As filed with the Securities and Exchange Commission on November 21, 2016

 

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 

 

Pre-Effective Amendment No. ____ ☐

Post-Effective Amendment No. 100   ☒

and/or

 

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 

 

Amendment No. 101 ☒

(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 Add ress of Agent for Service)

 

with a copy to:

 

Michael D. Mabry, Esq.

Stradley Ronon Stevens & Young, LLP

2005 Market Street, Suite 2600

Philadelphia, PA 19103

 

It is proposed that this filing will become effective (check appropriate box):

  [   ] immediately upon filing pursuant to paragraph (b) of Rule 485
  [   ] on (date) pursuant to paragraph (b) of Rule 485
  [X] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
  [   ] On (date) pursuant to paragraph (a)(1) of Rule 485
  [   ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
  [   ] on (date) pursuant to paragraph (a)(2) of Rule 485
     
     

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, dated November 21, 2016

 

 

PROSPECTUS | December 2, 2016

 

   

 

 

 

InfraCap REIT Preferred ETF

( Ticker: PFFR )

 

 

 

 

 

a series of the

ETFis Series Trust I

 

 

 

 

 

 

The InfraCap REIT Preferred ETF (the “ Fund ”) is an exchange-traded fund (“ ETF ”). Shares of the Fund are listed on the NYSE Arca, Inc. (the “ Exchange ”) and trade at market prices. The market price for the Fund’s shares may be different from its 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.

 

 
 

 

Table of Contents

 

RISK/RETURN SUMMARY INFORMATION 3
INVESTMENT OBJECTIVE 3
FEES AND EXPENSES OF THE FUND 3
PORTFOLIO TURNOVER 3
PRINCIPAL INVESTMENT STRATEGY 4
PRINCIPAL RISKS 5
PERFORMANCE INFORMATION 7
MANAGEMENT OF THE FUND 7
PURCHASE AND SALE OF FUND SHARES 7
TAX INFORMATION 8
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES 8
ADDITIONAL INFORMATION REGARDING THE FUND’S INVESTMENT OBJECTIVE, STRATEGY AND RISKS 9
MANAGEMENT OF THE FUND 10
INVESTMENT ADVISER 10
INVESTMENT SUB-ADVISER 10
PORTFOLIO MANAGERS 11
BOARD OF TRUSTEES 12
OPERATIONAL ADMINISTRATOR 12
ACCOUNTING SERVICES ADMINISTRATOR, CUSTODIAN, AND TRANSFER AGENT 12
DISTRIBUTOR 12
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 12
LEGAL COUNSEL 12
EXPENSES OF THE FUND 12
INVESTING IN THE FUND 13
DISTRIBUTION AND SERVICE PLAN 13
DETERMINATION OF NET ASSET VALUE 13
INDICATIVE INTRA-DAY VALUE 14
PREMIUM/DISCOUNT INFORMATION 14
FREQUENT TRADING 14
DISTRIBUTIONS 15
FEDERAL INCOME TAXES 15
FUND DISTRIBUTIONS 15
SALES OF FUND SHARES 15
TAX TREATMENT OF FUND SHAREHOLDERS 16
WITHHOLDING 16
CREATION UNITS 16
FUND WEBSITE AND DISCLOSURE OF PORTFOLIO HOLDINGS 17
OTHER INFORMATION 17
FINANCIAL HIGHLIGHTS 17
PRIVACY NOTICE 18
ADDITIONAL INFORMATION 20

 

 
 

RISK/RETURN SUMMARY INFORMATION

 

INVESTMENT OBJECTIVE

 

InfraCap REIT Preferred ETF (Ticker: PFFR) (the “ Fund ”) seeks investment results that correspond, before fees and expenses, to the price and yield performance of the InfraCap REIT Preferred Stock Index (the “ Underlying Index ”).

 

FEES AND EXPENSES OF THE FUND

 

This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund (“ Shares ”). 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 0.45 %
Distribution and/or Service (12b-1) Fees 2 0.00 %
Other Expenses 3 0.00 %
Total Annual Fund Operating Expenses 0.45 %
     
(1) The management fee is structured as a “unified fee.” The Fund’s investment adviser has delegated to the Fund’s sub-adviser the obligation to pay all of the ordinary operating expenses of the Fund, except for the management fee paid to the Fund’s adviser; payments under any 12b-1 plan adopted by the Fund; taxes and other governmental fees; brokerage fees, commissions and other transaction expenses; interest and other costs of borrowing; litigation or arbitration expenses; acquired fund fees and expenses; and extraordinary or other non-routine expenses of the Fund; each of which is paid by the Fund.
(2) The Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year under a Rule 12b-1 plan; however, no such fees are currently paid by the Fund, and there are no current plans to impose these fees.
(3) “Other Expenses” are based on estimated amounts for the current fiscal year.

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
$47.25 $148.26

 

PORTFOLIO TURNOVER

 

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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PRINCIPAL INVESTMENT STRATEGY

 

Under normal market conditions, the Fund will invest not less than 90% of its total assets in component securities of the Underlying Index. The Underlying Index is comprised of preferred securities listed on U.S. exchanges that are issued by real estate investment trusts (“ REITs ”).

 

What are preferred securities? Preferred securities are a class of equity security that typically pay fixed or floating dividends to investors and have “preference” over common stock (but are subordinated to bonds) in the payment of dividends and in the event of the bankruptcy or liquidation of a company’s assets. Although preferred securities represent an ownership interest in a company, preferred stockholders usually have no voting rights with respect to corporate matters of the issuer. Instead, preferred securities typically have rights and characteristics similar to debt instruments. Preferred securities in the Underlying Index may include, without limitation, floating and fixed-rate preferred securities, callable preferred securities, cumulative and non-cumulative preferred securities, convertible preferred securities, trust preferred securities and depositary preferred securities.

 

What is a REIT? A REIT is a corporation, trust or association dedicated to owning, operating or financing income-producing real estate. To qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “ Code ”), a REIT is required to distribute at least 90% of its taxable income to shareholders annually and receive at least 75% of that income from rents, mortgages and sales of property. A REIT that qualifies under the Code is generally not taxed on income that it distributes to its shareholders. The Underlying Index may include preferred securities issued by Equity REITs, Mortgage REITs or Hybrid REITs. Equity REITs, which invest the majority of their assets directly in real property, derive their income primarily from rental and lease income, but may also realize capital gains by selling properties that have appreciated in value. Mortgage REITs, which provide loans to owners and operators of real estate assets or hold or trade mortgages or mortgage-backed securities, derive their income primarily from interest payments made on the underlying mortgages. Hybrid REITs may invest in a combination of properties, mortgages and mortgage-backed securities.

 

The Underlying Index . The Underlying Index, which was launched in January 2015, was co-developed and is co-sponsored by Infrastructure Capital Advisors, LLC, the Fund’s sub-adviser (the “ Sub-Adviser ”), and Indxx, LLC (“ Indxx ”), which is not affiliated with the Fund or the Fund’s adviser, Virtus ETF Advisers LLC. To be included in the Underlying Index, a security generally must meet the following minimum criteria as of each reconstitution date:

 

· Security Type: Preferred Securities
· Primary Exchange: United States
· Type of Issuer: REIT
· Market Capitalization: $75 million or more
· 6 Month Average Monthly Trading Volume: 250,000 shares or more
· Yield to Worst (i.e., an estimate of the lowest potential yield that can be received on a preferred security without issuer default): 3% or more
· Concentration: No single issuer will exceed 10% of its representation in the Underlying Index. No REIT sub-sector will exceed 30% of the Underlying Index, upon rebalance, with the exception of the Diversified REIT sub-sector, which will not exceed 35%.

 

The foregoing criteria are subject to certain additional proprietary conditions, limitations and exceptions. As of September 30, 2016, the Underlying Index contained 31 securities of 26 issuers. Indxx calculates and maintains the Underlying Index, and reconstitutes the Underlying Index on March 31 and September 30 of each year in accordance with the Underlying Index methodology and a market capitalization weighting. Market capitalization weighting means that each component security is weighted by the issuer’s market capitalization relative to the overall capitalization of the index.

 

The Fund uses a “passive” or indexing investment approach to try to approximate the investment performance of the Underlying Index. Unlike many investment companies, the Fund will not seek to “beat” the performance of the Underlying Index and will not seek temporary defensive measures when markets decline or appear overvalued.

 

    4  

 

The Fund is not required to purchase all of the securities in the Underlying Index. Instead, the Sub-Adviser invests in a representative sample of securities that, in the aggregate, approximates the key characteristics of the Underlying Index, including, without limitation, market capitalization, industry weightings, yield and liquidity measures.

 

The Fund expects to concentrate its investments (i.e., to hold 25% or more of its total assets) in a particular industry or group of industries approximately to the same extent that the Underlying Index is concentrated. The Underlying Index is expected to be concentrated in the real estate industry.

 

PRINCIPAL RISKS

 

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 principal 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 the quality of the Fund’s investments, economic conditions, adverse investor sentiment, poor management decisions, lower demand for a company’s goods or services and general equity market conditions. In a declining market, prices for all securities (including those in the Fund’s portfolio) may decline, regardless of their long-term prospects. Security values tend to move in cycles, with periods when securities markets generally rise and periods when they generally decline.

 

Passive Strategy/Index Risk . The Fund is managed with a passive investment strategy that seeks to track the performance of the Underlying Index. This differs from an actively managed fund, which typically seeks to outperform a benchmark index. As a result, the Fund may hold constituent securities of the Underlying Index regardless of the current or projected performance of a specific security or preferred REITs as a whole. Maintaining investments in securities regardless of market conditions or the performance of individual securities could cause the Fund’s returns to be lower than if the Fund employed an active strategy.

 

Index Tracking Risk . While the Sub-Adviser seeks to track the performance of the Underlying Index closely (i.e., to achieve a high degree of correlation with the Underlying Index), it will not seek to beat the performance of the Underlying Index. Further, the Fund’s return may not match or achieve a high degree of correlation with the returns of the Underlying Index due to operating expenses, transaction costs, cash flows, regulatory requirements and operational inefficiencies.

 

Sampling Risk. Because the Fund will invest in a representative sample of the Underlying Index securities, the Fund will be subject to an increased risk of tracking error because the securities selected for the Fund in the aggregate may vary from the investment profile of the Underlying Index. If the Fund holds a smaller number of securities than the Underlying Index, an adverse development to an issuer of securities that the Fund holds could result in a greater decline in the net asset value (“ NAV ”) of the Fund than would be the case if the Fund held all of the securities in the Underlying Index.

Real Estate Industry/REIT Risk. The Fund is subject to the risk that the value of stocks of REITs will decline because of adverse developments affecting the real estate industry and real property values. Such a decline could be precipitated by, among other things, general economic decline, deterioration in the real estate rental market, declines in real estate property demand, changes in interest rates, declines in the availability of real estate financing, increases in borrower defaults, overbuilding, or other developments that reduce credit and cash positions of REITs and REIT operators on a local, regional or national level. REITs may also be adversely affected by poor management, failure to quality as a REIT under the Code, environmental problems, property tax increases or changes in federal, state or local regulations. In addition to the above, Mortgage REITs are subject to the following risks: credit risk of the borrowers under the underlying mortgages, insufficient insurance, risks of investments in subprime mortgages, foreclosure risk, interest rate risk, risks of borrowing and leverage, and prepayment risk.

Concentration Risk. A fund concentrated in an industry or sector is likely to present more risks than a fund that is broadly invested in several industries or sectors. Compared to the broad market, an individual industry or sector may

    5  

 

be more strongly affected by changes in the economic climate, broad market shifts, moves in a particular dominant stock or regulatory changes.

 

Interest Rate Risk. REITs may be particularly sensitive to changes in prevailing interest rates. The value of preferred securities will generally vary inversely with the direction of prevailing interest rates such that, generally, when interest rates rise, the value of REIT securities (including preferred securities) can be expected to decline. The current historically low interest rate environment increases the risk associated with rising interest rates.

 

Issuer Risk. The performance of the Fund depends on the performance of the issuers of the individual securities in which the Fund invests. Poor performance by any issuer may cause the value of its securities, and the value of the Fund’s Shares, to decline.

 

Preferred Securities . There are special risks associated with investing in preferred securities, including:

 

Deferral and Omission . Preferred securities may include provisions that permit the issuer, at its discretion, to defer or omit distributions for a stated period without any adverse consequences to the issuer. If the Fund owns a preferred security that is deferring or omitting its distributions, the Fund may be required to report income for tax purposes although it has not yet received such income.

 

Subordination . Preferred securities are generally subordinated to bonds and other debt instruments in a company’s capital structure in terms of having priority to corporate income and liquidation payments, and therefore will be subject to greater credit risk than more senior debt instruments.

 

Liquidity . Preferred securities may be substantially less liquid than many other securities, such as common stocks or U.S. government securities.

 

Limited Voting Rights . Generally, traditional preferred securities offer no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may elect a number of directors to the issuer’s board. Generally, once all the arrearages have been paid, the preferred security holders no longer have voting rights. In the case of hybrid-preferred securities, holders generally have no voting rights.

 

Special Redemption Rights . In certain varying circumstances, an issuer of preferred securities may redeem the securities prior to a specified date. For instance, for certain types of preferred securities, a redemption may be triggered by certain changes in Federal income tax or securities laws. As with call provisions, a special redemption by the issuer may negatively impact the return of the security held by the Fund.

 

Non-Diversified Fund Risk. The Fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund.

 

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. Price differences may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for Shares will be closely related to, but not identical to, the same forces influencing the prices of the securities of the Fund trading individually or in the aggregate at any point in time. The market prices of Shares may deviate significantly from the NAV of the Shares during periods of market volatility. While the creation/redemption feature is designed to make it likely that Shares normally will trade close to the Fund’s NAV, disruptions to creations and redemptions and/or market volatility may result in trading prices that differ significantly from the Fund’s 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.

 

    6  

 

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 those brokers. 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). This difference in bid and ask prices is often referred to as the “spread” or “bid/ask spread”. The bid/ask spread varies over time for Shares based on trading volume and market liquidity, and is generally lower if the Fund’s Shares have more trading volume and market liquidity and higher if the Fund’s Shares have little trading volume and market liquidity. Further, increased market volatility may cause increased bid/ask spreads. 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.

 

Authorized Participant Risk.  The Fund has a limited number of financial institutions that may act as Authorized Participants, none of which are obligated to engage in creation or redemption transactions. To the extent these Authorized Participants exit the business or are unable to process creation and/or redemption orders and no other Authorized Participant is able to step forward to process creation and/or redemption orders, in either of these cases, Shares of the Fund may trade like closed-end fund shares at a discount to NAV and possibly face delisting.

 

Fund Shares 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 Shares inadvisable. In addition, trading in 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. During stressed market conditions, the liquidity of Fund Shares may be less than the liquidity of the securities in the Fund’s portfolio, which may be significantly less than the liquidity of other ETFs.

 

No Assurance of Active Trading Market.  Although the Shares in the Fund are approved for listing on the Exchange, there can be no assurance that an active trading market will develop and be maintained for the Shares of the Fund. Further, market makers (other than lead market makers) have no obligation to make markets in the Fund’s shares and may discontinue doing so at any time without notice. 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.

 

PERFORMANCE INFORMATION

 

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.

 

MANAGEMENT OF THE FUND

 

Virtus ETF Advisers LLC is the Fund’s investment adviser (the “ Adviser ”). The Trust and the Adviser have engaged Infrastructure Capital Advisors, LLC as the Fund’s sub-adviser (the “ Sub-Adviser ”) to manage the Fund’s investments, subject to the oversight and supervision of the Adviser and the Board of Trustees (the “ Board ”) of ETFis Series Trust I (the “ Trust ”).

 

Jay D. Hatfield, co-founder and president of the Sub-Adviser, and Edward F. Ryan, co-founder, chief financial officer and chief operating officer of the Sub-Adviser, are the Fund’s portfolio managers and have served in such positions since the inception of the Fund’s operations.

 

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 50,000 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. Shares of the Fund will trade on the

    7  

 

Exchange at market price rather than NAV. As such, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).

 

TAX INFORMATION

 

The Fund’s distributions generally are taxed as ordinary income, capital gains or some combination of both, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an IRA, in which case your distributions generally will be taxed as ordinary income when withdrawn from such account.

 

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.

    8  

 

 

ADDITIONAL INFORMATION REGARDING THE FUND’S INVESTMENT OBJECTIVE, STRATEGY AND RISKS

 

Additional Information Regarding the Fund’s Objective. The investment objective of the Fund may be changed by the Board without shareholder approval upon 60 days’ notice to the shareholders. Additionally, the Fund’s 90% investment policy is non-fundamental and may be changed without shareholder approval upon 60 days’ notice to the 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 Limitations”.

 

Additional Information Regarding the Fund’s Investments. To the extent that the Fund is not invested in securities of the Underlying Index, the Fund may invest in other investments that the Fund believes will help it track the Underlying Index, including cash and cash equivalents, 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 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 U.S. Securities and Exchange Commission (“ 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. Accordingly, the 3% limitation may prevent the Fund from allocating its investments in the manner the Sub-Adviser considers optimal, or may 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 the Fund will generally be higher than the cost of investing directly in those 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.

 

    9  

 

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.

  

Redeeming Risk. Shares in the Fund may be redeemed only in Creation Units. Shares may not be redeemed in fractional Creation Units. Only Authorized Participants are authorized to transact in Creation Units with the Fund. All other persons or entities transacting in 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 Shares of the Fund on that day.

 

Disclosure of Portfolio Holdings. The Fund’s portfolio holdings will be disclosed on the Fund’s website (www.InfraCapPFFR.com) daily after the close of trading on the Exchange and prior to the opening of trading on the Exchange the following day.

 

 

MANAGEMENT OF THE FUND

 

INVESTMENT ADVISER

 

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., 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 June 30, 2016, on a collective basis, Virtus-affiliated registered investment advisers manage over $45.1 billion in assets.

 

The Adviser has served as the Fund’s investment adviser since inception of the Fund’s operations pursuant to an investment advisory agreement with the Trust on behalf of the Fund. 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. The Adviser also assists with: (a) non-advisory operations of the Fund, (b) the preparation and submission of reports to existing shareholders, (c) the periodic updating of prospectuses and statements of additional information, (d) the preparation of reports to be filed with the SEC and other regulatory authorities, and (e) maintaining certain of the Fund’s records.

 

Adviser Compensation. The Adviser is entitled to receive a fee, payable monthly, at the annual rate of the greater of 0.45% of the Fund’s average daily net assets or $25,000 per year (the “Advisory Fee”). The Fund has not paid any advisory fees to the Adviser as of the date of this Prospectus. The Advisory Fee is structured as a “unified fee.” The Adviser has delegated to the Sub-Adviser the obligation to pay all of the ordinary operating expenses of the Fund, except for the Advisory Fee; payments under any 12b-1 plan adopted by the Fund; taxes and other governmental fees; brokerage fees, commissions and other transaction expenses; interest and other costs of borrowing; litigation or arbitration expenses; acquired fund fees and expenses; and extraordinary or other non-routine expenses of the Fund; each of which is paid by the Fund.

 

INVESTMENT SUB-ADVISER

 

The Fund’s sub-adviser is Infrastructure Capital Advisors, LLC, 1325 Avenue of the Americas, 28th Floor, New York, NY 10019. 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 Sub-Adviser’s best execution obligations and the Trust’s and the Sub-Adviser’s brokerage policies.

    10  

 

 

The Sub-Adviser was organized as a New York limited liability company in January 2012. The Sub-Adviser has served as the sub-adviser of the Fund since the inception of the Fund’s operations. The Sub-Adviser is controlled by Jay D. Hatfield, its co-founder and president. Mr. Hatfield has been managing investments for clients, including private investment funds, since 2001. As of June 30, 2016, the Sub-Adviser had approximately $199.95 million in assets under management.

 

Sub-Adviser Compensation. The Adviser pays the Sub-Adviser out of the Advisory Fee it receives from the Fund. The Adviser retains a portion of the Advisory Fee that is equal to the greater of (i) an annualized rate of 0.075% of the average daily net asset value of the Fund, during the prior calendar month, or (ii) a minimum annual fee of $25,000 per calendar year. The remainder of the Advisory Fee is paid by the Adviser to the Sub-Adviser as full compensation for its services.

 

PORTFOLIO MANAGERS

 

Jay D. Hatfield, co-founder and president of the Sub-Adviser, and Edward F. Ryan, co-founder, chief financial officer, and chief operating officer of the Sub-Adviser, have served as portfolio managers for the Fund since the inception of the Fund’s operations. The portfolio managers are primarily responsible for the day-to-day management of the Fund.

 

Mr. Hatfield is the Chief Executive Officer of Infrastructure Capital Management, LLC (“ ICM ”), a private investment company and parent of the Sub-Adviser, which he founded in 2008.  Mr. Hatfield also is a co-founder of, and holds a significant interest in the general partner of, NGL Energy Partners, LP, an NYSE-listed master limited partnership (Symbol: NGL).

 

Prior to founding ICM, Mr. Hatfield was a portfolio manager with SAC Capital Advisors, where he managed a $500 million infrastructure fund focused on investing in credit instruments and infrastructure-related equities. Before joining SAC, Mr. Hatfield was a Managing Director and Head of Fixed Income Research at Zimmer Lucas Partners, where he was responsible for directing research for credit funds with over $300 million of assets, including infrastructure related equities in the energy and utility sectors. Mr. Hatfield began his investment banking career at Morgan Stanley & Co. Inc., where he spent over 10 years as an investment banker advising clients in the utility, power and energy industries. Mr. Hatfield began his career as an auditor and consultant at Arthur Young & Co. (now Ernst & Young), where he was a Certified Public Accountant and consultant, auditing and providing consulting services to companies in the technology, biotechnology and retailing industries.

 

Mr. Hatfield has a Master of Business Administration degree from the Wharton School, University of Pennsylvania, where he specialized in Finance and graduated with distinction and as a member of the Beta Gamma Sigma honor society.  Mr. Hatfield also has a Bachelor of Science degree in Managerial Economics from the University of California, Davis.

 

Mr. Ryan is a co-founder, Chief Financial Officer, and the Chief Operating Officer of the Sub-Adviser. Prior to co-founding the Sub-Adviser, Mr. Ryan was engaged in venture capital projects in the financial technology sector. Prior to his venture capital activities, he was founder and Managing Partner of Mansion Partners, LP, a private investment partnership focused on value stocks and special situations, which he ran for twelve years.

 

Before launching his own investment management business, Mr. Ryan was Vice President and Director of Ansbacher (Dublin) Asset Management, Ltd., where he was part of a small team managing investments in global equity and fixed income markets for an offshore investment company and U.S. trusts and foundations. His primary investment focus was on financially troubled utilities, real estate investment trusts (REITs) and banks and thrifts.

 

Prior to joining Ansbacher, he was an Investment Analyst and the Secretary/Treasurer at J. Rothschild Capital Management Corp., a unit of RIT Capital Partners plc. Mr. Ryan was a member of the team that launched the U.S. operation, where he evaluated U.S. investment opportunities and managed all corporate financial functions. Mr. Ryan began his career at The Bank of New York, where he was a Senior Industry Analyst specializing in the oil service industry.

 

    11  

 

Mr. Ryan has a Master of Business Administration from the Graduate School of Business at Columbia University with a concentration in finance. He also has a Bachelor of Arts degree in Accounting from Saint John’s University (MN).

 

Additional Information. Additional information about the portfolio managers’ compensation, other accounts managed by the portfolio managers and the portfolio managers’ ownership of Shares of the Fund is available in the SAI.

 

Disclosure Regarding Advisory Agreement Approval. A discussion regarding the basis for the Board’s most recent approval of the investment advisory agreement and investment sub-advisory agreement for the Fund will be available in the Fund’s first annual or semi-annual report. You may obtain a copy of the Fund’s annual and semi-annual reports, without charge, upon request to the Fund.

 

Board of Trustees

 

The Fund is a non-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.

 

Operational Administrator

 

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 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.

 

Distributor

 

ETF Distributors LLC (the “ Distributor ”), located at 1540 Broadway, New York, NY 10036, serves as the distributor of Creation Units for the Fund on an agency basis. The Distributor does not maintain a secondary market in Shares.

 

Independent Registered Public Accounting Firm

 

BBD, LLP, located at 1835 Market St, Philadelphia, PA 19103, serves as the independent registered public accounting firm for the Trust and the Fund.

 

Legal Counsel

 

Stradley Ronon Stevens & Young, LLP, located at 2005 Market Street, Suite 2600, Philadelphia, PA 19103, serves as counsel to the Trust and the Independent Trustees.

 

Expenses of the Fund

 

The Fund pays all 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

    12  

 

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.

 

INVESTING IN THE FUND

 

DISTRIBUTION AND SERVICE PLAN

 

The Board 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 respective 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, equity securities are generally valued at market using quotations from the primary market in which they are traded. Debt securities (other than short-term investments) are valued on the basis of broker quotes or valuations provided by a pricing service, which in determining value utilizes information regarding recent sales, market transactions in comparable securities, quotations from dealers, and various relationships between securities. Short-term investments having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Other assets, such as accrued interest, accrued dividends and cash are also included in determining the NAV. The Fund normally uses third party pricing services to obtain market quotations.

 

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 Fund 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.

    13  

 

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.

 

INDICATIVE INTRA-DAY VALUE

 

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 at www.InfraCapPFFR.com.

 

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.

 

PREMIUM/DISCOUNT INFORMATION

 

Information regarding the extent and frequency with which market prices of 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.

 

FREQUENT TRADING

 

The Board has not adopted policies and procedures with respect to frequent purchases and redemptions of Fund Shares by Fund 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 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

    14  

 

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.

 

DISTRIBUTIONS

The Fund intends to qualify each year as a regulated investment company under the Code. As a regulated investment company, the Fund generally pays no federal income tax on the income and gains it distributes to shareholders. The Fund expects to distribute substantially all of its net investment income monthly and its net realized capital gains, if any, at least annually. The Fund may distribute such income dividends and capital gains more frequently, if necessary, in order to reduce or eliminate federal excise or income taxes on the Fund. The amount of any distribution will vary, and there is no guarantee the Fund will pay either an income dividend or a capital gains distribution. Distributions may be reinvested automatically in additional whole Shares only if the broker through whom you purchased Shares makes such option available.

Each year, you will receive an annual statement (Form 1099) of your account activity to assist you in completing your federal, state and local tax returns. Distributions declared in December to shareholders of record in such month, but paid in January, are taxable as if they were paid in December. The Fund make every effort to search for reclassified income to reduce the number of corrected forms mailed to you. However, when necessary, you will receive a corrected Form 1099 to reflect reclassified information.

At the time you purchase your Fund Shares, the price of Shares may reflect undistributed income, undistributed capital gains, or net unrealized appreciation in value of portfolio securities held by the Fund. For taxable investors, a subsequent distribution to you of such amounts, although constituting a return of your investment, would be taxable. Buying Shares in the Fund just before it declares an income dividend or capital gains distribution is sometimes known as “buying a dividend.”

Federal Income Taxes

 

FUND DISTRIBUTIONS

The Fund expects, based on its investment objective and strategies, that its distributions, if any, will be taxable as ordinary income, capital gains, or some combination of both. This is true whether you reinvest your distributions in additional Fund Shares or receive them in cash. For federal income tax purposes, Fund distributions of short-term capital gains are taxable to you as ordinary income. Fund distributions of long-term capital gains are taxable to you as long-term capital gains no matter how long you have owned your Shares. Because the income of the Fund is primarily derived from investments in U.S. REITs, generally none or only a small portion of the income dividends paid to you by the Fund is anticipated to be qualified dividend income eligible for taxation by individuals at long-term capital gain tax rates.

Because of “noncash” expenses such as property depreciation, the cash flow of a REIT that owns properties will exceed its taxable income. The REIT, and in turn the Fund, may distribute this excess cash to shareholders. Such a distribution is classified as a return of capital. Return of capital distributions generally are not taxable to you. Your cost basis in your Fund shares will be decreased by the amount of any return of capital. Any return of capital distributions in excess of your cost basis will be treated as capital gain.

SALE OF FUND SHARES

A sale or exchange of Fund Shares is a taxable event and, accordingly, a capital gain or loss may be recognized. Currently, any capital gain or loss realized upon a sale of Fund Shares generally is treated as long-term capital gain or loss if the Shares have been held for more than one year and as short-term capital gain or loss if the Shares have been held for one year or less. The ability to deduct capital losses may be limited.

    15  

 

TAX TREATMENT OF FUND SHAREHOLDERS

An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions or other taxable dispositions of Fund Shares) of U.S. individuals, estates and trusts to the extent that such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds a threshold amount. This Medicare tax, if applicable, is reported by you on, and paid with, your federal income tax return.

Fund distributions and gains from the sale or exchange of your Fund Shares generally are subject to state and local taxes.

Non-U.S. investors may be subject to U.S. withholding tax at a 30% or lower treaty rate and U.S. estate tax and are subject to special U.S. tax certification requirements to avoid backup withholding and claim any treaty benefits. Exemptions from U.S. withholding tax are provided for certain capital gain dividends paid by the Fund from net long-term capital gains, interest-related dividends and short-term capital gain dividends, if such amounts are reported by the Fund. However, notwithstanding such exemptions from U.S. withholding at the source, any such dividends and distributions of income and capital gains will be subject to backup withholding at a rate of 28% if you fail to properly certify that you are not a U.S. person.

Under the Foreign Account Tax Compliance Act (“FATCA”), a 30% withholding tax is imposed on payments or distributions made by the Fund to certain foreign entities, referred to as foreign financial institutions or nonfinancial foreign entities, that fail to comply (or be deemed compliant) with extensive reporting and withholding requirements designed to inform the U.S. department of the Treasury of U.S.-owned foreign investment accounts: (a) income dividends and (b) after December 31, 2018, certain capital gain distributions, return of capital distributions and the proceeds arising from the sale of Fund shares. Information about a shareholder in the Fund may be disclosed to the IRS, non-U.S. taxing authorities or other parties as necessary to comply with FATCA. Withholding also may be required if a foreign entity that is a shareholder of the Fund fails to provide the appropriate certifications or other documentation concerning its status under FATCA.

WITHHOLDING

By law, if you do not provide your proper taxpayer identification number and certain required certifications, you may be subject to backup withholding on any distributions of income, capital gains or proceeds from the sale of your Shares. Withholding is also imposed if the Internal Revenue Service (“IRS”) requires it. When withholding is required, the amount will be 28% of any distributions or proceeds paid.

CREATION UNITS

An Authorized Participant who exchanges equity securities for Creation Units generally will recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units (plus any cash received by the Authorized Participant as part of the issue) at the time of purchase and the exchanger’s aggregate basis in the securities surrendered. A person who exchanges Creation Units for equity securities generally will recognize a gain or loss equal to the difference between the exchanger’s basis in the Creation Units (plus any cash received by the Authorized Participant as part of the redemption) and the aggregate market value of the securities received (plus any cash paid by the Authorized Participant as part of the redemption). The IRS, however, may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing “wash sales,” or on the basis that there has been no significant change in economic position. Persons exchanging securities should consult their own tax advisor with respect to whether the wash sale rules apply and when a loss might be deductible.

Under current federal tax laws, any capital gain or loss realized upon redemption of Creation Units is generally treated as long-term capital gain or loss if the Shares have been held for more than one year and as a short-term capital gain or loss if the Shares have been held for one year or less.

If the Fund redeems Creation Units in cash, it may recognize more capital gains than it will if it redeems Creation Units in-kind.

    16  

 

This discussion of “Federal Income Taxes” is not intended or written to be used as tax advice. Because everyone’s tax situation is unique, you should consult your tax professional about federal, state, local or foreign tax consequences before making an investment in the Fund. For additional information, see the “Taxation” section of the Statement of Additional Information.  

 

FUND WEBSITE AND DISCLOSURE OF PORTFOLIO HOLDINGS

 

The Trust maintains a website for the Fund at www.InfraCapPFFR.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 Business Day, before the commencement of trading in 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 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.

 

 

OTHER INFORMATION

 

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 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 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.

 

 

FINANCIAL HIGHLIGHTS

 

The Fund is newly organized and therefore has not yet had any operations as of the date of this Prospectus.

 

    17  

 

Privacy Notice

 

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.

     
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?

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

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

For our affiliates’ everyday business purposes –

information about your transactions and experiences

No We don’t share

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

 

Questions? Call(212) 593-4383
         

  

    18  

 

 


Page 2
 
Who we are
Who is providing this notice? ETFis Series Trust I
What we do
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.

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.

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.

   
Definitions
Affiliates

Companies related by common ownership or control. They can be financial and nonfinancial companies.

§   Virtus ETF Advisers LLC, the investment adviser to ETFis Series Trust I, ETF Distributors LLC, principal underwriter for ETFis Series Trust I, and Virtus ETF Solutions LLC, the operational administrator for ETFis Series Trust I, could each be deemed to be an affiliate.

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.

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.

    19  

 

ADDITIONAL INFORMATION

 

If you would like more information about the Trust, the Fund or 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 are 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.InfraCapPFFR.com.

 

To obtain other information and for shareholder inquiries :

 

By telephone: (212) 593-4383
By mail: InfraCap REIT Preferred ETF
  ETFis Series Trust I
  1540 Broadway
  New York, NY 10036
   
On the Internet SEC Edgar database: http://www.sec.gov; or www.InfraCapPFFR.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 Fund 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. 20549-1520 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

    20  

 

The information in this Statement of Additional Information is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Statement of Additional Information is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, dated November 21, 2016

 

STATEMENT OF ADDITIONAL INFORMATION

INFRACAP REIT PREFERRED ETF (PFFR)

 

December 2, 2016

 

a series of the

ETFis Series Trust I

1540 Broadway

New York, NY 10036

Telephone: (212) 593-4383

 

TABLE OF CONTENTS

  Page
GENERAL DESCRIPTION OF THE TRUST AND THE FUND 2
EXCHANGE LISTING AND TRADING 2
OTHER INVESTMENT POLICIES 3
INVESTMENT LIMITATIONS 11
MANAGEMENT AND OTHER SERVICE PROVIDERS 13
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES 16
MANAGEMENT SERVICES 16
OTHER SERVICE PROVIDERS 18
PORTFOLIO TRANSACTIONS AND BROKERAGE 20
DISCLOSURE OF PORTFOLIO HOLDINGS 21
INDICATIVE INTRA-DAY VALUE 23
ADDITIONAL INFORMATION CONCERNING SHARES 23
PURCHASE AND REDEMPTION OF CREATION UNITS 24
SECURITIES SETTLEMENTS FOR CREATIONS AND REDEMPTIONS 29
CONTINUOUS OFFERING 30
DETERMINATION OF NET ASSET VALUE 30
DIVIDENDS AND DISTRIBUTIONS 31
TAXATION 31
OTHER INFORMATION 42
FINANCIAL STATEMENTS 42
   
APPENDIX A - TRUST PROXY VOTING POLICY AND PROCEDURES A-1
APPENDIX B – SUB-ADVISER PROXY VOTING POLICY AND PROCEDURES B-1

This Statement of Additional Information (“ SAI ”) is meant to be read in conjunction with the prospectus (“ Prospectus ”) for InfraCap REIT Preferred ETF (Ticker: PFFR) (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.InfraCapPFFR.com, or writing to the Trust, c/o ETF Distributors LLC, 1540 Broadway, New York, NY 10036.

 
 

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 10 investment portfolios: the Fund, InfraCap MLP ETF (Ticker: AMZA); 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); iSectors Post-MPT Growth ETF (Ticker: PMPT); and Cumberland Municipal Bond ETF (Ticker: CUMB). Other portfolios may be added to the Trust in the future. The Fund is classified as a non-diversified management investment company under the 1940 Act. 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 Infrastructure Capital Advisors, LLC (the “ Sub-Adviser ”). The Sub-Adviser has been registered as an investment adviser with the SEC since June 2014.

 

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 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 50,000 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 NYSE Arca, Inc. (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 NAV 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 Trust reserves the right to adjust the price levels of the Shares in the future to maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of the Fund.

 

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OTHER INVESTMENT POLICIES

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.

EXCHANGE TRADED FUNDS AND INVESTMENTS IN OTHER INVESTMENT COMPANIES.

Exchange Traded Products (“ETPs”). The Fund may invest in exchange-traded funds (“ ETFs ”), exchange-traded notes (“ ETNs ”) and other ETPs. The shares of an ETF may be assembled in a block (typically 50,000 shares) 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’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. ETPs other than ETFs are issued in shares or units, and trade on exchanges like ETFs. 

There is a risk that the underlying ETPs in which the Fund invests may terminate due to extraordinary events that may cause any of the service providers to the ETPs, such as the trustees or sponsors, to close or otherwise fail to perform their obligations to the ETPs. Also, because the ETPs in which the Fund invests 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 ETPs may terminate if such license agreements are terminated. In addition, an ETP 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 ETP, it will be able to invest instead in shares of an alternate ETP with a similar strategy, there is no guarantee that shares of an alternate ETP would be available for investment at that time.

Investments in ETPs involve certain inherent risks generally associated with investments in conventional registered investment companies (e.g., mutual funds) that hold a portfolio of securities including, without limitation: (1) risks that the general level of security prices for the ETP’s investment strategy may decline, thereby adversely affecting the value of each share or unit of the ETP; (2) an index-based ETP 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 ETP and the index with respect to the weighting of securities or number of stocks held; and (3) an index ETP may also be adversely affected by the performance of the specific index, market sector or group of industries on which it is based. In addition, ETPs are subject to the following risks that do not apply to conventional funds: (1) the market price of an ETP’s shares may trade at a discount to its net asset value; (2) an active trading market for an ETP’s shares may not develop or be maintained; (3) trading of an ETP’s shares may be halted if the listing exchange deems such action appropriate; and (4) ETP 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. ETPs are also subject to the risks of the underlying securities the ETP is designed to track or invest in.

Money Market Mutual Funds . In order to maintain sufficient liquidity or to implement investment strategies, the Fund may invest a 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 to the extent it invests in shares of money market mutual funds due to acquired fund fees and other costs.

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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.

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.

EQUITY SECURITIES. The Fund may invest in equity securities, both directly and indirectly through investment in shares of ETFs and other investment companies, American Depositary Receipts (“ ADRs ”) 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 domestic or foreign 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.

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 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, restricting 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.

 

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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 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.

Foreign Currency Transactions. Investments in foreign securities involve currency risk. The Fund may engage in various transactions to hedge currency risk, but is not required to do so. The instruments the Fund may use for this purpose include, without limitation, forward foreign currency contracts, foreign currency futures contracts and options on foreign currencies.

 

A forward foreign currency contract is an obligation to purchase or sell a specified currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price established at the time of the contract. These contracts are entered into directly between currency traders and their customers. The Fund may use these contracts to purchase or sell a foreign currency for the purpose of locking in the U.S. dollar price of foreign securities the Fund has agreed to purchase or the amount in U.S. dollars that the Fund will receive when it has sold foreign securities.

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Currency futures contracts are similar to forward currency contracts, except that they are traded on exchanges (and have margin requirements) and are standardized as to contract size and delivery date. The Fund may purchase or sell foreign currency futures contracts to protect against fluctuations in the U.S. dollar values of foreign securities. For example, the Fund may sell a futures contract on a foreign currency when it holds securities denominated in that currency and it anticipates a decline in the value of that currency relative to the U.S. dollar. If such a decline were to occur, the resulting adverse effect on the value of the foreign-denominated securities may be offset, in whole or in part, by gains on the futures contract.

 

A currency option is the right - but not the obligation - to buy (in the case of a call) or sell (in the case of a put) a set amount of one currency for another at a predetermined time in the future. The two parties to a currency option contract are the option buyer and the option seller/writer. The option buyer may, for an agreed upon price, purchase from the option writer a commitment that the option writer will sell (or purchase) a specified amount of a foreign currency upon demand. The option extends only until the stated expiration date. The rate at which one currency can be purchased or sold is one of the terms of the option and is called the strike price. The total description of a currency option includes the underlying currencies, the contract size, the expiration date, the strike price and whether the option is an option to purchase the underlying currency (a call) or an option to sell the underlying currency (a put). There are three types of option expirations: American-style, European-style and Bermuda-style. American-style options can be exercised on any business day prior to the expiration date. European-style options can be exercised at expiration only. Bermuda-style options can be exercised at the date of expiration, and on certain specified dates that occur between the purchase date and the date of expiration.

 

The use of foreign currency transactions involves risks, including, without limitation, the risk of imperfect correlation between movements in futures or options prices and movements in the price of currencies which are the subject of the hedge. The successful use of foreign currency transactions also depends on the ability of the Sub-Adviser to correctly forecast interest rate movements, currency rate movements and general stock market price movements. There can be no assurance that the Sub-Adviser’s judgment will be accurate. The use of foreign currency transactions also exposes the Fund to the general risks of investing in futures and options contracts, including, without limitation: the risk of an illiquid market and the risk of adverse regulatory actions. Any of these factors may cause the Fund to lose money on its foreign currency transactions.

 

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.

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.

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Mortgage REITs. Mortgage REITs lend money to developers and owners of properties and invest primarily in mortgages and similar real estate interests. Mortgage REITs receive interest payments from the owners of the mortgaged properties. Accordingly, mortgage REITs are subject to the credit risk of the borrowers to whom they extend funds. Credit risk is the risk that the borrower will not be able to make interest and principal payments on the loan to the REIT when they are due. Mortgage REITs also are subject to the risk that the value of mortgaged properties may be less than the amounts owed on the properties. If a mortgage REIT is required to foreclose on a borrower, the amount recovered in connection with the foreclosure may be less than the amount owed to the mortgage REIT.

Mortgage REITs are subject to significant interest rate risk. During periods when interest rates are declining, mortgages are often refinanced or prepaid. Refinancing or prepayment of mortgages may reduce the yield of mortgage REITs. When interest rates decline, however, the value of a REIT’s investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REIT’s investment in fixed rate obligations can be expected to decline. In addition, rising interest rates generally increase the costs of obtaining financing, which could cause the value of a mortgage REIT’s investments to decline. A REIT’s investment in adjustable rate obligations may react differently to interest rate changes than an investment in fixed rate obligations. As interest rates on adjustable rate mortgage loans are reset periodically, yields on a REIT’s investment in such loans will gradually align themselves to reflect changes in market interest rates, causing the value of such investments to fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed rate obligations.

Mortgage REITs typically use leverage (and in many cases, may be highly leveraged), which increases investment risk and could adversely affect a REIT’s operations and market value in periods of rising interest rates, increased interest rate volatility, downturns in the economy and reductions in the availability of financing or deterioration in the conditions of the REIT’s mortgage-related assets.

Equity REITs. Certain REITs may make direct investments in real estate. These REITs are often referred to as “Equity REITs.” Equity REITs invest primarily in real properties and earn rental income from leasing those properties. Equity REITs may also realize gains or losses from the sale of properties. Equity REITs will be affected by conditions in the real estate rental market and by changes in the value of the properties they own. A decline in rental income may occur because of extended vacancies, limitations on rents, the failure to collect rents, increased competition from other properties or poor management. Equity REITs also can be affected by rising interest rates. Rising interest rates may cause investors to demand a high annual yield from future distributions that, in turn, could decrease the market prices for such REITs. In addition, rising interest rates also increase the costs of obtaining financing for real estate projects. Because many real estate projects are dependent upon receiving financing, this could cause the value of the Equity REITs in which the Fund invests to decline.

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 each Master Note held by the Fund.

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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.

Derivative Instruments. The Fund will comply with and adhere to all limitations on the manner and extent to which it effects transactions in derivative instruments (including, without limitation, futures and options on such futures) imposed by the provisions of the 1940 Act applicable to the issuance of senior securities. Additionally, the Trust, on behalf of the Fund, has claimed an exclusion from the definition of the term “commodity pool operator” pursuant to Rule 4.5 under the Commodity Exchange Act, as amended (the “ CEA ”). Therefore, the Fund is not subject to regulation or registration as a commodity pool operator under the CEA.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010, provided for new regulation of the derivatives market, including, without limitation, clearing, margin, reporting and registration requirements. Because the legislation continues to be implemented, its ultimate impact remains unclear. Regulations could, among other things, restrict the Fund’s ability to engage in derivatives transactions (for example, by making certain types of derivatives transactions no longer available to the Fund) and/or increase the costs of such derivatives transactions (for example, by increasing margin or capital requirements), either of which could adversely affect the Fund’s derivative positions or the Fund’s use of derivatives generally.

Options. The Fund may write call and put options on securities, ETFs or security indexes to seek income or may purchase or write put or call options for hedging purposes. Although not required to do so, the Fund will typically write a call option only if the option is “covered” by the Fund holding a position in the underlying securities or by other means which would permit immediate satisfaction of the Fund’s obligation as writer of the option. The purchase and writing of options involves certain risks. During the option period, a covered call writer has, in return for the premium on the option, given up the opportunity to profit from a price increase in the underlying securities above the exercise price, but, as long as its obligation as a writer continues, has retained the risk of loss should the price of the underlying security decline. The writer of an option may have no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying securities at the exercise price. If a put or call option purchased by the Fund is not sold when it has remaining value, and if the market price of the underlying security, in the case of a put, remains equal to or greater than the exercise price or, in the case of a call, remains less than or equal to the exercise price, the Fund will lose its entire investment in the option. There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. Furthermore, if trading restrictions or suspensions are imposed on the options market, the Fund may be unable to close out a position.

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Futures Contracts. A futures contract is a bilateral agreement to buy or sell a security (or deliver a cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in the contracts) for a set price in the future. Futures contracts are designated by boards of trade that have been designated “contracts markets” by the Commodity Futures Trading Commission (“ CFTC ”). No purchase price is paid or received when the contract is entered into. Instead, the Fund, upon entering into a futures contract (and to maintain the Fund’s open positions in futures contracts), would be required to deposit with its custodian in a segregated account in the name of the futures broker an amount of cash, U.S. government securities, suitable money market instruments or liquid, high-grade fixed income securities, known as “initial margin”. The margin required for a particular futures contract is set by the exchange on which the contract is traded, and may be significantly modified from time to time by the exchange during the term of the contract. Futures contracts are customarily purchased and sold on margin that may range upward from less than 5% of the value of the contract being traded. By using futures contracts as a risk management technique, given the greater liquidity in the futures market than in the cash market, it may be possible to accomplish certain results more quickly and with lower transaction costs.

If the price of an open futures contract changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the futures contract reaches a point at which the margin on deposit does not satisfy margin requirements, the broker will require an increase in the margin. However, if the value of a position increases because of favorable price changes in the futures contract so that the margin deposit exceeds the required margin, the broker will pay the excess to the Fund. These subsequent payments, called “variation margin,” to and from the futures broker, are made on a daily basis as the price of the underlying assets fluctuate, making the long and short positions in the futures contract more or less valuable, a process known as “marking to market”.

The Fund will incur brokerage fees when it purchases and sell futures contracts. Positions taken in the futures markets are not normally held until delivery or cash settlement is required, but are instead liquidated through offsetting transactions which may result in a gain or a loss. While futures positions taken by the Fund will usually be liquidated in this manner, the Fund may instead make or take delivery of underlying securities whenever it appears economically advantageous for the Fund to do so. A clearing organization associated with the exchange on which futures are traded assumes responsibility for closing out transactions and guarantees that, as between the clearing members of an exchange, the sale and purchase obligations will be performed with regard to all positions that remain open at the termination of the contract.

Securities Index Futures Contracts . Purchases or sales of securities index futures contracts may be used in an attempt to protect the Fund’s current or intended investments from broad fluctuations in securities prices. A securities index futures contract does not require the physical delivery of securities, but merely provides for profits and losses resulting from changes in the market value of the contract to be credited or debited at the close of each trading day to the respective accounts of the parties to the contract. On the contract’s expiration date, a final cash settlement occurs, and the futures positions are simply closed out. Changes in the market value of a particular index futures contract reflect changes in the specified index of securities on which the future is based.

By establishing an appropriate “short” position in an index future, the Fund may also seek to protect the value of its portfolio against an overall decline in the market for the securities on which the future is based. Alternatively, in anticipation of a generally rising market, the Fund can seek to avoid losing the benefit of apparently low current prices by establishing a “long” position in securities index futures and later liquidating that position as particular securities are in fact acquired. To the extent that these hedging strategies are successful, the Fund will be affected to a lesser degree by adverse overall market price movements than would otherwise be the case.

Limitations on Purchase and Sale of Futures Contracts . Futures can be volatile instruments and involve certain risks. If the Sub-Adviser applies a hedge in the Fund’s portfolio at an inappropriate time or judges market movements incorrectly, futures strategies may lower the Fund’s return. The Fund could also experience losses if the prices of its futures positions were poorly correlated with its other investments, or if it could not close out its positions because of an illiquid market.

In general, the Fund will not purchase or sell futures contracts unless either (i) the futures contracts are purchased for “bona fide hedging” purposes (as defined under the CFTC regulations); or (ii) if purchased for other purposes, (A) the sum of the amounts of initial margin deposits and premiums required to establish such positions on the Fund’s existing futures would not exceed 5% of the liquidation value of the Fund’s total assets or (B) the aggregate

    9  

 

net notional value of commodity futures, commodity options contracts, or swaps positions determined at the time the most recent position was established does not exceed 100% of the liquidation value of the Fund’s total assets, after taking into account unrealized profits and unrealized losses on any such positions it has entered into.

In instances involving the purchase of futures contracts, the Fund will deposit in a segregated account with its custodian an amount of cash, cash equivalents and/or appropriate securities equal to the cost of such futures contracts, to the extent that such deposits are required under the 1940 Act.

Additional Information Regarding Leverage.  Certain derivatives involve leverage; that is, the amount invested may be less than the full economic exposure of the derivative instrument, and the Fund could lose more than the amount invested. Federal securities laws, regulations and guidance may require the Fund to segregate assets or to otherwise hold instruments that offset the Fund’s current obligations under the derivative instrument. This process is known as “cover.” The Fund will not enter into any derivative transaction unless it can comply with guidance from the SEC regarding cover, and, if SEC guidance so requires, the Fund will segregate cash or liquid assets with a value at least sufficient to cover its current obligations under the derivative transaction or otherwise “cover” the transaction in accordance with applicable SEC guidance. If a large portion of the Fund’s assets is used for cover, it could affect portfolio management or the Fund’s ability to meet redemption requests or other current obligations. The leverage involved in certain derivative transactions may result in the Fund’s NAV being more sensitive to changes in the value of the related investment. To the extent the Fund writes put and call options, the Fund will “cover” its obligations in accordance with applicable SEC guidance.

 

FORWARD COMMITMENT AND WHEN-ISSUED SECURITIES. The Fund may purchase securities on a when-issued basis or for settlement at a future date if the Fund holds sufficient liquid assets to meet the purchase price. In such purchase transactions, the Fund will not accrue interest on the purchased security until the actual settlement. Similarly, if a security is sold for a forward date, the Fund will accrue the interest until the settlement of the sale. When-issued security purchases and forward commitments have a higher degree of risk of price movement before settlement due to the extended time period between the execution and settlement of the purchase or sale. As a result, the exposure to the counterparty of the purchase or sale is increased. Although the Fund would generally purchase securities on a forward commitment or when-issued basis with the intention of taking delivery, the Fund may sell such a security prior to the settlement date if the Sub-Adviser felt such action was appropriate. In such a case, the Fund could incur a short-term gain or loss.

SHORT SALES OF SECURITIES. The Fund may make short sales, which are transactions in which the Fund sells a security it does not own in anticipation of a decline in the market value of that security. To complete a short sale transaction, the Fund will borrow the security from a broker-dealer, which generally involves the payment of a premium and transaction costs. The Fund then sells the borrowed security to a buyer in the market. The Fund will then cover the short position by buying shares in the market either (i) at its discretion or (ii) when called by the broker-dealer lender. Until the security is replaced, the Fund is required to pay the broker-dealer lender any dividends or interest that accrue during the period of the loan. In addition, the net proceeds of the short sale will be retained by the broker to the extent necessary to meet regulatory or other requirements, until the short position is closed out.

The Fund will incur a loss as a result of a short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in price between those dates. The amount of any gain will be decreased, and the amount of any loss increased by the amount of the premium, dividends, interest or expenses the Fund may be required to pay in connection with a short sale. When the Fund makes a short sale, the Fund will segregate liquid assets (such as cash, U.S. government securities, or equity securities) on the Fund’s books and/or in a segregated account at the Fund’s custodian or broker (or an affiliate thereof) in an amount sufficient to cover the current value of the securities to be replaced as well as any dividends, interest and/or transaction costs due to the broker-dealer lender, to the extent such deposit is required by applicable law and/or the parties involved in the transaction. In determining the amount to be segregated, any securities that have been sold short by the Fund will be marked to market daily. To the extent the market price of the security sold short increases and more assets are required to meet the Fund’s short sale obligations, additional assets will be segregated to ensure adequate coverage of the Fund’s short position obligations.

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In addition, the Fund may make short sales “against the box,” i.e., when the Fund sells a security short while owning securities equivalent in kind and amount to the securities sold short (or securities convertible or exchangeable into such securities) and will hold such securities while the short sale is outstanding.  The Fund will incur transaction costs, including, without limitation, interest, in connection with opening, maintaining and closing short sales against the box.

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 an investment adviser to the Fund. 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.

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.

INVESTMENT LIMITATIONS

 

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% 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.

FUNDAMENTAL RESTRICTIONS. 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);

 

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  (7) invest more than 25% of its total assets in any particular industry or group of industries, except that the Fund will concentrate to approximately the same extent that the Fund’s index concentrates in the securities of such particular industry or group of industries; 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 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 concentration in a particular industry, (i) securities of the U.S. Government (including its agencies and instrumentalities), tax-exempt 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 (although the Fund will consider the holdings of an underlying registered investment company in applying its concentration policy), (ii) 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, and (iii) in the case of loan participations where the Fund is not in a direct debtor/creditor relationship with the borrower, both the financial intermediary and the ultimate borrower are considered issuers.

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

    12  

 

 

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.

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, 16th Floor, 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

Year of Birth: 1970

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) 13 Trustee (since 2015), Virtus ETF Trust II (3 portfolios)

Robert S. Tull

Year of Birth: 1952

Trustee Since Inception Independent Consultant (2013-present); Chief Operating Officer, Factor Advisors, LLC (2010-2013); Chief Operating Officer, GlobalShares (2009-2010) 13 Trustee (since 2015), Virtus ETF Trust II (3 portfolios)

Stephen O’Grady

Year of Birth: 1946

Trustee Since September 2014 Lead Market Maker, GFI Group (2011-2012); Partner, Kellogg Capital Markets (2004-2011) 13 Trustee (since 2015), Virtus ETF Trust II (3 portfolios); Trustee (since 2013), Greenhaven Continuous Commodity ETF (GCC); Trustee (since 2014), Acacia Group LLC

Myles J. Edwards

Year of Birth: 1961

Trustee Since November 2016 General Counsel, CCO and COO, Shufro, Rose & Co., LLC (2014 – present); General Counsel and CC), Constellation Wealth Advisers, LLC (2011 – 2014) 13 Trustee (since 2015), Virtus ETF Trust II (3 portfolios)
 *The Fund Complex consists of the Trust and Virtus ETF Trust II. 
Interested Trustee**

William J. Smalley

Year of Birth: 1983

Trustee, President, Chief Executive Officer and Secretary Since Inception President, Virtus ETF Solutions LLC (2012-present); Managing Principal, ETF Distributors LLC (2012-present); President, Virtus ETF Trust II (2015-present); Vice President, Factor Advisors, LLC (2010-2012); Vice President, MacroMarkets, LLC (2006-2010) 13 None
** Mr. Smalley is an Interested Trustee because he is an employee of the Adviser.
OTHER EXECUTIVE OFFICERS

Brinton W. Frith

Year of Birth: 1969

Treasurer and Chief Financial Officer Since Inception Managing Director, Virtus ETF Solutions LLC (2013-present); Treasurer, ETFis Series Trust I (2012 – present); President, Javelin Investment Management, LLC (2008-2013) N/A N/A

Nancy J. Engberg

Year of Birth: 1956

Chief Compliance Officer Since 2015 Vice President (since 2008) and Chief Compliance Officer (2008 to 2011 and since 2016), 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) and 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 2013), Virtus Alternative Solutions Trust; Chief Compliance Officer (since 2015), ETFis Series Trust I. N/A N/A

   

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Board Structure. The Trust’s Board includes four Independent Trustees and one Interested Trustee, Mr. Smalley, who is Chairman of the Board. Each Trustee serves an indefinite term, until a successor is elected, qualified and serving as a Trustee . The Board has not appointed an Independent Trustee to serve as lead Independent Trustee. The Board believes this structure is appropriate 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 Trust’s sub-advisers, 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 a Nominating Committee (discussed in more detail below). Each Committee is comprised entirely of Independent Trustees.

 

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 an independent director for other ETFs and 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 an independent director for other ETFs and 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 as an independent director for other ETFs and in the development and operation of ETF trading systems and futures exchanges and has served as president of an options brokerage firm.
Myles J. Edwards Mr. Edwards has experience as general counsel, chief compliance officer and chief operating officer of SEC registered investment advisers, hedge funds and FINRA member broker-dealers.
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.

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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.

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 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 Sub-Adviser, the Fund’s principal underwriter or any affiliate of the Adviser, the Sub-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 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, 2017, the Trustees are estimated to receive the following compensation:

Name of Trustee Aggregate Compensation From the Fund 1 Pension or Retirement Benefits Accrued As Part of Fund Expenses Estimated Annual Benefits Upon Retirement Total Compensation From Fund Complex Paid to Trustees 1
Independent Trustees
James Simpson $2,000 None None $28,000
Robert S. Tull $2,000 None None $28,000
Stephen O’Grady $2,000 None None $28,000
Myles J. Edwards $2,000 None None $28,000
Interested Trustee
William J. Smalley None None None None

  1 As of October 31, 2016, the Fund had not yet commenced operations. Fees are estimated for the fiscal year ending October 31, 2017.

 

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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 Policy and Procedures and the Sub-Adviser’s Proxy Voting Policy 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, will be available upon request, without charge, by calling the Fund at (866) 383-7636. This information will also be 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. The Fund’s 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. (“ VPI ”), 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 June 30, 2016, on a collective basis, Virtus-affiliated registered investment advisers manage over $45.1 billion in 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 each other series of the Trust and each series of Virtus ETF Trust II, an open-end management investment company registered with the SEC.

 

    16  

 

 

The Adviser 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 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 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 is entitled to receive a fee, payable monthly, at the annual rate of the greater of 0.45% of the Fund’s average daily net assets or $25,000 per year (the “Advisory Fee”). The Fund has not paid any advisory fees to the Adviser as of the date of this Prospectus. The Advisory Fee is structured as a “unified fee.” The Adviser has delegated to the Sub-Adviser the obligation to pay all of the ordinary operating expenses of the Fund, except for the Advisory Fee; payments under any 12b-1 plan adopted by the Fund; taxes and other governmental fees; brokerage fees, commissions and other transaction expenses; interest and other costs of borrowing; litigation or arbitration expenses; acquired fund fees and expenses; and extraordinary or other non-routine expenses of the Fund; each of which is paid by the Fund.

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 Infrastructure Capital Advisors, LLC, 1325 Avenue of the Americas, 28th Floor, New York, NY, 10019. 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 Sub-Adviser’s best execution obligations and the Trust’s and the Sub-Adviser’s brokerage policies.

 

The Sub-Adviser was organized as a New York limited liability company in January 2012. The Sub-Adviser has served as the sub-adviser of the Fund since the inception of the Fund’s operations. The Sub-Adviser is controlled by Jay D. Hatfield, its co-founder and president. Mr. Hatfield has been managing investments for clients, including private investment funds and another ETF, since 2001. As of June 30, 2016, the Sub-Adviser had approximately $199.95 million in assets under management.

  

Sub-Adviser Compensation. The Adviser pays the Sub-Adviser out of the Advisory Fee it receives from the Fund. The Adviser retains a portion of the Advisory Fee that is equal to the greater of (i) an annualized rate of 0.075% of the average daily net asset value of the Fund, during the prior calendar month, or (ii) a minimum annual fee of $25,000 per calendar year. The remainder of the Advisory Fee is paid by the Adviser to the Sub-Adviser as full compensation for its services.

 

Portfolio ManagerS. Jay D. Hatfield, co-founder and president of the Sub-Adviser, and Edward F. Ryan, co-founder, chief financial officer and chief operating officer of the Sub-Adviser, have served as portfolio managers for the Fund since the inception of the Fund’s operations. The portfolio managers are primarily responsible for the day-to-day management of the Fund.

 

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.

    17  

 

Other Accounts. In addition to the Fund, Mr. Hatfield 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 September 30, 2016. As of the date of this SAI, Mr. Ryan is not responsible for the day-to-day management of any other accounts, other than the Fund.

Portfolio Manager Type of Accounts

Total Number
of Other

Accounts Managed

Total Assets
of Other

Accounts Managed

Number of Accounts where Advisory Fee is Based upon Account Performance Total Assets where Advisory Fee is Based upon Account Performance
Jay D. Hatfield Other Pooled Investment Vehicles 4 $175,639,800 3 $28,260,944
Separately Managed Accounts 8 $24,310,694 --- ---

 

Material Conflicts of Interest. Because the portfolio managers may at times manage multiple portfolios for multiple clients, the potential for conflicts of interest exists. The portfolio managers may manage portfolios having substantially the same investment style as the Fund. However, the portfolios managed by the portfolio managers 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 managers 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 managers 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 managers 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. The portfolio managers are compensated by the Sub-Adviser and do not receive any compensation directly from the Fund or the Adviser. Mr. Hatfield, as an owner of the Sub-Adviser, is thus entitled to profits related to his ownership.  Since profits are expected to increase as assets increase, Mr. Hatfield is expected to receive increased profits as an owner of the Sub-Adviser as assets of the Fund increase. Mr. Ryan receives compensation in the form of a base salary that is determined by the advisory fee revenue generated by the Sub-Adviser’s assets under management. Thus, Mr. Ryan’s compensation is aligned with the interests of the Sub-Adviser’s clients, including the Fund and its investors. Mr. Ryan may also earn a bonus each year based on the profitability of the Sub-Adviser.

 

OTHER SERVICE PROVIDERS

 

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 Sub-Adviser pays the Administrator out of the Sub-Adviser’s advisory fee; however, the Fund is newly formed and has not paid any fees for administration services as of the date of this SAI.

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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, NY 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.

 

The Sub-Adviser pays the Accounting Services Administrator out of the Sub-Adviser’s advisory fee; however, the Fund is newly formed and has not paid any fees for accounting administration services as of the date of this SAI.

 

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 Sub-Adviser pays the Custodian out of the Sub-Adviser’s advisory fee; however, 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 Sub-Adviser pays the Transfer Agent out of the Sub-Adviser’s advisory fee; however, 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 Board 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.

 

    19  

 

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. 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, PA 19103, to serve as the independent registered public accounting firm for the Fund for the current fiscal year, to audit the annual financial statements of the Fund and to 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. Stradley Ronon Stevens & Young, LLP, located at 2005 Market Street, Suite 2600, Philadelphia, PA 19103, serves as counsel to the Trust and the Independent Trustees.

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 will manage 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. The Sub-Adviser serves as investment adviser for a number of client accounts, in addition to the Fund.

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 size of the order, the difficulty of execution, the efficiency of the facilities of the executing broker-dealer (including research services), any risk assumed by an executing broker-dealer 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 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 that 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 the other clients of the Sub-Adviser 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 may be received in the form of written reports, telephone contacts, personal meetings,

    20  

 

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 advisory fees payable 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 may pay 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.

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 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 will be publicly available at no charge. The website for the Fund is www.InfraCapPFFR.com.

 

    21  

 

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 the 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 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 will generally be 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 will be 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.

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INDICATIVE INTRA-DAY VALUE

 

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 all Trust 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 series, only shares of that series may be entitled to vote on a matter affecting that particular series. 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.

 

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

    23  

 

 

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 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

    24  

 

 

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.

 

The Fund, through the NSCC, makes available on each Business Day, immediately prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern time), 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 (50,000 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 the close of the regular trading session on the Exchange (ordinarily 4:00 p.m. Eastern time) (“ Closing Time ”), in each case 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.

 

    25  

 

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 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 marked-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 marked-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

    26  

 


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 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
InfraCap REIT Preferred ETF (Ticker: PFFR) $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.

 

    27  

 


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.

 

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.

 

    28  

 

 

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
InfraCap REIT Preferred ETF (Ticker: PFFR) $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.

 

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.

    29  

 

 

CONTINUOUS OFFERING

 

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 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. 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 management fees, 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.

 

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, equity securities are generally valued at market using quotations from the primary market in which they are traded. Debt securities (other than short-term investments) are valued on the basis of broker quotes or valuations provided by a pricing service, which in determining value utilizes information regarding recent sales, market transactions in comparable securities, quotations from dealers, and various relationships between securities. Other assets, such as accrued interest, accrued dividends and cash are also included in determining the NAV. The Fund normally uses third party pricing services to obtain portfolio security prices.

 

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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. 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. 

 

DIVIDENDS AND DISTRIBUTIONS

 

General Policies . Dividends from net investment income are declared and paid at least monthly by the Fund. 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 Internal Revenue Code of 1986 (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.

 

TAXATION

 

The following is a summary of certain additional tax considerations generally affecting the Fund and its shareholders that are not described in the Prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in the Prospectus is not intended as a substitute for careful tax planning.

This “Taxes” section is based on the Internal Revenue Code and applicable regulations in effect on the date of this SAI. Future legislative, regulatory or administrative changes, including provisions of current law that sunset and thereafter no longer apply, or court decisions may significantly change the tax rules applicable to the Fund and its shareholders. Any of these changes or court decisions may have a retroactive effect.

This is for general information only and not tax advice. All investors should consult their own tax advisors as to the federal, state, local and foreign tax provisions applicable to them.

Taxation of the Fund

The Fund is a Separate Corporation . The Fund is treated as a separate corporation for federal income tax purposes. Losses in one Fund do not offset gains in another Fund and the requirements (other than certain organizational

    31  

 

requirements) for qualifying for regulated investment company status as described below are determined at the Fund level rather than the Trust level.

Election to be Taxed as a Regulated Investment Company. The Fund has elected and intends to qualify, or, if newly organized, intends to elect and qualify, each year as a regulated investment company (sometimes referred to as a “regulated investment company,” “RIC” or “fund”) under Subchapter M of the Internal Revenue Code. If the Fund so qualifies, the Fund will not be subject to federal income tax on the portion of its investment company taxable income (that is, generally, taxable interest, dividends, net short-term capital gains, and other taxable ordinary income, net of expenses, without regard to the deduction for dividends paid) and net capital gain (that is, the excess of net long-term capital gains over net short-term capital losses) that it distributes to shareholders.

In order to qualify for treatment as a regulated investment company, the Fund must satisfy the following requirements:

Distribution Requirement —the Fund must distribute an amount equal to the sum of at least 90% of its investment company taxable income and 90% of its net tax-exempt income, if any, for the tax year (including, for purposes of satisfying this distribution requirement, certain distributions made by the Fund after the close of its taxable year that are treated as made during such taxable year).
Income Requirement —the Fund must derive at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including, but not limited to, gains from options, futures or forward contracts) derived from its business of investing in such stock, securities or currencies and net income derived from qualified publicly traded partnerships (“QPTPs”).
Asset Diversification Test —the Fund must satisfy the following asset diversification test at the close of each quarter of the Fund’s tax year: (1) at least 50% of the value of the Fund’s assets must consist of cash and cash items, U.S. government securities, securities of other regulated investment companies, and securities of other issuers (as to which the Fund has not invested more than 5% of the value of the Fund’s total assets in securities of an issuer and as to which the Fund does not hold more than 10% of the outstanding voting securities of the issuer); and (2) no more than 25% of the value of the Fund’s total assets may be invested in the securities of any one issuer (other than U.S. government securities or securities of other regulated investment companies) or of two or more issuers which the Fund controls and which are engaged in the same or similar trades or businesses, or, in the securities of one or more QPTPs.

In some circumstances, the character and timing of income realized by the Fund for purposes of the Income Requirement or the identification of the issuer for purposes of the Asset Diversification Test is uncertain under current law with respect to a particular investment, and an adverse determination or future guidance by the Internal Revenue Service (“IRS”) with respect to such type of investment may adversely affect the Fund’s ability to satisfy these requirements. See, “Tax Treatment of Portfolio Transactions” below with respect to the application of these requirements to certain types of investments. In other circumstances, the Fund may be required to sell portfolio holdings in order to meet the Income Requirement, Distribution Requirement, or Asset Diversification Test, which may have a negative impact on the Fund’s income and performance.

If for any taxable year the Fund does not qualify as a regulated investment company, all of its taxable income (including its net capital gain) would be subject to tax at regular corporate rates without any deduction for dividends paid to shareholders, and the dividends would be taxable to the shareholders as ordinary income (or possibly as qualified dividend income) to the extent of the Fund’s current and accumulated earnings and profits. Failure to qualify as a regulated investment company would thus have a negative impact on the Fund’s income and performance. Subject to savings provisions for certain failures to satisfy the Income Requirement or Asset Diversification Test, which, in general, are limited to those due to reasonable cause and not willful neglect, it is possible that the Fund will not qualify as a regulated investment company in any given tax year. Even if such savings provisions apply, the Fund may be subject to a monetary sanction of $50,000 or more. Moreover, the Board reserves the right not to maintain the qualification of the Fund as a regulated investment company if it determines such a course of action to be beneficial to shareholders.

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Portfolio Turnover. For investors that hold their Fund Shares in a taxable account, a high portfolio turnover rate may result in higher taxes. This is because the Fund with a high turnover rate is likely to accelerate the recognition of capital gains and more of such gains are likely to be taxable as short-term rather than long-term capital gains in contrast to a comparable fund with a low turnover rate. Any such higher taxes would reduce the Fund’s after-tax performance. See, “Taxation of Fund Distributions - Distributions of Capital Gains” below. For non-U.S. investors, any such acceleration of the recognition of capital gains that results in more short-term and less long-term capital gains being recognized by the Fund may cause such investors to be subject to increased U.S. withholding taxes. See, “Non-U.S. Investors – Capital Gain Dividends” and “–Interest-Related Dividends and Short-Term Capital Gain Dividends” below.

Capital Loss Carryovers. The capital losses of the Fund, if any, do not flow through to shareholders. Rather, the Fund may use its capital losses, subject to applicable limitations, to offset its capital gains without being required to pay taxes on or distribute to shareholders such gains that are offset by the losses. Rules similar to those that apply to capital loss carryovers of individuals apply to RICs. Thus, if the Fund has a “net capital loss” (that is, capital losses in excess of capital gains), the excess (if any) of the Fund’s net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund’s next taxable year, and the excess (if any) of the Fund’s net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund’s next taxable year. Any such net capital losses of the Fund that are not used to offset capital gains may be carried forward indefinitely to reduce any future capital gains realized by the Fund in succeeding taxable years. The amount of capital losses that can be carried forward and used in any single year is subject to an annual limitation if there is a more than 50% “change in ownership” of the Fund. An ownership change generally results when shareholders owning 5% or more of the Fund increase their aggregate holdings by more than 50% over a three-year lookback period. An ownership change could result in capital loss carryovers being used at a slower rate, thereby reducing the Fund’s ability to offset capital gains with those losses. An increase in the amount of taxable gains distributed to the Fund’s shareholders could result from an ownership change. The Fund undertake no obligation to avoid or prevent an ownership change, which can occur in the normal course of shareholder purchases and redemptions or as a result of engaging in a tax-free reorganization with another fund. Moreover, because of circumstances beyond the Fund’s control, there can be no assurance that the Fund will not experience, or has not already experienced, an ownership change. Additionally, if the Fund engages in a tax-free reorganization with another fund, the effect of these and other rules not discussed herein may be to disallow or postpone the use by the Fund of its capital loss carryovers (including any current year losses and built-in losses when realized) to offset its own gains or those of the other fund, or vice versa, thereby reducing the tax benefits Fund shareholders would otherwise have enjoyed from use of such capital loss carryovers.

Deferral of Late Year Losses. The Fund may elect to treat part or all of any “qualified late year loss” as if it had been incurred in the succeeding taxable year in determining the Fund’s taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such “qualified late year loss” as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar year (see, “Taxation of Fund Distributions—Distributions of capital gains” below). A “qualified late year loss” includes:

(i) any net capital loss incurred after October 31 of the current taxable year, or, if there is no such loss, any net long-term capital loss or any net short-term capital loss incurred after October 31 of the current taxable year (“post-October capital losses”), and
(ii) the sum of (1) the excess, if any, of (a) specified losses incurred after October 31 of the current taxable year, over (b) specified gains incurred after October 31 of the current taxable year and (2) the excess, if any, of (a) ordinary losses incurred after December 31 of the current taxable year, over (b) the ordinary income incurred after December 31 of the current taxable year.

The terms “specified losses” and “specified gains” mean ordinary losses and gains from the sale, exchange, or other disposition of property (including the termination of a position with respect to such property), foreign currency losses and gains, and losses and gains resulting from holding stock in a passive foreign investment company (“PFIC”) for which a mark-to-market election is in effect. The terms “ordinary losses” and “ordinary income” mean other ordinary losses and income that are not described in the preceding sentence. 

Undistributed Capital Gains . The Fund may retain or distribute to shareholders its net capital gain for each taxable year. The Fund currently intend to distribute net capital gains. If the Fund elects to retain its net capital gain, the

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Fund will be taxed thereon (except to the extent of any available capital loss carryovers) at the highest corporate tax rate (currently 35%). If the Fund elects to retain its net capital gain, it is expected that the Fund also will elect to have shareholders treated as if each received a distribution of its pro rata share of such gain, with the result that each shareholder will be required to report its pro rata share of such gain on its tax return as long-term capital gain, will receive a refundable tax credit for its pro rata share of tax paid by the Fund on the gain, and will increase the tax basis for its Shares by an amount equal to the deemed distribution less the tax credit.

Federal Excise Tax . To avoid a 4% non-deductible excise tax, the Fund must distribute by December 31 of each year an amount equal to at least: (1) 98% of its ordinary income for the calendar year, (2) 98.2% of capital gain net income (that is, the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges) for the one-year period ended on October 31 of such calendar year, and (3) any prior year undistributed ordinary income and capital gain net income. The Fund may elect to defer to the following year any net ordinary loss incurred for the portion of the calendar year which is after the beginning of the Fund’s taxable year. Also, the Fund will defer any “specified gain” or “specified loss” which would be properly taken into account for the portion of the calendar year after October 31. Any net ordinary loss, specified gain, or specified loss deferred shall be treated as arising on January 1 of the following calendar year. Generally, The Fund intends to make sufficient distributions prior to the end of each calendar year to avoid any material liability for federal income and excise tax, but can give no assurances that all or a portion of such liability will be avoided. In addition, under certain circumstances, temporary timing or permanent differences in the realization of income and expense for book and tax purposes can result in the Fund having to pay an excise tax.

Purchase of Shares. As a result of tax requirements, the Trust on behalf of The Fund has the right to reject an order to purchase Shares if the purchaser (or group of purchasers acting in concert with each other) would, upon obtaining the Shares so ordered, own 80% or more of the outstanding Shares of the Fund and if, pursuant to Sections 351 and 362 of the Internal Revenue Code, the Fund would have a basis in the Deposit Securities different from the market value of such securities on the date of deposit. The Trust also has the right to require information necessary to determine beneficial Share ownership for purposes of the 80% determination.

Taxation of Fund Distributions

The Fund anticipates distributing substantially all of its investment company taxable income and net capital gain for each taxable year. Distributions by the Fund will be treated in the manner described below regardless of whether such distributions are paid in cash or reinvested in additional Shares of the Fund (or of another fund). You will receive information annually as to the federal income tax consequences of distributions made (or deemed made) during the year.

Distributions of Net Investment Income. The Fund receives ordinary income generally in the form of dividends and/or interest on its investments. The Fund may also recognize ordinary income from other sources, including, but not limited to, certain gains on foreign currency-related transactions. This income, less expenses incurred in the operation of the Fund, constitutes the Fund’s net investment income from which dividends may be paid to you. If you are a taxable investor, distributions of net investment income generally are taxable as ordinary income to the extent of the Fund’s earnings and profits. See the discussion below under the headings, “–Qualified Dividend Income for Individuals” and “– Dividends-Received Deduction for Corporations”

Distributions of Capital Gains. The Fund may derive capital gain and loss in connection with sales or other dispositions of its portfolio securities. Distributions derived from the excess of net short-term capital gain over net long-term capital loss will be taxable to you as ordinary income. Distributions paid from the excess of net long-term capital gain over net short-term capital loss will be taxable to you as long-term capital gain, regardless of how long you have held your Shares in the Fund. Any net short-term or long-term capital gain realized by the Fund (net of any capital loss carryovers) generally will be distributed once each year and may be distributed more frequently, if necessary, in order to reduce or eliminate federal excise or income taxes on the Fund.

Returns of Capital. Distributions by the Fund that are not paid from earnings and profits will be treated as a return of capital to the extent of (and in reduction of) the shareholder’s tax basis in his Shares; any excess will be treated as gain from the sale of his Shares. Thus, the portion of a distribution that constitutes a return of capital will decrease the shareholder’s tax basis in his Fund Shares (but not below zero), and will result in an increase in the amount of gain (or decrease in the amount of loss) that will be recognized by the shareholder for tax purposes on the later sale

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of such Fund Shares. Return of capital distributions can occur for a number of reasons including, among others, the Fund over-estimates the income to be received from certain investments such as those classified as partnerships or equity real estate investment trusts (“REITs”).

Qualified Dividend Income for Individuals. Ordinary income dividends reported by the Fund as derived from qualified dividend income will be taxed in the hands of individuals and other noncorporate shareholders at the rates applicable to long-term capital gain. “Qualified dividend income” means dividends paid to the Fund (a) by domestic corporations, (b) by foreign corporations that are either (i) incorporated in a possession of the United States, or (ii) are eligible for benefits under certain income tax treaties with the United States that include an exchange of information program, or (c) with respect to stock of a foreign corporation that is readily tradable on an established securities market in the United States. Both the Fund and the investor must meet certain holding period requirements to qualify Fund dividends for this treatment. Specifically, the Fund must hold the stock for at least 61 days during the 121-day period beginning 60 days before the stock becomes ex-dividend. Similarly, investors must hold their Fund Shares for at least 61 days during the 121-day period beginning 60 days before the Fund distribution goes ex-dividend. Income derived from investments in derivatives, fixed-income securities, U.S. REITs, PFICs, and income received “in lieu of” dividends in a securities lending transaction generally is not eligible for treatment as qualified dividend income. If the qualifying dividend income received by the Fund is equal to or greater than 95% of the Fund’s gross income (exclusive of net capital gain) in any taxable year, all of the ordinary income dividends paid by the Fund will be qualifying dividend income.

Dividends-Received Deduction for Corporations . For corporate shareholders, a portion of the dividends paid by the Fund may qualify for the 70% corporate dividends-received deduction. The portion of dividends paid by the Fund that so qualifies will be reported by the Fund each year and cannot exceed the gross amount of dividends received by the Fund from domestic (U.S.) corporations. The availability of the dividends-received deduction is subject to certain holding period and debt financing restrictions that apply to both the Fund and the investor. Specifically, the amount that the Fund may report as eligible for the dividends-received deduction will be reduced or eliminated if the Shares on which the dividends earned by the Fund were debt-financed or held by the Fund for less than a minimum period of time, generally 46 days during a 91-day period beginning 45 days before the stock becomes ex-dividend. Similarly, if your Fund Shares are debt-financed or held by you for less than a 46-day period then the dividends-received deduction for Fund dividends on your Shares may also be reduced or eliminated. Even if reported as dividends eligible for the dividends-received deduction, all dividends (including any deducted portion) must be included in your alternative minimum taxable income calculation . Income derived by the Fund from investments in derivatives, fixed-income and foreign securities generally is not eligible for this treatment.

Impact of Realized but Undistributed Income and Gains, and Net Unrealized Appreciation of Portfolio Securities . At the time of your purchase of Shares, the price of Shares may reflect undistributed income, undistributed capital gains, or net unrealized appreciation of portfolio securities held by the Fund. A subsequent distribution to you of such amounts, although constituting a return of your investment, would be taxable, and would be taxed as ordinary income (some portion of which may be taxed as qualified dividend income), capital gains, or some combination of both, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. The Fund may be able to reduce the amount of such distributions from capital gains by utilizing its capital loss carryovers, if any.

U.S. Government Securities. Income earned on certain U.S. government obligations is exempt from state and local personal income taxes if earned directly by you. States also grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject in some states to minimum investment or reporting requirements that must be met by the Fund. Income on investments by the Fund in certain other obligations, such as repurchase agreements collateralized by U.S. government obligations, commercial paper and federal agency-backed obligations (e.g., GNMA or FNMA obligations), generally does not qualify for tax-free treatment. The rules on exclusion of this income are different for corporations.

Dividends Declared in December and Paid in January . Ordinarily, shareholders are required to take distributions by the Fund into account in the year in which the distributions are made. However, dividends declared in October, November or December of any year and payable to shareholders of record on a specified date in such a month will be deemed to have been received by the shareholders (and made by the Fund) on December 31 of such calendar year if such dividends are actually paid in January of the following year. Shareholders will be advised annually as to the

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U.S. federal income tax consequences of distributions made (or deemed made) during the year in accordance with the guidance that has been provided by the IRS.

Medicare Tax . A 3.8% Medicare tax is imposed on net investment income earned by certain individuals, estates and trusts. “Net investment income,” for these purposes, means investment income, including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions or other taxable dispositions of Fund Shares, reduced by the deductions properly allocable to such income. In the case of an individual, the tax will be imposed on the lesser of (1) the shareholder’s net investment income or (2) the amount by which the shareholder’s modified adjusted gross income exceeds $250,000 (if the shareholder is married and filing jointly or a surviving spouse), $125,000 (if the shareholder is married and filing separately) or $200,000 (in any other case). This Medicare tax, if applicable, is reported by you on, and paid with, your federal income tax return.

Sales, Exchanges and Redemptions of Fund Shares

Sales, exchanges and redemptions (including redemptions in kind) of Fund Shares are taxable transactions for federal and state income tax purposes. If you redeem your Fund Shares, the IRS requires you to report any gain or loss on your redemption. If you held your Shares as a capital asset, the gain or loss that you realize will be a capital gain or loss and will be long-term or short-term, generally depending on how long you have held your Shares. Any redemption fees you incur on Shares redeemed will decrease the amount of any capital gain (or increase any capital loss) you realize on the sale. Capital losses in any year are deductible only to the extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.

Taxes on Purchase and Redemption of Creation Units. An Authorized Participant who exchanges equity securities for Creation Units generally will recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time of purchase and the exchanger’s aggregate basis in the securities surrendered and the Cash Component paid. A person who exchanges Creation Units for equity securities will generally recognize a gain or loss equal to the difference between the exchanger’s basis in the Creation Units and the aggregate market value of the securities received and the Cash Redemption Amount. The IRS, however, may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing “wash sales,” or on the basis that there has been no significant change in economic position. Persons exchanging securities should consult their own tax advisor with respect to whether wash sale rules apply and when a loss might be deductible.

Under current federal tax laws, any capital gain or loss realized upon redemption of Creation Units is generally treated as long-term capital gain or loss if the Shares have been held for more than one year and as a short-term capital gain or loss if the Shares have been held for one year or less.

If the Fund redeems Creation Units in cash, it may recognize more capital gains than it will if it redeems Creation Units in-kind.

Tax Basis Information . A shareholder’s cost basis information will be provided on the redemption of any of the shareholder’s Shares, subject to certain exceptions for exempt recipients. Please contact the broker (or other nominee) that holds your Shares with respect to reporting of cost basis and available elections for your account.

Wash Sales . All or a portion of any loss that you realize on a redemption of your Fund Shares will be disallowed to the extent that you buy other Shares in the Fund (through reinvestment of dividends or otherwise) within 30 days before or after your Share redemption. Any loss disallowed under these rules will be added to your tax basis in the new Shares.

Redemptions at a Loss Within Six Months of Purchase . Any loss incurred on a redemption or exchange of Shares held for six months or less will be treated as long-term capital loss to the extent of any long-term capital gain distributed to you by the Fund on those Shares.

Reportable Transactions. Under Treasury regulations, if a shareholder recognizes a loss with respect to the Fund’s Shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder (or certain greater amounts over a combination of years), the shareholder must file with the IRS a disclosure statement on Form 8886. The fact that a loss is reportable under these regulations does not affect the legal determination of

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whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.

Tax Treatment of Portfolio Transactions

Set forth below is a general description of the tax treatment of certain types of securities, investment techniques and transactions that may apply to the Fund and, in turn, affect the amount, character and timing of dividends and distributions payable by the fund to its shareholders. This section should be read in conjunction with the discussion above under “Investment Strategies” for a detailed description of the various types of securities and investment techniques that apply to the Fund.

In General . In general, gain or loss recognized by the Fund on the sale or other disposition of portfolio investments will be a capital gain or loss. Such capital gain and loss may be long-term or short-term depending, in general, upon the length of time a particular investment position is maintained and, in some cases, upon the nature of the transaction. Property held for more than one year generally will be eligible for long-term capital gain or loss treatment. The application of certain rules described below may serve to alter the manner in which the holding period for a security is determined or may otherwise affect the characterization as long-term or short-term, and also the timing of the realization and/or character, of certain gains or losses.

Options, Futures, Forward Contracts, Swap Agreements and Hedging Transactions . In general, option premiums received by the Fund are not immediately included in the income of the fund. Instead, the premiums are recognized when the option contract expires, the option is exercised by the holder, or the fund transfers or otherwise terminates the option (e.g., through a closing transaction). If an option written by the Fund is exercised and the fund sells or delivers the underlying stock, the fund generally will recognize capital gain or loss equal to (a) the sum of the strike price and the option premium received by the fund minus (b) the fund’s basis in the stock. Such gain or loss generally will be short-term or long-term depending upon the holding period of the underlying stock. If securities are purchased by the Fund pursuant to the exercise of a put option written by it, the fund generally will subtract the premium received from its cost basis in the securities purchased. The gain or loss with respect to any termination of the Fund’s obligation under an option other than through the exercise of the option and related sale or delivery of the underlying stock generally will be short-term gain or loss depending on whether the premium income received by the fund is greater or less than the amount paid by the fund (if any) in terminating the transaction. Thus, for example, if an option written by the Fund expires unexercised, the fund generally will recognize short-term gain equal to the premium received.

The tax treatment of certain futures contracts entered into by the Fund as well as listed non-equity options written or purchased by the fund on U.S. exchanges (including options on futures contracts, broad-based equity indices and debt securities) may be governed by section 1256 of the Internal Revenue Code (“section 1256 contracts”). Gains or losses on section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains or losses (“60/40”), although certain foreign currency gains and losses from such contracts may be treated as ordinary in character. Also, any section 1256 contracts held by the Fund at the end of each taxable year (and, for purposes of the 4% excise tax, on certain other dates as prescribed under the Internal Revenue Code) are “marked to market” with the result that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as ordinary or 60/40 gain or loss, as applicable. Section 1256 contracts do not include any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement.

In addition to the special rules described above in respect of options and futures transactions, the Fund’s transactions in other derivative instruments (including options, forward contracts and swap agreements) as well as its other hedging, short sale, or similar transactions, may be subject to one or more special tax rules (including the constructive sale, notional principal contract, straddle, wash sale and short sale rules). These rules may affect whether gains and losses recognized by the Fund are treated as ordinary or capital or as short-term or long-term, accelerate the recognition of income or gains to the fund, defer losses to the fund, and cause adjustments in the holding periods of the fund’s securities. These rules, therefore, could affect the amount, timing and/or character of distributions to shareholders. Moreover, because the tax rules applicable to derivative financial instruments are in some cases uncertain under current law, an adverse determination or future guidance by the IRS with respect to these rules (which determination or guidance could be retroactive) may affect whether the Fund has made sufficient

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distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a regulated investment company and avoid the Fund-level tax.

Certain of the Fund’s investments in derivatives and foreign currency-denominated instruments, and the fund’s transactions in foreign currencies and hedging activities, may produce a difference between its book income and its taxable income. If the Fund’s book income is less than the sum of its taxable income and net tax-exempt income (if any), the fund could be required to make distributions exceeding book income to qualify as a regulated investment company. If the Fund’s book income exceeds the sum of its taxable income and net tax-exempt income (if any), the distribution of any such excess will be treated as (i) a dividend to the extent of the fund’s remaining earnings and profits (including current earnings and profits arising from tax-exempt income, reduced by related deductions), (ii) thereafter, as a return of capital to the extent of the recipient’s basis in the Shares, and (iii) thereafter, as gain from the sale or exchange of a capital asset.

Investments in U.S. REITs. A U.S. REIT is not subject to federal income tax on the income and gains it distributes to shareholders. Dividends paid by a U.S. REIT, other than capital gain distributions, will be taxable as ordinary income up to the amount of the U.S. REIT’s current and accumulated earnings and profits. Capital gain dividends paid by a U.S. REIT to the Fund will be treated as long-term capital gains by the Fund and, in turn, may be distributed by the Fund to its shareholders as a capital gain distribution. Because of certain noncash expenses, such as property depreciation, an equity U.S. REIT’s cash flow may exceed its taxable income. The equity U.S. REIT, and in turn the Fund, may distribute this excess cash to shareholders in the form of a return of capital distribution. However, if a U.S. REIT is operated in a manner that fails to qualify as a REIT, an investment in the U.S. REIT would become subject to double taxation, meaning the taxable income of the U.S. REIT would be subject to federal income tax at regular corporate rates without any deduction for dividends paid to shareholders and the dividends would be taxable to shareholders as ordinary income (or possibly as qualified dividend income) to the extent of the U.S. REIT’s current and accumulated earnings and profits. Also, see, “Tax Treatment of Portfolio Transactions – Investment in taxable mortgage pools (excess inclusion income)” and “Non-U.S. Investors – Investment in U.S. real property” below with respect to certain other tax aspects of investing in U.S. REITs.

Investment in non-U.S. REITs. While non-U.S. REITs often use complex acquisition structures that seek to minimize taxation in the source country, an investment by the Fund in a non-U.S. REIT may subject the Fund, directly or indirectly, to corporate taxes, withholding taxes, transfer taxes and other indirect taxes in the country in which the real estate acquired by the non-U.S. REIT is located. The Fund’s pro rata share of any such taxes will reduce the Fund’s return on its investment. The Fund’s investment in a non-U.S. REIT may be considered an investment in a PFIC, as discussed above in “PFIC investments.” Additionally, foreign withholding taxes on distributions from the non-U.S. REIT may be reduced or eliminated under certain tax treaties, as discussed above in “Taxation of the Fund — Foreign income tax.” Also, the Fund in certain limited circumstances may be required to file an income tax return in the source country and pay tax on any gain realized from its investment in the non-U.S. REIT under rules similar to those in the U.S., which tax foreign persons on gain realized from dispositions of interests in U.S. real estate.

Investment in taxable mortgage pools (excess inclusion income). Under a Notice issued by the IRS, the Internal Revenue Code and Treasury regulations to be issued, a portion of the Fund’s income from a U.S. REIT that is attributable to the REIT’s residual interest in a real estate mortgage investment conduit (“REMIC”) or equity interests in a “taxable mortgage pool” (referred to in the Internal Revenue Code as an excess inclusion) will be subject to federal income tax in all events. The excess inclusion income of a regulated investment company, such as the Fund, will be allocated to shareholders of the regulated investment company in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related REMIC residual interest or, if applicable, taxable mortgage pool directly. In general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions), (ii) will constitute unrelated business taxable income (“UBTI”) to entities (including qualified pension plans, individual retirement accounts, 401(k) plans, Keogh plans or other tax-exempt entities) subject to tax on UBTI, thereby potentially requiring such an entity that is allocated excess inclusion income, and otherwise might not be required to file a tax return, to file a tax return and pay tax on such income, and (iii) in the case of a foreign stockholder, will not qualify for any reduction in U.S. federal withholding tax. In addition, if at any time during any taxable year a “disqualified organization” (which generally includes certain cooperatives, governmental entities, and tax-exempt organizations not subject to UBTI) is a record holder of a share in a regulated investment company, then

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the regulated investment company will be subject to a tax equal to that portion of its excess inclusion income for the taxable year that is allocable to the disqualified organization, multiplied by the highest federal income tax rate imposed on corporations. The Notice imposes certain reporting requirements upon regulated investment companies that have excess inclusion income. There can be no assurance that the Fund will not allocate to shareholders excess inclusion income.

Securities Lending . While securities are loaned out by the Fund, the fund generally will receive from the borrower amounts equal to any dividends or interest paid on the borrowed securities. For federal income tax purposes, payments made “in lieu of” dividends are not considered dividend income. These distributions will neither qualify for the reduced rate of taxation for individuals on qualified dividends nor the 70% dividends-received deduction for corporations. Also, any foreign tax withheld on payments made “in lieu of” dividends or interest will not qualify for the pass-through of foreign tax credits to shareholders.

Investments in Convertible Securities. Convertible debt is ordinarily treated as a “single property” consisting of a pure debt interest until conversion, after which the investment becomes an equity interest. If the security is issued at a premium (i.e., for cash in excess of the face amount payable on retirement), the creditor-holder may amortize the premium over the life of the bond. If the security is issued for cash at a price below its face amount, the creditor-holder must accrue original issue discount in income over the life of the debt. The creditor-holder’s exercise of the conversion privilege is treated as a nontaxable event. Mandatorily convertible debt (e.g., an exchange traded note or ETN issued in the form of an unsecured obligation that pays a return based on the performance of a specified market index, exchange currency, or commodity) is often, but not always, treated as a contract to buy or sell the reference property rather than debt. Similarly, convertible preferred stock with a mandatory conversion feature is ordinarily, but not always, treated as equity rather than debt. Dividends received generally are qualified dividend income and eligible for the corporate dividends received deduction. In general, conversion of preferred stock for common stock of the same corporation is tax-free. Conversion of preferred stock for cash is a taxable redemption. Any redemption premium for preferred stock that is redeemable by the issuing company might be required to be amortized under original issue discount principles.

Investments in Securities of Uncertain Tax Character. The Fund may invest in securities the U.S. federal income tax treatment of which may not be clear or may be subject to recharacterization by the IRS. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by the Fund, it could affect the timing or character of income recognized by the fund, requiring the fund to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to regulated investment companies under the Internal Revenue Code.

Backup Withholding

By law, a portion of your taxable dividends and sales proceeds may be withheld unless you:

provide your correct social security or taxpayer identification number,
certify that this number is correct,
certify that you are not subject to backup withholding, and
certify that you are a U.S. person (including a U.S. resident alien).

Withholding is also imposed if the IRS requires it. When withholding is required, the amount will be 28% of any distributions or proceeds paid. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability, provided the appropriate information is furnished to the IRS. Certain payees and payments are exempt from backup withholding and information reporting. The special U.S. tax certification requirements applicable to non-U.S. investors to avoid backup withholding are described under the “Non-U.S. Investors” heading below.

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Non-U.S. Investors

Non-U.S. investors (shareholders who, as to the United States, are nonresident alien individuals, foreign trusts or estates, foreign corporations, or foreign partnerships) may be subject to U.S. withholding and estate tax and are subject to special U.S. tax certification requirements. Non-U.S. investors should consult their tax advisors about the applicability of U.S. tax withholding and the use of the appropriate forms to certify their status.

In General . The United States imposes a flat 30% withholding tax (or a withholding tax at a lower treaty rate) on U.S. source dividends, including on income dividends paid to you by the Fund, subject to certain exemptions described below. However, notwithstanding such exemptions from U.S. withholding at the source, any dividends and distributions of income and capital gains, including the proceeds from the sale of your Fund Shares, will be subject to backup withholding at a rate of 28% if you fail to properly certify that you are not a U.S. person.

Capital Gain Dividends . In general, capital gain dividends reported by the Fund as paid from its net long-term capital gains, other than long-term capital gains realized on disposition of U.S. real property interests (see the discussion below), are not subject to U.S. withholding tax unless you are a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the calendar year.

Interest-related dividends and short-term capital gain dividends.  Generally, dividends reported by the Fund as interest-related dividends and paid from its qualified net interest income from U.S. sources are not subject to U.S. withholding tax. “Qualified interest income” includes, in general, U.S. source (1) bank deposit interest, (2) short-term original discount, (3) interest (including original issue discount, market discount, or acquisition discount) on an obligation that is in registered form, unless it is earned on an obligation issued by a corporation or partnership in which the Fund is a 10-percent shareholder or is contingent interest, and (4) any interest-related dividend from another regulated investment company. Similarly, short-term capital gain dividends reported by the Fund as paid from its net short-term capital gains, other than short-term capital gains realized on disposition of U.S. real property interests (see discussion below), are not subject to U.S. withholding tax unless you were a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the calendar year.  The Fund reserves the right to not report interest-related dividends or short-term capital gain dividends.  Additionally, the Fund’s reporting of interest-related dividends or short-term capital gain dividends may not be passed through to shareholders by intermediaries who have assumed tax reporting responsibilities for this income in managed or omnibus accounts due to systems limitations or operational constraints.

Net Investment Income from Dividends on Stock and Foreign Source Interest Income Continue to be Subject to Withholding Tax; Foreign Tax Credits. Ordinary dividends paid by the Fund to non-U.S. investors on the income earned on portfolio investments in (i) the stock of domestic and foreign corporations and (ii) the debt of foreign issuers continue to be subject to U.S. withholding tax.

Foreign shareholders may be subject to U.S. withholding tax at a rate of 30% on the income resulting from an election to pass-through foreign tax credits to shareholders, but may not be able to claim a credit or deduction with respect to the withholding tax for the foreign tax treated as having been paid by them.

Income Effectively Connected with a U.S. Trade or Business . If the income from the Fund is effectively connected with a U.S. trade or business carried on by a foreign shareholder, then ordinary income dividends, capital gain dividends and any gains realized upon the sale or redemption of Shares of the Fund will be subject to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations and require the filing of a nonresident U.S. income tax return.

Investment in U.S. real property . The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) makes non-U.S. persons subject to U.S. tax on disposition of a U.S. real property interest (“USRPI”) as if he or she were a U.S. person. Such gain is sometimes referred to as FIRPTA gain. The Fund may invest in equity securities of corporations that invest in USRPI, including U.S. REITs, which may trigger FIRPTA gain to the Fund’s non-U.S. shareholders.

The Code provides a look-through rule for distributions of FIRPTA gain when a RIC is classified as a qualified investment entity. A RIC will be classified as a qualified investment entity if, in general, 50% or more of the RIC’s assets consist of interests in U.S. REITs and other U.S. real property holding corporations (“USRPHC”). If a RIC is a qualified investment entity and the non-U.S. shareholder owns more than 5% of a class of Fund Shares at any time during the one-year period ending on the date of the FIRPTA distribution, the FIRPTA distribution to the non-U.S.

    40  

 

 

shareholder is treated as gain from the disposition of a USRPI, causing the distribution to be subject to U.S. withholding tax at a rate of 35% (unless reduced by future regulations), and requiring the non-U.S. shareholder to file a nonresident U.S. income tax return. In addition, even if the non-U.S. shareholder does not own more than 5% of a class of Fund Shares, but the Fund is a qualified investment entity, the FIRPTA distribution will be taxable as ordinary dividends (rather than as a capital gain or short-term capital gain dividend) subject to withholding at 30% or lower treaty rate.

FIRPTA “wash sale” rule. If the Fund is a qualified investment entity that is domestically controlled (i.e. less than 50% in value of the Fund has been owned directly or indirectly by non-U.S. shareholders during the 5-year period ending on the date of disposition) and a non-U.S. shareholder of the Fund (i) disposes of his interest in the Fund during the 30-day period preceding a FIRPTA distribution, (ii) acquires an identical stock interest during the 61-day period beginning the first day of such 30-day period preceding the FIRPTA distribution, and (iii) does not in fact receive the FIRPTA distribution in a manner that subjects the non-U.S. shareholder to tax under FIRPTA, then the non-U.S. shareholder is required to pay U.S. tax on an amount equal to the amount of the distribution that was not taxed under FIRPTA as a result of the disposition. These rules also apply to substitute dividend payments and other similar arrangements; the portion of the substitute dividend or similar payment treated as FIRPTA gain equals the portion of the RIC distribution such payment is in lieu of that otherwise would have been treated as FIRPTA gain.

Gain on sale of Fund Shares as FIRPTA gain. In addition, a sale or redemption of Fund Shares will be FIRPTA gain to a non-U.S. shareholder if the non-U.S. shareholder owns more than 5% of a class of Shares in the Fund and the Fund is otherwise considered a USRPHC, i.e. 50% or more of the Fund’s assets consist of (1) more than 5% interests in publicly traded companies that are USRPHC, (2) interests in non-publicly traded companies that are USRPHC, and (3) interests in U.S. REITs that are not controlled by U.S. shareholders where the REIT shares are either not publicly traded or are publicly traded and the Fund owns more than 10%.

In the unlikely event that the Fund meets the requirements described above, the gain will be taxed as income “effectively connected with a U.S. trade or business.” As a result, the non-U.S. shareholder will be required to pay U.S. income tax on such gain and file a nonresident U.S. income tax return.

Because the Fund expects to invest less than 50% of its assets at all times, directly or indirectly, in U.S. real property interests, the Fund expects that neither gain on the sale or redemption of Fund Shares nor Fund dividends and distributions would be subject to FIRPTA reporting and tax withholding.

U.S. Estate Tax. Transfers by gift of Shares of the Fund by a foreign shareholder who is a nonresident alien individual will not be subject to U.S. federal gift tax. An individual who, at the time of death, is a non-U.S. shareholder will nevertheless be subject to U.S. federal estate tax with respect to Fund Shares at the graduated rates applicable to U.S. citizens and residents, unless a treaty exemption applies. If a treaty exemption is available, a decedent’s estate may nonetheless need to file a U.S. estate tax return to claim the exemption in order to obtain a U.S. federal transfer certificate, which permits the decedent’s property to be transferred without federal estate tax liability. The transfer certificate will identify the property (i.e., Fund Shares) as to which the U.S. federal estate tax lien has been released. In the absence of a treaty, there is a $13,000 statutory estate tax credit (equivalent to U.S. situs assets with a value of $60,000). For estates with U.S. situs assets of not more than $60,000, an affidavit from an appropriate individual that states that the decedent’s U.S. situs assets are below this threshold amount may be sufficient to transfer the Fund shares.

U.S. Tax Certification Rules . Special U.S. tax certification requirements may apply to non-U.S. shareholders both to avoid U.S. backup withholding imposed at a rate of 28% and to obtain the benefits of any treaty between the United States and the shareholder’s country of residence. In general, if you are a non-U.S. shareholder, you must provide a Form W-8 BEN (or other applicable Form W-8) to establish that you are not a U.S. person, to claim that you are the beneficial owner of the income and, if applicable, to claim a reduced rate of, or exemption from, withholding as a resident of a country with which the United States has an income tax treaty. A Form W-8 BEN provided without a U.S. taxpayer identification number will remain in effect for a period beginning on the date signed and ending on the last day of the third succeeding calendar year unless an earlier change of circumstances makes the information on the form incorrect. Certain payees and payments are exempt from backup withholding.

The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders are urged to consult their own tax advisors with

    41  

 

respect to the particular tax consequences to them of an investment in the Fund, including the applicability of foreign tax.

Foreign Account Tax Compliance Act (“FATCA”). Under FATCA, a 30% withholding tax is imposed on payments or distributions made by the Fund to certain foreign entities, referred to as foreign financial institutions (“FFI”) or non-financial foreign entities (“NFFE”): (a) income dividends and (b) after December 31, 2018, certain capital gain distributions, return of capital distributions and the proceeds arising from the sale of Fund Shares. The FATCA withholding tax generally can be avoided: (a) by an FFI, if it reports certain direct and indirect ownership of foreign financial accounts held by U.S. persons with the FFI and (b) by an NFFE, if it: (i) certifies that it has no substantial U.S. persons as owners or (ii) if it does have such owners, reporting information relating to them. The U.S. Treasury has negotiated intergovernmental agreements (“IGA”) with certain countries and is in various stages of negotiations with a number of other foreign countries with respect to one or more alternative approaches to implement FATCA; an entity in one of those countries may be required to comply with the terms of an IGA instead of U.S. Treasury regulations.

An FFI can avoid FATCA withholding if it is deemed compliant or by becoming a “participating FFI,” which requires the FFI to enter into a U.S. tax compliance agreement with the IRS under section 1471(b) of the Internal Revenue Code (“FFI agreement”) under which it agrees to verify, report and disclose certain of its U.S. accountholders and meet certain other specified requirements. The FFI will either report the specified information about the U.S. accounts to the IRS, or, to the government of the FFI’s country of residence (pursuant to the terms and conditions of applicable law and an applicable IGA entered into between the United States and the FFI’s country of residence), which will, in turn, report the specified information to the IRS. An FFI that is resident in a country that has entered into an IGA with the U.S. to implement FATCA will be exempt from FATCA withholding provided that the FFI shareholder and the applicable foreign government comply with the terms of such agreement.

An NFFE that is the beneficial owner of a payment from the Fund can avoid the FATCA withholding tax generally by certifying that it does not have any substantial U.S. owners or by providing the name, address and taxpayer identification number of each substantial U.S. owner. The NFFE will report the information to the applicable withholding agent, which will, in turn, report information to the IRS.

Such foreign shareholders also may fall into certain exempt, excepted or deemed compliant categories as established by U.S. Treasury regulations, IGAs, and other guidance regarding FATCA. An FFI or NFFE that invests in the Fund will need to provide documentation properly certifying the entity’s status under FATCA in order to avoid FATCA withholding. Non-U.S. investors should consult their own tax advisors regarding the impact of these requirements on their investment in the Fund. The requirements imposed by FATCA are different from, and in addition to, the U.S. tax certification rules to avoid backup withholding described above. Shareholders are urged to consult their tax advisors regarding the application of these requirements to their own situation.

Effect of Future Legislation; Local Tax Considerations

The foregoing general discussion of U.S. federal income tax consequences is based on the Internal Revenue Code and the regulations issued thereunder as in effect on the date of this SAI. Future legislative or administrative changes, including provisions of current law that sunset and thereafter no longer apply, or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect with respect to the transactions contemplated herein. Rules of state and local taxation of ordinary income, qualified dividend income and capital gain dividends may differ from the rules for U.S. federal income taxation described above. Distributions may also be subject to additional state, local and foreign taxes depending on each shareholder’s particular situation. Non-U.S. shareholders may be subject to U.S. tax rules that differ significantly from those summarized above. Shareholders are urged to consult their tax advisors as to the consequences of these and other state and local tax rules affecting investment in the Fund.

 

OTHER INFORMATION

 

Shareholder inquiries may be made by writing to the Trust, c/o Virtus ETF Advisers LLC, 1540 Broadway, New York, NY 10036.

 

FINANCIAL STATEMENTS

 

The Fund is newly organized and therefore has not yet had any operations as of the date of this SAI.

 

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APP ENDIX A

 

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

   A- 1  

 

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 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.

 

   A- 2  

 

APPENDIX B

 

Sub-Adviser PROXY VOTING POLICY AND PROCEDURES

 

Statement of Policy

Proxy voting is an important right of shareholders, and reasonable care and diligence must be undertaken to ensure that these rights are properly and timely exercised. Infrastructure Capital Advisors, LLC (the “Sub-Advisor”) votes proxies in the best interest of its clients and in accordance with these policies and procedures.

Proxy-Voting Procedures

All proxies received by the Sub-Advisor are sent to Edward F. Ryan, who (1) keeps a record of each proxy received, (2) determines which accounts managed by the Sub-Advisor hold the security to which the proxy relates, and (3) determines the date by which the Sub-Advisor must vote the proxy in order to allow adequate time for the completed proxy to be returned to the issuer. Absent material conflicts, the portfolio managers determine how the Sub-Advisor should vote the proxy. Mr. Ryan is responsible for completing the proxy and mailing the proxy in a timely and appropriate manner.

Voting Guidelines

In the absence of specific voting guidelines from the client, the Sub-Advisor votes proxies in the best interests of each particular client, which may result in different voting results for proxies for the same issuer.

Conflicts of Interest

The Chief Compliance Officer seeks to identify any conflicts that exist between the interests of the Sub-Advisor and its clients. This examination includes a review of the relationship of the Sub-Advisor and its affiliates with the issuer of each security and any affiliates of the issuer to determine if the issuer is a client of the Sub-Advisor or an affiliate of the Sub-Advisor or has some other relationship with the Sub-Advisor or a client of the Sub-Advisor.

If a material conflict exists, the Chief Compliance Officer determines whether voting is in the best interests of the client and whether it is appropriate to disclose the conflict to the affected clients. Except in the case of clients that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”), the Chief Compliance Officer may give the clients the opportunity to vote their proxies themselves. In the case of ERISA clients, if the Advisory Contract reserves to the client the authority to vote proxies when the Sub-Advisor determines that it has a material conflict that affects its best judgment as an ERISA fiduciary, the Sub-Advisor will give the ERISA client the opportunity to vote the proxies itself.

Disclosure

The Sub-Advisor discloses in the Brochure and brochure supplement that clients may contact the Chief Compliance Officer by electronic mail or telephone to obtain information on how the Sub-Advisor voted proxies for the accounts of particular clients and to request a copy of this policy and these procedures. If a client requests this information, the Chief Compliance Officer will prepare a written response to the client that lists, with respect to each voted proxy about which the client has inquired, the name of the issuer, the proposal voted upon, and how the Sub-Advisor voted the proxy.

Recordkeeping

The Chief Compliance Officer maintains files relating to the proxy-voting procedures in an easily accessible place. Records will be maintained and preserved for five years from the end of the fiscal year during which the last entry was made on a record, with records for the first two years kept in the offices of the Advisor. Records of the following are included:

   B- 1  

 

 

  This policy and these procedures and any amendments thereto;
  Each proxy statement that the Sub-Advisor receives, unless the Sub-Advisor has a third party retain the proxy statements, so long as the third party undertakes to provide a copy of a proxy statement promptly upon request;
  A record of each vote that the Sub-Advisor casts;
  A copy of any document the Sub-Advisor created that was material to making a decision how to vote proxies or that memorializes that decision; and
  A copy of each written client request for information on how the Sub-Advisor voted client proxies and a copy of any written response to any written or oral client request for information on how the Sub-Advisor voted client proxies.

 

   B- 2  

 

 

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) Agreement and 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 dated September 20, 2012, incorporated by reference to Registrant’s Registration Statement on Form N-1A, filed April 2, 2013
(c) Instruments Defining Rights of Security Holders – See relevant portions of Certificate of Trust, Declaration of Trust and Bylaws
(d) (1) Investment Advisory Agreement dated June 4, 2015, between ETFis Series Trust I and Virtus ETF Advisers LLC (“Advisory Agreement”), incorporated by reference to Registrant’s Post-Effective Amendment No. 48, filed June 8, 2015
  (2) Amendment to Schedule A to the Advisory Agreement dated November 10, 2016, filed herewith
  (3) 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
  (4) Sub-Advisory Agreement dated August 1, 2014, 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
  (5) Sub-Advisory Agreement dated December 1, 2014, 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
  (6) Sub-Advisory Agreement dated December 1, 2014, 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
  (7) Sub-Advisory Agreement dated May 4, 2015, 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
  (8) Sub-Advisory Agreement dated May 8, 2015, 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
  (9) Sub-Advisory Agreement dated August 5, 2015, 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
  (10) Sub-Advisory Agreement dated December 3, 2015, among ETFis Series Trust I, Virtus ETF Advisers LLC and Bramshill Investments, LLC, on behalf of AltShares Long/Short High Yield Fund, incorporated by reference to Registrant’s Post-Effective Amendment No. 78, filed December 8, 2015

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  (11) Sub-Advisory Agreement dated December 3, 2015, among ETFis Series Trust I, Virtus ETF Advisers LLC and Cumberland Advisors, Inc., on behalf of Cumberland Municipal Bond ETF, incorporated by reference to Registrant’s Post-Effective Amendment No. 79, filed December 8, 2015
  (12) Sub-Advisory Agreement dated August 16, 2016, among ETFis Series Trust I, Virtus ETF Advisers LLC and iSectors, LLC, on behalf of iSectors Post-MPT Growth ETF, incorporated by reference to Registrant’s Post-Effective Amendment No. 99, filed August 25, 2016
  (13) Sub-Advisory Agreement dated November 10, 2016, among ETFis Series Trust I, Virtus ETF Advisers LLC and Infrastructure Capital Advisors, LLC, on behalf of InfraCap REIT Preferred ETF, filed herewith
(e) (1) Distribution Agreement dated February 10, 2016, between ETFis Series Trust I and ETF Distributors LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 41, filed May 8, 2015
(f) Not Applicable
(g) (1) Custody Agreement dated December 6, 2013, between ETFis Series Trust I and The Bank of New York Mellon (“Custody Agreement”), incorporated by reference to Registrant’s Post-Effective Amendment No 58, filed August 21, 2015
  (2) Amendment dated October 8, 2015 to the Custody Agreement, incorporated by reference to Registrant’s Post-Effective Amendment No. 78, filed December 8, 2015
(h) (1) Fund Administration and Accounting Agreement dated December 6, 2013,between ETFis Series Trust I and The Bank of New York Mellon (“Fund Administration and Accounting Agreement”), 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, incorporated by reference to Registrant’s Post-Effective Amendment No. 70, filed October 16, 2015
  (3) Amendment dated October 8, 2015 to the Fund Administration and Accounting Agreement, incorporated by reference to Registrant’s Post-Effective Amendment No. 78, filed December 8, 2015
  (4) Transfer Agency and Service Agreement dated December 6, 2013, between ETFis Series Trust I and The Bank of New York Mellon (“Transfer Agency and Service Agreement”), 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, incorporated by reference to Registrant’s Post-Effective Amendment No. 70, filed October 16, 2015
  (6) Amendment dated October 8, 2015 to the Transfer Agency and Service Agreement, incorporated by reference to Registrant’s Post-Effective Amendment No. 78, filed December 8, 2015
  (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) Administrative Services Agreement dated August 6, 2013, between ETFis Series Trust I and Virtus ETF Solutions LLC (“Administrative Services Agreement”), incorporated by reference to Registrant’s Post-Effective Amendment No 41, filed May 8, 2015
  (9) First Amendment to the Administrative Services Agreement dated August 21, 2015, on behalf of Reaves Utilities ETF, incorporated by reference to Registrant’s Post-Effective Amendment No 58, filed August 21, 2015
  (10) Second Amendment to the Administrative Services Agreement dated September 18, 2015, 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

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  (11) Third Amendment to the Administrative Services Agreement dated October 16, 2015, on behalf of ActiveAlts Contrarian ETF, incorporated by reference to Registrant’s Post-Effective Amendment No. 70, filed October 16, 2015
  (12) Fourth Amendment to the Administrative Services Agreement dated December 8, 2015, on behalf of AltShares Long/Short High Yield Fund and Cumberland Municipal Bond ETF, incorporated by reference to Registrant’s Post-Effective Amendment No. 78, filed December 8, 2015
  (13) Fifth Amendment to the Administrative Services Agreement dated February 29, 2016, on behalf of iSectors Post-MPT Growth ETF, incorporated by reference to Registrant’s Post-Effective Amendment No. 90, filed March 1, 2016
  (14) Sixth Amendment to the Administrative Services Agreement dated July 8, 2016, on behalf of Telsey Millennial Consumer ETF, incorporated by reference to Registrant’s Post-Effective Amendment No. 91, filed July 8, 2016
  (15) Expense Limitation Agreement dated May 8, 2015, 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
  (16) Expense Limitation Agreement dated December 3, 2015, between ETFis Series Trust I, on behalf of AltShares Long/Short High Yield Fund, and Bramshill Investments, LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 78, filed December 8, 2015
  (17) Expense Limitation Agreement dated December 8, 2015, between ETFis Series Trust I, on behalf of Cumberland Municipal Bond ETF, and Virtus ETF Advisers LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 79, filed December 8, 2015
(i) (1) Legal Opinion of Kilpatrick Townsend & Stockton LLP, incorporated by reference to Registrant’s Pre-Effective Amendment No. 1, filed December 24, 2013
  (2) Legal Opinion of Kilpatrick Townsend & Stockton LLP with respect to Telsey Millennial Consumer ETF, incorporated by reference to Registrant’s Post-Effective Amendment No. 91, filed July 8, 2016
  (3) Legal Opinion of Stradley Ronon Stevens & Young, LLP with respect to InfraCap REIT Preferred ETF, filed herewith
(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 dated May 5, 2016, incorporated by reference to Registrant’s Post-Effective Amendment No. 91, filed July 8, 2016
(n) Not applicable
(o) Reserved
(p) (1) Code of Ethics of the ETFis Series Trust I, filed herewith
  (2) Code of Ethics of ETF Distributors LLC, Virtus ETF Advisers LLC, and Newfleet Asset Management, LLC, dated June 30, 2016, filed herewith

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  (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 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
  (7) Code of Ethics of Bramshill Investments, LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 78, filed December 8, 2015
  (8) Code of Ethics of Cumberland Advisors, Inc., incorporated by reference to Registrant’s Post-Effective Amendment No. 79, filed December 8, 2015
  (9) Code of Ethics of iSectors ® , LLC, incorporated by reference to Registrant’s Post-Effective Amendment No. 90, filed   March 1, 2016
(q) Powers of Attorney, incorporated by reference to Registrant’s Post-Effective Amendment No. 11, filed October 10, 2014

Item 29. Persons Controlled By or Under Common Control with Registrant

No person is controlled by or under common control with the Registrant.

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 an Agreement and 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 Agreement and 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 Agreement and Declaration of Trust

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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 Agreement and 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-Advisers

 

The description of the Adviser is found under the caption “Management of the Fund - Investment Adviser” in the Prospectus and under the caption “Management Services - 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 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.

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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 Bramshill Investments, LLC set forth in Bramshill investments’ Form ADV filed with the SEC (Reference No. 801-74578) and amended through the date hereof is incorporated herein by reference.

The information as to the directors and officers of Cumberland Advisors, Inc. set forth in Cumberland Advisors, Inc.’s Form ADV filed with the SEC (Reference No. 801-55344) and amended through the date hereof is incorporated herein by reference.

The information as to the directors and officers at iSectors ® , LLC, set forth in iSectors ® , LLC’s Form ADV filed with the SEC (Reference No. 801-69601) and amended through the date hereof is incorporated herein by reference.

Item 32. Principal Underwriters

 

(a) ETF Distributors LLC (the “ Distributor ”) acts as the distributor for each series of the Registrant and each series of Virtus ETF Trust II.

 

(b) The directors and officers of the Distributor are as follows:

 

Name* Positions with the Distributor Positions with Trust
Michael A. Angerthal Executive Vice President n/a
George R. Aylward Executive Vice President Trustee
Matthew Brown President n/a
Kevin J. Carr Assistant Secretary n/a
Mark S. Flynn General Counsel and Secretary n/a
Brinton Frith Senior Vice President Treasurer and Chief Financial Officer
David G. Hanley Treasurer n/a
David Martin Vice President and Chief Compliance Officer n/a
Mardelle Peña Executive Vice President n/a
William J. Smalley Executive Vice President President, Chief Executive Officer, Secretary

 

*     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, 16th Floor

New York, NY 10036

 

The Bank of New York Mellon

One Wall Street

New York, NY 10286

 

ETF Distributors LLC

1540 Broadway, 16th Floor

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

 

Bramshill Investments, LLC

411 Hackensack Avenue

Hackensack, NJ 07601

 

Cumberland Advisors, Inc.

One Sarasota Tower

2 N. Tamiami Trail, Suite 303

Sarasota, Florida 34236

 

iSectors ® , LLC

W6240 Communication Court

Appleton, WI 54914

 

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 (“1933 Act”) and the Investment Company Act of 1940, the Registrant 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 21 st day of November, 2016.

  ETFIS SERIES TRUST I
  (Registrant)
 
  By: /s/ William J. Smalley  
    William J. Smalley, President  

Pursuant to the requirements of the 1933 Act, 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)

November 21, 2016

 /s/ Brinton Frith

Brinton Frith

Treasurer

(Principal Financial Officer)

November 21, 2016

 /s/ Stephen G. O’Grady*

Stephen G. O’Grady

Trustee November 21, 2016

 /s/ James Simpson*

James Simpson

Trustee November 21, 2016

 /s/ Robert S. Tull*

Robert S. Tull

Trustee November 21, 2016

 

Myles J. Edwards

Trustee  

* By:   /s/ William J. Smalley

William J. Smalley, Attorney-in-fact

  November 21, 2016

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Exhibit Index

(d) (2) Amendment to Schedule A to the Advisory Agreement dated November 10, 2016
(d) (13) Sub-Advisory Agreement dated November 10, 2016, among ETFis Series Trust I, Virtus ETF Advisers LLC and Infrastructure Capital Advisors, LLC, on behalf of InfraCap REIT Preferred ETF
(i) (3) Legal Opinion of Stradley Ronon Stevens & Young, LLP with respect to InfraCap REIT Preferred ETF
(p) (1) Code of Ethics of the ETFis Series Trust I
(p) (2) Code of Ethics of ETF Distributors LLC, Virtus ETF Advisers LLC, and Newfleet Asset Management, LLC

 

Exhibit (d)(2)

 

ETFis SERIES TRUST I

AMENDMENT TO SCHEDULE A TO THE

ADVISORY AGREEMENT

 

THIS AMENDMENT (the “Amendment”) dated as of the 10 th day of November, 2016, 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, 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 the Advisory Agreement to replace Schedule A.

 

NOW, THEREFORE, the parties agree as follows:

 

1.      Schedule A to the Advisory Agreement is hereby deleted in its entirety and replaced with Schedule 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 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

William J. Smalley, President

 

By: /s/ Brinton W. Frith

Brinton W. Frith, President

 

 

SCHEDULE A

to the

ADVISORY AGREEMENT

between

ETFis SERIES TRUST I

and

VIRTUS ETF ADVISERS LLC

 

(As of November 10, 2016)

 

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
Tuttle Tactical Management Multi-Strategy Income ETF $ 15,000   0.075%
         
Newfleet Multi-Sector Unconstrained Bond ETF $ 0   0.700%
         
Reaves Utilities ETF $ 25,000   0.075%
         
Cumberland Municipal Bond ETF $ 0   0.245%
         
iSectors Post-MPT Growth ETF $ 25,000   0.125%
         
InfraCap REIT Preferred ETF* $ 25,000   0.45%

 

 

 

 

* The management fee for this Fund is structured as a “unified fee”, out of which the Adviser pays all of the ordinary operating expenses of the Fund, except for the fee payment under this Agreement; payments under any 12b-1 plan; taxes and other governmental fees; brokerage fees, commissions and other transaction expenses; interest and other costs of borrowing; litigation or arbitration expenses; acquired fund fees and expenses; and extraordinary or other non-routine expenses of the Fund; each of which is paid by the Fund. For the avoidance of doubt, the Trust, the Adviser and the Fund’s Sub-Adviser have not entered into a Sub-Advisory Agreement for the Fund that provides for a unified fee pursuant to which the Sub-Adviser is obligated to pay, or reimburse the Fund for the payment of, the Adviser’s fee, as described in the third sentence of the first paragraph of Section 9 of the Agreement.

 

 

Exhibit (d)(13)

 

INVESTMENT SUB-ADVISORY AGREEMENT

 

THIS AGREEMENT, made effective as of the 10th day of November, 2016, by and between ETFis Series Trust I (the “ Trust ”), on behalf of the InfraCap REIT Preferred ETF (the “ Fund ”), Virtus ETF Advisers LLC, a Delaware limited liability company (the “ Adviser ”) and Infrastructure Capital Advisors, LLC, a New York limited liability company (the “ Sub-Adviser ”).

 

W I T N E S S E T H:

 

WHEREAS, the Trust has been organized and operates as an investment company registered under the Investment Company Act of 1940, as amended (the “ 1940 Act ”) and engages in the business of investing and reinvesting its assets in securities and other investments; and

 

WHEREAS, each of Adviser and Sub-Adviser is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “ Advisers Act ”);

 

WHEREAS, Adviser has been selected as investment adviser for the Fund by the Trust; and

 

WHEREAS, Sub-Adviser has been selected as sub-adviser for the Fund by the Trust and the Adviser on the terms described herein;

 

NOW, THEREFORE, in consideration of the mutual covenants herein contained, the sufficiency of which is hereby acknowledged, and each of the parties hereto intending to be legally bound, it is agreed as follows:

 

1. Obligations of the Sub-Adviser

 

(a) Services . Subject to the oversight of the Adviser, the Sub-Adviser agrees to perform the following services (the “ Services ”) for the Trust:

 

(1) manage the investment and reinvestment of the assets of the Fund;

 

(2) determine, in its discretion, the securities to be purchased, retained or sold (and implement those decisions) with respect to the Fund;

 

(3) unless the Adviser or the Fund gives the Sub-Adviser written instructions to the contrary, vote proxies on behalf of the Fund;

 

(4) 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 Fund to file Form N-PX as required by Rule 30b1-4 under the Act;

 

(5) provide the Trust, the Fund and the Adviser with records concerning the Sub-Adviser’s activities under this Agreement that the Trust and the Fund are required to maintain;

 

(6) render regular reports to the Adviser and the Trust’s trustees and officers concerning the Sub-Adviser’s discharge of the foregoing responsibilities; and

 

(7) perform any and all other services commonly performed by sub-advisers to a registered investment company, as reasonably requested from time to time by the Trust or the Adviser.

 

(b) Manner of Discharging Services . The Sub-Adviser shall discharge the foregoing responsibilities subject to the oversight of the Adviser and the trustees and officers of the Trust and in compliance with (i) such policies as the trustees may from time to time establish; (ii) the Fund’s objectives, policies, and limitations as set forth in its prospectus and statement of additional information, as the same may be amended from time to time; and (iii) with all applicable laws and regulations (hereinafter collectively referred to as the “ Rules ”).

 

 

All Services to be furnished by the Sub-Adviser under this Agreement may be furnished through the medium of any directors, managers, officers or employees (or the equivalent) of the Sub-Adviser or through such other parties (including, without limitation and subject to approval by the Adviser and the Trust under the Rules, one or more third party sub-advisers) as the Sub-Adviser may determine (and, if applicable, engage) from time to time.

 

(c) Books and Records . All books and records prepared and maintained by the Sub-Adviser for the Trust and the Fund under this Agreement shall be the property of the Trust and the Fund and, upon request therefor, the Sub-Adviser shall surrender to the Trust and the Fund or the Adviser such of the books and records so requested; provided, however, that the Sub-Adviser may retain a copy of such books and records and may also make use of such records for its own reasonable track-record related purposes.

 

2. Fund Expenses

 

(a) Responsibility for Fund Fees and Expenses; Unified Fee Arrangement . During the term of this Agreement, the Sub-Adviser shall reimburse the Adviser for, or, at the direction of the Adviser, pay directly, all of the expenses of the Fund, such expenses including but not limited to: the Adviser’s Shortfall, if any (as defined on Exhibit A ); transfer agent fees; administrative fees and expenses; custodian fees; legal fees; accounting fees; any other expenses (including clerical expenses) of issue, sale, repurchase or redemption of shares; expenses of registering or qualifying shares for sale; transfer taxes; all expenses of preparing the Trust’s registration statement and prospectus for the Fund; and the cost of printing and delivering to shareholders prospectuses and reports; provided , however , that the Sub-Adviser will not be responsible under this paragraph for the Adviser’s advisory fee(other than the Adviser’s Shortfall, if any), payments under the Fund’s 12b-1 plan (if any), brokerage expenses, taxes, interest, litigation expenses, acquired fund fees and expenses and extraordinary expenses of the Fund. A summary of projected fees and expenses that the Sub-Adviser will be responsible for under this paragraph has been provided to the Sub-Adviser by the Trust and the Adviser. The Sub-Adviser acknowledges and agrees that the Adviser may pay any of the Fund’s fees and expenses directly, and that the fee payable to the Sub-Adviser pursuant to Section 4(a) hereunder shall be reduced and set off by the amount of such payment and/or by the amount of the Adviser’s Shortfall.

 

(b) Sub-Adviser Personnel and Expenses . The Sub-Adviser agrees, at its own expense or at the expense of one or more of its affiliates, to render the Services and to provide the office space, furnishings, equipment and personnel as may be reasonably required to perform the Services on the terms and for the compensation provided herein.

 

3. Custody and Brokerage Selection .

 

(a) Custodian . The Trust will establish and maintain an account with a custodian chosen by the Trust (the “ Custodian ”). The Trust, the Fund, and the Adviser agree to cooperate with the Sub-Adviser and the Custodian in taking all such action as may be necessary or advisable to establish the Sub-Adviser’s and the Custodian’s authority with respect to the management of the cash, securities, and other property in the account.

 

(b) Selecting Brokers; Best Execution . Subject to the oversight of the Adviser and the Rules, the Sub-Adviser is authorized to select brokers or dealers that will execute the purchases and sales of portfolio securities for the Fund. With respect to brokerage selection, the Sub-Adviser shall seek to obtain the best overall execution for Fund transactions, which is a combination of price, quality of execution and other factors. 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 Sub-Adviser will promptly communicate to the officers and the trustees of the Trust such information relating to portfolio transactions as they may reasonably request.

 

(c) Affiliated Brokerage . The Sub-Adviser is authorized to direct portfolio transactions to a broker that is an affiliated person of the Adviser, the Sub-Adviser or other sub-advisers to the Fund (if any), or the

2  

 

Fund in accordance with such standards and procedures as may be approved by the Trust in accordance with the Rules. Any transaction placed with an affiliated broker must (i) represent best execution, and (ii) may not be a principal transaction.

 

(d) Aggregated Transactions . The Sub-Adviser is authorized to aggregate or “bunch” purchase or sale orders for the Fund with orders for various other clients when it believes that such action is in the best interests of the Fund and all other such clients. In such an event, allocation of the securities purchased or sold will be made by the Sub-Adviser in accordance with the Sub-Adviser’s written policy.

 

4. Compensation of Sub-Adviser

 

(a) Sub-Advisory Fee . The Adviser shall pay to the Sub-Adviser from the advisory fee paid to the Adviser by the Fund a fee equal to the amount of the daily average net assets of such Fund shown on Exhibit B attached hereto (the “Sub-Adviser Fee”), payable on a monthly basis, subject to reduction and set off as described in Section 2(a). The Sub-Adviser shall look exclusively to the Adviser for payment of the Sub-Adviser’s fee.

 

(b) Effect of Termination . If this Agreement is terminated prior to the end of any calendar month, the Sub-Adviser’s fee shall be prorated for the portion of any month in which this Agreement is in effect according to the proportion which the number of calendar days during which the Agreement is in effect bears to the number of calendar days in the month, and shall be payable within 20 days after the date of termination.

 

5. Non-Exclusive Services . The services to be rendered by the Sub-Adviser to the Trust on behalf of the Fund under the provisions of this Agreement are not to be deemed to be exclusive, and the Sub-Adviser shall be free to render similar or different services to others so long as its ability to render the services provided for in this Agreement shall not be impaired thereby. Without limiting the foregoing, the Sub-Adviser may engage in other businesses, may render investment advisory services to other investment companies, or to any other corporation, association, firm, entity or individual, and may render other services to the Trust on behalf of the Fund or to any other investment company, corporation, association, firm, entity or individual.

 

6. Limits of Liability . The Sub-Adviser shall have no liability to the Fund, its shareholders or its creditors for any error of judgment, mistake of law, or for any loss arising out of any investment, or for any other act or omission in the performance of its obligations to the Fund not involving willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations and duties hereunder. It is agreed that the Sub-Adviser shall have no responsibility or liability for the accuracy or completeness of the Trust's registration statement under the Act or the Securities Act of 1933, except for information supplied by the Sub-Adviser for inclusion therein.

 

7. Term of Agreement

 

(a) Initial Term; Renewal . This Agreement shall be executed and become effective as of the date written below if approved by (i) the board of trustees of the Trust (the “ Board ”), including a majority of the Trustees who are not parties to this Agreement or interested persons of such party (the “ Independent Trustees ”), cast in person at a meeting called for the purpose of voting on such approval; and (ii) the vote of a majority of the outstanding voting securities of the Fund. It shall continue in effect for a period of two years and may be renewed annually thereafter only so long as such renewal and continuance is specifically approved as required by the 1940 Act (currently, at least annually by the Board or by vote of a majority of the outstanding voting securities of the Fund and only if the terms and the renewal hereof have been approved by the vote of a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on such approval).

 

(b) Amendments . No amendment to this Agreement shall be effective unless the terms thereof have been approved as required by the 1940 Act (currently, by the vote of a majority of the outstanding voting securities of a Fund unless such shareholder approval would not be required under applicable interpretations of the 1940 Act, and by the vote of a majority of Independent Trustees, cast in person at a meeting called for the purpose of voting on such approval).

 

(c) Termination . Notwithstanding the foregoing, this Agreement may be terminated by the Trust at any time, without the payment of a penalty, on sixty (60) days’ written notice to the Sub-Adviser of the Trust’s

3  

 

intention to do so, pursuant to action by the Board or pursuant to a vote of a majority of the outstanding voting securities of the Fund. The Sub-Adviser may terminate this Agreement at any time, without the payment of penalty, on sixty (60) days’ written notice to the Trust of its intention to do so. Upon termination of this Agreement, the obligations of all the parties hereunder shall cease and terminate as of the date of such termination, except for any obligation to respond for a breach of this Agreement committed prior to such termination, and except for the obligation of the Trust to pay to the Sub-Adviser the fee provided in Paragraph 4 hereof through the date of termination. This Agreement may also be terminated, without the payment of penalty, by any party upon breach by the other party of any representation, warranty or covenant which shall not have been cured within twenty (20) days of receipt of written notice of such breach. This Agreement shall automatically terminate in the event of its assignment unless the parties hereto, by agreement, obtain an exemption from the SEC from the provisions of the 1940 Act pertaining to the subject matter of this paragraph.

 

8. Representations, Warranties and Covenants

 

(a) Adviser . The Adviser hereby represents, warrants and covenants to the Sub-Adviser as follows: (i) the Adviser is a limited liability company duly organized and in good standing under the laws of the State of Delaware and is fully authorized to enter into this Agreement and carry out its duties and obligations hereunder; and (ii) the Adviser is registered as an investment adviser under the Advisers Act, and shall maintain such registration in effect at all times during the term of this Agreement.

(b) Sub-Adviser . The Sub-Adviser hereby represents, warrants and covenants to the Adviser and the Trust as follows: (i) the Sub-Adviser is a limited liability company duly organized and in good standing under the laws of the State of Delaware and is fully authorized to enter into this Agreement and carry out its duties and obligations hereunder; (ii) the Sub-Adviser is registered as an investment adviser under the Advisers Act, and shall maintain such registration in effect at all times during the term of this Agreement; (iii) the Sub-Adviser shall on an annual basis, promptly after its completion, provide the Trust and the Adviser with the Sub-Adviser’s written report demonstrating its compliance with, Rule 206(4)-7 under the Advisers Act; and (iv) the Sub-Adviser will provide accurate and complete information upon reasonable request from the Adviser or the Trust in connection with (y) the preparation of the registration statement or other documents for the Fund and (z) the compliance obligations of the Trust. In addition, the Sub-Adviser agrees to promptly provide the Trust with notice, as well as any related documentation reasonably requested by the Trust, upon:

 

(i)        any material adverse change in the Sub-Adviser’s business or financial condition;

 

(ii)      any material change in the Sub-Adviser’s ownership (including, without limitation, any change that would result in the assignment of this Agreement);

 

(iii)     any event or occurrence known to the Sub-Adviser that would make information previously provided by the Sub-Adviser to the Trust untrue;

 

(iv)    the Sub-Adviser’s receipt from any regulator or other governmental authority to which the Sub-Adviser is subject of any lawsuit, notice of any investigation or order (to the extent that such lawsuit, notice of investigation or order names the Sub-Adviser or its personnel); or

 

(v)      any final judgments or material settlements involving the Sub-Adviser and its provision of investment advisory services.

 

(c) Trust. The Trust hereby represents, warrants and covenants to the Sub-Adviser as follows: (i) the Trust has been duly organized as a statutory trust under the laws of the State of Delaware and is authorized to enter into this Agreement and carry out its terms; (ii) the Trust is registered as an investment company under the 1940 Act; (iii) shares of the Trust are registered for offer and sale (or will be before any such offer or sale) to the public under the 1933 Act; and (iv) such registrations will be kept in effect during the term of this Agreement.

 

9. The Name “InfraCap”. The Sub-Adviser grants to the Trust a sublicense to use the name “InfraCap” (the “Name”) as part of the name of any Fund. The foregoing authorization by the Sub-Adviser to the Trust to use the Name as part of the name of any Fund is not exclusive of the right of the Sub-Adviser itself to use, or to

4  

 

authorize others to use, the Name; the Trust acknowledges and agrees that, as between the Trust and the SubAdviser, the Sub-Adviser has the right to use, or authorize others to use, the Name. The Trust shall (1) only use the Name in a manner consistent with uses approved by the Sub-Adviser; (2) use its best efforts to maintain the quality of the services offered using the Name; and (3) adhere to such other specific quality control standards as the Sub-Adviser may from time to time promulgate. At the request of the Sub-Adviser, the Trust will (a) submit to Sub-Adviser representative samples of any promotional materials using the Name; and (b) change the name of any Fund within three months of its receipt of the Sub-Adviser’s request, or such other shorter time period as may be required under the terms of a settlement agreement or court order, so as to eliminate all reference to the Name and will not thereafter transact any business using the Name in the name of any Fund; provided, however, that the Trust may continue to use beyond such date any supplies of prospectuses, marketing materials and similar documents that the Trust had on the date of such name change in quantities not exceeding those historically produced and used in connection with such Fund.

 

10. Binding Agreement . This Agreement shall extend to and bind the heirs, executors, administrators and successors of the parties hereto.

 

11. Certain Definitions . For the purposes of this Agreement, the terms “vote of a majority of the outstanding voting securities” and “assignment” shall have the meaning defined in the 1940 Act and the rules and interpretations thereunder.

 

12. Governing Law . This Agreement shall be governed by New York law, excluding the laws on conflicts of laws. To the extent that the applicable laws of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the 1940 Act, the latter shall control, and nothing herein shall be construed in a manner inconsistent with the 1940 Act or any rule or order of the Commission thereunder. Any provision of this Agreement which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. In such case, the parties shall in good faith modify or substitute such provision consistent with the original intent of the parties.

 

13. Notices . Any notice required or permitted to be given by either party to the other shall be in writing and shall be deemed to have been given when sent by registered or certified mail, postage prepaid, return receipt requested, as follows:

 

Notice to the Adviser shall be sent to:

 

Virtus ETF Advisers LLC

1540 Broadway, Suite 1610
New York, NY  10036

Attention: Brinton W. Frith

Notice to the Trust shall be sent to:

 

ETFis Series Trust I

1540 Broadway, Suite 1610
New York, NY  10036

Attention: William J. Smalley

 

Notice to the Sub-Adviser shall be sent to:

 

Infrastructure Capital Advisors, LLC

1325 Avenue of the Americas, 28th Floor

New York, NY 10019

Attention: Edward F. Ryan

 

 

14. Miscellaneous

 

(a)            This Agreement constitutes the entire Agreement of the parties hereto.

 

(b)            This Agreement is executed by the Trust with respect to the Fund and the obligations hereunder are not binding upon any of the Trustees, officers or shareholders of the Fund individually, but are binding only upon the Fund to which such obligations pertain and the assets and property of the Fund.

 

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(c)            This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original agreement but such counterparts shall together constitute but one and the same instrument.

 

 

 

 

[Remainder of page intentionally left blank. Next page is signature page.]

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IN WITNESS WHEREOF , the parties hereto have caused this instrument to be executed in duplicate original by their officers thereunto duly authorized as of the day and year first written above.

 

ETFIS SERIES TRUST I   INFRASTRUCTURE CAPITAL
    ADVISORS, LLC
     
/s/ William J. Smalley   /s/ Edward F. Ryan
William J. Smalley, President   Edward F. Ryan, Chief Financial Officer
     
     
     
VIRTUS ETF ADVISERS LLC    
     
     
/s/ Brinton W. Frith    
Brinton W. Frith, Chief Executive Office    

 

 

 

 

Exhibit A

Adviser’s Shortfall

 

The Adviser shall be entitled to retain a payment equal to the greater of: (i) an annualized rate of 7.5 basis points (0.075%) of the average daily net asset value of the Fund, during the prior calendar month and (ii) a minimum annual Adviser’s fee of $25,000 per calendar year, payable (if applicable) at the end of each calendar year or the termination of this Agreement (the minimum fee shall be prorated for partial calendar years) (the “Adviser’s Retention”). To the extent that the Adviser’s Retention for any month (or calendar year, with respect to the minimum fee) is less than the net advisory fee actually retained by the Adviser for such period after payment by the Adviser of any of the Fund’s expenses for such period and the Sub-Adviser Fee as set forth in Exhibit B (such difference, the “Adviser’s Shortfall”), then the Sub-Adviser will waive its fee and/or reimburse the Adviser in an aggregate amount equal to the Adviser’s Shortfall.

 

 

Exhibit B

 

Sub-Adviser’s Fee

 

The Adviser shall pay to the Sub-Adviser each month the Sub-Adviser Fee, equal to an annualized rate of 37.5 basis points (0.375%) of the daily average net value of the Fund during the prior calendar month, subject to reduction and set off as described in Section 2(a). Upon any termination of this Agreement on a day other than the last day of the month the fee for the period from the beginning of the month in which termination occurs to the date of termination shall be prorated according to the proportion which such period bears to the full month.

 

 

 

Exhibit (i)(3)

Stradley Ronon Stevens & Young, LLP
Suite 2600
2005 Market Street
Philadelphia, PA 19103-7018
Telephone 215.564.8000
Fax 215.564.8120
www.stradley.com

 

 

November 21, 2016

 

Board of Trustees

ETFis Series Trust I

1540 Broadway
New York, NY 10036

Re: Post-Effective Amendment No. 100 to the Registration
Statement of ETFis Series Trust I

 

Ladies and Gentlemen:

We have acted as counsel to ETFis Series Trust I, a statutory trust organized under Delaware law (the “Trust”), in connection with the issuance and sale by the Trust of its shares of beneficial interest, no par value (the “Shares”), of the InfraCap REIT Preferred ETF series of the Trust (the “Fund”).

This opinion is furnished in accordance with the requirements of Item 28(i) of Form N-1A under the Investment Company Act of 1940 (the “Investment Company Act”) and the Securities Act of 1933 (the “Securities Act”).

We have examined the Certificate of Trust of the Trust, the Agreement and Declaration of Trust of the Trust (the “Declaration”), the Bylaws of the Trust, certain resolutions adopted by the Board of Trustees of the Trust relating to the creation, authorization, issuance and sale of the Shares, and a Certificate of Good Standing dated November 14, 2016 from the State of Delaware.

We have also examined the Registration Statement on Form N-1A filed by the Trust, on behalf of the Fund (the “Registration Statement”) under the Investment Company Act and the Securities Act, all as amended to date, as well as other items we deem material to this opinion.

In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as facsimile, electronic, certified, conformed or photostatic copies and the authenticity of the originals of such copies. As to any facts material to the opinions expressed herein that we did not independently establish or verify, we have relied upon statements and representations of officers and other representatives of the Trust and others.

Philadelphia | Washington | New York | Chicago

     
     

Board of Trustees
ETFis Series Trust I
November 21, 2016
Page 2

 

This opinion is based exclusively on the provisions of the Delaware Statutory Trust Act governing the issuance of the Shares of the Fund and the reported case law thereunder, and does not extend to the securities or “blue sky” laws of the State of Delaware or other States.

We have assumed the following for purposes of this opinion:

1.     The Shares will be issued in accordance with the Trust’s Declaration and Bylaws, each as amended to date, and resolutions of the Trust’s Board of Trustees relating to the creation, authorization, issuance and sale of the Shares.

2.      The Shares will be issued against payment therefor as described in the Prospectus and the Statement of Additional Information relating thereto included in the Registration Statement.

Based upon and subject to the foregoing, we are of the opinion that, when the Registration Statement becomes effective under the Investment Company Act and Securities Act, the Shares will, when sold in accordance with the Registration Statement, be validly issued, fully paid and non-assessable.

We hereby consent to the use of this opinion as an exhibit to the Registration Statement of the Trust and we further consent to reference in the Registration Statement of the Trust to the fact that this opinion concerning the legality of the issue has been rendered by us.

  Very truly yours,
  STRADLEY RONON STEVENS & YOUNG, LLP
     
     
  By:  /s/ Michael D. Mabry
    Michael D. Mabry, a Partner
     

Exhibit (p)(1)

 

CODE OF ETHICS

 

 

Each Fund 1 has adopted this Code of Ethics pursuant to Rule 17j-1 of the Investment Company Act of 1940 (the “1940 Act”) and it applies to a Fund’s Access Persons. Individuals that may meet the definition of Access Person below may not be required to comply with this particular Code of Ethics if such individuals are subject to another code of ethics that satisfies Rule 17j-1 of the 1940 Act. For example, the Fund’s investment advisers and service providers that are subsidiaries of Virtus Investment Partners, Inc. (“Virtus”) and affiliates of one another have adopted separate codes of ethics (the “Affiliate Codes”) that are substantially similar to this Code of Ethics, satisfy Rule 17j-1 and apply to individuals who would otherwise be covered by this Code of Ethics. In addition, the Fund’s subadvisers, if any, that are not Virtus affiliates have adopted their own codes of ethics.

 

This Code of Ethics is administered by the Virtus Compliance Department on behalf of the Funds together with the Affiliate Codes.

 

 

Standard of Business Conduct

 

The Fund acknowledges the integrity and good faith of all of the employees, officers, trustees or directors of the Fund and of those entities providing services on behalf of the Fund. The Fund recognizes, however, that the knowledge of present or future portfolio transactions or the power to influence portfolio transactions, if held by such individuals, could place them in a position where their personal interests might conflict with the interests of the Fund if they were to trade in securities eligible for investment by the Fund.

 

In view of the foregoing and of the provisions of Rule 17j-1 under the 1940 Act, the Fund has adopted this Code of Ethics to specify and prohibit certain types of transactions deemed to create conflicts of interest (or at least the potential for or the appearance of such conflicts) and to establish related reporting requirements and enforcement procedures.

 

When persons covered by the terms of this Code of Ethics engage in personal securities transactions, they must adhere to the following general principles as well as to the Code’s specific provisions:

 

(a) At all times, the interests of Fund shareholders must be paramount;

 

(b) Personal transactions must be conducted consistent with this Code of Ethics in a manner that avoids or mitigates any actual or potential conflict of interest;

1 Registered Investment Companies (“Funds”) include ETFis Series Trust I, Virtus ETF Trust II, Virtus Alternative Solutions Trust, Virtus Equity Trust, Virtus Insight Trust, Virtus Opportunities Trust, Virtus Retirement Trust, Virtus Global Multi-Sector Income Fund, Virtus Total Return Fund, Virtus Variable Insurance Trust, Duff & Phelps Select Energy MLP Fund, Inc., The Zweig Fund, Inc., and The Zweig Total Return Fund, Inc.

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(c) No inappropriate advantage should be taken of any position of trust or responsibility;

 

(d) Non-public information regarding security holdings in any Fund must remain confidential;

 

(e) Compliance with all applicable federal securities laws must be maintained; and

 

(f) Access Persons are required to adhere to the standards of business conduct in the Virtus Code of Conduct.

 

 

Definitions of Terms Used in this Code

 

“Access Person” of a Fund means any Advisory Person of a Fund. In addition, all of the Fund’s directors, officers, and general partners are presumed to be Access Persons of the Fund. Access Persons also includes any director, officer or general partner of ETF Distributors LLC, VP Distributors, LLC and Virtus Fund Services, LLC who, in the ordinary course of business, makes, participates in or obtains information regarding the purchase or sale of Covered Securities by the Fund for which ETF Distributors, VP Distributors or Virtus Fund Services acts as service provider, distributor or principal underwriter, or whose functions or duties in the ordinary course of business relate to the making of any recommendation to the Fund regarding the purchase or sale of Covered Securities.

 

“Advisory Person” of a Fund means:

 

(a)  Any director, officer, general partner or employee of the Fund or its investment adviser (or of any company in a control relationship to the Fund or its investment adviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding, the purchase or sale of Covered Securities by a Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales;

 

(b)  Any natural person in a control relationship to the Fund or its investment adviser who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of Covered Securities by the Fund; and

 

(c)  Any Investment Personnel.

 

“Affiliated Open-End Mutual Fund” means any open-end mutual fund as to which a Virtus affiliate serves as the investment adviser or principal underwriter.

 

“Affiliated person” of another person means (A) any person directly or indirectly owning, controlling, or holding with power to vote, 5 per centum or more of the outstanding voting securities of such other person; (B) any person 5 per centum or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other

2

 

person; (C) any person directly or indirectly controlling, controlled by, or under common control with, such other person; (D) any officer, director, partner, copartner, or employee of such other person; (E) if such other person is an investment company, any investment adviser thereof or any member of an advisory board thereof; and (F) if such other person is an unincorporated investment company not having a board of directors, the depositor thereof.

 

“Being considered for Purchase or Sale” means a security for which a recommendation to purchase or sell has been made and communicated; and with respect to the Advisory Person making the recommendation, when such person seriously considers making such a recommendation.

 

“Beneficial Ownership” shall be interpreted in the same manner as it would be under Rule 16a-1(a)(2) in determining whether a person is the beneficial owner of a security for purposes of Section 16 of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules and regulations there under. Generally, Beneficial Ownership means having or sharing, directly or indirectly through any contract, arrangement, understanding, relationship, or otherwise, a direct or indirect “pecuniary interest” in the security. For the purposes hereof,

 

(a)  “Pecuniary interest” means the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the security.

 

(b)  “Indirect pecuniary interest” includes, but is not limited to:

 

(i) securities held by members of the person’s “immediate family” (this means any child, child-in-law, stepchild, grandchild, parent, parent-in-law, stepparent, grandparent, spouse, partner, sibling, or sibling-in-law and includes adoptive relationships) sharing the same household (which ownership interest may be rebutted);

 

(ii) a general partner’s proportionate interest in portfolio securities held by a general or limited partnership;

 

(iii) a person’s right to dividends that is separated or separable from the underlying securities (otherwise, a right to dividends alone will not constitute a pecuniary interest in securities);

 

(iv) a person’s interest in securities held by a trust;

 

(v) a person’s right to acquire securities through the exercise or conversion of any derivative security, whether or not presently exercisable; and

 

(vi) a performance-related fee, other than an asset based fee, received by any broker, dealer, bank, insurance company, investment company, investment manager, trustee, or person or entity performing a similar function, with certain exceptions (see Rule 16a-1(a)(2) of the Exchange Act).

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“Crowdfunding Offering” means an offering that is exempt from registration under the Securities Act of 1933 pursuant to Section 4(a)(6).

 

“Chief Compliance Officer” or “CCO” refers to the person appointed by the Boards of the Funds pursuant to the provisions of Rule 38a-1.

 

“Control” shall have the same meaning as that set forth in Section 2(a)(9) of the 1940 Act.

 

“Covered Security” means a security as defined in Section 2(a)(36) of the 1940 Act, except securities that are direct obligations of the Government of the United States, bankers’ acceptances, bank certificates of deposit, commercial paper, high quality short-term debt instruments, including repurchase agreements and shares of traditional, unaffiliated registered open-end investment companies.

 

“Disinterested Trustee or Director” means a Member of the Board of Trustees or Board of Directors of a Fund who is not an “interested person” of the Fund within the meaning of Section 2(a)(19) of the 1940 Act.

 

“Immediate Family Member” any Access Person’s spouse or domestic partner who shares the same household and any relative by blood, adoption or marriage living in the Access Person’s household. This definition includes children (including financially dependent children away at school), stepchildren, grandchildren, parents, stepparents, grandparents, siblings and parents, children, or siblings-in-law.

 

“Initial Public Offering” or “IPO” means an offering of securities registered under the Securities Act of 1933, as amended, the issuer of which, immediately before the registration, was not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act.

 

“Investment Personnel” shall mean:

 

(a)  any employee of the Fund or its adviser (or of any company in a control relationship to the Fund or its adviser) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Fund; and

 

(b)  any natural person who controls the Fund or its adviser and who obtains information concerning recommendations made to the Fund regarding the purchase or sale of securities by the Fund. Investment Personnel includes any Portfolio Manager or other investment person, such as an analyst or trader, who provides information and advice to a Portfolio Manager or assists in the execution of the investment decisions.

 

“Limited Offering” or “Private Placement” means an offering that is exempt from registration under the Securities Act of 1933 pursuant to Section 4(a)(2) or Section 4(a)(5), or pursuant to Rule 504, Rule 505, or Rule 506 thereunder.

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“Managed Portfolio” shall mean those Funds, individually and collectively, for which the Portfolio Manager makes buy and sell decisions. For those Funds operating as series companies, Managed Portfolio shall include only the series for which the Portfolio Manager serves as the Portfolio Manager.

 

“Personal Brokerage Account” refers to any account (including, without limitation, a custody account, safekeeping account, and an account maintained by an entity that may act in a brokerage or a principal capacity) in which securities may be traded or custodied, and in which an Access Person has any Beneficial Ownership, and any such account of an Immediate Family member, through which an Access Person may hold or acquire Reportable Securities, even though the account currently holds only non-Reportable Securities (such as Unaffiliated Open-end Mutual Funds). To the extent that the Virtus 401(k) plan and potentially 401(k) plans of an Access Person’s prior employer(s) or 401(k) plans of Immediate Family Members have the capacity to invest in Affiliated Open-end Mutual Funds and/or other Reportable Securities, such accounts are considered “Personal Brokerage Accounts.” Furthermore, Individual Retirement Accounts (“IRA’s”) that are constructed within a brokerage account capable of transacting in Reportable Securities are also considered “Personal Brokerage Accounts.”

 

The meaning of “Personal Brokerage Account” does not include the following: Open-end mutual funds held directly with the sponsor in an account that is not capable of transacting in Reportable Securities; 401(k) accounts that may only hold Unaffiliated Open-end Mutual Funds; other accounts that cannot transact in Reportable Securities as determined by the Virtus Compliance Department; direct purchase accounts such as “DRIP” plans and Section 529 Plans that are not managed, distributed marketed or underwritten by a Virtus affiliate.

 

“Portfolio Manager” means the person or portfolio management team entrusted to make or participate in the making of the buy and sell decisions for a Fund, or series thereof; as disclosed in the Fund(s) prospectus.

 

“Purchase or sale of a Reportable Security” includes, among other things, the writing of an option to purchase or sell a security or the purchase or sale of a security that is exchangeable for or convertible into a security.

 

“Reportable Security” means a security as defined in Section 2(a)(36) of the 1940 Act and includes: common stocks, preferred stocks, stock options (put, call and straddles, etc.), debt securities, privileges on any security or on any group or index of securities (including any interest therein or based on the value thereof) and derivative instruments; ETFs, UIT ETFs, closed end funds, stock indices vehicles (such as the Standard & Poor’s Composite Stock Indices, SPDR S&P 500, SPDR S&P MidCap 400, “iShares”, etc.); Affiliated Open-end Mutual Funds and municipal securities.

 

“Reportable Security” does not include direct obligations of the Government of the United States; money market instruments; bankers’ acceptances; bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments; shares of money market funds; shares of Unaffiliated Open-end Mutual Funds; and units of a unit investment trust if the unit investment trust is invested exclusively in Unaffiliated Open-end Mutual Funds. Note:

5

 

This exception extends only to open-end funds registered in the U.S.; therefore, transactions and holdings in offshore funds are reportable.

 

“Security Held or to be Acquired” by a Fund means:

 

(i)  any Covered Security which, within the most recent 15 days:
(A)  is or has been held by the Fund; or
(B)  is being or has been considered by the Fund or any of its investment advisers for purchase by the Fund; and

 

(ii)  any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security.

 

“Unaffiliated Open-End Mutual Fund” means any open-end mutual fund as to which a Virtus affiliate does not serve as the investment adviser or principal underwriter for the fund.

 

 

Unlawful Actions

 

It is unlawful for any Affiliated person of any Fund or any of its advisers, in connection with the purchase or sale, directly or indirectly, by the person of a Security Held or to be Acquired by any Fund:

 

(a)  to employ any device, scheme or artifice to defraud any Fund;

 

(b)  to make any untrue statement of a material fact to any Fund or omit to state a material fact necessary in order to make the statements made to any Fund, in light of the circumstances under which they are made, not misleading;

 

(c)  to engage in any act, practice or course of business that operates or would operate as a fraud or deceit on any Fund;

 

(d)  to engage in any manipulative practice with respect to any Fund; or

 

(e)  to divulge or act upon any material, non-public information, as such term is defined under relevant securities laws.

 

 

Disclosure of Personal Brokerage Accounts

 

All Access Persons must disclose their Personal Brokerage Accounts to their respective Compliance Department. It is each Access Person’s responsibility to notify their respective Compliance Department of all Personal Brokerage Accounts and to direct the broker to provide their Compliance Department with brokerage transaction confirmations and account statements (and verify that it has been done). Access Persons do not need to disclose the existence of their Virtus-Fidelity 401(k) account, however, any other Virtus Fidelity account holding securities,

6

 

options or restricted stock of Virtus must be disclosed. 401(k) plans of an Access Person’s prior employer(s) or 401(k) plans of Immediate Family Members must be disclosed if such accounts have the capacity to invest in Affiliated Open-End Mutual Funds and/or other Reportable Securities.

 

 

Prohibited Activities and Restrictions

 

Initial Public Offering (“IPO”) Rule : No Access Person may directly or indirectly acquire beneficial ownership in any securities in an Initial Public Offering (including IPOs offered through the Internet), except with the prior written approval of the Virtus Compliance Department. No FINRA registered person may participate in an IPO pursuant to FINRA Rule 5130.

 

Crowdfunding Offering/Limited Offering/Private Placement Rule : No Access Person may directly or indirectly acquire beneficial ownership in any securities in a Crowdfunding Offering, Limited Offering or Private Placement except with the prior written approval of the Virtus Compliance Department.

 

Preclearance Rule : No Advisory Person may directly or indirectly acquire or dispose of beneficial ownership in a Reportable Security unless such transaction has been precleared by the Virtus Compliance Department. Preclearance is valid through the next business day to the close of the U.S. Market following the approval. An order not executed within that time must be resubmitted for pre-clearance approval. Advisory Persons must wait for approval before placing the order with their broker.

 

Exceptions : The following transactions do not require preclearance:

 

(a) Purchases or sales of up to and including 500 shares per month of Reportable Securities of an issuer ranked in the Standard & Poor’s 500 Composite Stock Index (S&P 500) at the time of the transaction. An S&P 500 constituent list is updated quarterly and available on the Virtus intranet website. A copy is also available for review in the Compliance Department.

 

(b) Affiliated Open-end Mutual Funds. (However such funds are subject to Quarterly Transaction and Annual Holdings reporting requirements.)

 

(c) Purchases or sales which are non-volitional on the part of either the Advisory Person or the Fund.

 

(d) Purchase orders of Reportable Securities sent directly to the issuer via mail (other than in connection with a Private Placement or Limited Offering) or sales of such securities that are redeemed directly by the issuer via mail.

7

 

(e) Purchases of shares of Reportable Securities necessary to establish an automatic investment or dividend reinvestment plan, as well as any subsequent purchases and sales pursuant to any such plan.

 

(f) Purchases or sales effected in any account over which the Advisory Person has no direct or indirect influence or control in the reasonable estimation of the Virtus Compliance Department. This exemption will also apply to Personal Brokerage Accounts for which a third party (e.g. broker or financial adviser) makes all investment decisions on behalf of the Advisory Person. The discretionary arrangement must be documented to the Virtus Compliance Department.

 

(g) Purchases or sales of Reportable Securities not eligible for purchase or sale by the Fund(s).

 

(h) Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired.

 

(i) Purchase or sale of securities issued under an employee stock purchase or incentive program unless otherwise restricted.

 

Open Order Rule : No Advisory Person may directly or indirectly acquire or dispose of Beneficial Ownership in any Reportable Security which requires preclearance on a day during which a Fund has a pending order for that security of the same type (i.e.. buy or sell) as the proposed personal trade, until the Fund’s order is executed or withdrawn.

 

Black-Out Rule : Investment Personnel may not directly or indirectly acquire or dispose of Beneficial Ownership in a Reportable Security within seven calendar days before and after the portfolio(s) associated with the Investment Personnel’s assigned duties trades in that security. The seven day period is exclusive of the execution date. The Black-Out Rule applies to transactions in securities that are required to be precleared.

 

Holding Period Rule : Except as provided herein, Advisory Persons must hold all Reportable Securities, including options, for no less than sixty (60) days, regardless of whether or not the purchase was exempt from preclearance under this Code. Generally, a first in, first out (“FIFO”) accounting methodology will be applied for determining compliance with this holding rule.

 

This Holding Period Rule does not apply to the following Reportable Securities and transactions:

· Affiliated Open-End Mutual Funds;
· Sales of Virtus shares after restricted stock units vest;
· Sales of Virtus shares after exercising employee stock options; or
· Sales effected in any account over which the Advisory Person has no direct or indirect influence or control.

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Gifts and Entertainment : Access Persons may not give or receive gifts or entertainment that may be construed to have an influence on business transactions conducted by the Fund(s) or its investment adviser. Moreover, pursuant to Section 17(e) of the 1940 Act, gifts and entertainment may not be received by fund advisory personnel as compensation for the purchase or sale of any Fund property.

 

Gifts include any items of value, including sports paraphernalia or equipment, wine or food baskets, and gift certificates for good or services. Tickets to events are also considered gifts if the provider of such tickets does not attend the event. Gifts to or from any person or entity doing business with or seeking to do business with the Fund(s) or its investment adviser must not exceed $100 per person per year.

 

Entertainment includes events that are attended by the provider and recipient, and the $100 limit that applies to gifts does not apply to entertainment. Nonetheless, entertainment must be neither so frequent nor so extensive as to raise any question of impropriety.

 

All gifts and entertainment received or given must be reported to the Virtus Compliance Department.

 

Service as Director : No Advisory Person shall serve on the board of directors of a publicly traded company without prior authorization by the President or the Chief Compliance Officer of the Fund. If board service is authorized, such Advisory Person shall have no role in making investment decisions with respect to the publicly traded company.

 

Excessive Trading Rule: Access Persons shall comply with any mutual funds disruptive trading or market timing policies.

 

 

Reporting Requirements

 

The Code of Ethics, and any amendments thereto, shall be provided to every Access Person. Access Persons will provide written acknowledgement of receipt.

 

Duplicate Trade Confirmations and Personal Brokerage Account Statements : All Access Persons (other than Disinterested Trustees or Directors) shall direct their brokers to supply, at the same time that they are sent to the Access Person, a copy of the confirmation for each Reportable Securities trade in a Personal Brokerage Account, and a copy, at least quarterly, of an account statement for each Personal Brokerage Account to the Virtus Compliance Department (an electronic feed from the broker will satisfy these requirements). Access to duplicate confirmations and account statements will be restricted to those persons assigned to perform review functions, and all materials will be kept confidential except as required by law.

 

Quarterly Transaction Reports : Access Persons shall report to the Fund the information (specified further below) with respect to transactions in any Reportable Security in which such Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership in the Reportable Security.

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Access Persons shall not be required to make a report with respect to transactions effected for any account over which that person lacks any direct or indirect influence or control in the reasonable estimation of the Virtus Compliance Department which may make reasonable periodic inquiries and request reasonable assurances in making such determination.

 

Every Quarterly Transaction Report shall be made not later than 15 days after the end of the calendar quarter, and shall include all transactions in Reportable Securities effected during the calendar quarter being reported on. Quarterly Transaction Reports shall contain such information as the Virtus Compliance Department may request and shall be reported in such manner (e.g., utilizing an on-line service) as the Virtus Compliance Department directs.

 

Initial and Annual Holdings Reports : Each Access Person shall submit an Initial Holdings and Annual Holdings Report listing all personal Reportable Securities holdings to the Virtus Compliance Department, upon commencement of service and annually thereafter (the Initial Holdings Report and the Annual Holdings Report , respectively) in the form and content requested by the Virtus Compliance Department. The information on the Initial Holdings Report must be current as of a date not more than 45 days prior to the date the individual becomes an Access Person. An Initial Holdings Report and certification must be submitted to the designated Compliance Officer no later than 10 days after becoming an Access Person. The Annual Holdings Report information shall be as of December 31 of the prior year. Access Persons shall submit the Annual Holdings Report and Certification to the designated Compliance Officer by January 31 of each year. Access Persons shall include on their Annual Holdings Report any holdings in Affiliated Open-end Mutual Funds, including those held in the Access Person’s Virtus-Fidelity 401(k) plan.

 

 

Disinterested Trustees and Directors

 

A Disinterested Trustee or Director of the Fund who would be considered an Access Person solely by reason of being a trustee or director of the Fund shall not be subject to the pre-clearance or reporting requirements applicable to Access Persons or the IPO Rule or Limited Offering/Private Placement Rule set forth in this Code of Ethics, except that such Trustee or Director shall report any transaction where the Trustee or Director knew, or, in the ordinary course of fulfilling his or her official duties as a Fund Trustee or Director, should have known, that during the 15-day period immediately before or after the Trustee’s/Director’s transaction in a Covered Security, the Fund purchased or sold the Covered Security or the Fund or any of its investment advisers or subadvisers considered purchasing or selling the Covered Security. Any report made pursuant to the Reporting Requirements of this Code of Ethics may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect Beneficial Ownership in the security to which the report relates.

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401(k) Plans

 

Disclosure of Personal Brokerage Accounts: Access Persons are not required to disclose the existence of their Virtus-Fidelity 401(k) plan, but Access Persons must disclose any other 401(k) account if the account can transact in Affiliated Open-end Mutual Funds and/or other Reportable Securities.

 

Preclearance Rule: Advisory Persons are not required to preclear transactions in Affiliated Open-end Mutual Funds (e.g., transferring amounts from one fund to another) or contributions in the form of payroll deductions. Advisory Persons are required to preclear transactions in Reportable Securities that are not exceptions to the Preclearance Rule (e.g., the sale of previous employer’s stock).

 

Duplicate Trade Confirmations and Personal Brokerage Account Statements: If an Access Person has a 401(k) account from a previous employer that can transact in Affiliated Open-end Mutual Funds and/or other Reportable Securities, the Access Person shall direct his or her broker to supply, at the same time that they are sent to the Access Person, a copy of the confirmation for each personal Reportable Securities trade and a copy, at least quarterly, of an account statement to the Virtus Compliance Department for each 401(k) account other than the Virtus-Fidelity 401(k) plan.

 

Quarterly Transactions Reports: For 401(k) accounts other than the Virtus-Fidelity 401(k) plan, Access Persons are required to submit a Quarterly Transaction Report for transactions in Reportable Securities (e.g., Affiliated Open-end Mutual Funds or a previous employer’s stock).

 

Initial and Annual Holdings Reports: Access Persons are required to report all holdings in Reportable Securities, including holdings in the Virtus-Fidelity 401(k) plan (e.g., Affiliated Open-end Mutual Funds).

 

 

Administration

 

A. At least annually, the Fund’s Chief Compliance Officer shall obtain certification that the Fund, each investment adviser and principal underwriter, as applicable, has adopted procedures reasonably necessary to prevent Access Persons from violating this Code of Ethics or another code of ethics that satisfies Rule 17j-1 of the 1940 Act.

 

B. Any Access Person shall immediately report any potential violation of this Code of which he or she becomes aware to the Fund CCO or the Virtus Compliance Department

 

C. The Virtus Compliance Department will maintain a list of all Access Persons who are required to make reports under this Code of Ethics, and shall inform those Access Persons of their reporting obligations. The Virtus Compliance Department shall promptly notify any Access Person when any report has not been filed on a timely basis.

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Recordkeeping Requirements

 

Documents and records required to be made and maintained in connection with this Code of Ethics shall be made and maintained in accordance with the Fund’s Policy Regarding Books and Records.

 

 

Sanctions

 

Upon discovering a violation of this Code, the Virtus Compliance Department may impose such sanctions as it deems appropriate, including, among other things, a letter of censure, suspension of personal trading privileges for a period of time, or suspension or termination of employment; and the Virtus Compliance Department shall advise the Fund CCO accordingly.

 

 

Exceptions

 

The Virtus Compliance Department may, in consultation with the Fund’s Chief Legal Officer and/or Fund CCO as appropriate, grant written exceptions to provisions of the Code based on equitable considerations. The exceptions may be granted to individuals or classes of individuals with respect to particular transactions, classes of transactions or all transactions, and may apply to past as well as future transactions, provided, however, that no exception will be granted where the exceptions would result in a violation of Rule 17j-1. To the extent any such exception relates to an Access Person of a Fund, the exception will be reported to the Fund CCO for reporting to the Fund’s Board at its next regularly scheduled meeting.

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CERTIFICATION:

 

 

 

By my signature below, I certify that I have received, read, and understood the foregoing policies of the Virtus Funds Code of Ethics, and will comply in all respects with such policies.

 

 

 

 

 

     
Signature   Date

 

Please print or type name: ___________________________________

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Exhibit (p)(2)

 

CODE OF ETHICS

 

Amended and Restated June 30, 2016

 

 

 

 

 

 

A message from George Aylward, Chief Executive Officer:

 

At Virtus Investment Partners, our goal is to be a distinctive and trusted provider of asset management products and services that is profitable, growing and consistently delivers value for our clients and shareholders. In this highly competitive industry we need to distinguish Virtus through our products, our service approach, and our values in managing our company.

 

Foremost among those values is the expectation I have that each member of the Virtus team adhere to the highest standards of legal and ethical conduct in all of our business dealings.

 

By demonstrating Virtus is a company that our clients can trust with their assets, a company that our distribution partners respect, and a company that all of our stakeholders think of with admiration, we can accomplish our business goals.

 

George Aylward

Chief Executive Officer

Virtus Investment Partners, Inc.

 

 

1. Introduction

 

This Code of Ethics (the “Code”) has been adopted individually by the entities listed in Schedule A, referred to herein (individually) as the “Firm”. This Code is administered by each Firm’s designated Chief Compliance Officer or their delegate as a separate program. Each Firm may attach to this Code an appendix describing any unique provisions the Firm has made to provide additional requirements or modify requirements set forth by this Code.

 

2. Standard of Business Conduct

 

A. Statement of Ethical Principles

 

The Firm holds its Supervised Persons to a high standard of integrity and business practices. In serving their respective shareholders and clients, the Firm strives to avoid conflicts of interest or the appearance of conflicts of interest related to the personal trading activities of its Supervised Persons and the securities transactions in any managed account.

 

The Firm acknowledges its confidence in the integrity and good faith of all of its Supervised Persons. The Firm recognizes that the knowledge of present or future portfolio transactions or the power to influence portfolio transactions, if held by such individuals, could place them in a position where their personal interests might conflict with those of the managed account, if they were to trade in securities eligible for investment by the managed account.

 

In view of the foregoing and of the provisions of Sections 204-2 and 204A-1 under the Investment Advisers Act of 1940 (Advisers Act), as amended, and Rule 17j-1 of the Investment Company Act, as amended, the Firm has adopted this Code to specify and prohibit certain types of transactions deemed to create conflicts of interest or the potential for or appearance of such a conflict, and to establish reporting requirements and enforcement procedures. Because the Firm cannot foresee all possible situations, the Firm ultimately relies upon the integrity and judgment of its personnel, in addition to requirements set forth by this Code. This Code presents a framework against which all Supervised Persons should seek to measure their conduct. When Supervised Persons covered by this Code engage in personal securities transactions, they must adhere to the following general principles and the Code’s specific provisions:

 

a) At all times, the interests of the Firm and its Clients must be paramount;
   
b) Personal transactions must be conducted consistent with this Code in a manner that avoids any actual or potential conflict of interest;

 

 

c) No inappropriate advantage should be taken of any position of trust and responsibility;
   
d) Information about the identity of security holdings and financial circumstances of Clients is confidential;
   
e) Ensure that the investment management and overall business of the Firm complies with the policies of the Firm, Virtus Investment Partners (Virtus) and applicable U.S. federal and state securities laws and regulations; and
   
f) Supervised Persons are required to adhere to the standards of business conduct in the Virtus Code of Conduct.

 

B. Unlawful Actions

 

It is unlawful for any Supervised Person, in connection with the purchase or sale, directly or indirectly, by them of a security held or to be held by any Client account to:

 

a) Employ any device, scheme or artifice to defraud any Client;
   
b) Make any untrue statement of a material fact to any Client or omit to state a material fact necessary in order to make the statements made to any Client, in light of the circumstances under which they are made, not misleading;
   
c) Engage in any act, practice or course of business that operates or would operate as a fraud or deceit on any Client; or to engage in any manipulative practice with respect to any Client; and
   
d) Divulge or act upon any material, non-public information, as is defined under relevant securities laws.

 

3. Definitions

 

"Access Person" means all directors, officers, general partners, partners of the Firm and Advisory Persons of Firm’s Advisers (or other persons occupying a similar status or performing similar functions). In addition, Access Person means all Supervised Persons, who:

 

Are involved in making securities recommendations to Clients; or
   
Have access to nonpublic information regarding the following:

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o Any Clients’ purchase or sale of securities, or recommendation to purchase or sell such securities; or
   
o Information regarding the portfolio holdings of any fund the Firm or its control affiliates manages.

 

“Advisers Act” means the Investment Advisers Act of 1940, as amended.

 

"Advisory Person" means (i) any Access Person of the Firm or of any company in a control relationship to the Firm, who, in connection with their regular functions or duties, makes, participates in or obtains information regarding the purchase or sale of a security by the Firm for a Client, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) any natural person in a control relationship to the Firm who obtains information concerning recommendations made to the Client with regard to the purchase or sale of a security.

 

"Affiliated Officer" means (i) any corporate officer or director of the Firm who is not a resident at the Firm’s business location; and (ii) is subject to the provisions of an affiliate’s code of ethics for personal trading.

 

“Affiliated Open-End Mutual Fund” means any open-end mutual fund to which the Firm or its control affiliate(s) serve as the investment adviser or principal underwriter. Currently, this means all open-end (non-exchange traded) funds managed by Virtus or its affiliates. A chart of such funds is available at Schedule B and on the Virtus Compliance Intranet site. Schedule B may be updated from time to time without being considered an amendment to this Code of Ethics. See also the definition of “Unaffiliated Open-End Mutual Fund” below.

 

“Being considered for Purchase or Sale” means when a security for which a recommendation to purchase or sell has been made and communicated; and with respect to the Advisory Person making the recommendation, when such person seriously considers making such a recommendation.

 

"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 (the Exchange Act) in determining whether a person is the beneficial owner of a security for purposes of Section 16 of the Exchange Act and the rules and regulations there under. It includes ownership by any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in a security. For purposes hereof,

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“Pecuniary Interest” means the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the security.

 

“Indirect Pecuniary Interest” includes, but is not limited to:

 

o Securities held by Immediate Family Members sharing the same household;
   
o A general partner’s proportionate interest in portfolio securities held by a general or limited partnership;
   
o A person’s right to dividends that is separated or separable from the underlying securities (otherwise, a right to dividends alone will not constitute a pecuniary interest in securities);
   
o A person’s interest in securities held by a trust;
   
o A person’s right to acquire securities through the exercise or conversion of any derivative security, whether or not presently exercisable; and
   
o A performance-related fee, other than an asset based fee, received by any broker, dealer, bank, insurance company, investment company, investment manager, trustee, or person or entity performing a similar function, with certain exceptions (see Rule 16a-1(a)(2)of the Exchange Act).

 

An Access Person is presumed to have Beneficial Ownership in, and so an obligation to report, the securities held by his or her Immediate Family Members. Access Persons should note that the Firm’s policies and procedures with respect to personal securities transactions also apply to transactions by a spouse, domestic partner, child or other Immediate Family Member residing in the same household. See definition of “Immediate Family Member” below.

 

“Chief Compliance Officer” or “CCO” refers to the person appointed by the Firm pursuant to the provisions of Section 206(4)-7 of the Advisers Act.

 

"Client" means each and every investment company, or series thereof, or other account managed by the Firm.

 

"Control" shall have the same meaning as that in Section 2(a) (9) of the Investment Company Act.

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“Covered Associate” is a term used in the Firm’s Pay to Play Policy and Procedures and is incorporated by reference.

 

"Firm" means each of the entities listed in Schedule A who have each adopted this Code and administer it under their respective individual compliance programs managed by their designated Chief Compliance Officer or his/her delegate.

 

“Immediate Family Member” shall have the following meaning: With respect to personal securities reporting requirements, terms such as “Employee”, “Personal Brokerage Account”, “Third Party Managed Account”, “Supervised Person” and “Access Person” are defined to include any Supervised Person’s or Access Person’s spouse or domestic partner who share their household and any relative by blood, adoption or marriage living in the Supervised or Access Person’s household. This definition includes children (including financially dependent children away at school), stepchildren, grandchildren, parents, stepparents, grandparents, siblings and parents-children-or siblings-in-law.

 

"Initial Public Offering" or “IPO” means an offering of securities registered under the Securities Act of 1933 as amended, the issuer of which, immediately before the registration, was not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act.

 

Investment Company Act” means the Investment Company Act of 1940, as amended.

 

"Managed Fund or Portfolio" shall mean those Clients, individually and collectively, for whom the Portfolio Manager makes buy and sell decisions.

 

“Personal Brokerage Account” refers to any account (including, without limitation, a custody account, safekeeping account and an account maintained by an entity that may act in a brokerage or a principal capacity) in which securities may be traded or held in custody, and in which a Supervised Person or Access Person has any Beneficial Ownership, and any such account of an Immediate Family Member. The meaning of “Personal Brokerage Account” includes accounts in which a Supervised Person or Access Person may hold or acquire Reportable Securities, even though the account currently holds only non-Reportable Securities (such as unaffiliated open-end mutual funds). To the extent that the Virtus 401(k) plan and potentially 401(k) plans of a Supervised Person or Access Person’s prior employer(s) or 401(k) plans of Immediate Family Members have the capacity to invest in Affiliated Open- end Mutual Funds and/or other Reportable Securities, such accounts are considered “Personal Brokerage Accounts”. Furthermore, Individual Retirement Accounts (i.e.: “IRAs”) that are constructed within a brokerage

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account capable of transacting in Reportable Securities are also considered “Personal Brokerage Accounts”.

 

The meaning of “Personal Brokerage Account” does not include the following: open-end mutual funds held directly with the sponsor in an account that is not capable of transacting in Reportable Securities; 401(k) accounts that may only hold non-affiliated open-end mutual funds; Third Party Managed Accounts; other accounts that cannot transact in Reportable Securities as determined by the Compliance Department; and direct purchase accounts such as “DRIP” plans.

 

“Portfolio Manager” or "Fund Portfolio Manager" is an Advisory Person (or one of the Advisory Persons) entrusted with the day-to-day management of the Fund’s portfolio.

 

"Private Placement" or "Limited Offering" means an offering that is exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) or Section 4(6) thereof, or pursuant to Rule 504, Rule 505 or Rule 506 there under and securities offered and sold under “Regulation Crowdfunding” under Section 4(a)(6) of the Securities Act of 1933.

 

"Purchase or sale of a Reportable Security" includes, among other things, the writing of an option to purchase or sell a security, or the purchase or sale of a security, that is exchangeable for or convertible into, a security that is held or to be acquired for a Client.

 

"Reportable Security" shall have the meaning set forth in Section 2(a)(36) of the Investment Company Act, and Rule 204A-1 of the Advisers Act as amended, and includes common stocks, preferred stocks, stock options (put, call and straddle), debt securities, privilege on any security or on any group or index of securities (including any interest therein or based on the value thereof) and derivative instruments, ETFs, UIT ETFs, closed-end funds, other well-known stock indices vehicles, such as the Standard & Poor’s 500 Composite Stock Indices (such as but not limited to SPDR S&P 500, SPDR S&P MidCap 400, “iShares”, etc.); affiliated open-end mutual funds and municipal securities.

 

The meaning of “Reportable Security” shall not include transactions and holdings in direct obligations of the Government of the United States; money market instruments; bankers’ acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments; shares of money market funds; transactions and holdings in shares of non-affiliated open-end mutual funds; and transactions in units of a unit investment trust if the unit investment trust is invested exclusively in unaffiliated open-end mutual funds. Note: This exception extends only to

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open end funds registered in the U.S.; therefore, transactions and holdings in offshore funds ARE reportable.

 

"Supervised Person" means any director, officer, and partner of the Firm (or other person occupying a similar status or performing similar functions); an employee of the Firm; and any other person who provides advice on behalf of the Firm and is subject to the Firm’s supervision and control. To affect such policies as required by this Code, the Firm’s CCO shall further classify certain Supervised Persons as an “Access Person”, or “Advisory Person”.

 

“Third Party Managed Account” is an account where the Supervised Person or Access person has no direct or indirect influence or control. A third-party, such as a broker or financial advisor, makes all investment decisions on behalf of the Supervised Person or Access Person and the Supervised Person or Access Person does not discuss any specific transactions for the account with the third-party manager. In particular, the Supervised Person or Access person and any other persons named on the account are not permitted to engage in the following activities:

 

Suggest or direct that the individual advising the account make any particular purchase or sale of securities.
   
Consult with the individual advising the account as to the particular allocation of specific securities to be made in the account(s).

 

“Unaffiliated Open-End Mutual Fund” means any open-end (non-exchange traded) mutual fund not falling within the definition of “Affiliated Open-End Mutual Fund” defined above, i.e., any open-end mutual fund to which the Firm or its control affiliate(s) do not serve as the investment adviser or principal underwriter for the fund.

 

4.   Disclosure of Personal Brokerage Accounts 1

 

All Access Persons must disclose their Personal Brokerage Accounts and Third Party Managed Accounts to their respective Compliance Department. Each Access Person’s responsibility is to notify their respective Compliance Department of all Personal Brokerage Accounts and to direct the broker to provide their Compliance Department with brokerage transaction confirmations and account statements (and verify that it has been done). Access Persons cannot assume that the broker-dealer will automatically arrange for this information to be set up and forwarded correctly. Access Persons do not need to disclose the existence of their Virtus-Fidelity 401(k) account, however any other Virtus Fidelity account holding securities, options or restricted stock of Virtus must be disclosed. 401(k) plans of an Access

 

 

1 Certain Supervised Persons are subject to the requirements of Section 4. Please see the Appendix following this Code.

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Person’s prior employer(s) or 401(k) plans of Immediate Family Members must be disclosed if such accounts have the capacity to invest in Affiliated Open-end Mutual Funds and/or other Reportable Securities.

 

5. Prohibited Activities for Access Persons

 

A. Initial Public Offering (“IPO”) Rule: No Access Person may directly or indirectly acquire beneficial ownership in any securities in an IPO, without the prior written approval of the CCO. This also applies to IPO’s offered through the internet. No FINRA registered person or Portfolio Manager may participate in an IPO pursuant to FINRA Rule 5130.
   
B. Private Placement/ Limited Offering/ Crowdfunding Rule: No Access Person may directly or indirectly acquire beneficial ownership in any securities in a Private Placement, Limited Offering, or Crowdfunding without the prior written approval of the CCO. The approved purchase should be disclosed to the Client if they are considering that issuer’s securities for purchase or sale.
   
C. Preclearance Rule: No Access Person may directly or indirectly acquire or dispose of beneficial ownership in a Reportable Security unless the transaction has been pre-cleared by the Compliance Department. Preclearance is valid through the next business day at the close of the U.S. market following the approval. An order not executed within that time must be re-submitted for preclearance approval. Access Persons must wait for approval before placing the order with their broker .

 

Exceptions: The following Reportable Securities transactions do not require preclearance:

 

a) Purchases or sales of up to and including 500 shares per calendar month (in total for all of the Access Person’s Personal Brokerage Accounts) of Reportable Securities in any issuer ranked in the S&P 500 at the time of the transaction. An S&P 500 holding list is updated quarterly and available on the Virtus intranet website. A copy is also available for review in your Firm’s Compliance Department. The Compliance Department monitors de minimis trading for patterns of abuse. If a pattern of abuse is determined to have occurred, the Compliance Department reserves the right to suspend or cancel the ability of an Access Person to conduct de minimis transactions.
   
b) Transactions in Affiliated Open-End Mutual Funds.
   
c) Purchase orders of Reportable Securities sent directly to the issuer via mail (other than in connection with a Private Placement or Limited

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Offering) or sales of such securities that are redeemed directly by the issuer via mail.

 

d) Purchases or sales of Reportable Securities effected in any account over which the Access Person has no direct or indirect influence or control, including Third Party Managed Accounts.
   
e) Purchases or sales of Reportable Securities (i) not eligible for purchase or sale by the Client; or (ii) specified from time to time by the Firm’s Directors, subject to rules the Firm’s Directors shall specify.
   
f) Purchases of shares of Reportable Securities necessary to establish an automatic investment or dividend reinvestment plan, as well as any subsequent purchases and sales pursuant to any such automatic investment or dividend reinvestment plan.
   
g) Purchases of Reportable Securities effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent the rights were acquired from the issuer, and sales of such rights so acquired.
   
h) Purchases or sales of Reportable Securities issued under an employee stock purchase or incentive program unless otherwise restricted.
   
i) Non-volitional transactions (such as stock splits, dividends, corporate actions, etc.).

 

Note: The foregoing are exceptions to the Preclearance Rule only; other provisions of this Code may apply.

 

The Firm’s CCO or other designated compliance personnel may deny approval of any transaction requiring preclearance under this Pre-clearance Rule, even if nominally permitted under the Code, if believed that denial is necessary for the protection of the Client or the Firm.

 

D. Open Order Rule: No Access Person may directly or indirectly acquire or dispose of the Beneficial Ownership in any Reportable Security that requires preclearance (i.e., is not exempt from preclearance) when a Client has a pending buy or sell for that security of the same type until the Client's order is executed or withdrawn.
   
E. Blackout Rule: Portfolio Managers and Advisory Persons may not directly or indirectly acquire or dispose of Beneficial Ownership in a Reportable Security within seven calendar days before and after the portfolio(s) associated with the Portfolio Manager’s and Advisory Person’s assigned duties trades in that

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security. The seven-day period is exclusive of the execution date. The Blackout Rule applies only to transactions in securities that are required to be precleared.

 

F. Holding Period Rule: Access Persons must hold all Reportable Securities, (see the definition of “Reportable Security” in Section 3 of this Code of Ethics), for no less than sixty (60) days, whether or not the purchase was an exempt transaction under any other provision of Section 5 except for the following:
· Affiliated Open-End Mutual Funds;
· Sales of shares of Virtus Investment Partners, Inc. common stock received through vesting of Restricted Stock Units (“RSUs”), grants;
· Striking VRTS call options and selling the shares, where such options have been provided as grants; or
· Third Party Managed Accounts to which the Holding Period Rule does not apply.

 

Generally, a first-in first-out (“FIFO”) accounting methodology will be applied for determining compliance with this holding period rule.

 

G. Gifts and Entertainment: Supervised Persons may not give or receive gifts or payments that may be construed to have an influence on business transactions conducted by the Firm. Consequently, gifts to or from any person or entity doing business with, or seeking to do business with Virtus or its affiliates, must not exceed $100 per person per year. Gifts include any items of value, including sports paraphernalia or equipment, wine or food baskets and gift certificates for goods or services. Tickets to events are considered gifts if the provider does not attend the event. The $100 limit that applies to gifts does not apply to “entertainment” (when the provider attends the event). Nonetheless, entertainment must be neither so frequent nor so extensive as to raise any question of impropriety. The CCO or other designated personnel will maintain records of all gifts and payments of $100 or more per person and all entertainment. ALL gifts and entertainment received or given must be promptly reported to the Compliance Department using FTT (or Sales Page for certain designated individuals).
   
H. Serving on Boards of Directors: No Advisory Person shall serve on the board of directors of a publicly traded company without prior authorization from Virtus Investment Partners Inc. Counsel or the Firm’s CCO. If authorized, the Advisory Person shall have no role in making investment decisions with respect to the publicly traded company.
   
I. Excessive Trading Rule: No Portfolio Manager shall engage in excessive trading or market timing activities with respect to any mutual fund regardless of whether or not the mutual fund is managed by that Firm/Sub-advisor or any

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affiliated adviser/sub-advisor. Market timing is defined as a purchase and redemption, regardless of size, in and out of the same mutual fund within any sixty (60) day period. The foregoing restrictions shall not apply to Portfolio Managers investing in mutual funds through asset allocation programs, automatic reinvestment programs, Third Party Managed Accounts and any other non-volitional investment vehicles.

 

J. Material, Non-public Information: No Supervised Person shall divulge or act upon any material, non-public information as defined under relevant

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securities laws. For more information, refer to the Firm’s Insider Trading Policy and Procedures .

 

K. Pay to Play Rule: The Securities and Exchange Commission (“SEC”) adopted Rule 206(4)-5 (“Rule” or “Pay to Play Rule”) as a means to curtail the ability of investment advisers to use political contributions to influence state and municipal officials responsible for the hiring of investment advisers, otherwise known as “pay to play” practices. Under the Rule, political contributions made by advisers or their Covered Associates may result in serious limitations on advisers’ ability to receive compensation for the management of certain public funds. The Rule does not prohibit political contributions but prohibits the adviser from receiving compensation from the government plan. The Rule does not preempt state and local pay to play or other laws restricting political contributions which may be more restrictive.

 

Virtus Pay to Play Policy prohibits political contributions to state or local government officials or candidates by Covered Associates in excess of the contribution limits established by the Rule. This prohibition includes contributions made by a Covered Associate’s spouse or family members living in the same household. The Policy also applies to certain contributions to Political Action Committees (“PACs”) and state and local political parties or committees. All contributions to state and local government officials and candidates, state and local political parties and committees and PACs must be reported in accordance with the Policy. Please refer to Virtus Pay to Play Policy for further information.

 

6.   Reporting & Compliance Procedures 2

 

A. Duplicate Trade Confirmations and Personal Brokerage Account Statements: For all Personal Brokerage Accounts and Third Party Managed Accounts, all Access Persons shall direct their brokers to supply, at the same time that they are sent to the Access Person, a copy of the confirmation for each personal Reportable Securities trade, and a copy, at least quarterly, of an account statement for each account to their respective Compliance Department (an electronic feed from the broker will satisfy these requirements). If the broker does not provide an account statement, then it is the employee’s responsibility to provide pertinent information such as a Quarterly Transaction Report to their respective Compliance Department. Access to duplicate confirmations and account statements will be restricted to those persons assigned to perform review functions, and all materials will be kept confidential except as required by law.

 

 

2 Certain Supervised Persons are subject to the requirements of Sections 6A, 6B and 6C. Please see the Appendix following this Code.

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B. Quarterly Transactions Reports: Access Persons shall report to the Firm the information (specified further below) with respect to transactions in any Reportable Security in which the Access Person has, or by reason of that transaction acquires, any direct or indirect Beneficial Ownership in the Reportable Security.

 

Access Person’s Quarterly Transaction Reports shall contain the following information:

 

(i) All transactions in Reportable Securities effected during the calendar quarter being reported on;
   
(ii) The date of the transaction in the Reportable Security, the title and number of shares of equity securities; or, the maturity date, principal amount and interest rate of debt securities, of each Reportable Security involved; and as applicable, the exchange ticker symbol or cusip number;
   
(iii) The type of transaction (i.e., purchase, sale, or any other type of acquisition or disposition);
   
(iv) The price of the Reportable Security at which the transaction was effected; (v) The name of the broker, dealer or bank with or through whom the transaction was effected; and
   
(vi) The date the report is submitted.

 

To the extent that the Access Person certified that the Compliance Department is receiving duplicate statements of Personal Brokerage Accounts, and Third Party Managed Accounts, the above disclosures are considered to have been made for transactions in Reportable Securities occurring in those accounts.

 

The Firm’s CCO may grant an extension to the 15-day quarterly reporting deadline for cases of hardship, illness, system unavailability or other extenuating circumstances provided that such extension does not exceed the 30-day limit required by Rule 204A-1 of the Investment Advisers Act of 1940, as amended. Such extension will not be considered a waiver of this Code of Ethics.

 

C. Initial and Annual Holdings Reports: Each Access Person shall submit an Initial Holdings and Annual Holdings Report listing all personal Reportable Securities holdings to their Firm’s Compliance Department upon the commencement of service and annually thereafter (the Initial Holdings Report and the Annual Holdings Report , respectively). The information on the Initial

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Holdings Report must be current as of a date not more than 45 days prior to the date the individual becomes an Access Person. An Initial Holdings Report and certification must be submitted to their Firm’s Compliance Departments no later than 10 days after becoming an Access Person. The Annual Holdings Report holdings information shall be as of December 31 of the prior year. Access Persons shall submit the Annual Holdings Report and certification to their Firm’s Compliance Department by January 31 of each year. Access Persons shall include on their Annual Holdings Report any holdings in Affiliated Open-end Mutual Funds including those held in the Access Person’s Virtus-Fidelity 401(k) plan. In addition, Access Persons need to disclose any Third Party Managed Accounts in the Initial and Annual Holdings Reports.

 

Every Initial Holdings Report and Annual Holdings Report required pursuant to this section shall contain the following information for Reportable Securities:

 

(i) The title, type and number of shares of equity securities; and/or the maturity date, principal amount and interest rate of debt securities; and as applicable the exchange ticker symbol or CUSIP number, number of shares, and principal amount of each Reportable Security in which the Access Person has any direct or indirect Beneficial Ownership;
   
(ii) The name of any broker, dealer or bank with which the Access Person maintains an account in which any securities are held for the Access Person’s direct or indirect Beneficial Ownership;
   
(iii) The date the Access Person submits the report; and
   
(iv) For Initial Holdings Reports and Annual Holdings Reports, a certification by the Supervised Person that he or she has read, understood, has complied, and shall continue to comply with the requirements of this Code and the Firm’s Insider Trading Policy and Procedures.

 

D. Any report made under this Section 6 may contain a statement that the report shall not be construed as an admission by the person making such reports that he or she has any direct or indirect Beneficial Ownership in the security to which the report relates.
   
E. The Firm’s CCO shall submit an annual report to the Fund Board of Directors/Trustee for any fund advised or sub-advised by the Firm that summarizes the current Code procedures, identifies any violations requiring significant remedial action, and recommends appropriate changes to the Code, if any.

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F. Any Supervised Person must promptly report possible violations of the Code to the Firm’s CCO or other designee (including but not limited to potential conflicts of interest) when they suspect, in good faith, that a violation may have occurred or is reasonably likely to occur. If a matter implicates the Firm’s CCO or other designee, notice of a violation should be reported to the Virtus Investment Partners Inc. CCO. Failure to do so is in itself a violation of this Code. No retaliation or retribution of any kind will be taken against any Supervised Person who, in good faith, reports a suspected violation of this Code. To the extent possible under the circumstances, all information will be kept confidential.
   
G. The Firm’s Compliance Department will review all reports and other information submitted under Section 6. This review will include comparisons with trading records of Client accounts as are necessary or appropriate in determining whether there have been any violations of the Code.
   
H. The Firm’s Compliance Personnel will maintain a list of all Supervised Persons, Access Persons, Advisory Persons, and Portfolio Managers who are required to make reports under the Code, and shall inform such individuals of their reporting obligations and if any requirement of this Code has not been complied with.
   
I. The Virtus Investment Partners Inc. Corporate Compliance Department (or at its direction, another Firm CCO) is responsible for administration of all aspects of this Code with respect to those individuals designated as Affiliated Officers by providing written affirmation that the provisions of this Code were upheld and that these Affiliated Officers were or were not in compliance with the Code and/or providing any required records to the applicable Firm (or other affiliate) CCO.
   
J. The Firm shall provide a copy of the Code and any amendments to all Supervised Persons and obtain their written acknowledgement of receipt.
   
K. Exceptions to reporting requirements: The Firm’s CCO may predetermine certain accounts are not within the Access Person’s direct or indirect control and provide exemption (in writing) to any and all of the requirements of the Code of Ethics.

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7.   401(k) Plans and the Requirements of the Code 3

 

A. Disclosure of Personal Brokerage Accounts: Access Persons are not required to disclose the existence of their Virtus-Fidelity 401(k) plan, but Access Persons must disclose any other 401(k) account if the account can transact in Affiliated Open-end Mutual Funds and/or other Reportable Securities.
   
B. Preclearance Rule: Access Persons are not required to preclear transactions in Affiliated Open-end Mutual Funds (e.g., transferring amounts from one fund to another) or contributions in the form of payroll deductions. Access Persons are required to preclear transactions in Reportable Securities that are not exceptions to the Preclearance Rule of Section 5 (e.g., the sale of previous employer’s stock).
   
C. Duplicate Trade Confirmations and Personal Brokerage Account Statements: If an Access Person has a 401(k) account from a previous employer that can transact in Affiliated Open-end Mutual Funds and/or other Reportable Securities, the Access Person shall direct her broker to supply, at the same time that they are sent to the Access Person, a copy of the confirmation for each personal Reportable Securities trade and a copy, at least quarterly, of an account statement to the Access Person’s Compliance Department for each 401(k) account other than the Virtus-Fidelity 401(k) plan.
   
D. Quarterly Transactions Reports: If the Compliance Department is not receiving copies of broker trade confirmations or account statements, Access Persons are required to submit a Quarterly Transaction Report for transactions in Reportable Securities (e.g., Affiliated Open-end Mutual Funds or a previous employer’s stock) for 401(k) accounts other than the Virtus-Fidelity 401(k) plan.
   
E. Initial and Annual Holdings Reports: Access Persons are required to report all holdings in Reportable Securities, including holdings in the Virtus-Fidelity 401(k) plan (e.g., Affiliated Open-end Mutual Funds).

 

 

 

 

 

3 Certain Supervised Persons are subject to the requirements of Sections 7A and 7C – 7E. Please see the Appendix following this Code.

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8. Pay to Play Rule Reporting

 

A. Covered Associates shall refer to Virtus Pay to Play Policy for reporting requirements.

 

9. Recordkeeping Requirements

 

A. The Firm will maintain in an easily accessible place, the following records:

 

a) A copy of any Code for the organization that is in effect, or at any time within the past five (5) calendar years was in effect;
   
b) A record of any Code violation or action taken as a result of the violation that occurred during the current year and the past five (5) calendar years;
   
c) A record of all written acknowledgments as required by Rule 204A-1 of the Advisers Act for each Supervised Person who is currently, or within the past five (5) calendar years was, a Supervised Person;
   
d) A copy of each report made by an Access Person during the current year and the past five (5) calendar years as required by Rule 17j-1 of the Investment Company Act and/or Rule 204A-1 of the Advisers Act and Sections 6B and 6C of this Code, including any information provided in lieu of the reports under Section 6B and 6C above;
   
e) A list of all persons, currently or within the past five (5) calendar years who are or were required to make reports pursuant to Rule 17j-1 of the Investment Company Act and/or Rule 204A-1 of the Advisers Act and Sections 6B and 6C above, or who were responsible for reviewing those reports, together with an appropriate description of their title or employment;
   
f) A copy of each report made by the Firm’s CCO pursuant to Section 6E above during the current year and the past five (5) calendar years;
   
g) A record of any decision made during the current year and the past five (5) calendar years by the Firm’s CCO, and the reasons supporting each decision, to grant prior approval pursuant to Sections 5A and 5B above for acquisition by an Access Person of securities in an IPO or a Private Placement transaction;
   
h) As required by enhanced recordkeeping requirements under Rule 204-2 of the Adviser Act, records related to political contributions made by the Firm and its Covered Associates are specified in Virtus Pay to Play Policy.

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9. Sanctions

 

Upon discovering a violation of this Code, the Parent of the Firm or if applicable the Funds Board of Directors, besides any remedial action already taken by the respective adviser or related entity, may impose sanctions as it deems appropriate (see under separate cover the currently imposed sanctions), including, among other things, a letter of censure or suspension or termination of employment, or suspension of personal trading privileges for such period as it may deem appropriate.

 

Any profits realized by a Portfolio Manager or Advisory Person on a personal trade in violation of Section 5E (Blackout Rule) must be disgorged. In addition, the Firm’s CCO may direct any Supervised Person to disgorge any profit realized (or loss avoided) on a personal trade in violation of this Code.

 

10. Exceptions

 

The Firm’s CCO may grant written exceptions (aka “waivers”) to provisions of the Code based on equitable considerations. The exceptions may be granted to individuals or classes of individuals with respect to particular transactions, classes of transactions or all transactions, and may apply to past as well as future transactions.

 

However, no exception will be granted when it would result in a violation of Section 204-2 of the Advisers Act. Exceptions granted are reported to the Directors of the Firm, as well as the Boards of any managed Fund. Extensions to reporting deadlines that are not exceptions or waivers are reported only to the Virtus Corporate CCO.

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Appendix

 

Additional requirements for Euclid Advisors LLC, Newfleet Asset Management, LLC, Virtus Alternative Investment Advisers, Inc., Virtus Investment Advisers, Inc., VP Distributors, LLC and Zweig Advisers LLC are as follows:

 

All Supervised Persons of the above Firms are subject to the same requirements as Access Persons as indicated in Section 4. “Disclosure of Personal Brokerage Accounts”, Section 6. “Reporting & Compliance Requirements” (Sections: 6A, 6B, and 6C) and Section 7. “401(k) Accounts and the Requirements of the Code” (Sections: 7A and 7C – 7E). Specifically the term “Access Person(s)” as used in those sections is hereby replaced with the term “Access Person(s) and Supervised Person(s)”.

 

Additional requirements for Kayne Anderson Rudnick Investment Management, LLC (“KAR”) are as follows:

 

All KAR employees are considered Access Persons. KAR employees are permitted to buy or sell exchange traded funds (“ETFs”) without receiving pre-clearance from Compliance. However, all ETFs are considered Reportable Securities and are subject to the applicable rules in Section 5 of this Code of Ethics. ETF transactions should be included on the quarterly personal trade certifications.
   
KAR employees follow the policy on gifts and entertainment discussed below. However, any KAR employee who is registered with VP Distributors, LLC will follow the gift and entertainment policy in Section 5 (g) of this Code of Ethics.

 

o A conflict of interest occurs when the personal interests of employees interfere or could potentially interfere with their responsibilities to the firm and its clients. Supervised Persons should not accept inappropriate gifts, favors, entertainment, special accommodations, or other things of material value that could influence their decision-making or make them feel beholden to a person or firm. Supervised Persons should not offer gifts, favors, entertainment, or other things of value that could be viewed as overly generous or aimed at influencing decision- making or making a client feel beholden to the firm or the supervised person.

 

o Gifts: No Supervised Person may receive any gift, services, or other things of more than a $175.00 value per year from any person or entity that does business with or on behalf of KAR, without pre-approval by the Chief Compliance Officer or Chief Operating Officer. No Supervised Person may give or offer any gift of more than a $175.00 value per year to existing clients, prospective clients, or any entity that does business with or on behalf of the adviser without pre-approval by the Chief Compliance Officer or the Chief Operating Officer. Compliance will maintain a Gift Log of all gifts over $175 given or received from by any KAR employees, which are not broker/dealer related. The Gift Log will include:

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employee name, type of gift, dollar amount of gift, and sender of the gift. In addition, Compliance will maintain a Gift Log of all gifts over $100 given or received by any broker/dealer. The broker/dealer Gift Log will include: employee name, type of gift, dollar amount of gift, and broker who sent the gift.

 

o Cash: No Supervised Person may give or accept cash gifts or cash equivalents to or from a client, prospective client, or any entity that does business with or on behalf of KAR without approval from the Chief Compliance Officer.
   
o Entertainment: No Supervised Person may 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 KAR. Supervised Persons may provide or accept a business entertainment event, such as dinner or a sporting event.

 

Additional requirement for Access Persons of Cliffwater Investments LLC (“Cliffwater”) are as follows: Preclearance and Holding Period Rule: It is understood that Cliffwater does not as a general practice maintain trading operations for its clients; nor does it complete research, consider or recommend transactions on individual securities. Therefore, as long as this is the case, Cliffwater Access Persons shall not be required to preclear transactions as required by Sections 5.C. and 5.D. Rather, Cliffwater Access Persons will be required to preclear any security that is listed on the Cliffwater Restricted List. The Restricted List shall be maintained in Virtus’s Hartford Compliance Department and circulated to Cliffwater Access Persons whenever there are changes made thereto, or no less than quarterly. Cliffwater Access Persons shall be subject to all other requirements of this Code of Ethics. Furthermore, Section 5.F is modified to reflect that Cliffwater’s Access Persons must hold all Reportable Securities for no less than thirty (30) days, whether or not the purchase was an exempt transaction under any other provision of Section 5. Generally, a first-in first-out (“FIFO”) accounting methodology will be applied for determining compliance with this holding rule.

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Additional requirement for Access and Advisory Persons of Virtus ETF Advisers LLC (“VEA”) are as follows: Preclearance and Holding Period Rule: VEA Access Persons and Advisory Persons will be required to preclear transactions as required by Sections 5.C. and 5.D. VEA will provide Virtus with a “daily data file” that will include current holdings. The “daily data file” will be used to populate the VEA Restricted List. Issuers in addition to those indicated by the “daily data file” may be added to the Restricted List from time-to-time determined to be appropriate by Virtus Compliance. VEA Access and Advisory Persons shall be subject to all other requirements of this Code of Ethics. Furthermore, Section 5.F. shall continue to apply to all purchases such that VEA Access and Advisory Persons must hold all Reportable Securities for no less than sixty (60) days, whether or not the purchase was an exempt transaction under any other provision of Section 5. Generally, a first-in first- out (“FIFO”) accounting methodology will be applied for determining compliance with this holding rule.

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Schedule A

 

On October 1, 2012, the following entities adopted this Code of Ethics:

 

Euclid Advisors LLC

Duff & Phelps Investment Management Co.

Kayne Anderson Rudnick Investment Management, LLC Newfleet Asset Management, LLC

Rampart Investment Management Company, LLC Virtus Alternative Investment Advisers, Inc.

Virtus Investment Advisers, Inc. VP Distributors, LLC

Zweig Advisers LLC

 

On January 22, 2014, the following entity adopted this Code of Ethics: Cliffwater Investments LLC

 

On April 10, 2015, the following entities adopted this Code of Ethics:

Virtus ETF Advisers LLC and its affiliates (Virtus ETF Solutions LLC and ETF Distributors LLC)

 

On September 4, 2015, the following entity adopted this Code of Ethics: Virtus Retirement Investment Advisers, LLC

 

 

 

 

This Schedule will be updated from time to time without being considered an amendment to the Code of Ethics).

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Schedule B

 

Listing of Affiliated Open-End Mutual Funds

 

Section 3.E. of the Code of Ethics adopted by Virtus and its affiliates defines an “Affiliated Open-End Mutual Fund” to mean any open-end mutual fund to which the Firm or its control affiliate(s) serve as the investment adviser or principal underwriter. Currently, this means all open-end (non-exchange traded) funds managed by Virtus and its affiliates. Such funds are listed below:

 

Virtus Insight Trust (all funds)
Virtus Equity Trust (all funds)
Virtus Opportunities Trust (all funds)
Virtus Variable Insurance Trust (all funds)
Virtus Retirement Trust aka “Virtus DFA Target Date Retirement Income Funds” (all funds)
Virtus Alternative Solutions Trust (all funds)
Dunham Corporate / Government Bond Fund
Dreyfus Select Managers Small Cap Value Fund
UBS Pace Small Medium Co Value Equity Investment
Dunham Floating Rate Bond Fund
SunAmerica Flexible Credit Fund

 

 

 

 

This Schedule will be updated from time to time without being considered an amendment to the Code of Ethics).

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