule 204A-1 which is or has been in effect during the past five years; |
| · | A record of any violation of the Adviser’s Code and any action that was taken as a result of such violation for a period of five years from the end of the fiscal year in which the violation occurred; |
| · | A record of all written acknowledgements of receipt of the Code and amendments thereto for each person who is currently, or within the past five years was, a supervised person which shall be retained for five years after the individual ceases to be a supervised person of Active Alts; |
| · | A copy of each report made pursuant to the Advisers Act Rule 204A-1, including any brokerage confirmations and account statements made in lieu of these reports; |
| · | A list of all persons who are, or within the preceding five years have been, access persons; |
| · | A record of any decision and reasons supporting such decision to approve a supervised persons’ acquisition of securities in IPOs and limited offerings within the past five years after the end of the fiscal year in which such approval is granted. |
Reporting Violations and Sanctions
All access persons shall promptly report to the CCO or an alternate designee all apparent violations of the Code. Any retaliation for the reporting of a violation under this Code will constitute a violation of the Code.
The CCO shall promptly report to senior management all apparent material violations of the Code. When the CCO finds that a violation otherwise reportable to senior management could not be reasonably found to have resulted in a fraud, deceit, or a manipulative practice in violation of Section 206 of the Advisers Act, he or she may, in his or her discretion, submit a written memorandum of such finding and the reasons therefore to a reporting file created for this purpose in lieu of reporting the matter to senior management.
Senior management shall consider reports made to it hereunder and shall determine whether or not the Code has been violated and what sanctions, if any, should be imposed. Possible sanctions may include reprimands, monetary fine or assessment, or suspension or termination of the employee’s employment with the firm.
Protecting the Confidentiality of Client Information
Confidential Client Information
In the course of investment advisory activities of Active Alts, the firm gains access to non-public information about its clients. Such information may include a person’s status as a client, personal financial and account information, the allocation of assets in a client portfolio, the composition of investments in any client portfolio, information relating to services performed for or transactions entered into on behalf of clients, advice provided by Active Alts to clients, and data or analyses derived from such non-public personal information (collectively referred to as “Confidential Client Information”). All Confidential Client Information, whether relating to Active Alts’ current or former clients, is subject to the Code’s policies and procedures. Any doubts about the confidentiality of information must be resolved in favor of confidentiality.
Non-Disclosure of Confidential Client Information
All information regarding Active Alts’ clients is confidential. Information may only be disclosed when the disclosure is consistent with the firm’s policy and the client’s direction. Active Alts does not share Confidential Client Information with any third parties, except in the following circumstances:
| · | As necessary to provide service that the client requested or authorized, or to maintain and service the client’s account. Active Alts will require that any financial intermediary, agent or other service provider utilized by Active Alts (such as broker-dealers or sub-advisers) comply with substantially similar standards for non-disclosure and protection of Confidential Client Information and use the information provided by Active Alts only for the performance of the specific service requested by Active Alts; |
| · | As required by regulatory authorities or law enforcement officials who have jurisdiction over Active Alts, or as otherwise required by any applicable law. In the event Active Alts is compelled to disclose Confidential Client Information, the firm shall provide prompt notice to the clients affected, so that the clients may seek a protective order or other appropriate remedy. If no protective order or other appropriate remedy is obtained, Active Alts shall disclose only such information, and only in such detail, as is legally required; |
| · | To the extent reasonably necessary to prevent fraud, unauthorized transactions or liability. |
Employee Responsibilities
All supervised persons are prohibited, either during or after the termination of their employment with Active Alts, from disclosing Confidential Client Information to any person or entity outside the firm, including family members, except under the circumstances described above. A supervised person is
permitted to disclose Confidential Client Information only to such other supervised persons who need to have access to such information to deliver Active Alts’ services to the client.
Supervised persons are also prohibited from making unauthorized copies of any documents or files containing Confidential Client Information and, upon termination of their employment with Active Alts, must return all such documents to Active Alts.
Any supervised person who violates the non-disclosure policy described above will be subject to disciplinary action, including possible termination, whether or not he or she benefited from the disclosed information.
Security of Confidential Personal Information
Active Alts enforces the following policies and procedures to protect the security of Confidential Client Information:
| · | The firm restricts access to Confidential Client Information to those supervised persons who need to know such information to provide Active Alts’ services to clients; |
| · | Any supervised person who is authorized to have access to Confidential Client Information in connection with the performance of such person’s duties and responsibilities is required to keep such information in a secure compartment, file or receptacle on a daily basis as of the close of each business day; |
| · | All electronic or computer files containing any Confidential Client Information shall be password secured and firewall protected from access by unauthorized persons; |
| · | Any conversations involving Confidential Client Information, if appropriate at all, must be conducted by supervised persons in private, and care must be taken to avoid any unauthorized persons overhearing or intercepting such conversations. |
Enforcement and Review of Confidentiality Policy
The CCO (or his or her designee) is responsible for reviewing, maintaining and enforcing Active Alts’ confidentiality policy and is also responsible for conducting appropriate employee training to ensure adherence to these policy. Any exceptions to this policy require the written approval of the CCO.
POLICIES AND PROCEDURES TO PREVENT INSIDER TRADING
Principals, managers, officers, and employees of Active Alts who have access to confidential information are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of Active Alts’ business. All non-public information should be considered confidential information. Under most circumstances, it is illegal to trade in securities while in possession of material, non-public information, as well as to communicate or “tip” such information to others. (Note that in one matter the SEC imposed a penalty of $470,000 on a "tipper" even though he did not profit personally from his tippee's trading.)
What constitutes “material non-public information” is a complex legal question, but is generally considered to be information not available to the general public which, if disclosed, is likely to affect the market price of the company’s securities or to be considered important by an average investor in deciding whether to purchase or sell those securities. Such information may include, but is not limited to, information relating to dividend increases or decreases, major litigation by or against the company, liquidity or solvency problems, significant business developments, changes to capital structure, major management changes, contemplated acquisitions or divestitures, information concerning earnings or other financial information, or similar major events that would be viewed as having materially altered the “total mix” of information available regarding the company or the market for any of its securities. Such information continues to be “inside” information until a reasonable time after it is disclosed to the general public.
The penalties for trading or "tipping" inside information can be severe. Among other things, a person who trades on material nonpublic information, or who provides such information to others, is potentially subject to a civil penalty of up to three times the profits earned or losses avoided, a criminal fine of up to $5,000,000, no matter how small the profit obtained, and a jail term of up to 20 years. Securities laws also subject controlling persons to civil penalties for illegal insider trading by employees, including employees located outside the United States. Controlling persons include employers, and the term is being interpreted by the SEC to include directors, officers and supervisors. These persons may be subject to a civil penalty up to the greater of $1,000,000 or three times the profit of (or loss avoided by) the insider trader and a criminal fine of up to $25 million. Failure to adhere to the policies which follow may result in dismissal for cause whether or not any civil or criminal penalties arise from the "inside" securities trading.
The unauthorized use or disclosure of any material nonpublic information about any company that is acquired in connection with work for Active Alts is prohibited. Also, such conduct may be grounds for termination.
In order to ensure that these policies are adhered to, the following procedures are to be followed with respect to securities transactions by principals, managers, officers, and employees of Active Alts (collectively, "Covered Employees"), as well as by members of the households or dependents of, and any trust or other entity controlled by, any Covered Employees (collectively, "Family Members"): (1) For all Covered Employees (and their Family Members), all trading in the securities of any public company with respect to which Active Alts holds a greater than 5% position, has a nominee on its board of directors, or has a non-disclosure agreement, must be pre-cleared by the CCO; and (2) All Covered Employees are forbidden from communicating any material non-public information to anyone outside the firm except for advisers (e.g., counsel, investment bankers, accountants, and the like).
POLICY ON GIFTS & BUSINESS ENTERTAINMENT
I. Gifts .
Employees of Adviser are prohibited from using his or her position at Active Alts to obtain an item of value from any person or company that does business with Active Alts. Employees are prohibited from accepting any gift greater than $100 in value from any person or company that does business with Active Alts. Unsolicited business entertainment, including meals or tickets to cultural and sporting events are permitted if: a) they are not so frequent or of such high value as to raise a question of impropriety and b) the person providing the entertainment is present at the event.
Employees shall not provide or accept extravagant or excessive entertainment to or from a client, prospective client, or any person or entity that does or seeks to do business with or on behalf of Active Alts. Employees may provide or accept a business entertainment event, such as dinner or a sporting event, of reasonable value, if the person or entity providing or accepting the entertainment is present. Pre-approval is not required for bona fide dining or entertainment if accompanied by the person providing or accepting the entertainment.
II. Reporting/Recordkeeping
| · | Gifts. Employees must report any gifts over $50 received in connection with their employment to the CCO. The CCO may require that any such gift be returned to the provider or that an expense be repaid by the employee. |
| · | Business Entertainment. Each employee must report any event likely to be viewed as so frequent or of such high value as to raise a question or impropriety. Any such event must be approved by the CCO. |
| · | Quarterly Transaction Reports – Each Covered Person must include any previously unreported or prospective gift or business entertainment event in excess of the $100 value on its Quarterly Transaction Statement filed under the Code of Ethics. |
| · | Recordkeeping. The CCO (or his or her designee) will maintain records of any gifts and/or business entertainment events so reported. |
Political Contributions
1. Political Contributions and Activity Policy
All employees must obtain approval for all political and charitable contributions from CCO prior to making any contribution in accordance with the following policy.
2. Introduction
This Political Contributions and Activities Policy applies to employees of Active Alts Inc. (the “Company”). The objective of this policy is to ensure that the Company and its employees comply with applicable U.S. federal, state and local laws, rules and regulations relating to elected and appointed U.S. federal, state, and local officials or staff of governmental subdivisions or instrumentalities. In certain jurisdictions, violation of the applicable rules and laws could lead to detrimental effects on the Company’s businesses. The Company respects employees’ involvement in political activities and implementation of this policy provides a way to allow certain political activities in a manner which is compliant with applicable laws and rules while also protecting the Company’s expanding business interests.
3. Corporate Political Contributions
No payment or other contribution may be made by, or in the name of, the Company without the express prior approval of the Chief Compliance Officer (or their respective designee) in connection with, or in anticipation of, any political campaign or to influence the outcome of elections, legislative initiatives or similar processes (including working for the election of anyone to political office or for any organization or campaign to influence legislation). In addition, corporate facilities of the Company may not be used for political fundraising activities.
4. Personal Political Contributions
Employees, as individual citizens, may have an interest in the election process. However, participating in the election process by making political contributions may raise legal implications and liability for the Company. Depending on the jurisdiction, this may be the case even if an employee is acting in his personal capacity and not as a representative of the Company. Contributions to candidates, party committees, political action committees, and section 527 and 501(c)(4) organizations are subject to federal and state laws. These laws govern the ability of an individual to make a contribution. Failure to comply with these laws and the Company’s policies and procedures may result in fines or penalties against the individual and/or disqualification of the Company to do business with government agencies and government-sponsored entities.
For purposes of this Policy, a “political contribution” means a monetary or in-kind contribution to a federal, state or local candidate, incumbent official, political party, political action committee, section 527 organization, 501(c)(4) organization, or similar organization.
Please refer to Limitations on Personal Political Contributions and Solicitations – for specific guidelines on permissibility of contributions and the process for submitting a pre-clearance request to the CCO to make a contribution.
In no event may a Company employee make any political contribution for the purposes of obtaining or retaining the business of any government entity. Additionally, under no circumstances will an employee be reimbursed for a political contribution.
Employees are prohibited from using any indirect means to avoid the requirements of this Policy. Indirect means would include, amongst other things, making contributions through family, friends, an entity controlled by the employee, soliciting contributions from others, or by bundling contributions with other employees.
5. Political Activities
All political activities of an employee must be kept separate from his/her employment and related expenses may not be charged to the Company. Employees may not conduct political activities during working hours or use Company property for political activities. Political activities include, but are not limited to: volunteering for candidate campaigns; supporting ballot measures; hosting fundraising events; soliciting contributions; serving as an advisor or having a formal role in a campaign, political party or political committee; or seeking, accepting or holding any political office. Employees should only act in their individual capacity, rather than as a representative of the Company, when engaging in political activity. Further, employees should not use their corporate title, or utilize the Company’s resources (including e-mail and phone systems), name or logo in connection with political fundraising or solicitation activity. Employees who have questions regarding whether their activities are political in nature should contact the Chief Compliance Officer or designee. Employees interested in holding a formal position in a campaign or political party or seeking elective or appointive office of a governmental subdivision or instrumentality, or any board, commission or other vehicle that exercises power granted by statute or other governmental authority, must first obtain approval from the Chief Compliance Officer.
6. Offering Gifts or Entertainment to Public Officials or Employees
Federal, state and local laws restrict the offering of gifts, meals or entertainment to public officials or employees. Improper gifts may result in the Company being disqualified or unable to enter into contracts with governmental entities. Employees are, therefore, generally prohibited from offering anything of value to government officials or employees. Employees must seek prior approval from the Chief Compliance Officer before being offering or agreeing to provide anything of value to any public official or employee
7. Lobbying Activities
In certain federal, state and local jurisdictions lobbying or engaging in outreach with public officials, including attempts to influence legislation, rulemakings, the awarding of government contracts, or efforts to influence investment decisions by a public retirement system or public pension fund may require lobbying registration. As a result, employees may not engage in lobbying or outreach efforts to public officials on behalf of the Company without prior approval from the CCO.
8. Apprising Management of Permitted Political Activities
Employees are encouraged, but not required, to apprise management of their political involvement (which does not otherwise require prior approval) permitted by this Policy. It is useful for the Company to have information concerning permissible political involvement by employees, which might help us address conflicts, issues or positions potentially affecting the Company and its businesses.
9. Pre-Approval of New Hires
The CCO will request from new employees at the time of hire information regarding past political contributions, as deemed necessary and appropriate for the Company to comply with this Policy.
10. Questions and Reports of Potential Violations
All employees are expected to adhere to these policies. Questions may arise from time-to-time regarding the application of these polices. If any doubt exists, you are strongly encouraged to submit your inquiry to the CCO. Anyone who becomes aware of a potential violation of these policies must immediately report the matter to the CCO. Prompt notice of a violation of our policies may allow the Company to eliminate or reduce potential adverse consequences.
11. Limitations on Personal Political Contributions and Solicitations
Prior to making any political contribution, or soliciting others to make contributions, an employee must submit a request e-mail to CCO. After the request has been reviewed the employee will receive an electronic confirmation that such request has been approved or denied. In certain situations the employee will be asked to provide additional information before a determination can be made regarding the request. Except as permitted below, employees are prohibited from contributing to, or soliciting contributions for, state and local office and state and local political action committees. Contributions and solicitations to state and local political party committees also fall under this ban.
Subject to federal contribution limits and the pre-clearance process described in Section 1 above, an employee may contribute to federal candidates (that are not currently state or local officeholders), federal political party committees and federal political actions committees (that are accompanied by a letter confirming that the contribution will not be used for state or local candidates).
Subject to the pre-clearance process described in Section 1 above, in certain limited situations, de minimus contributions for state and local candidates are permitted subject to the restrictions below:
| a) | Contributions to state and local candidates are prohibited if the employee is not entitled to vote for the candidate. |
| b) | Contributions to and solicitations for state and local candidates where an employee is entitled to vote are subject to the following restrictions: |
| i. | Requests to make a contribution to any state or local candidate must be submitted to the Company for prior approval. Pre-approval requests must be made via the CCO's e-mail and include the name of the candidate, office for which candidate is running, amount contributed, date of contribution, and name of the person making the contribution. |
| ii. | Contributions to candidates in all other states are limited to $250 per election where the employee is entitled to vote for the candidate. |
Spouses and dependent children may make contributions subject to the restrictions below as long as the decision to contribute is made independently of the employee. In other words, the spouse or dependent child must have the ability to sign the check and have full authority on how the funds in the account are spent (the employee may not sign the check). Where permitted by this policy, all contributions must in compliance with applicable contribution limits.
| a) | Requests to make a contribution to any state or local candidate must be submitted to the Company by the employee for prior approval. Pre-approval requests must be made to CCO's e-mail, and include the name of the candidate, office for which candidate is running, amount contributed, date of contribution, and name of the person making the contribution. The employee will be provided a confirmation that such request has been approved or denied. In certain situations the employee will be asked to provide additional information before a determination can be made regarding the request. |
Pay to Play
1. Active Alts Inc. does not currently solicit investment contracts for managing public pension plan assets and/or other state governmental investments.
In July 2010, the SEC adopted “pay-to-play” rules, including the new anti-fraud political contributions rule.
There are three key elements to the rule:
Investment advisers are prohibited from receiving compensation for providing advice to a government entity for a two-year period after the adviser or its covered associates [i] make political contributions to a public official of a government entity or to a candidate for such office who is or will be in a position to influence the award of advisory business.
Investment advisers are prohibited from “bundling” or making payments to political parties or coordinating a large number of small employee contributions to influence and election in order to affect the investment adviser selection process.
Advisers may not solicit or coordinate any contribution to an official of a government entity, to which the adviser is seeking or providing investment advice, or solicit or coordinate any payment to a political party of a state or locality where the investment adviser is seeking or providing investment advisory services to a government entity.
In addition, advisers are prohibited from channeling contributions to officials of government entities through third parties such as spouses, attorneys or companies affiliated with the adviser.
Advisers and their covered associates are prohibited from paying a third party, such as a solicitor, pension consultant or placement agent, to solicit a government entity on behalf of the adviser.
Active Alts Inc. and its employees are prohibited from engaging in pay-to-play practices, including making or soliciting campaign contributions or payments to certain government officials to influence the awarding of investment contracts for managing public pension plan assets and other state governmental investments.
In the event that Active Alts Inc changes its business model to include the management of public pension plan assets, it will adopt procedures to maintain compliance with applicable laws, rules and regulations.
2. Separation of Political and Employment Activities
Employees may not conduct political activities during working hours or use Active Alts facilities for political campaign purposes, nor may employees submit expenses associated with such activities for reimbursement.
SCHEDULE TO CODE OF ETHICS
CERTIFICATION BY CCO
The undersigned has reviewed the transaction reports delivered to the undersigned prior to the date set forth below to determine whether the below-named employees have complied with the Code of Ethics of Active Alts Inc.
Names of employees for whom transaction reports have been reviewed:
_________________ ______________________________
_________________ ______________________________
_________________ ______________________________
_________________ ______________________________
_________________ ______________________________
Any instance of noncompliance of which I am aware has been reported to the Chief Compliance Officer of Active Alts Inc.
| Signed: | |
| Name: | |
| Date: |
SCHEDULE TO CODE OF ETHICS
LIST OF ACCESS PERSONS REQUIRED TO REPORT UNDER CODE OF ETHICS:
Chief Executive Officer- Brad Lamensdorf
Chief Compliance Officer- John Allen
SCHEDULE TO CODE OF ETHICS
(Privileged and Confidential Information)
ACTIVE ALTS INC.
CODE OF ETHICS
INITIAL ACKNOWLEDGMENT FORM
I have read the Code of Ethics of Active Alts Inc. and I understand the requirements thereof. I certify that I will comply with the Code. I understand that any violation of the Code may lead to sanctions or other significant remedial action.
I understand that there are prohibitions and restrictions on certain types of securities transactions imposed by the Code.
| Print Name | ||
| Signature | ||
| Date |
SCHEDULE TO CODE OF ETHICS
(Privileged and Confidential Information)
ACTIVE ALTS INC.
CODE OF ETHICS
ANNUAL ACKNOWLEDGMENT FORM
I have read the Code of Ethics of Active Alts Inc. I understand the requirements thereof, and except as otherwise disclosed to the Chief Compliance Officer, I certify that I have, to date, complied with, and will continue to comply with, such requirements. I understand that any violation of the Code may lead to sanctions or significant remedial action.
I understand that there are prohibitions and restrictions on certain types of securities transactions imposed by the Code.
| Print Name | ||
| Signature | ||
| Date |
SCHEDULE TO CODE OF ETHICS
ACTIVE ALTS INC.
QUARTERLY TRANSACTION REPORT OF ACCESS PERSONS
For The Calendar Quarter Ended __________
Instructions
1. List transactions in Reportable Securities held in any account (that is, each account in which you may be deemed to have Beneficial Ownership) as of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You may exclude any of such accounts from this report, however, if you have no direct or indirect influence or control over those accounts.
2. Write “none” if you had no transactions in Reportable Securities during the quarter.
3. You must submit this form within 30 days after the end of the calendar quarter.
4. If you submit copies of your monthly brokerage statements to the Compliance Officer, and those monthly brokerage statements disclose the required information with respect to all Reportable Securities in which you may be deemed to have Beneficial Ownership, you need not file this form unless you established a new account during the quarter.
| Name of Security 1 | Date of Transaction | Purchase/Sale | No. of Shares or Principal Amount | Price | Broker, Dealer or Other Party Through Whom Transaction Was Made |
During the previous quarter, I established the following accounts with a broker, dealer or bank:
| Broker, Dealer or Bank | Account Number | Date Established |
Certifications: I hereby certify that:
1. The information provided above is correct.
2. This report excludes transactions with respect to which I had no direct or indirect influence or control.
| Date: | Signature: | ||
| Name: | |||
1 Including interest rate and maturity, if applicable.
SCHEDULE TO CODE OF ETHICS
ACTIVE ALTS INC.
HOLDINGS REPORT
| AS OF _________________[DATE] | ☐ Initial |
| ☐ Annual |
Instructions
1. List each Reportable Security in each account in which you may be deemed to have Beneficial Ownership that you held at the end of the date indicated above. You are deemed to have Beneficial Ownership of accounts of your immediate family members. You may exclude any of such accounts from this report, however, if you have no direct or indirect influence or control over those accounts.
2. Deadline for Submission:
Initial: You must submit this form within 10 days of becoming an Access Person.
Annual: You must submit this form no later than 30 days from December 31 of each year. Write “none” if you did not hold any Reportable Securities at year-end.
3.
You must complete and sign this form
whether or not you or your broker sends statements directly to Active Alts Inc.
|
Name of Security 2 |
Name of Broker, Dealer or Bank | No. of Shares or Principal Amount | Registration on Account |
Nature of Interest |
Account Number |
Certifications: I hereby certify that:
1. The securities listed above, or listed in the brokerage statements that I have provided, reflect all the Reportable Securities in which I may be deemed to have Beneficial Ownership as of the date listed above.
2. I have read the Code of Ethics and the Insider Trading Procedures and certify that I am in compliance with them.
3. This report excludes holdings with respect to which I had no direct or indirect influence or control.
| Date: | Signature: | ||
| Name: | |||
| 2 | Including interest rate and maturity, if applicable. |
SCHEDULE TO CODE OF ETHICS
ACTIVE ALTS INC.
Pre-Clearance of Personal Securities Transactions
PART 1: To be completed by the Access Person seeking pre-clearance:
| 1. | Supervised Person Name: |
| 2. | Date of Request: Date Request Granted: ٭ |
| 3. | Name of Issuer/Security: |
| 4. | Quantity (specify Par/Shares/Contracts): |
| 5. | Is this a purchase or sell transaction? |
| 6. | Is this security a new issue (IPO)? |
| 7. | Is this an unregistered or private placement security? |
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Certification: I have read the Active Alts Inc. Code of Ethics and Insider Trading Policy within the past year, and I believe that this transaction complies with the Code of Ethics and Insider Trading Policy. Supervised Person’s Signature: |
| Approved By: | |
| Reviewed By: | |
| (Chief Compliance Officer) |
Comments:
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Notes The following transactions are exempted from the pre-clearance and/or reporting process, even it the security involved requires pre-clearance and/or reporting: - Automatic reinvestment plans for securities (the initial investment is not exempted from this process) - Investments in open-end investment companies other than Reportable Funds. - Purchases and sales that are non-volitional Private securities transactions involving securities that require pre clearance and/or reporting are not exempted from this process.
* Trades must be executed within 24 hours of approval being granted . |