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As filed with the Securities and Exchange Commission on November 2, 2007 |
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Securities Act File
No. 333-123257
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Registration Statement Under the Securities Act Of 1933 |
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Pre-Effective Amendment No. |
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Post Effective Amendment No. 14 |
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and/or |
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Registration Statement Under the Investment Company Act of 1940 |
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Amendment No. 18 |
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(Check appropriate box or boxes) |
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Immediately upon filing pursuant to paragraph (b) |
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On [date] pursuant to paragraph (b) |
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60 days after filing pursuant to paragraph (a)(1) |
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On [date] pursuant to paragraph (a)(1) |
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75 days after filing pursuant to paragraph (a)(2) |
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On November 13, 2007 pursuant to paragraph (a)(2) of rule 485 |
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE TRUST
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
MARKET VECTORS ETF TRUST
PROSPECTUS
[ · ], 2007
Market Vectors—Lehman Brothers AMT-Free Intermediate Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Long Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Short Municipal ETF, Market Vectors—Lehman Brothers High Yield Municipal ETF, Market Vectors—Lehman Brothers AMT-Free California Long Municipal ETF and Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF (the “Funds”) are distributed by Van Eck Securities Corporation and seek to track the Lehman Brothers AMT-Free Intermediate Continuous Municipal Index, Lehman Brothers AMT-Free Long Continuous Municipal Index, Lehman Brothers AMT-Free Short Continuous Municipal Index, Lehman Brothers Non-Investment Grade Municipal Index, Lehman Brothers AMT-Free California Long Municipal Index and Lehman Brothers AMT-Free New York Long Municipal Index, respectively, each of which is published by Lehman Brothers (“Lehman Brothers”). Lehman Brothers does not sponsor, endorse, or promote the Funds and bears no liability with respect to any such Funds or security. For more detailed information about the Funds, see the Statement of Additional Information for the Funds (“SAI”), which is incorporated by reference into this Prospectus. Additional information about each Fund’s investments will be available in each Fund’s annual and semi-annual reports to shareholders. In each Fund’s annual report, when available, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year.
Call Van Eck at 1.888.MKT.VCTR to request, free of charge, the annual or semi-annual reports, the SAI, or other information about the Funds or to make shareholder inquiries. You may also obtain the SAI or the Funds’ annual or semi-annual reports, when available, by visiting the Van Eck website at www.vaneck.com/etf. Information about the Funds (including the SAI) can also be reviewed and copied at the Securities and Exchange Commission (“SEC”) Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room may be obtained by calling 1.202.551.8090.
Reports
and other information about the Funds are available on the EDGAR Database on
the SEC’s internet site at http://www.sec.gov. In addition, copies of this
information may be obtained, after paying a duplicating fee, by electronic
request at the following email address: publicinfo@sec.gov, or by writing the
SEC’s Public Reference Section, Washington, DC 20549-0102.
The SEC has not approved or disapproved these securities or passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
No person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer of a Fund’s shares, and, if given or made, the information or representations must not be relied upon as having been authorized by the Funds. Neither the delivery of this Prospectus nor any sale of shares shall under any circumstance imply that the information contained herein is correct as of any date after the date of this Prospectus.
Dealers effecting transactions in a 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 of dealers to deliver the Prospectus when acting as underwriters.
This Prospectus offers shares of the Market Vectors ETF Trust. The Trust currently has thirteen investment portfolios. This Prospectus relates to shares of only six portfolios, Market Vectors—Lehman Brothers AMT-Free Intermediate Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Long Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Short Municipal ETF, Market Vectors—Lehman Brothers High Yield Municipal ETF, Market Vectors—Lehman Brothers AMT-Free California Long Municipal ETF and Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF.
This
Prospectus, dated [
·
], 2007, explains concisely the information you ought
to know before investing in a Fund. We suggest that you keep it for future
reference.
-i-
-ii-
Market Vectors ETF Trust (the “Trust”) is an open-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”), currently consisting of thirteen investment portfolios: Market Vectors—Agribusiness ETF, Market Vectors—Environmental Services ETF, Market Vectors—Global Alternative Energy ETF, Market Vectors—Gold Miners ETF, Market Vectors—Nuclear Energy ETF, Market Vectors—Russia ETF, Market Vectors—Steel ETF, Market Vectors—Lehman Brothers AMT-Free Intermediate Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Long Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Short Municipal ETF, Market Vectors—Lehman Brothers High Yield Municipal ETF, Market Vectors—Lehman Brothers AMT-Free California Long Municipal ETF and Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF. This Prospectus relates to the following six portfolios of the Trust (each, a “Fund”): Market Vectors—Lehman Brothers AMT-Free Intermediate Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Long Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Short Municipal ETF, Market Vectors—Lehman Brothers High Yield Municipal ETF, Market Vectors—Lehman Brothers AMT-Free California Long Municipal ETF and Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF. Van Eck Associates Corporation (the “Adviser”) is the investment adviser to the Funds.
It is anticipated that the shares of each of the Funds will be listed on the American Stock Exchange (“AMEX”) and will trade in the secondary market at prices that may differ to some degree from the net asset value (“NAV”) of the shares. Unlike conventional mutual funds, the Trust issues and redeems shares of each Fund (“Shares”) on a continuous basis at NAV only in large specified blocks each called a Creation Unit. Creation Units are issued and redeemed principally in-kind for securities generally included in each Fund’s respective index or substantially similar to such securities. Except when aggregated in Creation Units, Shares are not redeemable securities of the Trust.
The
Funds may be suitable for long term investment in the market or market segment
represented by each Fund’s respective index. Shares of the Funds may also be
used as an asset allocation or speculative trading vehicle. Unlike many
conventional mutual funds which are only bought and sold at closing NAVs, the
Shares have been designed to be tradable in a secondary market on an intraday
basis and to be created and redeemed in-kind in Creation Units at each day’s
market close. These arrangements are designed to protect ongoing shareholders
from adverse effects on a Fund’s portfolio that could arise from frequent cash
purchase and redemption transactions that affect the NAV of the Fund. Moreover,
in contrast to conventional mutual funds where frequent redemptions can have an
adverse tax impact on taxable shareholders because of the need to sell
portfolio securities which, in turn, may generate taxable gain, the in-kind
redemption mechanism of the Funds generally is not expected to lead to a tax
event for shareholders.
Principal Investment Objective and Strategies
Investment Objective . The Fund’s investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Lehman Brothers AMT-Free Intermediate Continuous Municipal Index (the “Intermediate Index” or the “Index”). For a further description of the Intermediate Index, see “The Lehman Brothers AMT-Free Intermediate Continuous Municipal Index.”
Principal Investment Policy . The Fund will normally invest at least 80% of its total assets in municipal bonds that are exempt from Federal income tax. This 80% investment policy is non-fundamental and requires 60 days’ prior written notice to shareholders before it can be changed.
The Fund has adopted a fundamental investment policy to invest at least 80% of its assets in investments suggested by its name. For purposes of this policy, the term “assets” means net assets plus the amount of any borrowings for investment purposes. This percentage limitation applies at the time of investment. The Board of Trustees of the Trust may change the Fund’s investment strategy, Index and other policies without shareholder approval, except as otherwise indicated.
Indexing Investment Approach . The Fund is not managed according to traditional methods of “active” investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Fund, utilizing a “passive” or indexing investment approach, attempts to approximate the investment performance of the Intermediate Index.
The Fund expects to use a sampling approach in seeking to achieve its objective. Sampling means that the Adviser uses quantitative analysis to select municipal bonds and other securities that represent a sample of securities in the Index in terms of key risk factors, performance attributes and other characteristics. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. The Adviser generally expects the Fund to hold less than the total number of securities in the Index, but reserves the right to hold as many securities as it believes necessary to achieve the Fund’s investment objective.
In addition, from time to time, securities are added to or removed from the Index. The Fund may sell securities that are represented in the Index, or purchase securities that are not yet represented in the Index, in anticipation of their removal from or addition to the Index. Further, the Adviser may choose to overweight securities, purchase or sell securities not in the Index, or utilize various combinations of other available investment techniques, in seeking to track the Index.
The Fund will normally invest at least 80% of its total assets in bonds contained in the Intermediate Index. A lesser percentage may be so invested to the extent that the Adviser needs additional flexibility to comply with the requirements of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and other regulatory requirements.
Because
of the passive investment management approach of the Fund, the portfolio
turnover rate is expected to be under 30%, generally a lower turnover rate than
for many other investment companies. Sales as a result of Intermediate Index
changes could result in the realization of short or long-term capital gains in
the Fund resulting in tax liability for shareholders subject to U.S. Federal
income tax. See “Shareholder Information—Tax Matters.”
2
Eligibility
Criteria
. To be
included in the Intermediate Index, bonds must be rated Baa3/BBB- or higher by
at least two of the following ratings agencies: Moody’s Investors Service,
Inc., Standard & Poor’s and Fitch Inc. If only two of the three agencies
rate the security, the lower rating is used to determine index eligibility. If
only one of the three agencies rates a security, the rating must be at least
Baa3/BBB-. Potential Intermediate Index constituents must have an outstanding
par value of at least $7 million and be issued as part of a transaction of at
least $75 million. The bonds must be fixed rate, have a dated-date within the
last five years and have a nominal maturity of 6-17 years. The following types
of bonds are excluded from the Index: bonds subject to the alternative minimum
tax, remarketed issues, taxable municipal bonds, floating rate bonds, and
derivatives. The Intermediate Index has four main sectors: state and local
general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.
The Intermediate Index is calculated using a market value weighting
methodology.
Borrowing Money . The Fund may borrow money from a bank up to a limit of one-third of the market value of its assets.
Fundamental and Non-Fundamental Policies . The Fund’s investment objective and each of the other investment policies are non-fundamental policies that may be changed by the Board of Trustees without shareholder approval, except as noted herein or in the Statement of Additional Information under the heading “Investment Policies and Restrictions—Investment Restrictions.” However, shareholders would be notified prior to any material change in these policies.
Principal
Investment Risks
. The
Fund is subject to the following risks, as set forth under “Principal Risks of
Investing in the Funds:” Municipal Securities Risk, Credit Risk, Interest Rate
Risk, Call Risk, Lease Obligations Risk, Tobacco Bond Risk, Education Bond
Risk, Electric Utilities Bond Risk, Housing Bond Risk, Transportation Bond Risk,
Water and Sewer Bond Risk, Market Risk, Index Tracking Risk, Tax Risk and
Replication Management Risk. The Fund is also subject to certain additional
risks as set forth under “Additional Risks of Investing in the Funds.”
3
Principal Investment Objective and Strategies
Investment Objective . The Fund’s investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Lehman Brothers AMT-Free Long Continuous Municipal Index (the “Long Index” or the “Index”). For a further description of the Long Index, see “The Lehman Brothers AMT-Free Long Continuous Municipal Index.”
Principal Investment Policy . The Fund will normally invest at least 80% of its total assets in municipal bonds that are exempt from Federal income taxation. This 80% investment policy is non-fundamental and requires 60 days’ prior written notice to shareholders before it can be changed.
The Fund has adopted a fundamental investment policy to invest at least 80% of its assets in investments suggested by its name. For purposes of this policy, the term “assets” means net assets plus the amount of any borrowings for investment purposes. This percentage limitation applies at the time of investment. The Board of Trustees of the Trust may change the Fund’s investment strategy, Index and other policies without shareholder approval, except as otherwise indicated.
Indexing Investment Approach . The Fund is not managed according to traditional methods of “active” investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Fund, utilizing a “passive” or indexing investment approach, attempts to approximate the investment performance of the Long Index.
The Fund expects to use a sampling approach in seeking to achieve its objective. Sampling means that the Adviser uses quantitative analysis to select municipal bonds and other securities that represent a sample of securities in the Index in terms of key risk factors, performance attributes and other characteristics. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. The Adviser generally expects the Fund to hold less than the total number of securities in the Index, but reserves the right to hold as many securities as it believes necessary to achieve the Fund’s investment objective.
In addition, from time to time, securities are added to or removed from the Index. The Fund may sell securities that are represented in the Index, or purchase securities that are not yet represented in the Index, in anticipation of their removal from or addition to the Index. Further, the Adviser may choose to overweight securities, purchase or sell securities not in the Index, or utilize various combinations of other available investment techniques, in seeking to track the Index.
The Fund will normally invest at least 80% of its total assets in bonds contained in the Long Index. A lesser percentage may be so invested to the extent that the Adviser needs additional flexibility to comply with the requirements of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and other regulatory requirements.
4
Borrowing Money . The Fund may borrow money from a bank up to a limit of one-third of the market value of its assets.
Fundamental and Non-Fundamental Policies . The Fund’s investment objective and each of the other investment policies are non-fundamental policies that may be changed by the Board of Trustees without shareholder approval, except as noted herein or in the Statement of Additional Information under the heading “Investment Policies and Restrictions—Investment Restrictions.” However, shareholders would be notified prior to any material change in these policies.
5
Principal Investment Objective and Strategies
Investment Objective . The Fund’s investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Lehman Brothers AMT-Free Short Continuous Municipal Index (the “Short Index” or the “Index”). For a further description of the Short Index, see “The Lehman Brothers AMT-Free Short Continuous Municipal Index.”
Principal Investment Policy . The Fund will normally invest at least 80% of its total assets in municipal bonds that are exempt from Federal income tax. This 80% investment policy is non-fundamental and requires 60 days’ prior written notice to shareholders before it can be changed.
The Fund has adopted a fundamental investment policy to invest at least 80% of its assets in investments suggested by its name. For purposes of this policy, the term “assets” means net assets plus the amount of any borrowings for investment purposes. This percentage limitation applies at the time of investment. The Board of Trustees of the Trust may change the Fund’s investment strategy, Index and other policies without shareholder approval, except as otherwise indicated.
Indexing Investment Approach . The Fund is not managed according to traditional methods of “active” investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Fund, utilizing a “passive” or indexing investment approach, attempts to approximate the investment performance of the Short Index.
The Fund expects to use a sampling approach in seeking to achieve its objective. Sampling means that the Adviser uses quantitative analysis to select municipal bonds and other securities that represent a sample of securities in the Index in terms of key risk factors, performance attributes and other characteristics. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. The Adviser generally expects the Fund to hold less than the total number of securities in the Index, but reserves the right to hold as many securities as it believes necessary to achieve the Fund’s investment objective.
In addition, from time to time, securities are added to or removed from the Index. The Fund may sell securities that are represented in the Index, or purchase securities that are not yet represented in the Index, in anticipation of their removal from or addition to the Index. Further, the Adviser may choose to overweight securities, purchase or sell securities not in the Index, or utilize various combinations of other available investment techniques, in seeking to track the Index.
The Fund will normally invest at least 80% of its total assets in bonds included in the Short Index. A lesser percentage may be so invested to the extent that the Adviser needs additional flexibility to comply with the requirements of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and other regulatory requirements.
6
Borrowing Money . The Fund may borrow money from a bank up to a limit of one-third of the market value of its assets.
Fundamental and Non-Fundamental Policies . The Fund’s investment objective and each of the other investment policies are non-fundamental policies that may be changed by the Board of Trustees without shareholder approval, except as noted herein or in the Statement of Additional Information under the heading “Investment Policies and Restrictions—Investment Restrictions.” However, shareholders would be notified prior to any material change in these policies.
7
Principal Investment Objective and Strategies
Investment Objective . The Fund’s investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Lehman Brothers Non-Investment Grade Municipal Index (the “High Yield Index” or the “Index”). For a further description of the High Yield Index, see “The Lehman Brothers Non-Investment Grade Municipal Index.”
Principal Investment Policy . The Fund will normally invest at least 80% of its total assets in municipal bonds that are exempt from Federal income tax and are rated below investment grade. This 80% investment policy is non-fundamental and requires 60 days’ prior written notice to shareholders before it can be changed.
The Fund has adopted a fundamental investment policy to invest at least 80% of its assets in investments suggested by its name. For purposes of this policy, the term “assets” means net assets plus the amount of any borrowings for investment purposes. This percentage limitation applies at the time of investment. The Board of Trustees of the Trust may change the Fund’s investment strategy, Index and other policies without shareholder approval, except as otherwise indicated.
Indexing Investment Approach . The Fund is not managed according to traditional methods of “active” investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Fund, utilizing a “passive” or indexing investment approach, attempts to approximate the investment performance of the High Yield Index.
The Fund expects to use a sampling approach in seeking to achieve its objective. Sampling means that the Adviser uses quantitative analysis to select municipal bonds and other securities that represent a sample of securities in the Index in terms of key risk factors, performance attributes and other characteristics. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. The Adviser generally expects the Fund to hold less than the total number of securities in the Index, but reserves the right to hold as many securities as it believes necessary to achieve the Fund’s investment objective.
In addition, from time to time, securities are added to or removed from the Index. The Fund may sell securities that are represented in the Index, or purchase securities that are not yet represented in the Index, in anticipation of their removal from or addition to the Index. Further, the Adviser may choose to overweight securities, purchase or sell securities not in the Index, or utilize various combinations of other available investment techniques, in seeking to track the Index.
The Fund will normally invest at least 80% of its total assets in bonds contained in the High Yield Index. A lesser percentage may be so invested to the extent that the Adviser needs additional flexibility to comply with the requirements of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and other regulatory requirements.
8
Borrowing Money . The Fund may borrow money from a bank up to a limit of one-third of the market value of its assets.
Fundamental and Non-Fundamental Policies . The Fund’s investment objective and each of the other investment policies are non-fundamental policies that may be changed by the Board of Trustees without shareholder approval, except as noted herein or in the Statement of Additional Information under the heading “Investment Policies and Restrictions—Investment Restrictions.” However, shareholders would be notified prior to any material change in these policies.
9
Principal Investment Objective and Strategies
Investment Objective . The Fund’s investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Lehman Brothers AMT-Free California Long Municipal Index (the “California Index” or the “Index”). For a further description of the California Index, see “The Lehman Brothers AMT-Free California Long Municipal Index.”
Principal Investment Policy . The Fund will normally invest at least 80% of its total assets in municipal bonds that are exempt from Federal and California (the “State”) state income tax or other local income taxes. This 80% investment policy is non-fundamental and requires 60 days’ prior written notice to shareholders before it can be changed.
The Fund has adopted a fundamental investment policy to invest at least 80% of its assets in investments suggested by its name. For purposes of this policy, the term “assets” means net assets plus the amount of any borrowings for investment purposes. This percentage limitation applies at the time of investment. The Board of Trustees of the Trust may change the Fund’s investment strategy, Index and other policies without shareholder approval, except as otherwise indicated.
Indexing Investment Approach . The Fund is not managed according to traditional methods of “active” investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Fund, utilizing a “passive” or indexing investment approach, attempts to approximate the investment performance of the California Index.
The Fund expects to use a sampling approach in seeking to achieve its objective. Sampling means that the Adviser uses quantitative analysis to select municipal bonds and other securities that represent a sample of securities in the Index in terms of key risk factors, performance attributes and other characteristics. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. The Adviser generally expects the Fund to hold less than the total number of securities in the Index, but reserves the right to hold as many securities as it believes necessary to achieve the Fund’s investment objective.
In addition, from time to time, securities are added to or removed from the Index. The Fund may sell securities that are represented in the Index, or purchase securities that are not yet represented in the Index, in anticipation of their removal from or addition to the Index. Further, the Adviser may choose to overweight securities, purchase or sell securities not in the Index, or utilize various combinations of other available investment techniques, in seeking to track the Index.
The Fund will normally invest at least 80% of its total assets in bonds contained in the California Index. A lesser percentage may be so invested to the extent that the Adviser needs additional flexibility to comply with the requirements of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and other regulatory requirements.
10
Borrowing Money . The Fund may borrow money from a bank up to a limit of one-third of the market value of its assets.
Fundamental and Non-Fundamental Policies . The Fund’s investment objective and each of the other investment policies are non-fundamental policies that may be changed by the Board of Trustees without shareholder approval, except as noted herein or in the Statement of Additional Information under the heading “Investment Policies and Restrictions—Investment Restrictions.” However, shareholders would be notified prior to any material change in these policies.
11
Principal Investment Objective and Strategies
Investment Objective . The Fund’s investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Lehman Brothers AMT-Free New York Long Municipal Index (the “AMT-Free New York Long Municipal Index”). For a further description of the New York Index, see “The Lehman Brothers AMT-Free New York Long Municipal Index.”
Principal Investment Policy . The Fund will normally invest at least 80% of its total assets in municipal bonds that are exempt from Federal, New York State (the “State”) and New York City (the “City”) income tax or other local income taxes. This 80% investment policy is non-fundamental and requires 60 days’ prior written notice to shareholders before it can be changed.
The Fund has adopted a fundamental investment policy to invest at least 80% of its assets in investments suggested by its name. For purposes of this policy, the term “assets” means net assets plus the amount of any borrowings for investment purposes. This percentage limitation applies at the time of investment. The Board of Trustees of the Trust may change the Fund’s investment strategy, Index and other policies without shareholder approval, except as otherwise indicated.
Indexing Investment Approach . The Fund is not managed according to traditional methods of “active” investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Fund, utilizing a “passive” or indexing investment approach, attempts to approximate the investment performance of the New York Index.
The Fund expects to use a sampling approach in seeking to achieve its objective. Sampling means that the Adviser uses quantitative analysis to select municipal bonds and other securities that represent a sample of securities in the Index in terms of key risk factors, performance attributes and other characteristics. The quantity of holdings in the Fund will be based on a number of factors, including asset size of the Fund. The Adviser generally expects the Fund to hold less than the total number of securities in the Index, but reserves the right to hold as many securities as it believes necessary to achieve the Fund’s investment objective.
In addition, from time to time, securities are added to or removed from the Index. The Fund may sell securities that are represented in the Index, or purchase securities that are not yet represented in the Index, in anticipation of their removal from or addition to the Index. Further, the Adviser may choose to overweight securities, purchase or sell securities not in the Index, or utilize various combinations of other available investment techniques, in seeking to track the Index.
The Fund will normally invest at least 80% of its total assets in bonds contained in the New York Index. A lesser percentage may be so invested to the extent that the Adviser needs additional flexibility to comply with the requirements of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and other regulatory requirements.
12
Borrowing Money . The Fund may borrow money from a bank up to a limit of one-third of the market value of its assets.
Fundamental and Non-Fundamental Policies . The Fund’s investment objective and each of the other investment policies are non-fundamental policies that may be changed by the Board of Trustees without shareholder approval, except as noted herein or in the Statement of Additional Information under the heading “Investment Policies and Restrictions—Investment Restrictions.” However, shareholders would be notified prior to any material change in these policies.
13
Municipal Securities Risk (All Funds) . Municipal securities are subject to the risk that litigation, legislation or other political events, local business or economic conditions or the bankruptcy of the issuer could have a significant effect on an issuer’s ability to make payments of principal and/or interest.
Municipal securities can be significantly affected by political changes as well as uncertainties in the municipal market related to taxation, legislative changes or the rights of municipal security holders. Because many securities are issued to finance similar projects, especially those relating to education, health care, transportation and utilities, conditions in those sectors can affect the overall municipal market. In addition, changes in the financial condition of an individual municipal insurer can affect the overall municipal market.
Municipal securities backed by current or anticipated revenues from a specific project or specific assets can be negatively affected by the discontinuance of the taxation supporting the project or assets or the inability to collect revenues for the project or from the assets. If the Internal Revenue Service (“IRS”) determines an issuer of a municipal security has not complied with applicable tax requirements, interest from the security could become taxable and the security could decline significantly in value.
The market for municipal bonds may be less liquid than for taxable bonds. There may also be less information available on the financial condition of issuers of municipal securities than for public corporations. This means that it may be harder to buy and sell municipal securities, especially on short notice, and municipal securities may be more difficult for a Fund to value accurately than securities of public corporations. Since the Fund invests a significant portion of its portfolio in municipal securities, each Fund’s portfolio may have greater exposure to liquidity risk than a fund that invests in non-municipal securities.
High Yield Securities (“Junk Bonds”) Risk (Market Vectors—Lehman Brothers High Yield Municipal ETF) . Junk bonds are subject to greater risk of loss of income and principal than higher rated securities. The prices of junk bonds are likely to be more sensitive to adverse economic changes or individual municipal developments than higher rated securities. During an economic downturn or substantial period of rising interest rates, junk bond issuers may experience financial stress that would adversely affect their ability to service their principal and interest payment obligations, to meet their projected business goals or to obtain additional financing. In the event of a default, the Fund may incur additional expenses to seek recovery. The secondary market for municipal securities that are junk bonds may be less liquid than the markets for higher quality securities or junk bonds issued by corporate issuers and, as such, may have an adverse effect on the market prices of certain securities. The illiquidity of the market may also, at certain times, adversely affect the ability of (i) the pricing service utilized by the Fund to determine the value of certain junk bonds, and/or (ii) the Fund’s Board to arrive at a fair value for certain junk bonds. The illiquidity of the market also could make it difficult for the Fund to sell certain securities in connection with a rebalancing of the Index. In addition, periods of economic uncertainty and change probably would result in an increased volatility of market prices of high yield securities and a corresponding volatility in the Fund’s net asset value.
14
Call Risk (All Funds) . During periods of falling interest rates, an issuer of a callable bond may “call” or repay a security before its stated maturity, which may result in the Fund having to reinvest the proceeds at lower interest rates, resulting in a decline in the Fund’s income.
Private Activity Bonds Risk (Market Vectors—Lehman Brothers High Yield Municipal ETF). The issuers of private activity bonds in which the Fund may invest may be negatively impacted by conditions affecting either the general credit of the user of the private activity project or the project itself. Conditions such as regulatory and environmental restrictions and economic downturns may lower the need for these facilities and the ability of users of the project to pay for the facilities. This could cause a decline in the Fund’s value. The Fund’s private activity bond holdings also may pay interest subject to the alternative minimum tax. See “Shareholder Information - Tax Matters” for more details.
California-Specific Risk (Market Vectors—Lehman Brothers AMT-Free California Long Municipal ETF) . Investors will be exposed to risks associated with the unique aspects of California’s economy, political system and government financing structures. As of early 2007, the State’s economy was growing moderately, similar to the national economy. State General Fund expenditures in 2006-07 will exceed revenues, using accumulated surpluses to balance the budgets, and the State will face structural budget deficits in future years including the need to repay substantial internal and external borrowings which were used to balance budgets in the early 2000’s when large budget deficits were created. Provisions of the California Constitution and state statutes that limit the taxing and spending authority of California governmental entities may impair the ability of State issuers to pay principal and/or interest on their obligations. While the State’s economy is broad, it does have major concentrations in high technology, aerospace and defense-related manufacturing, trade, entertainment, real estate and financial services, and may be sensitive to economic problems affecting those industries. Future State political and economic developments, constitutional amendments, legislative measures, executive orders, administrative regulations, litigation and voter initiatives could have an adverse effect on the debt obligations of State issuers.
New York-Specific Risk (Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF) . The economic condition and finances of the City and State of New York are closely related and both the City and the State have experienced financial difficulty. The fiscal demands on the State may be affected by the fiscal condition of the City, which relies in part on State aid to balance its budget and meet its cash requirements. It is also possible that the State’s finances may be affected by the ability of the City, and certain entities issuing debt for the benefit of the City, to market securities successfully in the public credit markets. Certain issuers of State and/or City municipal bonds have experienced serious financial difficulties in the past and reoccurrence of these difficulties may impair the ability of certain State and/or City issuers to pay principal or interest on their obligations. The growth rate of the State and/or City has at times been somewhat slower than the nation overall. The economic and financial condition of the State and/or City also may be affected by various financial, social, economic and political factors.
15
Tobacco Bond Risk (All Funds). Tobacco settlement revenue bonds are neither general nor legal obligations of a state or any of its political subdivisions and neither the faith and credit nor the taxing power nor any other assets or revenues of a state or of any political subdivision will be pledged to the payment of any such bonds. In addition, tobacco companies’ profits from the sale of tobacco products are inherently variable and difficult to estimate. There can be no guarantee that tobacco companies will earn enough revenues to cover the payments due under tobacco bonds.
Education Bond Risk (All Funds) . In general, there are two types of education-related bonds: those issued to finance projects for public and private colleges and universities, and those representing pooled interests in student loans. Bonds issued to supply educational institutions with funds are subject to the risk of unanticipated revenue decline, primarily the result of decreasing student enrollment or decreasing state and federal funding. Among the factors that may lead to declining or insufficient revenues are restrictions on student’ ability to pay tuition, availability of state and federal funding, and general economic conditions. Student loan revenue bonds are generally offered by state (or substate) authorities or commissions and are backed by pools of student loans. Underlying student loans may be guaranteed by state guarantee agencies and may be subject to reimbursement by the United States Department of Education through its guaranteed student loan program. Others may be private, uninsured loans made to parents or students which are supported by reserves or other forms of credit enhancement. Recoveries of principal due to loan defaults may be applied to redemption of bonds or may be used to re-lend, depending on program latitude and demand for loans. Cash flows supporting student loan revenue bonds are impacted by numerous factors, including the rate of student loan defaults, seasoning of the loan portfolio, and student repayment deferral periods of forbearance. Other risks associated with student loan revenue bonds include potential changes in federal legislation regarding student loan revenue bonds, state guarantee agency reimbursement and continued federal interest and other program subsidies currently in effect.
Electric Utilities Bond Risk (All Funds) . The electric utilities industry has been experiencing, and will continue to experience, increased competitive pressures. Federal legislation in the last two years will open transmission access to any electricity supplier, although it is not presently known to what extent competition will evolve. Other risks include: (a) the availability and cost of fuel; (b) the availability and cost of capital, (c) the effects of conservation on energy demand, (d) the effects of rapidly changing environmental, safety, and licensing requirements, and other federal, state and local regulations, (e) timely and sufficient rate increases, and (f) opposition to nuclear power.
16
Water and Sewer Bond Risk (All Funds) . Water and sewer revenue bonds are often considered to have relatively secure credit as a result of their issuer’s importance, monopoly status, and generally unimpeded ability to raise rates. Despite this, lack of water supply due to insufficient rain, run-off, or snow pack is a concern that has led to past defaults. Further, public resistance to rate increases, costly environmental litigation, and Federal environmental mandates are challenges faced by issuers of water and sewer bonds.
Market Risk (All Funds) . The prices of the securities in the Fund are subject to the risk associated with investing in the municipal security market, including sudden and unpredictable drops in value. An investment in the Fund may lose money.
Index Tracking Risk (All Funds) . Each Fund’s return may not match the return of its respective Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the applicable Index and incurs costs in buying and selling securities; especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the applicable Index. In addition, each Fund’s use of a representative sampling approach may cause the Fund to not be as well correlated with the return of its respective Index as would be the case if the Fund purchased all of the securities in its respective Index in the proportions represented in its respective Index. Each Fund may not be fully invested at times either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet redemptions and pay expenses. The need to comply with the diversification and other requirements of the Internal Revenue Code may also impact a Fund’s ability to replicate the performance of its respective Index.
Tax Risk (All Funds) . There is no guarantee that a Fund’s income will be exempt from federal or state income taxes. Events occurring after the date of issuance of a municipal bond or after a Fund’s acquisition of a municipal bond may result in a determination that interest on that bond is includible in gross income for federal income tax purposes retroactively to its date of issuance. Such a determination may cause a portion of prior distributions by a Fund to its shareholders to be taxable to those shareholders in the year of receipt. Federal or state changes in income or alternative minimum tax rates or in the tax treatment of municipal bonds may make municipal bonds less attractive as investments and cause them to lose value. In addition, in May 2007, the United States Supreme Court agreed to hear a case that challenges whether it is permissible for a state to tax interest payments from bonds issued by out-of-state municipal entities while exempting from tax interest payments from bonds issued by the state itself or other in-state municipalities. It is not known what the Supreme Court will decide nor when the Supreme Court will render an opinion. However, if the court finds that differential treatment of interest income from in-state and out-of-state bonds is impermissible, the value of bonds held by a Fund could decline and the tax advantage of owning a fund investing in municipal bonds could be diminished.
17
18
19
This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund. (a)
|
|
|
|
|
|
|
(a) |
When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges. |
|
|
|
|
(b) |
If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged. |
|
|
|
|
(c) |
Other operating expenses are based on estimated amounts for the current fiscal year and calculated as a percentage of Fund net assets. |
|
|
|
|
(d) |
The Adviser has contractually agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.20% of average net assets per year at least until May 1, 2008. |
|
|
|
|
(e) |
The offering costs excluded from the 0.20% expense cap are: (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. |
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.
20
|
|
|
|
|
|
|
|
Year |
|
Expenses |
|||
|
|
|
|
|||
|
1 |
|
|
$ |
20 |
|
|
3 |
|
|
$ |
163 |
|
Creation Transaction Fees and Redemption Transaction Fees
21
This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund. (a)
|
|
|
|
|
|
|
(a) |
When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges. |
|
|
|
|
(b) |
If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged. |
|
|
|
|
(c) |
Other operating expenses are based on estimated amounts for the current fiscal year and calculated as a percentage of Fund net assets. |
|
|
|
|
(d) |
The Adviser has contractually agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.24% of average net assets per year at least until May 1, 2008. |
|
|
|
|
(e) |
The offering costs excluded from the 0.24% expense cap are: (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. |
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.
22
|
|
|
|
|
|
|
|
Year |
|
Expenses |
|||
|
|
|
|
|||
|
1 |
|
|
$ |
25 |
|
|
3 |
|
|
$ |
167 |
|
Creation Transaction Fees and Redemption Transaction Fees
23
This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund. (a)
|
|
|
|
|
|
|
(a) |
When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges. |
|
|
|
|
(b) |
If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged. |
|
|
|
|
(c) |
Other operating expenses are based on estimated amounts for the current fiscal year and calculated as a percentage of Fund net assets. |
|
|
|
|
(d) |
The Adviser has contractually agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.16% of average net assets per year at least until May 1, 2008. |
|
|
|
|
(e) |
The offering costs excluded from the 0.16% expense cap are: (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. |
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.
24
|
|
|
|
|
|
|
|
Year |
|
Expenses |
|||
|
|
|
|
|||
|
1 |
|
|
$ |
16 |
|
|
3 |
|
|
$ |
159 |
|
Creation Transaction Fees and Redemption Transaction Fees
25
This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund. (a)
|
|
|
|
|
|
|
(a) |
When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges. |
|
|
|
|
(b) |
If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged. |
|
|
|
|
(c) |
Other operating expenses are based on estimated amounts for the current fiscal year and calculated as a percentage of Fund net assets. |
|
|
|
|
(d) |
The Adviser has contractually agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.35% of average net assets per year at least until May 1, 2008. |
|
|
|
|
(e) |
The offering costs excluded from the 0.35% expense cap are: (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. |
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.
26
|
|
|
|
|
|
|
|
Year |
|
Expenses |
|||
|
|
|
|
|||
|
1 |
|
|
$ |
36 |
|
|
3 |
|
|
$ |
232 |
|
Creation Transaction Fees and Redemption Transaction Fees
27
This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund. (a)
|
|
|
|
|
|
|
Shareholder Expenses |
|
|
None |
|
|
(fees paid directly from your investment, but see “Shareholder Information—Creation and Redemption of Creation Units” for a discussion of Creation and Redemption Transaction Fees) |
|
|
None |
|
|
Standard Creation/Redemption Transaction Fee |
|
$ |
500 |
|
|
Maximum Creation/Redemption Transaction Fee (b) |
|
$ |
2,000 |
|
|
Annual Fund Operating Expenses |
|
|
|
|
|
(expenses that are deducted from Fund assets) |
|
|
|
|
|
|
|
|
|
|
|
Management Fee |
|
|
0.25 |
% |
|
Other Operating Expenses (c) |
|
|
0.40 |
% |
|
Total Gross Annual Fund Operating Expenses (d) |
|
|
0.65 |
% |
|
Fee Waivers and Expenses Assumption (e) |
|
|
0.41 |
% |
|
Total Net Annual Fund Operating Expenses (e) |
|
|
0.24 |
% |
|
|
|
|
|
|
|
(a) |
When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges. |
|
|
|
|
(b) |
If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged. |
|
|
|
|
(c) |
Other operating expenses are based on estimated amounts for the current fiscal year and calculated as a percentage of Fund net assets. |
|
|
|
|
(d) |
The Adviser has contractually agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.24% of average net assets per year at least until May 1, 2008. |
|
|
|
|
(e) |
The offering costs excluded from the 0.24% expense cap are: (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. |
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
Fund sells and redeems Shares in Creation Units principally on an in-kind basis
for portfolio securities of the Index.
Shares in less than Creation Units are not redeemable. An investor purchasing a Creation Unit on an
in-kind basis would pay the following expenses on a $10,000 investment (payment
with a deposit of securities included in the California Index), assuming all Shares
are redeemed at the end of the periods shown, a 5% annual return and that the
Fund’s operating expenses remain the same.
Investors
should note that the presentation below of a $10,000 investment is for
illustration purposes only as Shares will be issued by the Fund only in
Creation Units. Further, the return of
5% and estimated expenses are for illustration purposes only, and should not be
considered indicators of expected Fund
28
expenses or performance, which may be greater
or less than the estimates. Based on
these assumptions, your costs would be
:
|
|
|
|
|
|
|
|
Year |
|
Expenses |
|||
|
|
|
|
|||
|
1 |
|
|
$ |
25 |
|
|
3 |
|
|
$ |
167 |
|
C reation Transaction Fees and Redemption Transaction Fees
The
Trust issues and redeems Shares at NAV only in blocks of 50,000 Shares or
multiples thereof. As a practical
matter, only authorized participants may purchase or redeem these Creation
Units. A standard creation transaction
fee of $500 is charged to each purchaser of Creation Units. The fee is the same regardless of the number
of Creation Units purchased by an authorized participant on the same day. The value of a Creation Unit as of the first
creation was approximately $5,000,000.
An authorized participant who holds Creation Units and wishes to redeem
at NAV would also pay a standard redemption transaction fee of $500 on the date
of such redemption(s), regardless of the number of Creation Units redeemed that
day. Authorized participants who hold Creation
Units will also pay the annual Fund operating expenses described in the table
on the previous page. Assuming an
investment in a Creation Unit of $5,000,000 and a 5% return each year, and
assuming that the Fund’s operating expenses remain the same, the total costs
would be $12,500 if the Creation Unit is redeemed after one year and $83,500 if
the Creation Unit is redeemed after three years. Investors should note that this presentation is for illustration
purposes only and actual costs may be higher.
See “Shareholder Information—Creation and Redemption of Creation Units.”
29
This table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund. (a)
|
|
|
|
|
|
|
Shareholder Expenses |
|
|
None |
|
|
(fees paid directly from your investment, but see “Shareholder Information—Creation and Redemption of Creation Units” for a discussion of Creation and Redemption Transaction Fees) |
|
|
None |
|
|
Standard Creation/Redemption Transaction Fee |
|
$ |
500 |
|
|
Maximum Creation/Redemption Transaction Fee (b) |
|
$ |
2,000 |
|
|
Annual Fund Operating Expenses |
|
|
|
|
|
(expenses that are deducted from Fund assets) |
|
|
|
|
|
|
|
|
|
|
|
Management Fee |
|
|
0.25 |
% |
|
Other Operating Expenses (c) |
|
|
0.41 |
% |
|
Total Gross Annual Fund Operating Expenses (d) |
|
|
0.66 |
% |
|
Fee Waivers and Expenses Assumption (e) |
|
|
0.42 |
% |
|
Total Net Annual Fund Operating Expenses (e) |
|
|
0.24 |
% |
|
|
|
|
|
|
|
(a) |
When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges. |
|
|
|
|
(b) |
If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee will be charged. |
|
|
|
|
(c) |
Other operating expenses are based on estimated amounts for the current fiscal year and calculated as a percentage of Fund net assets. |
|
|
|
|
(d) |
The Adviser has contractually agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.24% of average net assets per year at least until May 1, 2008. |
|
|
|
|
(e) |
The offering costs excluded from the 0.24% expense cap are: (a) legal fees pertaining to the Fund’s Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange. |
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
Fund sells and redeems Shares in Creation Units principally on an in-kind basis
for portfolio securities of the Index.
Shares in less than Creation Units are not redeemable. An investor purchasing a Creation Unit on an
in-kind basis would pay the following expenses on a $10,000 investment (payment
with a deposit of securities included in the New York Index), assuming all Shares
are redeemed at the end of the periods shown, a 5% annual return and that the
Fund’s operating expenses remain the same.
Investors
should note that the presentation below of a $10,000 investment is for
illustration purposes only as Shares will be issued by the Fund only in
Creation Units. Further, the return of
5% and estimated expenses are for illustration purposes only, and should not be
considered indicators of expected Fund
30
expenses or performance, which may be greater
or less than the estimates. Based on
these assumptions, your costs would be
:
|
|
|
|
|
|
|
|
Year |
|
Expenses |
|||
|
|
|
|
|||
|
1 |
|
|
$ |
25 |
|
|
3 |
|
|
$ |
169 |
|
C reation Transaction Fees and Redemption Transaction Fees
The
Trust issues and redeems Shares at NAV only in blocks of 50,000 Shares or
multiples thereof. As a practical
matter, only authorized participants may purchase or redeem these Creation
Units. A standard creation transaction fee of $500 is charged to each purchaser
of Creation Units. The fee is the same
regardless of the number of Creation Units purchased by an authorized
participant on the same day. The value
of a Creation Unit as of the first creation was approximately $5,000,000. An
authorized participant who holds Creation Units and wishes to redeem at NAV
would also pay a standard redemption transaction fee of $500 on the date of
such redemption(s), regardless of the number of Creation Units redeemed that
day. Authorized participants who hold Creation Units will also pay the annual
Fund operating expenses described in the table on the previous page. Assuming an investment in a Creation Unit of
$5,000,000 and a 5% return each year, and assuming that the Fund’s operating
expenses remain the same, the total costs would be $12,500 if the Creation Unit
is redeemed after one year and $84,500 if the Creation Unit is redeemed after
three years. Investors should note that this presentation is for illustration
purposes only and actual costs may be higher. See “Shareholder
Information—Creation and Redemption of Creation Units.”
31
The Lehman Brothers AMT-Free Intermediate Continuous Municipal Index is a market size weighted index comprised of publicly traded municipal bonds that cover the U.S. dollar denominated intermediate term tax exempt bond market. It is a total return benchmark designed for high quality and tax-efficient investments. The Index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The sectors of general obligation, insured and pre-refunded are further divided into sub-sectors based on the range of maturity. The revenue sector is divided into industry sectors that consist of electric, IDR/PCR, transportation, education, water & sewer, resource recovery, leasing and special tax.
To be included in the Intermediate Index, bonds must be rated Baa3/BBB- or higher by at least two of the following ratings agencies: Moody’s Investors Service, Inc., Standard & Poor’s and Fitch Inc. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be at least Baa3/BBB-. Potential Intermediate Index constituents must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date within the last five years and have a nominal maturity of 6-17 years. The following types of bonds are excluded from the Index: bonds subject to the alternative minimum tax, remarketed issues, taxable municipal bonds, floating rate bonds and derivatives. The Intermediate Index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-funded bonds. The Intermediate Index is calculated using a market value weighting methodology.
The composition of the Intermediate Index is rebalanced monthly. Interest and principal payments earned by the component securities are held in the Intermediate Index without a reinvestment return until month end when it is removed from the Intermediate Index. Qualifying securities issued, but not necessarily settled, on or before the month-end rebalancing date qualify for inclusion in the Intermediate Index in the following month.
Total
returns are calculated based on the sum of price changes, gain/loss on repayments
of principal, and coupon received or accrued, expressed as a percentage of
beginning market value. The Intermediate Index is calculated once a day.
32
The Lehman Brothers AMT-Free Long Continuous Municipal Index is a market size weighted index comprised of publicly traded municipal bonds that cover the U.S. dollar denominated long term tax exempt bond market. It is a total return benchmark designed for high quality and tax-efficient investments. The Long Index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The sectors of general obligation, insured and pre-refunded are further divided into sub-sectors based on the range of maturity. The revenue sector is divided into industry sectors that consist of electric, IDR/PCR, transportation, education, water & sewer, resource recovery, leasing and special tax.
To be included in the Long Index, bonds must be rated Baa3/BBB- or higher by at least two of the following ratings agencies: Moody’s Investors Service, Inc., Standard & Poor’s and Fitch Inc. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be at least Baa3/BBB-. Potential Long Index constituents must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date within the last five years and have a nominal maturity of 17 or more years. The following types of bonds are excluded from the Index: bonds subject to the alternative minimum tax, remarketed issues, taxable municipal bonds, floaters, and derivatives. The Long Index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The Long Index is calculated using a market value weighting methodology.
The composition of the Long Index is rebalanced monthly. Interest and principal payments earned by the component securities are held in the Long Index without a reinvestment return until month end when it is removed from the Long Index. Qualifying securities issued, but not necessarily settled, on or before the month-end rebalancing date qualify for inclusion in the Long Index in the following month.
Total
returns are calculated based on the sum of price changes, gain/loss on
repayments of principal, and coupon received or accrued, expressed as a
percentage of beginning market value. The Long Index is calculated once a day.
33
The Lehman Brothers AMT-Free Short Continuous Municipal Index is a market size weighted index comprised of publicly traded municipal bonds that cover the U.S. dollar denominated short term tax exempt bond market. It is a total return benchmark designed for high quality and tax-efficient investments. The Short Index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The sectors of general obligation, insured and pre-refunded are further divided into sub-sectors based on the range of maturity. The revenue sector is divided into industry sectors that consist of electric, IDR/PCR, transportation, education, water & sewer, resource recovery, leasing and special tax.
To be included in the Short Index, bonds must be rated Baa3/BBB- or higher by at least two of the following ratings agencies: Moody’s Investors Service, Inc., Standard & Poor’s and Fitch Inc. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be at least Baa3/BBB-. Potential Short Index constituents must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date within the last five years and have a nominal maturity of 1-6 years. The following types of bonds are excluded from the Short Index: bonds subject to the alternative minimum tax, remarketed issues, taxable municipal bonds, floaters, and derivatives. The Index has four main sectors: general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The Short Index is calculated using a market value weighting methodology.
The composition of the Short Index is rebalanced monthly. Interest and principal payments earned by the component securities are held in the Short Index without a reinvestment return until month end when it is removed from the Short Index. Qualifying securities issued, but not necessarily settled, on or before the month-end rebalancing date qualify for inclusion in the Short Index in the following month.
Total
returns are calculated based on the sum of price changes, gain/loss on
repayments of principal, and coupon received or accrued, expressed as a
percentage of beginning market value. The Short Index is calculated once a day.
34
The Lehman Brothers Non-Investment Grade Municipal Index is a market size weighted index comprised of publicly traded municipal bonds that cover the U.S. dollar denominated high yield long term tax exempt bond market. It is a total return benchmark designed for high quality and tax-efficient investments. The majority of the High Yield Index’s constituents are from the revenue sector, with some constituents being from the general obligation sector. The revenue sector is divided into industry sectors that consist of electric, IDR/PCR, transportation, education, water & sewer, resource recovery, leasing and special tax. As of December 2006, the High Yield Index totaled over $40 billion in market value and maintained over 1,800 securities.
To be included in the High Yield Index, bonds must be rated Baa3 or lower by at least two of the following ratings agencies: Moody’s Investors Service, Inc., Standard & Poor’s and Fitch Inc. If only two of the three agencies rate the security, the higher rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be at least Baa3 or lower. Potential High Yield Index constituents must have an outstanding par value of at least $3 million and be issued as part of a transaction of at least $20 million. The bonds must be fixed rate and have a nominal maturity of one or more years. The following types of bonds are excluded from the High Yield Index: taxable municipal bonds, floaters, and derivatives. The High Yield Index may contain private activity bonds that pay interest income subject to the “alternative minimum tax.” The majority of the High Yield Index’s constituents are from the revenue sector, with some constituents being from the general obligation sector. The High Yield Index is calculated using a market value weighting methodology.
The composition of the High Yield Index is rebalanced monthly. Interest and principal payments earned by the component securities are held in the High Yield Index without a reinvestment return until month end when it is removed from the High Yield Index. Qualifying securities issued, but not necessarily settled, on or before the month-end rebalancing date qualify for inclusion in the High Yield Index in the following month.
Total
returns are calculated based on the sum of price changes, gain/loss on
repayments of principal, and coupon received or accrued, expressed as a
percentage of beginning market value. The High Yield Index is calculated once a
day.
35
The Lehman Brothers AMT-Free California Long Municipal Index is a market size weighted index comprised of publicly traded California municipal bonds that cover the U.S. dollar denominated long term tax exempt bond market. It is a total return benchmark designed for high quality and tax-efficient investments. The California Index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The sectors of general obligation, insured and pre-refunded are further divided into sub-sectors based on the range of maturity. The revenue sector is divided into industry sectors that consist of electric, IDR/PCR, transportation, education, water & sewer, resource recovery, leasing and special tax.
To be included in the California Index, bonds must be rated Baa3/BBB- or higher by at least two of the following ratings agencies: Moody’s Investors Service, Inc., Standard & Poor’s and Fitch Inc. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be at least Baa3/BBB-. Potential California Index constituents must be issued by authorities within California, have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990 and have a nominal maturity of at least 22 years. The following types of bonds are excluded from the California Index: bonds subject to the alternative minimum tax, remarketed issues, taxable municipal bonds, floaters, and derivatives. The Index has four main sectors: general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The California Index is calculated using a market value weighting methodology.
The composition of the California Index is rebalanced monthly. Interest and principal payments earned by the component securities are held in the California Index without a reinvestment return until month end when it is removed from the California Index. Qualifying securities issued, but not necessarily settled, on or before the month-end rebalancing date qualify for inclusion in the California Index in the following month.
Total
returns are calculated based on the sum of price changes, gain/loss on
repayments of principal, and coupon received or accrued, expressed as a
percentage of beginning market value. The California Index is calculated once a
day.
36
The Lehman Brothers AMT-Free New York Long Municipal Index is a market size weighted index comprised of publicly traded New York municipal bonds that cover the U.S. dollar denominated long term tax exempt bond market. It is a total return benchmark designed for high quality and tax-efficient investments. The New York Index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The sectors of general obligation, insured and pre-refunded are further divided into sub-sectors based on the range of maturity. The revenue sector is divided into industry sectors that consist of electric, IDR/PCR, transportation, education, water & sewer, resource recovery, leasing and special tax.
To be included in the New York Index, bonds must be rated Baa3/BBB- or higher by at least two of the following ratings agencies: Moody’s Investors Service, Inc., Standard & Poor’s and Fitch Inc. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be at least Baa3/BBB-. Potential New York Index constituents must be issued by authorities within New York, have an outstanding par value of at least $7 million, have a dated-date after December 31, 1990 and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate and have a nominal maturity of at least 22 years. The following types of bonds are excluded from the New York Index: bonds subject to the alternative minimum tax, remarketed issues, taxable municipal bonds, floaters, and derivatives. The Index has four main sectors: general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The New York Index is calculated using a market value weighting methodology.
The composition of the New York Index is rebalanced monthly. Interest and principal payments earned by the component securities are held in the New York Index without a reinvestment return until month end when it is removed from the New York Index. Qualifying securities issued, but not necessarily settled, on or before the month-end rebalancing date qualify for inclusion in the AMT-Free New York Long Municipal Index in the following month.
Total
returns are calculated based on the sum of price changes, gain/loss on
repayments of principal, and coupon received or accrued, expressed as a
percentage of beginning market value. The New York Index is calculated once a
day.
37
A description of each Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the Funds’ SAI.
ADDITIONAL INVESTMENT STRATEGIES
Each Fund will normally invest at least 80% of its total assets in bonds contained in its respective Index. Each Fund may invest its remaining assets in money market instruments, including repurchase agreements or other funds which invest exclusively in money market instruments (subject to applicable limitations under the 1940 Act, or exemptions therefrom), convertible securities, structured notes (notes on which the amount of principal repayment and interest payments are based on the movement of one or more specified factors, such as the movement of a particular bond or bond index) and in swaps, options and futures contracts. Swaps, floaters, options and futures contracts (and convertible securities and structured notes) may be used by each Fund in seeking performance that corresponds to its respective benchmark index, and in managing cash flows. The Funds will not invest in money market instruments as part of a temporary defensive strategy to protect against potential stock market declines.
The Funds may lend their portfolio securities to brokers, dealers and other financial institutions desiring to borrow securities to complete transactions and for other purposes. In connection with such loans, the Funds receive liquid collateral equal to at least 102% of the value of the portfolio securities being loaned. This collateral is marked-to-market on a daily basis. Although a Fund will receive collateral in connection with all loans of its securities holdings, the Fund would be exposed to a risk of loss should a borrower default on its obligation to return the borrowed securities ( e.g. , the loaned securities may have appreciated beyond the value of the collateral held by the Fund). In addition, the Fund will bear the risk of loss of any cash collateral that it invests.
ADDITIONAL RISKS OF INVESTING IN THE FUNDS
Non-Diversified . Each Fund is a separate investment portfolio of the Trust, which is an open-end investment company registered under the 1940 Act. Each Fund is classified as a “non-diversified” investment company under the 1940 Act. As a result, each Fund is subject to the risk that it will be more volatile than a diversified fund because each Fund may invest its assets in a smaller number of issuers or may invest larger proportions of the assets of the Fund in a single company within the industries that comprise the applicable Index. As a result, the gains and losses on a single security may have a greater impact on a Fund’s NAV and may make a Fund more volatile than diversified funds.
Leverage Risk. To the extent that a Fund borrows money, it may be leveraged; at such times, the Fund may appreciate or depreciate in value more rapidly than its respective Index.
Absence of Prior Active Market . Each Fund is a newly organized series of an investment company and thus has no operating history. While each Fund anticipates that its Shares will be listed on the AMEX, there can be no assurance that active trading markets for the Shares will develop or be maintained. Van Eck Securities Corporation, the distributor of the Shares (the “Distributor”), does not maintain a secondary market in the Shares.
Trading
Issues
. Trading in Shares on the AMEX may be halted
due to market conditions or for reasons that, in the view of the AMEX, make
trading in Shares inadvisable. In addition, trading in Shares on the AMEX is
subject to trading halts caused by extraordinary market volatility pursuant to
AMEX “circuit breaker” rules. There can be no assurance that the requirements
of the AMEX necessary to maintain the listing of the Fund will continue to be
met or will remain unchanged.
38
Fluctuation
of Net Asset Value
. The NAV of the Shares will
fluctuate with changes in the market value of each Fund’s securities holdings.
The market prices of Shares will fluctuate in accordance with changes in NAV
and supply and demand on the AMEX. The Adviser cannot predict whether Shares
will trade below, at or above their NAV. Price differences may be due, in large
part, to the fact that supply and demand forces at work in the secondary
trading market for Shares will be closely related to, but not identical to, the
same forces influencing the prices of the securities of each Index trading
individually or in the aggregate at any point in time. However, given that
Shares can be created and redeemed daily in Creation Units (unlike shares of
closed-end funds, which frequently trade at appreciable discounts from, and
sometimes at premiums to, their NAV), the Adviser believes that large discounts
or premiums to the NAV of the Shares should not be sustained.
Board of Trustees . The Board of Trustees of the Trust has responsibility for the general oversight of the management of the Funds, including general supervision of the Adviser and other service providers, but is not involved in the day-to-day management of the Trust. A list of the Trustees and the Trust officers, and their present positions and principal occupations, is provided in the Funds’ SAI.
Investment Manager . Under the terms of an Investment Management Agreement between the Trust and Van Eck Associates Corporation with respect to the Funds (the “Investment Management Agreement”), Van Eck Associates Corporation serves as the adviser to the Funds and, subject to the supervision of the Board of Trustees, will be responsible for the day-to-day investment management of the Funds. As of September 28, 2007, the Adviser managed approximately $7.1 billion in assets. The Adviser’s principal business address is 99 Park Avenue, 8th Floor, New York, New York 10016.
A discussion regarding the Board of Trustees’ approval of the Investment Management Agreement will be available in the Trust’s annual report for the fiscal year ending April 30, 2008.
For the services provided to each Fund under the Investment Management Agreement, each Fund will pay the Adviser monthly fees based on a percentage of each Fund’s average daily net assets at the annual rate of 0.25% for each Fund other than the Market Vectors—Lehman Brothers High Yield Municipal ETF, for which the annual rate is 0.50%. From time to time, the Adviser may waive all or a portion of its fee. Until at least May 1, 2008, the Adviser has contractually agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of Market Vectors—Lehman Brothers AMT-Free Intermediate Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Long Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Short Municipal ETF, Market Vectors—Lehman Brothers High Yield Municipal ETF, Market Vectors—Lehman Brothers AMT-Free California Long Municipal ETF and Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF (excluding interest expense, offering costs and other trading expenses, taxes and extraordinary expenses) from exceeding 0.20%, 0.24%, 0.16%, 0.35%, 0.24%, and 0.24%, respectively, of average daily net assets per year. The offering costs excluded from the expense caps are: (a) legal fees pertaining to the Funds’ Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid to be listed on an exchange.
Each Fund is responsible for all of its expenses, including the investment advisory fees, costs of transfer agency, custody, legal, audit and other services, interest, taxes, any distribution fees or expenses, offering fees or expenses and extraordinary expenses.
Administrator,
Custodian and Transfer Agent
. Van Eck Associates
Corporation is the administrator for the Funds (the “Administrator”), and The
Bank of New York is the custodian of each Fund’s assets and provides transfer
agency and fund accounting services to the Funds. The Administrator
39
is responsible
for certain clerical, recordkeeping and/or bookkeeping services which are
provided pursuant to the relevant Investment Management Agreement.
Distributor . Van Eck Securities Corporation is the distributor of each Fund’s Shares. The Distributor will not distribute Shares in less than Creation Units, and it does not maintain a secondary market in the Shares. As noted in the section entitled “Shareholder Information-Buying and Selling Exchange-Traded Shares,” the Shares are traded in the secondary market.
The
portfolio managers who are currently responsible for the day-to-day management
of each Fund’s portfolio are James T. Colby III and Michael F. Mazier.
Mr. Colby has been employed by the Adviser since September 2007. Prior to
joining the Adviser, Mr. Colby served as Senior Portfolio Manager and
Director of Municipal High Yield for Lord Abbett as well as Director and Senior
Portfolio Manager for Municipal Fixed Income at the John Hancock Funds in
Boston. Mr. Colby graduated from Brown University in 1972 with a Bachelor
of Arts in Economics and International Relations; and from Hofstra University
in 1979 with a Masters of Business Administration in Finance
.
Mr. Mazier
has been employed by the Adviser since August 2007. Prior to joining the
Adviser, Mr. Mazier served as a bond analyst in the Fixed Income Research
department of Morgan Stanley. He was also Vice President at Merrill Lynch
Global Research Department, where he covered closed-end funds. Mr. Mazier
graduated from Syracuse University in 1983 with a Bachelor of Science majoring
in Electrical Engineering; graduated from Villanova University in 1986 with a
Master of Science in Computer Engineering; and graduated from Columbia Business
School in 1990 with a Master of Business Administration. Neither Mr. Colby
nor Mr. Mazier manages any other accounts of any type for the Adviser. See
the Funds’ SAI for additional information about the portfolio managers’
compensation, other accounts managed by the portfolio managers and their
respective ownership of Shares.
40
Determination of Net Asset Value
The net asset value (“NAV”) per Share for each 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. Expenses and fees, including the management fee, are accrued daily and taken into account for purposes of determining NAV. The NAV of each Fund is determined each business day after the close of trading (ordinarily 4:00 p.m., Eastern time) of the AMEX.
Each Fund’s portfolio securities (except for short-term taxable debt securities and certain other investments) are valued by an outside independent pricing service. The service uses a computerized grid matrix of tax-exempt securities and its evaluations in determining what it believes is the fair value of the portfolio securities. The Board of Trustees believes that timely and reliable market quotations are generally not readily available to each Fund to value tax-exempt securities and the valuations that the pricing service supplies are more likely to approximate the fair value of the securities. U.S. municipal securities may be valued as of the announced closing time for trading in municipal instruments on any day that the Securities Industry and Financial Markets Association (“SIFMA”) announces an early closing time. Each Fund may also use fair value pricing in a variety of circumstances, including but not limited to, situations when the value of a security in a Fund’s portfolio has been materially affected by events occurring after the close of the market on which the security is principally traded (such as a corporate action or other news that may materially affect the price of a security) or trading in a security has been suspended or halted. Accordingly, a Fund’s NAV is expected to 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 security is materially different than the value that could be realized upon the sale of the security. In addition, fair value pricing could result in a difference between the prices used to calculate a Fund’s NAV and the prices used by the Fund’s benchmark index. This may adversely affect a Fund’s ability to track its benchmark index.
Buying and Selling Exchange-Traded Shares
It is anticipated that the Shares of each of the Funds will be listed on the AMEX. If you buy or sell Shares in the secondary market, you will incur customary brokerage commissions and charges and may pay some or all of the spread between the bid and the offered price in the secondary market on each leg of a round trip (purchase and sale) transaction. It is anticipated that the Shares of the Funds will trade in the secondary market at prices that may differ to varying degrees from the closing NAVs of the Shares. Given, however, that Shares can be created and redeemed daily in Creation Units, the Adviser believes that large discounts and premiums to NAV should not be sustained for very long.
The
Depository Trust Corporation (“DTC”) serves as securities depository for the
Shares. (The Shares may be held only in book-entry form; stock certificates
will not be issued.) DTC, or its nominee, is the record or registered owner of
all outstanding Shares. Beneficial ownership of Shares will be shown on the
records of DTC or its participants (described below). Beneficial owners of
Shares are not entitled to have Shares registered in their names, will not
receive or be entitled to receive physical delivery of certificates in
definitive form and are not considered the registered holder thereof.
Accordingly, to exercise any rights of a holder of Shares, each beneficial
owner must rely on the procedures of: (i) DTC; (ii) “DTC Participants,”
i.e.
,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, some of whom (and/or their representatives)
own DTC; and (iii) “Indirect Participants,”
i.e.
, brokers, dealers, banks and trust
companies that clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly, through which such beneficial owner holds its
interests. The Trust understands that under existing industry practice, in the
event the Trust
41
requests any
action of holders of Shares, or a beneficial owner desires to take any action
that DTC, as the record owner of all outstanding Shares, is entitled to take,
DTC would authorize the DTC Participants to take such action and that the DTC
Participants would authorize the Indirect Participants and beneficial owners
acting through such DTC Participants to take such action and would otherwise
act upon the instructions of beneficial owners owning through them. As
described above, the Trust recognizes DTC or its nominee as the owner of all
Shares for all purposes. For more information, see the section entitled “Book
Entry Only System” in the Funds’ SAI.
Market Timing and Related Matters . The Funds impose no restrictions on the frequency of purchases and redemptions. In determining not to approve a written, established policy limiting purchases and redemptions, the Board of Trustees evaluated the nature of the Funds ( i.e. , a fund whose shares are expected to trade intra-day). In particular, the Board of Trustees considered that, unlike traditional mutual funds, the Funds generally issue and redeem their Shares at the NAV per Share for a basket of securities intended to mirror each Fund’s portfolio, plus a small amount of cash, and Shares may be purchased and sold in the secondary market at prevailing market prices.
Given this structure, the Board of Trustees determined that it is unlikely that (a) market timing would be attempted by a Fund’s shareholders or (b) any attempts to market time the Funds by shareholders would result in negative impact to the Funds or their shareholders. However, creations and redemptions of Creation Units consisting of a significant amount of cash, although expected to be rare, could create the potential for market timing with its negative impact to the Funds and their shareholders.
Creation and Redemption of Creation Units
The Trust issues and redeems Shares at NAV only in a large specified number of Shares called a “Creation Unit.” A Creation Unit consists of 50,000 Shares. The Funds generally issue and redeem Creation Units only in-kind in exchange for a portfolio of fixed income securities included in each respective benchmark index and a relatively small cash payment. Except when aggregated in Creation Units, the Shares are not redeemable securities of the Funds. See “Shareholder Information—Buying and Selling Exchange-Traded Shares” and “—Procedures for Creation of Creation Units.”
Fund Deposits . The consideration for creation of Creation Units of the Funds generally consists of the in-kind deposit of a portfolio of fixed income securities (the “Deposit Securities”) and an amount of cash computed as described below (the “Cash Component”) and together with the Deposit Securities, the “Fund Deposit.” The specified Deposit Securities generally will correspond pro rata, to the extent practicable, to the component securities of a Fund. As described below, the categories of the Deposit Securities will be made available by the Administrator through the facilities of the National Securities Clearing Corporation (the “NSCC”) immediately prior to the opening of business each day of the AMEX. The Cash Component represents the difference between the NAV of a Creation Unit and the market value of the Deposit Securities and may include an additional payment as described in the Funds’ SAI.
Pursuant
to a patent pending process, and subject to the receipt of appropriate
regulatory relief, the Funds may in the future divide the daily list of Deposit
Securities into different “categories,” based on various risk and return
characteristics that may include (but not be limited to): (1) credit
rating; (2) sector (e.g., revenue, pre-refunded or insured bonds);
(3) issuer (or state of issuer); (4) call date; (5) maturity;
and (6) coupon yield. With respect to each category, an Authorized
Participant (as defined below) would be required to contribute one bond from
each category in-kind as a Deposit Security in a Portfolio Deposit. Each Fund
will reserve the right to reject bonds contributed by an Authorized Participant
as Deposit Securities in certain limited circumstances (such as when a
materially adverse development has occurred during the business day with
respect to a bond’s issuer).
42
Procedures
for Creation of Creation Units
. To be eligible to
place orders with the Distributor to create Creation Units of the Funds, an
entity or person either must be (1) a “Participating Party,”
i.e.
,
a broker-dealer or other participant through the Continuous Net Settlement
System of the NSCC; or (2) a DTC Participant; and, in either case, must have
executed an agreement with the Trust and with the Distributor 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.” All Creation Units of the Funds, however created,
will be entered on the records of the Depository in the name of Cede & Co.
for the account of a DTC Participant.
At any given time, there may be only a limited number of broker-dealers that have executed a Participant Agreement. Those placing orders to create Creation Units of the Funds should afford sufficient time to permit proper submission of the order to the Distributor prior to the Closing Time on the date on which a creation (or redemption order, as discussed below) is placed (the “Transmittal Date”).
Acceptance of Creation Order . The Trust reserves the absolute right to reject a creation order transmitted to it by the Distributor if, for any reason: (a) the order is not in proper form; (b) the creator or creators, upon obtaining the Shares ordered, would own 80% or more of the currently outstanding Shares of a Fund; (c) the Deposit Securities delivered do not conform to the relevant category of the list of Deposit Securities, as described above; (d) acceptance of the Deposit Securities would have certain adverse tax consequences to a 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) in the event that 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, telecopy and 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 Trust shall notify a prospective creator of its rejection of the order of such person. The Trust and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits nor shall either of them incur any liability for the failure to give any such notification. The Trust shall notify a prospective creator of its rejection of the order of such person.
All questions as to the number of Shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust’s determination shall be final and binding.
Creation
Transaction Fee
. A fixed creation transaction fee of
$500, which is paid to the Funds (the “Creation Transaction Fee”), is
applicable to each transaction regardless of the number of Creation Units
purchased in the transaction. An additional charge of up to four times the
Creation Transaction Fee may be imposed to the extent that cash is used in lieu
of securities to purchase Creation Units. See “Creation and Redemption of Creation Units” in
the SAI. The price for each Creation Unit will equal the daily NAV per Share
times the number of Shares in a Creation Unit plus the fees described above
and, if applicable, any transfer taxes. Shares of the Funds may be issued in
advance of receipt of all Deposit Securities subject to various conditions,
including a requirement to
43
maintain on
deposit with the Funds cash at least equal to 115% of the market value of the
missing Deposit Securities. See “Creation and Redemption of Creation Units” in
the Funds’ SAI.
Redemption of Creation Units . 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, only on a day on which the AMEX is open for trading and only through a Participating Party or DTC Participant, who has executed a Participant Agreement. The Trust will not redeem Shares in amounts less than Creation Units . Beneficial owners also may sell Shares in the secondary market, but must accumulate enough Shares 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.
The Administrator, through NSCC, makes available immediately prior to the opening of business on the AMEX (currently 9:30 a.m. Eastern time) on each day that the AMEX is open for business, the securities held by a Fund (“Fund Securities”) that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day. The specified Fund Securities generally will correspond pro rata, to the extent practicable, to the component securities of a Fund.
As with respect to the purchase of Creation Units, pursuant to a patent pending process, the Funds may in the future, subject to the receipt of appropriate regulatory relief, divide the daily list of Fund Securities into different “categories,” based on the same criteria set forth hereof in each Fund’s “Principal Investment Objective and Strategies - Indexing Investment Approach” regarding the division of each Fund’s underlying index into categories. Each category may contain both Component Securities and Similar Securities. In determining the Fund Securities and the order in which they are listed within each category, the Adviser would seek to construct a redemption basket that will reflect the general characteristics of the Fund’s portfolio. Upon each request for a redemption of Creation Units, the Custodian, acting on behalf of the Adviser, would allocate the first bond on the list from each category (as of the time such redemption request is received by the Transfer Agent) to such redeemer to receive in-kind.
Fund Securities received on redemption may not be identical to Deposit Securities which are applicable to purchasers of Creation Units. Unless cash redemptions are available or specified for the Funds, the redemption proceeds for a Creation Unit generally consist of Fund Securities, 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 Fund Securities, less the redemption transaction fee described below. The redemption transaction fee of $500 is deducted from such redemption proceeds. Should the Fund Securities have a value greater than the NAV of Shares being redeemed, a compensating cash payment to the Trust equal to the differential, plus the applicable redemption fee and, if applicable, any transfer taxes will be required to be arranged for by or on behalf of the redeeming shareholder. The basic redemption transaction fees are the same no matter how many Creation Units are being redeemed pursuant to any one redemption request. The Funds may adjust these fees from time to time based upon actual experience. An additional charge up to four times the redemption transaction fee may be charged for cash redemptions or partial cash redemptions (when cash redemptions are available). Investors who use the services of a broker or other such intermediary may be charged a fee for such services. Investors should refer to “Creation and Redemption of Creation Units” in the Funds’ SAI for details regarding the logistics of redemption orders.
Redemptions
of Shares for Fund Securities will be subject to compliance with applicable
U.S. Federal and state securities laws, and the Funds (whether or not it
otherwise permits cash redemptions)
44
reserves the
right to redeem Creation Units for cash to the extent that the Funds could not
lawfully deliver specific Deposit Securities upon redemptions or could not do so
without first registering the Fund Securities under such laws. Deliveries of
Fund Securities to redeeming investors generally will be made within three
business days.
The right of redemption may be suspended or the date of payment postponed (1) for any period during which the AMEX is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the AMEX is suspended or restricted; (3) for any period during which an emergency exists as a result of which disposal of the Shares of the Funds or determination of its NAV is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.
Investors interested in creating and/or redeeming Creation Units should refer to the more detailed information “Creation and Redemption of Creation Units” in the Funds’ SAI.
Net Investment Income and Capital Gains . As a Fund shareholder, you are entitled to your share of the Fund’s distributions of net investment income and net realized capital gains on its investments. The Funds pay out substantially all of their net earnings to their shareholders as “distributions.”
The Funds typically earn income dividends from stocks and interest from debt securities. These amounts, net of expenses, are typically passed along to Fund shareholders as dividends from net investment income. The Funds realize capital gains or losses whenever they sell securities. Net capital gains are distributed to shareholders as “capital gain distributions.”
Net investment income is typically distributed to shareholders monthly while capital gains are typically distributed to shareholders at least annually. Dividends may be declared and paid more frequently to improve index tracking or to comply with the distribution requirements of the Internal Revenue Code. In addition, the Funds may determine to distribute at least annually amounts representing the full dividend yield net of expenses on the underlying investment securities, as if the Funds owned the underlying investment securities for the entire dividend period in which case some portion of each distribution may result in a return of capital. You will be notified regarding the portion of the distribution which represents a return of capital.
Distributions in cash may be reinvested automatically in additional Shares of your Fund only if the broker through which you purchased Shares makes such option available.
As with any investment, you should consider how your Fund investment will be taxed. The tax information in this Prospectus is provided as general information. You should consult your own tax professional about the tax consequences of an investment in the Funds. Unless your investment in a Fund is through a tax-exempt entity or taxed deferred retirement account, such as a 401 (k) plan, you need to be aware of the possible tax consequences when: (i) a Fund makes distributions; (ii) you sell Shares in the secondary market or (iii) you create or redeem Creation Units.
Taxes
on Distributions
. The Funds expect to distribute net
investment income at least annually, and any net realized long-term or
short-term capital gains annually. Each Fund may also pay a special distribution
at the end of the calendar year to comply with U.S. federal tax requirements.
Dividends paid by the Fund that are properly designated as exempt-interest
dividends will not be subject to regular federal income tax. The Fund intends
to invest its assets in a manner such that a significant portion of its
45
dividend
distributions to shareholders will generally be exempt from U.S. federal income
taxes. Depending on a shareholder’s state of residence, exempt-interest
dividends from interest earned on municipal securities of a state or its
political subdivisions may be exempt in the hands of such shareholder from
income tax in that state. However, income from municipal securities of states
other than the shareholder’s state of residence generally will not qualify for
tax-free treatment for such shareholder.
Distributions from a Fund’s net investment income (other than net tax-exempt income), including any net short-term capital gains, if any, and distributions of income from securities lending, are taxable to you as ordinary income. In general, nontax-exempt distributions are subject to U.S. federal income tax when they are paid, whether you take them in cash or reinvest them in the Fund. Long-term capital gains distributions will result from gains on the sale or exchange of capital assets held by a Fund for more than one year. Any long-term capital gains distributions you receive from a Fund are taxable as long-term capital gains, regardless of how long you have held the Shares. Long-term capital gains are currently taxed at a maximum noncorporate rate of 15%. Absent further legislation, the maximum rate of 15% tax rate long-term capital gains will cease to apply to taxable years beginning after December 31, 2010.
The Market Vectors—Lehman Brothers High Yield Municipal ETF may invest a portion of its assets in certain “private activity bonds.” As a result, a portion of the exempt-interest dividends paid by the Fund will be an item of tax preference to shareholders subject to the alternative minimum tax. Certain corporations which are subject to the alternative minimum tax may also have to include exempt-interest dividends in calculating their alternative minimum taxable income in situations where the “adjusted current earnings” of the corporation exceeds its alternative minimum taxable income.
If you lend your Fund Shares pursuant to securities lending or similar arrangements you may lose the ability to treat Fund dividends (paid while the Shares are held by the borrower) as tax-exempt income. Also, interest on indebtedness incurred by a shareholder to purchase or carry shares of the Funds will not be deductible for U.S. federal income tax purposes. Consult your financial intermediary or tax adviser, before entering into such arrangements.
Exempt-interest dividends from the Fund are taken into account in determining the taxable portion of any Social Security or railroad retirement benefits that you receive.
Distributions in excess of a Fund’s current and accumulated earnings and profits are treated as a tax-free return of capital to the extent of your basis in the Shares, and as capital gain thereafter. A distribution will reduce a Fund’s NAV per Share and may be taxable to you as ordinary income or capital gain even though, from an economic standpoint, the distribution may constitute a return of capital.
Market Discount . Any market discount recognized on a bond is taxable as ordinary income. A market discount bond is a bond acquired in the secondary market at a price below redemption value or adjusted issue price if issued with original issue discount. Absent an election by the Fund to include the market discount in income as it accrues, gain on the fund’s disposition of such an obligation will be treated as ordinary income rather than capital gain to the extent of the accrued market discount.
If
you are not a citizen or resident alien of the United States, each Fund’s
ordinary income dividends (which include distributions of net short-term
capital gains) will generally be subject to a 30% U.S. withholding tax, unless
a lower treaty rate applies or unless such income is effectively connected with
a U.S. trade or business carried on through a permanent establishment in the
United States. The Funds may, under certain circumstances, designate all or a
portion of a dividend as an “interest-related dividend” that if received by a
nonresident alien or foreign entity generally would be exempt from the 30% U.S.
withholding tax, provided that certain other requirements are met. The Funds
may also, under certain circumstances, designate all or a portion of a dividend
as a “short-term capital gain dividend”
46
which if
received by a nonresident alien or foreign entity generally would be exempt
from the 30% U.S. withholding tax, unless the foreign person is a nonresident
alien individual present in the United States for a period or periods
aggregating 183 days or more during foreign person’s taxable year. However, the
Funds do not expect to pay significant amounts of “interest-related dividends”
or “short-term capital gains dividends.” The provisions contained in the
legislation relating to dividends to non-U.S. persons would apply to dividends
with respect to taxable years of the Fund beginning before January 1, 2008.
By law, the Funds must withhold a percentage of your distributions and proceeds if you have not provided a taxpayer identification number or social security number. The backup withholding rate for individuals is currently 28%. This is not an additional tax and may be refunded, or credited against your tax liability, provided certain required information is furnished to the Internal Revenue Service.
Taxes on the Sale of Exchange-Listed Shares . Currently, any capital gain or loss realized upon a sale of Shares is generally treated as long-term capital gain or loss if the Shares have been held for more than one year and as short-term capital gain or loss if held for one year or less, except that any capital loss on the sale of Shares held for six months or less is treated as long-term capital loss to the extent that capital gain dividends were paid with respect to such Shares.
Taxes on Creations and Redemptions of Creation Units . A person who exchanges equity securities for Creation Units generally will recognize a gain or loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time of exchange, and the exchanger’s aggregate basis in the securities surrendered, taking into consideration 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 exchangor’s basis in the Creation Units and the aggregate market value of the securities received. The Internal Revenue Service, however, may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing “wash sales,” or on the basis that there has been no significant change in economic position. Persons exchanging securities should consult their own tax adviser with respect to whether wash sale rules apply and when a loss might be deductible.
Under current U.S. federal income tax laws, any capital gain or loss realized upon a 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 you create or redeem Creation Units, you will be sent a confirmation statement showing how many Shares you created or sold and at what price.
The
foregoing discussion summarizes some of the consequences under current U.S.
federal income tax law of an investment in the Funds. It is not a substitute
for personal tax advice. Consult your own tax advisor about the potential tax
consequences of an investment in the Funds under all applicable tax laws.
47
The Adviser has entered into a licensing agreement with Lehman Brothers to use the Lehman Brothers AMT-Free Intermediate Continuous Municipal Index, Lehman Brothers AMT-Free Long Continuous Municipal Index, Lehman Brothers AMT-Free Short Continuous Municipal Index, Lehman Brothers Non-Investment Grade Municipal Index, Lehman Brothers AMT-Free California Long Municipal Index and Lehman Brothers AMT-Free New York Long Municipal Index. Each Fund is entitled to use its respective benchmark Index pursuant to a sub-licensing arrangement with the Adviser.
Lehman Brothers and Lehman Brothers Inc. are trademarks of the Licensor and have been licensed for use in connection with the listing and trading of the Funds on the AMEX. The Funds are not sponsored by, endorsed, sold or promoted by the Licensor and Licensor makes no representation regarding the advisability of investing in them.
The Adviser acknowledges and expressly agrees that the Funds are not sponsored, endorsed, sold or promoted by Licensor, and that Licensor makes no warranty, express or implied, as to the results to be obtained by any person or entity from the use of any Index, any opening, intra-day or closing value therefor, or any data included therein or relating thereto, in connection with the trading of any exchange traded fund or option contract on exchange traded funds based thereon or for any other purpose. Licensor’s only relationship to the Adviser with respect to the Funds is the licensing of certain trademarks and trade names of Licensor and the Indexes that are determined, composed and calculated by Licensor without regard to the Adviser or the Funds. Licensor has no obligation to take the needs of the Adviser or the owners of the Funds into consideration in determining, composing or calculating the Indexes. Licensor is not responsible for and has not participated in any determination or calculation made with respect to issuance of the Funds. Licensor has no obligation or liability in connection with the listing, trading, marketing or administration of the Funds.
LICENSOR
DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEXES, OR ANY
OPENING, INTRA-DAY OR CLOSING VALUE THEREFOR, OR ANY DATA INCLUDED THEREIN OR
RELATED THERETO. LICENSOR MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS
TO BE OBTAINED BY OWNERS OF THE FUNDS OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE INDEXES, ANY OPENING, INTRA-DAY OR CLOSING VALUE THEREFOR, ANY DATA
INCLUDED THEREIN OR RELATING THERETO, OR ANY EXCHANGE TRADED FUND OR OPTION
CONTRACT ON EXCHANGE TRADED FUNDS BASED THEREON, IN CONNECTION WITH THE RIGHTS
LICENSED OR FOR ANY OTHER USE. LICENSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES,
AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE WITH RESPECT TO THE INDEXES, ANY OPENING, INTRA-DAY OR
CLOSING VALUE THEREFOR, ANY DATA INCLUDED THEREIN OR RELATING THERETO, OR ANY
EXCHANGE TRADED FUND OR OPTION CONTRACT ON EXCHANGE TRADED FUNDS BASED THEREON.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL LICENSOR HAVE ANY
LIABILITY FOR ANY DAMAGES, CLAIMS, LOSSES (INCLUDING ANY INDIRECT OR
CONSEQUENTIAL LOSSES), EXPENSES OR DELAYS, WHETHER DIRECT OR INDIRECT, FORESEEN
OR UNFORESEEN, SUFFERED BY ANY PERSON ARISING OUT OF ANY CIRCUMSTANCE OR
OCCURRENCE RELATING TO THE PERSON’S USE OF ANY INDEX, ANY OPENING, INTRA-DAY OR
CLOSING VALUE THEREFOR, ANY DATA INCLUDED THEREIN OR RELATING THERETO, OR ANY
EXCHANGE TRADED FUND OR OPTION CONTRACT ON EXCHANGE TRADED FUNDS BASED THEREON,
OR ARISING OUT OF ANY ERRORS OR DELAYS IN CALCULATING OR DISSEMINATING SUCH
INDEX.
48
The
Funds have not yet commenced operations as of the date of this Prospectus and
therefore do not have a financial history.
49
The Trust was organized as a Delaware statutory trust on March 15, 2001. Its Declaration of Trust currently permits the Trust to issue an unlimited number of Shares of beneficial interest. If shareholders are required to vote on any matters, each Share outstanding would be entitled to one vote. Annual meetings of shareholders will not be held except as required by the 1940 Act and other applicable law. See the Funds’ SAI for more information concerning the Trust’s form of organization. Section 12(d)(1) of the 1940 Act restricts investments by investment companies in the securities of other investment companies, including Shares of the Funds. Registered investment companies are permitted to invest in the Funds beyond the limits set forth in Section 12(d)(1) subject to certain terms and conditions set forth in an SEC exemptive order issued to the Trust, including that such investment companies enter into an agreement with a Fund.
Clifford Chance US LLP serves as counsel to the Trust, including the Funds. Ernst & Young LLP serves as the Funds’ independent registered public accounting firm and will audit the Funds’ financial statements annually.
This Prospectus does not contain all the information included in the Registration Statement filed with the SEC with respect to the Funds’ Shares. Information about the Funds can be reviewed and copied at the SEC’s Public Reference Room and information on the operation of the Public Reference Room may be obtained by calling the SEC at 1.202.551.8090. The Funds’ Registration Statement, including this Prospectus, the Funds’ SAI and the exhibits may be examined at the offices of the SEC (100 F Street, NE, Washington, DC 20549) or on the Edgar database at the SEC’s website (http://www.sec.gov), and copies may be obtained, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, DC 20549-0102. These documents and other information concerning the Trust also may be inspected at the offices of the AMEX (86 Trinity Place, New York, New York 10006).
The SAI for these Funds, which has been filed with the SEC, provides more information about the Funds. The SAI for these Funds is incorporated herein by reference and is legally part of this Prospectus. It may be obtained without charge by writing to the Funds at Van Eck Securities Corporation, each Fund’s distributor, at 99 Park Avenue, New York, NY 10016 or by calling the distributor at the following number: Investor Information: 1.888.MKT.VCTR (658-8287).
Shareholder inquiries may be directed to a Fund in writing to 99 Park Avenue, 8th Floor, New York, New York 10016.
The
Funds’ SAI will be available through their website at www.vaneck.com/etf.
50
MARKET VECTORS ETF TRUST
Dated [ ˜ ] , 2007
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New York State and City Tax—Market Vectors-Lehman Brothers AMT-Free New York Long Municipal ETF |
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- ii -
Lehman Brothers and Lehman Brothers Inc. are trademarks of the Licensor and have been licensed for use in connection with the listing and trading of the Funds on the American Stock Exchange, LLC (the “AMEX”). The Funds are not sponsored by, endorsed, sold or promoted by the Licensor and Licensor makes no representation regarding the advisability of investing in them.
The Adviser acknowledges and expressly agrees that the Funds are not sponsored, endorsed, sold or promoted by Licensor, and that Licensor makes no warranty, express or implied, as to the results to be obtained by any person or entity from the use of any Index, any opening, intra-day or closing value therefor, or any data included therein or relating thereto, in connection with the trading of any exchange traded fund or option contract on exchange traded funds based thereon or for any other purpose. Licensor’s only relationship to the Adviser with respect to the Funds is the licensing of certain trademarks and trade names of Licensor and the Indexes that are determined, composed and calculated by Licensor without regard to the Adviser or the Funds. Licensor has no obligation to take the needs of the Adviser or the owners of the Funds into consideration in determining, composing or calculating the Indexes. Licensor is not responsible for and has not participated in any determination or calculation made with respect to issuance of the Funds. Licensor has no obligation or liability in connection with the listing, trading, marketing or administration of the Funds.
The Trust is an open-end management investment company. The Trust currently consists of thirteen investment series. This SAI relates to six investment series, Market Vectors—Lehman Brothers AMT-Free Intermediate Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Long Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Short Municipal ETF, Market Vectors—Lehman Brothers High Yield Municipal ETF, Market Vectors—Lehman Brothers AMT-Free California Long Municipal ETF and Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF (each a “Fund,” and collectively, the “Funds”). The Funds invest in municipal securities consisting of some or all of the component securities of each Fund’s respective benchmark index. The Trust was organized as a Delaware statutory trust on March 15, 2001. The shares of each Fund are referred to herein as “Shares.”
The Funds offer and issue Shares at their net asset value (“NAV”) only in aggregations of a specified number of Shares (each, a “Creation Unit”), usually in exchange for a basket of Deposit Securities (together with the deposit of a specified cash payment). It is anticipated that the Shares of each Fund will be listed on the American Stock Exchange, LLC (“AMEX”) and will trade in the secondary market at market prices. Those prices may differ from the Shares’ NAV. Similarly, Shares are also redeemable by the Funds only in Creation Units, and generally in exchange for specified securities held by each Fund and a specified cash payment. A Creation Unit consists of 50,000 Shares of each Fund.
2
The Funds invest a substantial portion of their assets in U.S.-registered, dollar-denominated bonds. A bond is an interest-bearing security issued by a company, governmental unit or, in some cases, a non-U.S. entity. The issuer of a bond has a contractual obligation to pay interest at a stated rate on specific dates and to repay principal (the bond’s face value) periodically or on a specified maturity date. Bonds generally are used by corporations and governments to borrow money from investors.
The Funds will invest in securities issued by states, municipalities and other political subdivisions, agencies, authorities and instrumentalities of states and multi-state agencies or authorities. Municipal securities share the attributes of debt/fixed income securities in general, but are generally issued by states, municipalities and other political subdivisions, agencies, authorities and instrumentalities of states and multi-state agencies or authorities. The municipal securities which the Fund may purchase include general obligation bonds and limited obligation bonds (or revenue bonds), including industrial development bonds issued pursuant to former federal tax law. General obligation bonds are obligations involving the credit of an issuer possessing taxing power and are payable from such issuer’s general revenues and not from any particular source. Limited obligation bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source. Tax-exempt industrial development bonds generally are also revenue bonds and thus are not payable from the issuer’s general revenues. The credit and quality of industrial development bonds are usually related to the credit of the corporate user of the facilities. Payment of interest on and repayment of principal of such bonds is the responsibility of the corporate user (and/or any guarantor). In addition, each Fund may invest in lease obligations. Lease obligations may take the form of a lease or an installment purchase contract issued by public authorities to acquire a wide variety of equipment and facilities.
The Funds may invest in repurchase agreements with commercial banks, brokers or dealers to generate income from its excess cash balances and to invest securities lending cash collateral. A repurchase agreement is an agreement under which a Fund acquires a money market instrument (generally a security issued by the U.S. Government or an agency thereof, a banker’s acceptance or a certificate of deposit) from a seller, subject to resale to the seller at an agreed upon price and date (normally, the next business day). A repurchase agreement may be considered a loan collateralized by securities. The resale price reflects an agreed upon interest rate effective for the period the instrument is held by a Fund and is unrelated to the interest rate on the underlying instrument.
3
Futures Contracts, Options and Swap Agreements
The Funds may utilize futures contracts, options and swap agreements. Futures contracts generally provide for the future sale by one party and purchase by another party of a specified instrument, index or commodity at a specified future time and at a specified price. Stock index futures contracts are settled daily with a payment by one party to the other of a cash amount based on the difference between the level of the stock index specified in the contract from one day to the next. Futures contracts are standardized as to maturity date and underlying instrument and are traded on futures exchanges. The Funds may use futures contracts, and options on futures contracts based on other indexes or combinations of indexes that the Adviser (defined below) believes to be representative of each Fund’s respective benchmark index.
Although futures contracts (other than cash settled futures contracts including most stock index futures contracts) by their terms call for actual delivery or acceptance of the underlying instrument or commodity, in most cases the contracts are closed out before the maturity date without the making or taking of delivery. Closing out an open futures position is done by taking an opposite position (“buying” a contract which has previously been “sold,” or “selling” a contract previously “purchased”) in an identical contract to terminate the position. Brokerage commissions are incurred when a futures contract position is opened or closed.
Futures traders are required to make a good faith margin deposit in cash or government securities with a broker or custodian to initiate and maintain open positions in futures contracts. A margin deposit is intended to assure completion of the contract (delivery or acceptance of the underlying instrument or commodity or payment of the cash settlement amount) if it is not terminated prior to the specified delivery date. Brokers may establish deposit requirements which are higher than the exchange minimums. Futures contracts are customarily purchased and sold on margin deposits which may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is marked to market daily. If the futures contract price changes to the extent that the margin on deposit does not satisfy margin requirements, payment of additional “variation” margin will be required.
Conversely, a change in the contract value may reduce the required margin, resulting in a repayment of excess margin to the contract holder. Variation margin payments are made to and from the futures broker for as long as the contract remains open. The Funds expect to earn interest income on their margin deposits.
4
Restrictions on the Use of Futures and Options
Except as otherwise specified in the Funds’ Prospectus or this SAI, there are no limitations on the extent to which the Funds may engage in transactions involving futures and options thereon. The Funds will take steps to prevent their futures positions from “leveraging” its securities holdings. When it has a long futures position, it will maintain with its custodian bank, cash or liquid securities having a value equal to the notional value of the contract (less any margin deposited in connection with the position). When it has a short futures position, as part of a complex stock replication strategy the Funds will maintain with their custodian bank assets substantially identical to those underlying the contract or cash and liquid securities (or a combination of the foregoing) having a value equal to the net obligation of each Fund under the contract (less the value of any margin deposits in connection with the position).
Swap agreements are contracts between parties in which one party agrees to make payments to the other party based on the change in market value or level of a specified index or asset. In return, the other party agrees to make payments to the first party based on the return of a different specified index or asset. Although swap agreements entail the risk that a party will default on its payment obligations thereunder, each Fund seeks to reduce this risk by entering into agreements that involve payments no less frequently than quarterly. The net amount of the excess, if any, of a Fund’s obligations over its entitlements with respect to each swap is accrued on a daily basis and an amount of cash or high liquid securities having an aggregate value at least equal to the accrued excess is maintained in an account at the Trust’s custodian bank.
The Funds may take advantage of opportunities in the area of options, futures contracts, options on futures contracts, options on the Funds, warrants, swaps and any other investments which are not presently contemplated for use or which are not currently available, but which may be developed, to the extent such investments are considered suitable for a Fund by the Adviser.
The Trust has adopted the following investment restrictions as fundamental policies with respect to each Fund. These restrictions cannot be changed without the approval of the holders of a majority of the Fund’s outstanding voting securities. For purposes of the Investment Company Act of 1940, as amended (the “1940 Act”), a majority of the outstanding voting securities of a Fund means the vote, at an annual or a special meeting of the security holders of the Trust, of the lesser of (1) 67% or more of the voting securities of the Fund present at such meeting, if the holders of more than 50% of the outstanding voting securities of the Fund are present or represented by proxy, or (2) more than 50% of the outstanding voting securities of the Fund. Under these restrictions:
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1. |
Each Fund may not make loans, except that the Fund may (i) lend portfolio securities, (ii) enter into repurchase agreements, (iii) purchase all or a portion of an issue of debt securities, bank loan or participation interests, bank certificates of deposit, bankers’ acceptances, debentures or other securities, whether or not the purchase is made upon the original issuance of the securities and (iv) participate in an interfund lending program with other registered investment companies; |
5
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Each Fund may not borrow money, except as permitted under the 1940 Act, and as interpreted or modified by regulation from time to time; |
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Each Fund may not issue senior securities except as permitted under the 1940 Act, and as interpreted or modified by regulation from time to time; |
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Each Fund may not purchase a security (other than obligations of the U.S. Government, its agencies or instrumentalities) if, as a result, 25% or more of its total assets would be invested in a single issuer; |
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5. |
Each Fund may not purchase or sell real estate, except that the Fund may (i) invest in securities of issuers that invest in real estate or interests therein; (ii) invest in mortgage-related securities and other securities that are secured by real estate or interests therein; and (iii) hold and sell real estate acquired by the Fund as a result of the ownership of securities; |
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6. |
Each Fund may not engage in the business of underwriting securities issued by others, except to the extent that the Fund may be considered an underwriter within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), in the disposition of restricted securities or in connection with its investments in other investment companies; |
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Each Fund may not purchase or sell commodities, unless acquired as a result of owning securities or other instruments, but it may purchase, sell or enter into financial options and futures, forward and spot currency contracts, swap transactions and other financial contracts or derivative instruments and may invest in securities or other instruments backed by commodities; or |
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Each Fund may not purchase any security if, as a result of that purchase, 25% or more of its total assets would be invested in securities of issuers having their principal business activities in the same industry, except that the Funds may invest 25% or more of the value of its total assets in securities of issuers in any one industry or group of industries if the index that the Fund replicates concentrates in an industry or group of industries. This limit does not apply to securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. |
In addition, each Fund has adopted a fundamental investment policy to invest at least 80% of its assets in investments suggested by its name. For purposes of this policy, the term “assets” means net assets plus the amount of borrowings for investment purposes.
In addition to the investment restrictions and policy adopted as fundamental policies as set forth above, each Fund observes the following restrictions, which may be changed by the Board without a shareholder vote. Each Fund will not:
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Invest in securities which are “illiquid” securities, including repurchase agreements maturing in more than seven days and options traded over-the-counter, if the result is that more than 15% of a Fund’s net assets would be invested in such securities. |
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Mortgage, pledge or otherwise encumber its assets, except to secure borrowing effected in accordance with the fundamental restriction on borrowing set forth below. |
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Make short sales of securities. |
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Purchase any security on margin, except for such short-term loans as are necessary for clearance of securities transactions. The deposit or payment by a Fund or initial or variation margin in connection with futures contracts or related options thereon is not considered the purchase of a security on margin. |
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Participate in a joint or joint-and-several basis in any trading account in securities, although transactions for the Funds and any other account under common or affiliated management may be combined or allocated between the Fund and such account. |
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Purchase securities of open-end or closed-end investment companies except in compliance with the 1940 Act, although the Fund may not acquire any securities of registered open-end investment companies or registered unit investment trusts in reliance on Sections 12(d)(1)(F) or 12(d)(1)(G) of the 1940 Act. |
If a percentage limitation is adhered to at the time of investment or contract, a later increase or decrease in percentage resulting from any change in value or total or net assets will not result in a violation of such restriction, except that the percentage limitations with respect to the borrowing of money and illiquid securities will be continuously complied with.
As long as the aforementioned investment restrictions are complied with, each Fund may invest its remaining assets in money market instruments or funds which reinvest exclusively in money market instruments, in municipal bonds that are in the relevant market but not the Index, and/or in combinations of certain bond index futures contracts, options on such futures contracts, bond options, bond index options, options on the Shares, and bond index swaps and swaptions, each with a view towards providing each Fund with exposure to the securities in its respective benchmark index. These investments may be made to invest uncommitted cash balances or, in limited circumstances, to assist in meeting shareholder redemptions of Creation Units. Each Fund also will not invest in money market instruments as part of a temporary defensive strategy to protect against potential bond market declines.
SPECIAL CONSIDERATIONS AND RISKS
A discussion of the risks associated with an investment in each Fund is contained in the Funds’ Prospectus under the headings “Principal Risks of Investing in the Funds” and “Additional Risks of Investing in the Funds.” The discussion below supplements, and should be read in conjunction with, such sections in the Prospectus.
Investment in each Fund should be made with an understanding that the value of the Fund’s portfolio securities may fluctuate in accordance with changes in the financial condition of the issuers of the portfolio securities, the value of municipal securities generally and other factors.
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The Funds are not actively managed by traditional methods, and therefore the adverse financial condition of any one issuer will not result in the elimination of its securities from the securities held by the Fund unless the securities of such issuer are removed from its respective Index.
An investment in each Fund should also be made with an understanding that the Fund will not be able to replicate exactly the performance of its respective Index because the total return generated by the securities will be reduced by transaction costs incurred in adjusting the actual balance of the securities and other Fund expenses, whereas such transaction costs and expenses are not included in the calculation of its respective Index. In addition, each Fund’s use of a representative sampling approach may cause a Fund to not be as well correlated with the return of its respective Index as would be the case if the Fund purchased all of the securities in its respective Index in the proportions represented in such Index. The risk of non-correlation may be higher than other exchange-traded funds which utilize a sampling approach to the extent that a Fund invests a portion of its assets in securities that have economic characteristics that are substantially identical to the securities comprising its respective Index, but which are not included in such Index. It is also possible that for short periods of time, a Fund may not fully replicate the performance of its respective Index due to the temporary unavailability of certain Index securities in the secondary market or due to other extraordinary circumstances. Such events are unlikely to continue for an extended period of time because a Fund is required to correct such imbalances by means of adjusting the composition of the securities. It is also possible that the composition of the Fund may not exactly replicate the composition of its respective Index if the Fund has to adjust is portfolio holdings in order to continue to qualify as a “regulated investment company” under the Internal Revenue Code.
The market for municipal bonds may be less liquid than for taxable bonds. There may also be less information available on the financial condition of issuers of municipal securities than for public corporations. This means that it may be harder to buy and sell municipal securities, especially on short notice, and municipal securities may be more difficult for each Fund to value accurately than securities of public corporations. Since each Fund invests a significant portion of its portfolio in municipal securities, each Fund’s portfolio may have greater exposure to liquidity risk than a fund that invests in non-municipal securities.
Some longer-term municipal securities give the investor the right to “put” or sell the security at par (face value) within a specified number of days following the investor’s request – usually one to seven days. This demand feature enhances a security’s liquidity by shortening its effective maturity and enables it to trade at a price equal to or very close to par. If a demand feature terminates prior to being exercised, the Fund would hold the longer-term security, which could experience substantially more volatility.
Municipal securities are subject to credit and market risk. Generally, prices of higher quality issues tend to fluctuate more with changes in market interest rates than prices of lower quality issues and prices of longer maturity issues tend to fluctuate more than prices of shorter maturity issues.
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Lease obligations may have risks not normally associated with general obligation or other revenue bonds. Leases and installment purchase or conditional sale contracts (which may provide for title to the leased asset to pass eventually to the issuer) have developed as a means for governmental issuers to acquire property and equipment without the necessity of complying with the constitutional statutory requirements generally applicable for the issuance of debt. Certain lease obligations contain “non-appropriation” clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for that purpose by the appropriate legislative body on an annual or other periodic basis. Consequently, continued lease payments on those lease obligations containing “non-appropriation” clauses are dependent on future legislative actions. If these legislative actions do not occur, the holders of the lease obligation may experience difficulty in exercising their rights, including disposition of the property.
Tobacco settlement revenue bonds are neither general nor legal obligations of a state or any of its political subdivisions and neither the faith and credit nor the taxing power nor any other assets or revenues of a state or of any political subdivision will be pledged to the payment of any such bonds. In addition, tobacco companies’ profits from the sale of tobacco products are inherently variable and difficult to estimate. There can be no guarantee that tobacco companies will earn enough revenues to cover the payments due under tobacco bonds.
In general, there are two types of education-related bonds: those issued to finance projects for public and private colleges and universities, and those representing pooled interests in student loans. Bonds issued to supply educational institutions with funds are subject to the risk of unanticipated revenue decline, primarily the result of decreasing student enrollment or decreasing state and federal funding. Among the factors that may lead to declining or insufficient revenues are restrictions on student’ ability to pay tuition, availability of state and federal funding, and general economic conditions. Student loan revenue bonds are generally offered by state (or substate) authorities or commissions and are backed by pools of student loans. Underlying student loans may be guaranteed by state guarantee agencies and may be subject to reimbursement by the United States Department of Education through its guaranteed student loan program. Others may be private, uninsured loans made to parents or students which are supported by reserves or other forms of credit enhancement. Recoveries of principal due to loan defaults may be applied to redemption of bonds or may be used to re-lend, depending on program latitude and demand for loans. Cash flows supporting student loan revenue bonds are impacted by numerous factors, including the rate of student loan defaults, seasoning of the loan portfolio, and student repayment deferral periods of forbearance. Other risks associated with student loan revenue bonds include potential changes in federal legislation regarding student loan revenue bonds, state guarantee agency reimbursement and continued federal interest and other program subsidies currently in effect.
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Transportation debt may be issued to finance the construction of airports, toll roads, highways or other transit facilities. Airport bonds are dependent on the general stability of the airline industry and on the stability of a specific carrier who uses the airport as a hub. Air traffic generally follows broader economic trends and is also affected by the price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as toll levels, the presence of competing roads and the general economic health of an area. Fuel costs and availability also affect other transportation-related securities, as do the presence of alternate forms of transportation, such as public transportation.
Water and sewer revenue bonds are often considered to have relatively secure credit as a result of their issuer’s importance, monopoly status, and generally unimpeded ability to raise rates. Despite this, lack of water supply due to insufficient rain, run-off, or snow pack is a concern that has led to past defaults. Further, public resistance to rate increases, costly environmental litigation, and Federal environmental mandates are challenges faced by issuers of water and sewer bonds.
As with any investment, you should consider how your investment in shares of the Fund will be taxed. The tax information in this Prospectus and SAI is provided as general information. You should consult your own tax professional about the tax consequences of an investment in shares of the Fund.
There is no guarantee that a Fund’s income will be exempt from federal or state income taxes. Events occurring after the date of issuance of a municipal bond or after a Fund’s acquisition of a municipal bond may result in a determination that interest on that bond is includible in gross income for federal income tax purposes retroactively to its date of issuance. Such a determination may cause a portion of prior distributions by a Fund to its shareholders to be taxable to those shareholders in the year of receipt. Federal or state changes in income or alternative minimum tax rates or in the tax treatment of municipal bonds may make municipal bonds less attractive as investments and cause them to lose value.
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A municipal security may be covered by insurance that guarantees the bond’s scheduled payment of interest and repayment of principal. This type of insurance may be obtained by either (i) the issuer at the time the bond is issued (primary market insurance), or (ii) another party after the bond has been issued (secondary market insurance).
Both primary and secondary market insurance guarantee timely and scheduled repayment of all principal and payment of all interest on a municipal security in the event of default by the issuer, and cover a municipal security to its maturity, enhancing its credit quality and value.
Municipal security insurance does not insure against market fluctuations or fluctuations in the Fund’s share price. In addition, a municipal security insurance policy will not cover: (i) repayment of a municipal security before maturity (redemption), (ii) prepayment or payment of an acceleration premium (except for a mandatory sinking fund redemption) or any other provision of a bond indenture that advances the maturity of the bond, or (iii) nonpayment of principal or interest caused by negligence or bankruptcy of the paying agent. A mandatory sinking fund redemption may be a provision of a municipal security issue whereby part of the municipal security issue may be retired before maturity.
Because a significant portion of the municipal securities issued and outstanding is insured by a small number of insurance companies, an event involving one or more of these insurance companies could have a significant adverse effect on the value of the securities insured by that insurance company and on the municipal markets as a whole.
Municipal Market Disruption Risk
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As described in the Prospectus, under normal circumstances, the Market Vectors-Lehman Brothers AMT-Free California Long Municipal ETF will invest at least 80% of its assets in California municipal securities. The portfolio of the Fund may include securities issued by the State of California (the “State”), by its various public bodies (the “Agencies”) and/or by other municipal entities located within the State (securities of all such entities are referred to herein as “California municipal securities”). In addition, the specific California municipal securities in which the Fund will invest will change from time to time. The Fund is therefore susceptible to political, economic, regulatory or other factors affecting issuers of California municipal securities. The following information constitutes only a brief summary of a number of the complex factors which may impact issuers of California municipal securities and does not purport to be a complete or exhaustive description of all adverse conditions to which issuers of California municipal securities may be subject. Such information is derived from official statements utilized in connection with the issuance of California municipal securities, as well as from other publicly available documents. Such an official statement, together with any updates or supplements thereto, generally may be obtained upon request to the Treasurer’s office of the State. Such information has not been independently verified by the Fund and the Fund assumes no responsibility for the completeness or accuracy of such information. The summary below does not include all of the information pertaining to the budget, receipts and disbursements of the State that would ordinarily be included in various public documents issued thereby, such as an official statement prepared in connection with the issuance of general obligation bonds of the State. Additionally, many factors, including national, economic, social and environmental policies and conditions, which are not within the control of such issuers, could have an adverse impact on the financial condition of such issuers. The Fund cannot predict whether or to what extent such factors or other factors may affect the issuers of California municipal securities, the market value or marketability of such securities or the ability of the respective issuers of such securities acquired by the Fund to pay interest on or principal of such securities. The creditworthiness of obligations issued by local California issuers may be unrelated to the creditworthiness of obligations issued by the State, and there is no assurance on the part of the State to make payments on such local obligations. There may be specific factors that are applicable in connection with investment in the obligations of particular issuers located within California, and it is possible the Fund will invest in obligations of particular issuers as to which such specific factors are applicable. However, the information set forth below is intended only as a general summary and not as a discussion of any specific factors that may affect any particular issuer of California municipal securities.
California’s economy, the largest among the 50 states and one of the largest in the world, has major components in high technology, trade, entertainment, agriculture, manufacturing, tourism, construction and services. U.S. economic growth was slower than expected in the first half of 2001, and the California economy began to slow in the spring of 2001. The State finally showed the impact of the national recession, coupled with a cyclical downturn in the high-technology sector, and entered a mild recession. The terrorist attacks on September 11, 2001 resulted in a further, but mostly temporary, weakening of the economy in tourism-based areas. The economy has since stabilized with 887,100 jobs gained between July 2003 and March 2007 compared with 367,600 jobs lost between January 2001 and July 2003. California’s population as of July 1, 2006 of over 37 million represented over 12 percent of the total United States population. The State’s population is concentrated in metropolitan areas.
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In October 2006, the State’s unemployment rate of 4.5 percent was the lowest in at least 30 years. The national unemployment rate was 4.4 percent in October 2006. California began 2007 with job losses in January, but February and March saw positive job gains. The annual benchmark revision of employment statistics in March 2007 revealed that considerably more jobs were created in the State during 2006 than were initially reported. California added 275,000 jobs in 2006, the best gain since 2000. Nine out of the 11 major industry sectors saw employment grow in 2006. An important development has been improved job growth in the San Francisco Bay Area. The region had the strongest percentage job growth of major California regional economies in 2006. The Department of Finance projected, in April 2006, that unemployment will remain at or below 4.9 percent throughout 2008. The State’s unemployment rate was 5.2 percent in June 2007 and the national unemployment rate was 4.5 percent in June 2007.
The housing sector has continued to slow the national and California economies. A sharp drop in home building was instrumental in the national economy growing at its slowest pace in four years in the first quarter of 2007. In California, housing permits were 40 percent below the peak level reached in the third quarter of 2005. Home building was less of a drag on the national economy in the first quarter of 2007 than it was in the last two quarters of 2006, and California housing permits were stable in the first quarter of 2007.
The outlook for the California economy is for slower growth in 2007 followed by improved growth in 2008 and 2009. Personal income is projected to grow 5.3 percent in 2007, 5.5 percent in 2008, and 5.8 percent in 2009, as compared to 6.1 percent in 2006. California non-farm payroll employment is forecasted to increase 1.3 percent in 2007, 1.2 percent in 2008 and 1.6 percent in 2009, as compared to 1.9 percent in 2006.
Taxable sales slowed considerably in the second half of 2006. For the year as a whole, taxable sales increased 3.9 percent compared to 7.4 percent in 2005. Made-in-California exports grew by 9.4 percent to a new record level of $127.7 billion in 2006. High-tech exports grew 6.7 percent in 2006. Exports of chemicals, miscellaneous manufactured products, and food and kindred products all grew at double-digit rates.
In the 2007-08 May Revision to the Governor’s Budget, the Department of Finance projected that the struggling housing sector will continue to weigh on the State and national economies for the 2007 calendar year and to a lesser extent in 2008, but economic growth should steadily improve beginning in the third quarter of 2007. The economic forecasts of the Department of Finance are prepared using national economic activity forecasts; major national and California economic indicators; revenue estimates; legislative, judicial and administrative changes; and recent cash results.
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The primary units of local government in California are the counties, which range in population from approximately 1,200 in Alpine County to approximately 10 million in Los Angeles County. Counties are responsible for the provision of many basic services, including indigent health care, welfare, jails, and public safety in unincorporated areas. There are also 478 incorporated cities and thousands of special districts formed for education, utilities, and other services. The fiscal condition of local governments has been constrained since Proposition 13, which added Article XIII A to the State Constitution (“Proposition 13”), was approved by California voters in 1978. Proposition 13 reduced and limited the future growth of property taxes and limited the ability of local governments to impose “special taxes” (those devoted to a specific purpose) without two-thirds voter approval. Proposition 218, another constitutional amendment enacted by initiative in 1996, further limited the ability of local governments to raise taxes, fees, and other exactions. Counties, in particular, have had fewer options to raise revenues than many other local government entities, while they have been required to maintain many services.
Subsequent to the adoption of Proposition 13, the State provided aid to local governments from the General Fund; however, during the recession of the early 1990s, the Legislature eliminated most components of aid to local government entities but provided additional revenue sources, such as sales taxes, and reduced certain mandates for local services. The 2004 Budget Act, related legislation and the enactment of Senate Constitutional Amendment No. 4 dramatically changed the State-local fiscal relationship. These statutory and Constitutional changes implemented an agreement negotiated between the Governor and local government officials (the “state-local agreement”) in connection with the 2004 Budget Act. One such change relates to the reduction of the vehicle license fee (“VLF”) rate from 2 percent to 0.65 percent of the market value of the vehicle. In order to protect local governments, which have previously received all VLF revenues, the reduction in VLF revenue to cities and counties from this rate change was replaced by an increase in the amount of property tax they receive.
As part of the state-local agreement, Proposition 1A was approved by voters at the November 2004 election. Proposition 1A amended the State Constitution to, among other things, reduce the Legislature’s authority over local government revenue sources by placing restrictions on the State’s access to local governments’ property, sales and VLF revenues as of November 3, 2004. Beginning with fiscal year 2008-09, the State will be able to borrow up to 8 percent of local property tax revenues, but only if the Governor proclaims such action is necessary due to a severe State fiscal hardship, two-thirds of both houses of the Legislature approve the borrowing and the amount borrowed is required to be paid back within three years. The State also will not be able to borrow from local property tax revenues for more than two fiscal years within a period of 10 fiscal years, and only if previous borrowings have been repaid. In addition, the State cannot reduce the local sales tax rate or restrict the authority of local governments to impose or change the distribution of the statewide local sales tax. Proposition 1A also prohibits the State from mandating activities on cities, counties or special districts without providing for the funding needed to comply with the mandates. Beginning in fiscal year 2005-06, if the State does not provide funding for the activity that has been determined to be mandated, the requirement on cities, counties or special districts to abide by the mandate would be suspended. In addition, Proposition 1A expanded the definition of what constitutes a mandate to encompass State action that transfers financial responsibility to cities, counties and special districts for a required program for which the State previously had partial or complete responsibility. The State mandate provisions of Proposition 1A do not apply to schools or community colleges or to mandates relating to employee rights.
The
moneys of the State are segregated into the General Fund and over 900 other
funds, including special, bond and trust funds. The General Fund consists of
revenues received by the State Treasury and
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is not required by law to be credited to any
fund and earnings from the investment of State moneys not allocable to another
Fund. The General Fund is the principal operating fund for the majority of
governmental activities and is the depository of most of the major revenue
sources of the State.
The following is a summary of the State’s major revenue sources:
— Personal Income Tax . The California personal income tax, modeled after the federal income tax laws, accounts for a significant portion of General Fund tax revenues. It is imposed on net taxable income (gross income less exclusions and deductions), with rates ranging from 1.0 percent to 9.3 percent. The personal income tax is adjusted annually by the change in the consumer price index. Taxpayers may be subject to an alternative minimum tax (“AMT”), similar to the federal AMT. In addition, Proposition 63, approved by the voters in the November 2004 election, imposes a 1 percent surcharge on taxpayers with taxable income over $1 million. The proceeds of the tax surcharge are required to be used to expand county mental health programs. The personal income tax structure is considered to be highly progressive. Taxes on capital gains realizations and stock options, which are largely linked to stock market performance, can add a significant dimension of volatility to personal income tax receipts. Capital gains and stock option tax receipts have accounted for as much as 24.7 percent or as little as 7.3 percent of General Fund revenues in the last ten years. The 2007-08 May Revision to the Governor’s Budget estimates that capital gains and stock option tax receipts will account for 15.3 percent of General Fund revenue and transfers in 2006-07 and 15.1 percent in 2007-08.
— Sales Tax . The sales tax is imposed upon retailers for the privilege of selling tangible personal property in California. Most retail sales and leases are subject to the tax. However, exemptions have been provided for certain essentials such as food for home consumption, prescription drugs, gas delivered through mains and electricity. Other exemptions provide relief for a variety of sales ranging from custom computer software to aircraft. As of January 1, 2007, the breakdown of the base state and local sales tax rate of 7.25 percent is as follows: 5 percent imposed as a State General Fund tax; 0.5 percent dedicated to local government for health and welfare program realignment (Local Revenue Fund); 0.5 percent dedicated to local governments for public safety services (Local Public Safety Fund); 1 percent local tax imposed under the Uniform Local Sales and Use Tax Law, with 0.25 percent dedicated to county transportation purposes and 0.75 percent for city and county general-purpose use; and 0.25 percent deposited into the Fiscal Recovery Fund to repay the State’s economic recovery bonds. The Department of Finance estimates that the reserve level will be insufficient to trigger a reduction for calendar year 2008. Senate Constitutional Amendment No. 4, approved by the voters as Proposition 1A in the November 2004 election, amended the State Constitution to, among other things, reduce the Legislature’s authority over local government revenue sources by restricting the State from lowering the local sales tax rate or changing the allocation of local sales tax revenues without meeting certain conditions.
— Corporation Tax . The State’s corporate tax revenue is derived from franchise tax, corporate income tax, additional taxes on banks and other financial corporations, an AMT similar to the federal AMT and a tax on the profits of Sub-Chapter S corporations. On February 23, 2004, the U.S. Supreme Court denied the Franchise Tax Board’s appeal requesting review of a tax refund case which involved the deductibility of corporate dividends. Potential revenue losses are estimated at $400 million over several fiscal years through 2007-08 (some revenue gains are expected in fiscal years after that). The revenue impact from this case is included in State budget projections for fiscal years 2006-07 and 2007-08.
— Insurance Tax . The majority of insurance written in California, subject to certain exceptions, is subject to a 2.35 percent gross premium tax.
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Estate
Tax; Other Taxes
. The California estate tax is based on the State
death tax credit allowed against the federal estate tax and is designed to pick
up the maximum credit allowed against the federal
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estate tax
return. The State estate tax was eliminated beginning in 2005 in conjunction
with the phase out of the federal estate tax. After December 31, 2010 the federal
estate tax will be reinstated along with the State estate tax, unless future
federal legislation is enacted to make the provisions eliminating the tax
permanent. Other sources of General Fund revenue include inheritance and gift
taxes, cigarette taxes, alcoholic beverage taxes, horse racing license fees and
trailer coach license fees.
The State’s fiscal year begins on July 1st and ends on June 30th of the following year. Under the State Constitution, money may be drawn from the Treasury only through an appropriation made by law. The primary source of the annual expenditure is the annual Budget Act as approved by the Legislature and signed by the Governor. The annual budget is proposed by the Governor by January 10 of each year for the next fiscal year (the “Governor’s Budget”). Under State law, the annual proposed Governor’s Budget cannot provide for projected expenditures in excess of projected revenues for the ensuing fiscal year. Following the submission of the Governor’s Budget, the Legislature takes up the proposal. During late spring, usually in May, the Department of Finance submits revised revenue and expenditure estimates for both the current and budget years to the Legislature. This update process is referred to as the May Revision. The Budget Act, which follows the May Revision, must be approved by a two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the Budget Act. With limited exceptions, bills containing General Fund appropriations must be approved by a two-thirds majority vote in each House of the Legislature and be signed by the Governor. Continuing appropriations, available without regard to fiscal year, may also be provided by statute or the State Constitution.
The Governor may reduce or eliminate specific line items in the Budget Act or any other appropriations bill without vetoing the entire bill. Such individual line-item vetoes are subject to override by a two-thirds majority vote of each House of the Legislature.
The Balanced Budget Amendment (“Proposition 58”) beginning with fiscal year 2004-2005 requires the State to enact a balanced budget, establishes a special reserve in the General Fund, restricts future borrowings to cover budget deficits, and provides for mid-year budget adjustments in the event that the budget falls out of balance. The Legislature may not pass a budget bill in which General Fund expenditures exceed estimated General Fund revenues and fund balances at the time of passage and as set forth in the budget bill. As a result of the requirements of Proposition 58, the State would, in some cases, have to take more immediate actions to correct budgetary shortfalls. Proposition 58 also prohibits certain future borrowings to cover budget deficits. These restrictions apply to general obligation bonds, revenue bonds and certain other forms of long-term borrowings, but do not apply to certain short-term and inter-fund borrowings.
In
addition to Proposition 58, a number of other laws and constitutional
amendments have been enacted over the years, often through voter initiatives,
which have made it more difficult to raise State taxes, have restricted the use
of State General Fund or special fund revenues, or have otherwise limited the
Legislature and Governor’s discretion in enacting budgets. Examples of
constraints on the budget process include Proposition 13 (requiring a
two-thirds vote in each House of the Legislature to change State taxes enacted
for the purpose of increasing revenues collected), Proposition 98 (requiring a
minimum percentage of General Fund revenues be spent on local education),
Proposition 49 (requiring expanded State funding for before and after school
programs), Proposition 10 (raising taxes on tobacco products but mandating the
expenditure of such revenues) and Proposition 63 (imposing a 1 percent tax
surcharge on taxpayers with annual taxable income of more than $1 million in
order to fund mental health
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services and
limiting the Legislature or Governor from redirecting funds now used for mental
health services).
The 2007-08 Budget Act was adopted by the Legislature on August 22, 2007, along with a number of implementing measures, and was signed by Governor Schwarzenegger on August 24, 2007. The 2007 Budget Act included the largest reserve of any budget act in the State’s history. The May Revision proposed a total reserve of $2.2 billion. Due to the shortfall in revenue collections that came to light in June, and in recognition of the State’s continuing structural deficit and other potential threats, the Legislature took actions to reduce spending and increase funds available, thereby increasing the total reserve to an unprecedented $3.4 billion. The Governor further reduced spending with $703 million in General Fund vetoes, raising the total reserve to $4.1 billion. As a result, General Fund spending growth in the 2007-08 budget is held to $0.6 billion, or 0.6 percent. These actions eliminate the gap between spending and revenues in 2007-08, after discounting the $1.023 billion of transfers to the Budget Stabilization Account.
The 2007-08 Budget Act contained General Fund expenditures of $102.26 billion, compared to $101.66 billion in 2006-07, and Special Fund expenditures of $2.58 billion, compared to $3.59 billion in 2006-07. Total revenues and transfers for 2007-08 are expected to be $101.24 billion, compared to $95.54 billion in 2006-07. A total of $2.05 billion will be transferred to the Budget Stabilization Account pursuant to Proposition 58; half of the transferred amount will remain in the Budget Stabilization Account for future purposes and the other half will be further transferred for the purpose of early retirement of Economic Recovery Bonds.
Most General Fund spending is non-discretionary. As of the May Revision to the Governor’s Budget, of the total spending proposed, $1.7 billion was for paying debt and $1 billion was proposed for policy choices. The remainder was required either by the State Constitution, federal laws, statutory entitlements, binding labor agreements or court orders. The 2007 Budget Act contains the following major General Fund components: $1.0 billion in prepayments of the Economic Recovery Bonds (“ERBs”); Proposition 98 General Fund expenditures of $41.1 billion; $66.8 billion ($41.4 billion General Fund and $25.4 billion other funds) for K-12 education programs in 2007-08, which reflects an increase of $3.5 billion ($1.6 billion General Fund and $1.9 billion other funds) over the 2006-07 revised budget; and $28.3 billion in health and human services programs.
The above discussion of the fiscal year 2007-08 budget is based on estimates and projections of revenues and expenditures for the current fiscal year and must not be construed as statements of fact. These estimates and projections are based upon various assumptions, which may be affected by numerous factors, including future economic conditions in the State and the nation, and there can be no assurance that the estimates will be achieved.
S tate Indebtedness and Other Obligations
The State Treasurer is responsible for the sale of debt obligations of the State and its various authorities and agencies. Current State debt obligations include:
—
General
Obligation
Bonds
. The State Constitution prohibits the creation of general obligation
indebtedness of the State unless a bond measure is approved by a majority of
the electorate voting at a general election or direct primary. General
obligation bond acts provide that debt service on general obligation bonds
shall be appropriated annually from the General Fund and all debt service on
general obligation bonds is paid from the General Fund.
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Under
the State Constitution, debt service on general obligation bonds is the second
charge to the General Fund after the application of moneys in the General Fund
to the support of the public school system and public institutions of higher
education. Certain general obligation bond programs receive revenues from
sources other than the sale of bonds or the investment of bond proceeds. As of
September 1, 2007, the State had outstanding $51.5 billion aggregate principal
amount of long-term general obligation bonds, and unused voter authorizations
for the future issuance of $68.01 billion of long-term general obligation
bonds.
In response to the Governor’s proposal for a $220 billion infrastructure investment plan, which would have used $68 billion in new general obligation bonds, the Legislature approved four bond measures, totaling approximately $37.3 billion, all of which were approved by voters at the November 7, 2006 general election.
— Commercial Paper Program. Pursuant to legislation enacted in 1995, voter-approved general obligation indebtedness may, in some cases, be issued as commercial paper notes. Commercial paper notes may be renewed or refunded by the issuance of long-term bonds. Commercial paper notes are deemed issued upon authorization by the respective finance committees, whether or not such notes are actually issued. Pursuant to the terms of the bank credit agreement presently in effect, the general obligation commercial paper program may have up to $1.5 billion in aggregate principal and interest commitments outstanding at any time. This amount may be increased or decreased in the future. As of May 1, 2007, $1.32 billion aggregate principal amount of general obligation commercial paper notes had been issued and were outstanding.
— Lease-Purchase Obligations . The State builds and acquires facilities through the use of lease purchase borrowing, in addition to general obligation bonds. Under these arrangements, the State Public Works Board, another State or local agency or a joint powers authority issues bonds to pay for the construction of facilities, such as office buildings, university buildings or correctional institutions. These facilities are leased to a State agency or the University of California under a long-term lease that provides the source of payment of the debt service on the lease-purchase bonds. Certain of the lease-purchase financings are supported by special funds rather than the General Fund. The State had $7.7 billion General Fund-supported lease-purchase obligations outstanding as of May 1, 2007. The State Public Works Board, which is authorized to sell lease revenue bonds, had $3.01 billion authorized and unissued as of May 1, 2007. On May 3, 2007, the Governor signed AB 900, which authorized issuance of up to $7.4 billion of lease-revenue bonds to finance acquisition, design and construction of new facilities at State prisons and county jails and for local re-entry facilities.
— Non-Recourse Debt . Certain State agencies and authorities issue revenue obligations for which the General Fund has no liability, including revenue bonds payable from State revenue-producing enterprises and projects, which are not payable from the General Fund, and conduit obligations payable only from revenues paid by private users of facilities financed by the revenue bonds. The enterprises and projects include transportation projects, various public works projects, public and private educational facilities, housing, health facilities and pollution control facilities. State agencies and authorities had $48.37 billion aggregate principal amount of revenue bonds and notes which are non-recourse to the General Fund outstanding as of December 31, 2006.
—
Pension
Obligation Bonds
. Pursuant to the California Pension Restructuring
Bond Act of 2004 (“Act”), the State may propose to issue pension obligation
bonds to make future contributions to the California Public Employees’
Retirement System (“CalPERS”). The payment of the debt service on the pension
obligation bonds will be payable from the General Fund.
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Pursuant
to the Act, the Pension Obligation Bond Committee authorized the issuance of
bonds to pay a portion of the State’s pension obligation for fiscal year
2004-05 or a subsequent fiscal year. The Pension Obligation Bond Committee
initiated a validation action seeking court determination that the bonds would
not be in violation of the Constitutional debt limit because the proceeds of
the bonds would be used to pay the State’s employer contribution obligation to
CalPERS, which is an obligation imposed by law. The Pacific Legal Foundation
challenged the validation action in court, which prevented the issuance of the
pension obligation bonds in time to pay the pension contribution during fiscal
year 2004-05 or fiscal year 2005-06. After a trial in the Sacramento County
Superior Court, the judge ruled on November 15, 2005 that the bonds were not
valid. The Pension Obligation Bond Committee has appealed. The State will not
be able to issue pension obligation bonds until this matter is resolved.
— Economic Recovery Bonds . The California Economic Recovery Bond Act (“Proposition 57” ) was approved by voters on March 2, 2004. Proposition 57 authorizes the issuance of up to $15 billion in economic recovery bonds to finance the negative General Fund reserve balance and other General Fund obligations. Repayment of the economic recovery bonds is secured by a pledge of revenues from a one-quarter cent increase in the State’s sale and use tax starting July 1, 2004. In addition, the economic recovery bonds are secured by the State’s full faith and credit; however, moneys in the General Fund will only be used in the event the dedicated sales and use tax revenue is insufficient to repay the bonds. The State has issued $10.896 billion principal amount of economic recovery bonds and may issue the remainder of authorized economic recovery bonds at any time in the future, but the 2006 Budget Act assumes no economic recovery bonds were issued in fiscal year 2006-07.
Three different sources of funds are required to be applied to the early retirement (generally by purchase or redemption) of economic recovery bonds: (i) all proceeds from the quarter cent sales tax in excess of the amounts needed, on a semi-annual basis, to pay debt service and other required costs of the bonds, (ii) all proceeds from the sale of surplus State property, and (iii) fifty percent of each annual deposit, up to $5 billion in the aggregate, of future deposits in the reserve fund created by the California Balanced Budget Act. Funds from sources (i) and (ii) above were used for early retirement of approximately $623 million of bonds during fiscal year 2005-2006. The 2006 Budget Act included $472 million that was transferred from the reserve created under Proposition 58, which has to be used to retire economic recovery bonds. The State redeemed $585 million of economic recovery bonds on March 1, 2007, and expected to redeem an additional $508.2 million on July 1, 2007.
— Tobacco Settlement Revenue Bonds . Under a settlement agreement between the State and four major cigarette manufacturers, the cigarette manufacturers agreed to make payments to the State in perpetuity, such payments amounting to approximately $25 billion over the first 25 years. Half of the payments made by the cigarette manufacturers will be paid to the State and half to local governments. The State has issued revenue bonds secured by the tobacco settlement revenues. An initial sale of 56.57 percent of the State’s tobacco settlement revenues producing $2.485 billion in proceeds was completed in January 2003.
A
second sale of the remaining 43.43 percent of the State’s tobacco settlement
revenues, which produced $2.264 billion in proceeds, was completed in September
2003 (“Series 2003B” ). The Tobacco Securitization Law was amended in 2003 to
require the Governor to request an appropriation in the annual Budget Act to
pay debt service and other related costs of the tobacco settlement revenue bonds
secured by the second (and only the second) sale of tobacco settlement revenues
when such tobacco settlement revenues are insufficient therefor. The
Legislature is not obligated to make any such requested appropriation. In
August 2005 the Series 2003B Bonds were refinanced (“Series 2005A”), retaining
substantially all of the covenants of the original issue, including the
covenant regarding the request for a General Fund appropriation in the event
tobacco revenues fall short. In return for providing this covenant, the State
was paid a credit enhancement fee of $525 million as part of the refinancing.
On
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March 14,
2007, the State completed a refunding of all of the Series 2005A Bonds. This
refunding generated additional proceeds of approximately $1.258 billion which
are intended to be used (i) to offset the General Fund cost for the initial
years of a litigation settlement related to the 2004-05 suspension of the
Proposition 98 guarantee and (ii) for other purposes, such as funding capital
projects.
In early 2006, participating tobacco manufacturers (“PMs”) to the Master Settlement Agreement asserted that they had lost market share in 2003 to the non-participating manufacturers (“NPMs”). After analysis by a verification agent, that assertion was confirmed. As such, the PMs were authorized to withhold up to three times the amount of lost market share until such time as it is proven that the various states diligently enforced their model statutes that govern the NPMs. As a result, the amount of tobacco revenues received by the State was reduced in 2006 by $50.9 million. Nevertheless, the amount of tobacco revenues received were still in excess of the required debt service payments. Therefore, it is anticipated that the need to invoke the provisions included in the State’s budget for Series 2005A is unlikely and there will be no impact to the General Fund for the 2006-07 or 2007-08 fiscal years. Furthermore, the Series 2005A Bonds have reserve funds in excess of one year’s debt service payments, which would be used before General Fund moneys. In April 2006, a similar filing was made by the PMs for the 2004 calendar year but it is anticipated that, likewise, there will be no impact to the General Fund for the 2006-07 or 2007-08 fiscal years. The State Attorney General has filed suit against the PMs to compel them to pay given that the State has been enforcing the statutes.
Tobacco settlement revenue bonds are neither general nor legal obligations of the State or any of its political subdivisions and neither the faith and credit nor the taxing power nor any other assets or revenues of the State or of any political subdivision is or shall be pledged to the payment of any such bonds.
— Cash Flow Borrowings. As part of its cash management program, the State has regularly issued short-term obligations to meet cash flow needs. The State has issued revenue anticipation notes (“RANs” ) in 19 of the last 20 fiscal years to partially fund timing differences between receipts and disbursements. By law, RANs must mature prior to the end of the fiscal year of issuance. If additional external cash flow borrowings are required, the State has issued revenue anticipation warrants (“RAWs” ), which can mature in a subsequent fiscal year. RANs and RAWs are both payable from any “Unapplied Money” in the General Fund on their maturity date.
At any given time, there are numerous civil actions pending against the State which could, if determined adversely to the State, affect the State’s expenditures and, in some cases, its revenues and cash flows. The following is a brief list of the most significant pending legal proceedings to which the State is a party, as reported by the Office of the Attorney General of the State:
— Challenge Seeking Payment to Teacher’s Retirement Board . This lawsuit seeks, primarily, a writ of mandate compelling the State Controller to transfer funds from the State’s General Fund to the CalSTRS’s Supplemental Benefit Maintenance Account.
—
Action
Seeking Modification of Retirement Formula for State Employees
. This
lawsuit seeks injunctive relief and retroactive retirement benefits. Because it
is unclear from the complaint what retroactive retirement benefits are being
sought, or whether they would be offset by reductions in benefits to younger
workers, it is impossible at this time to quantify the magnitude of the fiscal
impact; however, it may be in excess of $250 million. The State’s motion to
dismiss the entire complaint was sustained without leave to amend. Plaintiffs
filed on appeal on March 16, 2007.
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Six
cases have been filed challenging the Franchise Tax Board’s treatment of
proceeds from the investment of cash in short-term financial instruments, and
the resulting impact on the apportionment of corporate income to a
corporation’s California tax obligation. These cases are: General Motors Corp.
v. Franchise Tax Board (2006); Microsoft Corporation v. Franchise Tax Board (2006);
The Limited Stores, Inc. and Affiliates v. Franchise Tax Board; Toys “R” Us,
Inc. v. Franchise Tax Board; Montgomery Ward LLC v. Franchise Tax Board; and
Colgate-Palmolive v. Franchise Tax Board.
The California Supreme Court granted review of the lower courts decision in the following plaintiffs’ cases: General Motors, Microsoft, The Limited and Toys “R” Us. On August 17, 2006, the California Supreme Court issued its decisions in Microsoft’s and General Motors’ appeals. The Court affirmed the judgment against Microsoft. The Court remanded General Motors’ case for a determination of the proper treatment of other treasury function investments entered into by the taxpayer in light of its decisions in this case and in Microsoft’s case. On January 29, 2007, the Court of Appeal remanded to the trial court General Motors’ case for further proceedings. After the Microsoft and General Motors decisions, the California Supreme Court ordered the Limited Stores case to be transferred to the Court of Appeal, First Appellate District, and the Toys “R” Us case to be transferred to the Court of Appeal, Third Appellate District, with directions in each case to vacate the prior decision and to reconsider the case in the light of the Microsoft and General Motors decisions. Both cases are pending in the appellate courts. In The Limited’s case, the Court of Appeal affirmed the judgment in favor of the Franchise Tax Board on June 8, 2007. Montgomery Ward’s and Colgate-Palmolive’s cases are pending in the trial courts. Until further guidance is provided by the courts, it is impossible to determine the extent of any fiscal impact upon State revenues.
Three pending cases challenge the fee imposed by Revenue and Taxation Code section 17942 upon limited liability companies registered in California, alleging that it discriminates against interstate commerce and violates the Due Process and Equal Protection clauses of the federal Constitution. The plaintiffs also allege that the Franchise Tax Board misinterprets section 17942 and that section 17942 is an improper exercise of the State’s police powers. These cases are: Northwest Energetic Services, LLC v. Franchise Tax Board; Ventas Finance I, LLC v. Franchise Tax Board; and Bakersfield Mall LLC v. Franchise Tax Board. The trial courts have ruled in favor of plaintiffs Northwest and Ventas, and these matters are currently on appeal. Bakersfield Mall’s claim was filed on April 25, 2007 as a class action on behalf of all LLCs operating in California; if it proceeds as a class action, the claimed refunds would be significant.
Five
cases have been filed challenging the constitutionality of the State’s tax
amnesty program: General Electric Company & Subsidiaries v. Franchise Tax
Board; Garcia v. Franchise Tax Board; Hargis v. Franchise Tax Board; Duffield
v. Franchise Tax Board; and Gonzales v. Franchise Tax Board. Chapter 226,
Statutes of 2004 (“SB 1100” ) created an amnesty program for taxable years
beginning before January 1, 2003. Under the program, taxpayers that had not
paid or had underpaid an eligible tax could agree to pay the tax and waive
their rights to claim refunds thereof. In exchange, certain penalties and fees
associated with the unpaid taxes would be waived and no criminal actions would
be brought for the taxable years for which amnesty was allowed. SB 1100 also
imposed a new penalty equal to 50 percent of accrued interest as of March 31,
2005 on any unpaid tax liabilities ultimately determined to be due for taxable
years 2002 and earlier for which amnesty could have been requested. In General
Electric, no penalty has been assessed because the companies’ final tax
liability for the years has not been determined. General Electric seeks a
declaration that the amnesty penalty should not apply to tax liabilities that
become final after the amnesty period that are paid within the statutory
payment period, or alternatively, that the amnesty penalty is unconstitutional
because it violates due process. On September 15, 2006, General Electric
appealed the trial court’s decision sustaining the Franchise Tax Board’s motion
to dismiss. The other cases are pending in the trial court; the Garcia case is
set for trial in August 2007.
21
The fiscal
impact of these cases is unknown at this time and is dependent on court
rulings, but is estimated to be in excess of $300 million.
In Bratton v. Franchise Tax Board, the plaintiff is challenging a penalty assessed for promotion of an abusive tax shelter. The amount in dispute is $600,000, but an adverse ruling in this matter, applied to other similarly situated plaintiffs, could have a more significant fiscal impact.
Nortel v. State Board of Equalization, a tax refund case, involves the interpretation of certain statutory sales and use tax exemptions for “custom-written” computer software and licenses to use computer software. A ruling adverse to the State Board of Equalization in this matter if applied to other similarly situated taxpayers could have a significant negative impact, in the range of approximately $500 million annually, on tax revenues. Trial is currently scheduled to begin on January 28, 2008.
In Abbott Laboratories v. Franchise Tax Board, the plaintiff is challenging the denial of a deduction for dividends under section 24402 of the Revenue and Taxation Code. Section 24402 was held to be unconstitutional in Farmer Bros. Co. v. Franchise Tax Board (2003), because it allowed a dividend deduction only to the extent the dividends were paid from income previously taxed by California. After this ruling, the Franchise Tax Board allowed a deduction for all dividends for years in which the normal 4-year statute of limitations prevented additional assessments and denied a deduction for all dividends for all taxpayers for all years in which the 4-year statute was still open. A denial of deductions is the remedy authorized by section 19393 of the Revenue and Taxation Code. Plaintiff asserts that the proper remedy is to allow a deduction for all dividends based upon either a judicial reformation of the statute or constitutional grounds. An adverse ruling in this matter, applied in the context of other statutes, could have a significant negative impact on tax revenues.
In Dicon Fiberoptics, Inc. v. Franchise Tax Board, the plaintiff is challenging the Franchise Tax Board’s authority to require the plaintiff to provide substantiation that its employees met the statutory requirements allowing it to receive certain tax credits. Under Revenue and Taxation Code section 23622.7, employers may apply to enterprise zones for a voucher allowing the employers to claim tax credits for hiring qualified employees. In this case, the Board required that plaintiff provide additional substantiation of its employees’ qualification for the tax credits. At this time it is unknown what the fiscal impact would be of an adverse ruling if applied to similarly situated taxpayers.
— Environmental Cleanup Matters . The State, as owner of the Leviathan Mine, is a party in a federal Environmental Protection Agency administrative abatement action and related proceedings. Litigation on the related claims had been tolled by agreement among the parties until January 1, 2008. It is possible these matters could result in a potential loss to the State in excess of $400 million.
In another case, thirty-two plaintiffs who own property or live in Santa Rosa brought a toxic tort case alleging that water wells supplying water to their homes were contaminated by carcinogenic chemicals. The State was sued under a mandatory duty theory premised on an alleged violation of Proposition 65 (The Safe Drinking Water and Toxic Enforcement Act of 1986). Plaintiffs claimed property damage, a variety of physical and psychological harms including birth defects, medical monitoring costs and damages for fear of cancer. Plaintiffs claimed damages exceeding $400 million. The jury trial in this case ended in a mistrial, and the court reconsidered and granted the State’s motion for summary judgment. Plaintiffs have appealed.
—
Energy-Related
Matters
. The State is party to a case in which the court is
considering whether and to what extent compensation is due to a market
participant which has claimed compensation as a result of the Governor’s
issuance of executive orders “commandeering” power purchase arrangements.
22
—
Escheated
Property Claims
. In three pending cases, plaintiffs claim that the
State Controller has an obligation to pay interest on private property that has
escheated to the State, and that failure to do so constitutes an
unconstitutional taking of private property. If the issues raised in any of
these cases require the Controller to pay interest on escheated property or to
manage unclaimed property as a trust for the benefit of the true owners, as the
plaintiffs allege is required by law, costs to the State could be in excess of
$500 million.
In another case, plaintiffs challenge the constitutional adequacy of the notice provided by the State to owners of unclaimed property before the State takes possession of and sells such property. On June 1, 2007, the trial court issued a preliminary injunction prohibiting the State Controller from taking possession of, selling or destroying property pursuant to the State’s unclaimed property law until the State enacts and the court approves new notice provisions. A bill amending the State’s current notice procedures is currently pending in the Legislature. The preliminary injunction, while it is in effect, will prevent the transfer of unclaimed cash and other property to the State’s General Fund. In fiscal year 2006-07, the State accounted for net receipts from this source in the amount of $392 million.
— Actions Seeking Damages for Alleged Violations of Privacy Rights . In a class action, plaintiffs seek damages for alleged violations of prison visitors rights resulting from the Department of Corrections’ use of a body imaging machine to search visitors entering state prisons for contraband. The trial court granted final judgment in favor of the State. Plaintiffs have appealed. If a court were to revive the damages claims and award damages pursuant to the California Civil Code for every use of the body-imaging machine, damages could exceed $3 billion.
A pending case involves due process constitutional challenges to an individual being placed on the State’s child abuse central index prior to the conclusion of a noticed hearing. The Court of Appeals in another case said that before a person is placed on such an index he or she is entitled to a hearing. However, the Court did not decide the issue of what type of hearing would be sufficient. Depending on the type and scope of hearing that the trial court orders and the number of individuals currently on the index that might be entitled to a hearing prior to remaining on the index, the costs to the State related to conducting these hearings could be in excess of $500 million.
A plaintiff subject to an audit by the Franchise Tax Board involving a claimed change of residence from California to Nevada filed a tort action in the State of Nevada alleging invasion of privacy and interference with his business relationships arising from the audit. Plaintiff seeks damages exceeding $500 million.
— Action Seeking a Cost of Living Adjustment for CalWORKs Recipients . The trial court decision in this case pending before the Court of Appeals determined that the Governor’s executive order in November 2003, which reduced the Vehicle License Fee charged to vehicle owners and increased the corresponding Vehicle License Fee offset to local governments, acted as an “increase in tax relief,” which, by statute, triggers an upward cost of living adjustment for recipients of CalWORKs program benefits. The petitioners seek a cost of living adjustment, beginning with fiscal year 2003-04. The Court of Appeal, on February 16, 2007, reversed the trial court judgment against the State; the California Supreme Court denied the petitioners’ petition for review on June 13, 2007.
In
the following case, plaintiffs seek a court order or judgment that would
require the State to modify existing programs and, except as specified, do not
seek monetary damages. Nevertheless, a judgment against the State could require
changes in the challenged program that could result in increased programmatic
costs to the State in a future fiscal year in excess of $250 million.
Alternatively, it may be possible that a judgment against the State could be
addressed by legislative changes to the program that would cost less.
23
In
the case, a consortium of state and national law firms and public-interest
groups brought suit against the Department of Finance, Department of
Developmental Services and Department of Health Services, alleging violations
of the Lanterman Act, the Americans with Disabilities Act, and section 504 of
the Rehabilitation Act resulting in needlessly isolating thousands of people
with developmental disabilities in large facilities. The case seeks sweeping
reforms to State programs for the treatment of institutionalized disabled
persons, including requiring the State to offer a full range of community-based
services. Some rough estimates suggest the financial impact of a judgment
against the State defendants could be as high as $1 billion per year. The State
is vigorously defending this action.
— Actions Seeking Medi-Cal Reimbursements . Two cases have been consolidated in the First District Court of Appeal in which approximately 1400 skilled-nursing and intermediate-care facilities allege that the Medi-Cal reimbursement rates paid by the Department of Health Services (“DHS”) to providers for, respectively, the 2001-02 and 2002-03 rate years were too low. The trial court sustained DHS’s motions to dismiss in both cases and entered judgment for DHS. On December 26, 2006, the Court of Appeals reversed and remanded the case to the trial court for further proceedings. A final decision adverse to DHS in both of the consolidated cases could result in reimbursement costs exceeding $250 million.
— Actions to Increase Amount of State Aid for Foster or Adopted Developmentally Disabled Dependent Children . Ten pending class action lawsuits challenge the amount of aid provided by the State for the care of children who have been determined to be developmentally disabled by a regional center. Plaintiffs assert that they were entitled to, but did not receive, the Alternative Residential Model (“ARM”) rate (also known as the dual agency rate) but have instead been receiving the standard AFDC-FC (foster care) rate and/or the adoption assistance program rate. A final decision in favor of these plaintiffs could exceed $450 million.
In another class action lawsuit, plaintiffs seek to expand Medicaid-covered services under the Early and Periodic Screening, Diagnosis and Treatment program for mentally disordered children in foster care. The Federal District Court issued a preliminary injunction against the State defendants and ordered the State to provide several of the services sought to class members. An appeal of the preliminary injunction has been filed in the U.S. Court of Appeals, and on March 23, 2007, the U.S. Court of Appeals reversed the trial court and remanded the case for further proceedings. At this time, it is unknown what financial impact such an unprecedented decision would have on the General Fund.
— Local Government Mandate Claims and Actions . Two lawsuits are pending that challenge the State’s recent practice of deferring payments to local governments for certain state mandated services and programs by making a budgetary appropriation for each program, to be divided among all 58 counties. A final determination by an appellate court that the State is required to reimburse the counties now in an amount equal to the previously un-reimbursed State-mandated costs, if applied to each of the 58 counties, could result in costs in excess of $1.5 billion for existing unreimbursed mandates. Following a trial, the court entered a declaratory judgment in favor of the counties regarding the amounts owed, and issued a writ of mandate commanding the State to comply with Government Code section 17617 by making equal annual payments to the counties over the 15-year term currently prescribed by statute, or a shorter period should the statute be amended. Final judgment has been entered. The State defendants have appealed, and the counties have cross-appealed.
—
Actions
Seeking to Enjoin Implementation of or Cause Amendment to Certain Tribal Gaming
Compacts
. Amendments to tribal gaming compacts between the State and
five Indian tribes are being challenged in at least two pending cases. An
unfavorable decision to the State in any of the cases could eliminate future
receipts of gaming revenues anticipated to result from the Amended Compacts,
and could delay or impair the State’s ability to sell a portion of the revenue
stream anticipated to be generated by
24
these Amended
Compacts. The State anticipates using the proceeds of that sale to repay
existing internal borrowings of transportation funds.
— Matter Seeking Validation of Pension Obligation Bonds. Although the Legislature had authorized the Pension Obligation Bond Committee (“Committee”) to issue bonds to fund all or a portion of the State’s pension obligation in any two fiscal years, the Sacramento County Superior Court ruled on November 15, 2005 that the bonds were not valid under the State’s debt limit. The Committee has appealed. The State will not be able to issue pension obligation bonds until this matter is resolved.
— Prison Healthcare Reform . Plaintiffs in this class action regarding all prison medical care in California alleged that the State was not providing constitutionally adequate medical care as required by the Eighth Amendment to the U.S. Constitution. The case was settled in 2002, but the federal court retained jurisdiction to enforce the terms of a stipulated judgment. The district court appointed a Receiver, who took office in April 2006, to run and operate the approximately $1.3 billion adult health care delivery system (excluding mental health and dental care) of the California Department of Corrections and Rehabilitation, affecting approximately 32 prisons throughout the State (excluding Pelican Bay Prison). At this time it is unknown what financial impact such an unprecedented decision would have on the General Fund.
— Action Challenging Quality Assurance Fee . Plaintiffs challenge a quality assurance fee charged to skilled nursing facilities and a Medi-Cal reimbursement methodology applicable to such facilities that were enacted in 2004, alleging violations of federal Medicaid law, the federal and State constitutions and State law. Plaintiffs seek a refund of fees paid and to enjoin future collection of the fee. If an injunction against collection of the fee is issued, it could negatively affect the State’s receipt of federal funds. At this time it is unknown what fiscal impact this matter would have upon the State’s General Fund.
T he State of New York—Special Investment Considerations—Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF
As described in the Prospectus, under normal circumstances, the Market Vectors-Lehman Brothers AMT-Free New York Long Municipal ETF will invest at least 80% of its assets in New York municipal securities. In addition, the specific New York municipal securities in which the Fund will invest will change from time to time. The Fund is therefore susceptible to political, economic, regulatory or other factors affecting issuers of New York municipal securities. The following information constitutes only a brief summary of a number of the complex factors which may impact issuers of New York municipal securities and does not purport to be a complete or exhaustive description of all adverse conditions to which issuers of New York municipal securities may be subject. Such information is derived from official statements utilized in connection with the issuance of New York municipal securities, as well as from other publicly available documents. Such information has not been independently verified by the Fund, and the Fund assumes no responsibility for the completeness or accuracy of such information. The summary below does not include all of the information pertaining to the budget, receipts and disbursements of the State of New York (the “State”) that would ordinarily be included in various public documents issued thereby, such as an official statement prepared in connection with the issuance of general obligation bonds of the State of New York. Such an official statement, together with any updates or supplements thereto, may generally be obtained upon request to the Division of Budget of the State of New York.
The New York State Economy
. New York is
the third most populous state in the nation and has a relatively high level of
personal wealth. The State’s economy is diverse, with a comparatively large
share of the nation’s financial activities, information, education, and health
services employment, and a very small share of the nation’s farming and mining
activity. The State’s location and its air transport facilities
25
and natural
harbors have made it an important link in international commerce. Travel and
tourism constitute an important part of the economy.
Like the rest of the nation, New York has a declining proportion of its workforce engaged in manufacturing, and an increasing proportion engaged in service industries. The financial activities sector share of total wages is particularly large for the State relative to the nation. The State is likely to be less affected than the nation as a whole during an economic recession that is concentrated in manufacturing and construction, but likely to be more affected by any economic downturn that is concentrated in the services sector. Important industry sectors in the State include the following:
— Services . The services industries includes professional and business services, private education and healthcare, leisure and hospitality services, and other services. These industries account for more than four of every ten nonagricultural jobs in New York, and account for a higher proportion of total jobs than the rest of the nation.
— Manufacturing . Manufacturing employment continues to decline in New York, as in most other states, and New York’s economy is less reliant on this sector than in the past. However, it remains an important sector of the State economy, particularly for the upstate region, which hosts high concentrations of manufacturers of transportation and other types of equipment.
— Trade, Transportation & Utilities . The trade, transportation, and utilities supersector accounts for the largest component of State nonagricultural employment, but only the fourth largest when measured by wage share. This sector accounts for slightly less employment and wages for the State than for the nation.
— Financial Activities . New York City is the nation’s leading center of banking and finance and, as a result, this is a far more important sector in the State than in the nation as a whole. Although this sector accounts for under one-tenth of all nonagricultural jobs in the State, it contributes more than one-fifth of total wages.
— Agriculture . Farming is an important part of the economy in rural areas, although it constitutes only about 0.2 percent of total State output. Principal agricultural products of the State include milk and dairy products, greenhouse and nursery products, fruits, and vegetables. New York ranks among the nation’s leaders in the production of these commodities.
— Government . Federal, State and local governments together comprise the second largest sector in terms of nonagricultural jobs, with the bulk of the employment accounted for by local governments. Public education is the source of nearly one-half of total State and local government employment.
The State’s economic expansion entered its fourth year in September 2006, with State employment, personal income, and wages all experiencing solid growth. The momentum of the State’s expansion appears to have peaked, however, and the DOB forecast for the next four years predicts more moderate rates of economic growth.
The
State’s strong income performance in 2006, was due in large part to significant
increases in finance and insurance sector bonus growth, a strong real estate
market and substantial stock market gains. These trends have translated into
continuing strong growth in State tax revenues. If current estimates are
correct, annual growth in tax receipts will approach nearly 12 percent in the
current fiscal year, after factoring the impact of law changes. The
extraordinary rates of underlying growth are expected to moderate in future
years consistent with projected economic growth. In addition, receipts growth
will be reduced by already enacted tax reductions.
26
In
addition to the risks associated with the national economic forecast, there
exist specific risks to the State economy. Chief among them is a weaker
performance within the financial sector than is currently projected. An
accelerated pace of interest rate hikes, as well as lower corporate earnings
could adversely affect equity markets, possibly resulting in lower bonus
payment growth than projected, with the impact largely felt during the first
quarter of 2006. A larger increase in mortgage rates than expected could also
have a negative impact on the State’s housing market. In contrast, a stronger
national economy than anticipated could result in greater equity market growth
and, in turn, stronger finance sector income growth than expected.
The State’s Fund Structure . The State accounts for all of its spending and revenues by the fund in which the activity takes place (such as the General Fund), and the broad category or purpose of that activity (such as State Operations). State Funds include the General Fund and funds specified for dedicated purposes, with the exception of Federal Funds, All Government Funds, which includes both State and Federal Funds, comprise four major fund types, and provides the most comprehensive views of the financial operations of the State. It includes:
— The General Fund . The General Fund receives most of the State’s tax revenue and accounts for spending on programs that are not supported directly by dedicated fees and revenues.
— Special Revenue Funds . Special Revenue Funds receive Federal grants, certain dedicated taxes, fees and other revenues that are used for a specified purpose.
— Capital Projects Funds . Capital Projects Funds account for costs incurred in the construction and reconstruction of roads, bridges, prisons, and other infrastructure projects.
— Debt Service Funds . Debt Service Funds pay principal, interest and related expenses on long-term bonds issued by the State and its public authorities.
The State Constitution requires the Governor to submit an Executive Budget that is balanced in the General Fund which receives the majority of State taxes.
State Budget Process . The State budget process begins with the Governor’s submission of the Executive Budget to the Legislature each January, in preparation for the start of the fiscal year on April 1. In acting on the bills submitted by the Governor, the Legislature has certain powers to alter the recommended appropriations and proposed changes to existing law. The Legislature may strike out or reduce an item of appropriation recommended by the Governor. The Legislature may add items of appropriation, provided such additions are stated separately. These additional items are then subject to line-item veto by the Governor. If the Governor vetoes an appropriation or a bill (or a portion thereof) related to the budget, these items can be considered in accordance with the rules of each house of the Legislature. If approved by two-thirds of the members of each house, such items will become law notwithstanding the Governor’s veto. Once the appropriation bills and other bills become law, the Division of the Budget revises the State Financial Plan to reflect the Legislature’s actions, and begins the process of implementing the budget.
2007-08 Enacted Budget Financial Plan
. The
State finalized the Enacted Budget for 2007-08 on April 1, 2007. The Governor
did not veto any legislative additions. The General Fund is balanced on a cash
basis, with annual spending projected to grow by $2.1 billion (4.1 percent)
from 2006-2007 levels, which includes substantial increases in aid to public
schools. The growth in spending is moderated by cost containment initiatives
that reduce the overall rate of growth in health card spending. The General
Fund, Special Revenue Funds, Capital Projects Funds and Debt Service Funds (the
“Governmental Funds”) spending, which includes Federal aid, is estimated at
$120.7 billion, an increase of $7.9 billion
27
(7.0 percent)
from 2006-07. Consistent with the Executive Budget recommendations, the Enacted
Budget establishes $1.2 billion in flexible reserves that are planned to help
balance future budgets. The General Fund is projected to have a closing balance
of $3.0 billion in 2007-08, a slight decrease from 2006-7 results. The balance
consists of $1.2 billion in undesignated reserves and $1.8 billion in reserves
for designated purposes.
Entering the 2007-08 budget cycle, the State estimated a budget imbalance of $1.6 billion in 2007-08 and gaps in the range of $3 billion to $6 billion in future years. The Governor’s Executive Budget, if enacted in its entirety, would have eliminated the 2007-08 imbalance and left gaps of $2.3 billion in 2008-09, $4.5 billion in 2009-10 and $6.3 billion in 2010-11. The Enacted Budget Financial Plan, which incorporates both the Legislature’s modifications to Executive recommendations and revisions to current service receipts and spending estimates, is also balanced in 2007-8, with gaps somewhat greater than those forecast at the time of the Executive Budget.
The Enacted Budget includes a number of substantive fiscal and policy actions. These include:
— School Aid. A new Foundation Aid formula is enacted in permanent law that bases the amount of School Aid on a district’s educational needs an its ability to provide local support for education. Under the Foundation Aid formula, approximately 72 percent of the aid increase will go to high-needs districts.
— School Tax Relief (STAR). The Enacted Budget expands the STAR program, providing a new benefit that is targeted to middle class taxpayers.
— Expanded access to health care for children. Access to health insurance coverage is made available for the 400,000 children that are without coverage in New York State.
— Investment in stem cell research. Provides initial funding for stem cell research.
— Increased deposits in reserves. The Enacted Budget finances deposits of $250 million to the Debt Reduction Reserve and $175 million to the new Rainy Day Reserve. In January 2007, the State created a new State Rainy Day Reserve into law that has an authorized balance of 3 percent of General Fund spending. It may be used to respond to an economic downturn or catastrophic event.
To finance the initiatives and eliminate the “current services” imbalance, the Enacted Budget Financial Plan includes $3.5 billion in savings and the use of prior-year surpluses:
— Savings of $2.0 billion in spending restraint of which more than $1 billion will slow growth in Health, Medicaid and Mental Hygiene spending.
— Approximately $450 million in loophole-closing revenue actions, which is partially offset by $150 million in revenue reductions from broad-based business tax cuts.
— About $1.0 billion from the use of prior year surplus moneys.
The
Enacted Budget maintains reserves of $3.0 billion in 2007-08, comparable to the
level at the close of 2006-07. Reserves equal roughly 5.7 percent of projected
General Fund spending. The Enacted Budget includes an initial deposit of $175
million to the new Rainy Day Reserve that may be used to respond to an economic
downturn or catastrophic event and a $250 million deposit to the State’s Debt
Reduction Reserve that will be used to eliminate high-cost debt. The reserves
also include amounts in the Tax Stabilization Reserve Fund ($1.03 billion),
$1.2 billion in a flexible reserve that is planned to lower
28
the outyear
budget gaps, and $353 million in the Community Projects Fund to finance
existing legislative “member item” appropriations.
The balance of this Enacted Budget Financial Plan describes the information presented in this synopsis in more detail.
— State-Supported Lease-Purchase and Contractual-Obligation Financings . The State utilizes certain long-term financing mechanisms, lease-purchase and contractual-obligation financings, which involve obligations of public authorities or municipalities where debt service is payable by the State, but are not general obligations of the State. Under these financing arrangements, certain public authorities and municipalities have issued obligations to finance certain payments to local governments, various capital programs, including those which finance the State’s highway and bridge program, SUNY and CUNY educational facilities, health and mental hygiene facilities, prison construction and rehabilitation, economic development projects, State buildings and housing programs, and equipment acquisitions, and expect to meet their debt service requirements through the receipt of rental or other contractual payments made by the State. Debt service payable to certain public authorities from State appropriations for such lease-purchase and contractual obligation financings may be paid from general resources of the State or from dedicated tax and other sources (e.g., State personal income taxes, motor vehicle and motor fuel related-taxes, dormitory facility rentals, and patient charges). Although these financing arrangements involve a contractual agreement by the State to make payments to a public authority, municipality or other entity, the State’s obligation to make such payments is generally expressly made subject to appropriation by the Legislature and the actual availability of money to the State for making the payments.
State-related debt includes State-supported debt referenced above, as well as State-guaranteed debt (to which the full faith and credit of the State has been pledged), moral obligation financings and certain contingent-contractual obligation financings, where debt service is expected to be paid from other sources and State appropriations are contingent in that they may be made and used only under certain circumstances.
— Contingent Contractual-Obligation Financing . The State may also enter into statutorily authorized contingent contractual-obligation financings under which the State may enter into service contracts obligating it to pay debt service on bonds, subject to annual appropriation, in the event there are shortfalls in revenues from other non-State resources pledged or otherwise available, to pay the debt service on the bonds. The State has never been required to make any payments, and does not expect to make payments, under this financing arrangement in the 2007-08 fiscal year.
— Moral Obligation Financings . Moral obligation financing generally involves the issuance of debt by a public authority to finance a revenue-producing project or other activity. The debt is secured by project revenues and includes statutory provisions requiring the State, subject to appropriation by the Legislature, to make up any deficiencies which may occur in the issuer’s debt service reserve fund. There has never been a payment default on any moral obligation debt of any public authority. The State does not intend to increase statutory authorizations for moral obligation bond programs. The State has not been called upon to make any payments pursuant to any moral obligations since the 1986-87 fiscal year and no such requirements are anticipated during the 2007-08 fiscal year.
—
State-Guaranteed
Financings
. Pursuant to specific constitutional authorization, the
State may also directly guarantee certain public authority obligations. The
only current authorization provides for the State guarantee of the repayment of
certain borrowings for designated projects of the New York State Job
Development Authority. The State has never been called upon to make any direct
payments pursuant to any such guarantees and does not anticipate that it will
be called upon to make any payments pursuant
29
to the State
guarantee in the 2007-08 fiscal year. Payments of debt service on
State-guaranteed bonds and notes are legally enforceable obligations of the
State.
The State has never defaulted on any of its general obligation indebtedness or its obligations under lease-purchase or contractual obligation financing arrangements and has never been called upon to make any direct payments pursuant to its guarantees.
Public Authorities . The fiscal stability of the State is related in part to the fiscal stability of its public authorities, namely public benefit corporations, created pursuant to State law, other than local authorities. Public authorities are not subject to the constitutional restrictions on the incurrence of debt that apply to the State itself and may issue bonds and notes within the amounts and restrictions set forth in legislative authorization. The State’s access to the public credit markets could be impaired and the market price of its outstanding debt may be materially and adversely affected if any of its public authorities were to default on their respective obligations, particularly those using State-supported or State-related debt financings. As of December 31, 2005, there were 19 public authorities that had outstanding debt of $100 million or more, and the aggregate outstanding debt, including refunding bonds, of these State public authorities was approximately $124 billion, only a portion of which constitutes State-supported or State-related debt.
New York City . The fiscal demands on the State may be affected by the fiscal condition of the City, which relies in part on State aid to balance its budget and meet its cash requirements. It is also possible that the State’s finances may be affected by the ability of the City, and certain entities issuing debt for the benefit of the City, to market securities successfully in the public credit markets.
In response to the City’s fiscal crisis in 1975, the State took action to help the City return to fiscal stability. These actions included the establishment of the Municipal Assistance Corporation for the City of New York, to provide the City with financing assistance; the New York State Financial Control Board (FCB), to oversee the City’s financial affairs; and the Office of the State Deputy Comptroller for the City of New York (OSDC), to assist the Control Board in exercising its powers and responsibilities. The staffs of the FCB, OSDC, the City Comptroller and the Independent Budget Office of the City of New York, issue periodic reports on the City’s financial plans.
Other Localities . Certain localities outside New York City have experienced financial problems and have requested and received additional State assistance during the last several State fiscal years. Like the State, local governments must respond to changing political, economic and financial influences over which they have little or no control. Such changes may adversely affect the financial condition of certain local governments. For example, the Federal government may reduce (or in some cases eliminate) Federal funding of some local programs or disallow certain claims which, in turn, may require local governments to fund these expenditures from their own resources. It is also possible that New York City, other localities, or any of their respective public authorities may suffer serious financial difficulties that could jeopardize local access to the public credit markets, which may adversely affect the marketability of notes and bonds issued by localities within the State. Localities may also face unanticipated problems resulting from certain pending litigation, judicial decisions and long-range economic trends. Other large-scale potential problems, such as declining urban populations, increasing expenditures, and the loss of skilled manufacturing jobs, may also adversely affect localities and necessitate State assistance.
Other
New York Risk Factors
. When compared with the average
ratings among other states of full faith and credit state debt obligations, the
credit risk associated with obligations of the state of New York and its
agencies and authorities, including general obligation and revenue bonds,
“moral obligation” bonds, lease debt, appropriation debt and notes is somewhat
higher than average. Moreover, the credit
30
quality of
such obligations may be more volatile insofar as the state’s credit rating has
historically been upgraded and downgraded much more frequently than most other
states.
The combined state and local taxes of residents of the state of New York, and particularly of residents of New York City, are among the highest in the country, which may limit the ability of the state and its localities to raise additional revenue. In addition, combined state and local debt per capita in the state is significantly above the national average and debt service expenditures have represented an increasing claim on state and local budgets.
Additionally, many factors, including national, economic, social and environmental policies and conditions, which are not within the control of such issuers, could have an adverse impact on the financial conditions of such issuers. The Fund cannot predict whether or to what extent such factors or other factors may affect the issuers of New York municipal securities, the market value or marketability of such securities or the ability of the respective issuers of such securities acquired by the Fund to pay interest on or principal of such securities. The creditworthiness of obligations issued by local New York issuers may be unrelated to the creditworthiness of obligations issued by the state of New York, and there is no responsibility of the part of the state of New York to make payments on such local obligations. There may be specific factors that are applicable in connection with investment in the obligations of particular issuers located within New York, and it is possible the Fund will invest in obligations of particular issuers as to which such specific factors are applicable. However, the information set forth above is intended only as a general summary and not a discussion of any specific factors that may affect any particular issuer of New York municipal securities.
F utures and Options Transactions
Positions in futures contracts and options may be closed out only on an exchange which provides a secondary market therefor. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract or option at any specific time. Thus, it may not be possible to close a futures or options position. In the event of adverse price movements, the Funds would continue to be required to make daily cash payments to maintain its required margin. In such situations, if a Fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements at a time when it may be disadvantageous to do so. In addition, the Funds may be required to make delivery of the instruments underlying futures contracts they have sold.
The Funds will seek to minimize the risk that it will be unable to close out a futures or options contract by only entering into futures and options for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts or uncovered call options in some strategies ( e.g. , selling uncovered stock index futures contracts) is potentially unlimited. The Funds do not plan to use futures and options contracts in this way. The risk of a futures position may still be large as traditionally measured due to the low margin deposits required. In many cases, a relatively small price movement in a futures contract may result in immediate and substantial loss or gain to the investor relative to the size of a required margin deposit. The Funds, however, intend to utilize futures and options contracts in a manner designed to limit its risk exposure to that which is comparable to what it would have incurred through direct investment in stocks.
Utilization
of futures transactions by the Funds involves the risk of imperfect or even
negative correlation to each Fund’s respective benchmark index if the index
underlying the futures contracts differs from the benchmark index. There is
also the risk of loss by the Funds of margin deposits in the event of
bankruptcy of a broker with whom a Fund has an open position in the futures
contract or option.
31
Certain
financial futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day’s settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses.
The use of swap agreements involves certain risks. For example, if the counterparty, under a swap agreement, defaults on its obligation to make payments due from it as a result of its bankruptcy or otherwise, the Funds may lose such payments altogether or collect only a portion thereof, which collection could involve costs or delay.
U .S. Federal Tax Treatment of Futures Contracts
The Funds may be required for federal income tax purposes to mark-to-market and recognize as income for each taxable year their net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. The Funds may be required to defer the recognition of losses on futures contracts to the extent of any unrecognized gains on related positions held by the Funds.
In order for the Funds to continue to qualify for U.S. federal income tax treatment as a regulated investment company, at least 90% of their gross income for a taxable year must be derived from qualifying income, i.e. , dividends, interest, income derived from loans of securities, gains from the sale of securities or of foreign currencies or other income derived with respect to the Funds’ business of investing in securities. It is anticipated that any net gain realized from the closing out of futures contracts will be considered gain from the sale of securities and therefore will be qualifying income for purposes of the 90% requirement.
The Funds distribute to shareholders annually any net capital gains which have been recognized for U.S. federal income tax purposes (including unrealized gains at the end of a Fund’s fiscal year) on futures transactions. Such distributions are combined with distributions of capital gains realized on each Fund’s other investments and shareholders are advised on the nature of the distributions.
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
32
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(3)(C) of the Securities Act, would be unable to take advantage of the
prospectus-delivery exemption provided by Section 4(3) of the Securities Act.
This is because the prospectus delivery exemption in Section 4(3) of the
Securities Act is not available in respect of such transactions as a result of
Section 24(d) of the 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 overallotment within the meaning of Section
4(3)(A) of the Securities Act would be unable to take advantage of the
prospectus delivery exemption provided by Section 4(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 AMEX is satisfied by the fact that the
prospectus is available at the AMEX upon request. The prospectus delivery
mechanism provided in Rule 153 is only available with respect to transactions
on an exchange.
33
A discussion of exchange listing and trading matters associated with an investment in the Funds is contained under the headings “Principal Risks of Investing in the Funds,” “Additional Risks of Investing in the Funds,” “Shareholder Information—Determination of Net Asset Value” and “Shareholder Information—Buying and Selling Exchange-Traded Shares.” The discussion below supplements, and should be read in conjunction with, such sections of the Funds’ Prospectus.
The Funds anticipate that their Shares will be traded in the secondary market at prices that may differ to some degree from their NAV. There can be no assurance that the requirements of the AMEX necessary to maintain the listing of Shares of the Funds will continue to be met.
The AMEX may but is not required to remove the Shares of the Funds from listing if: (1) following the initial twelve-month period beginning upon the commencement of trading of the Funds, there are fewer than 50 beneficial holders of the Shares for 30 or more consecutive trading days, (2) the value of each Fund’s respective underlying Index or portfolio of securities on which a Fund is based is no longer calculated or available or (3) such other event shall occur or condition exists that, in the opinion of the AMEX, makes further dealings on the AMEX inadvisable. In addition, the AMEX will remove the Shares from listing and trading upon termination of the Trust.
As in the case of other securities traded on the AMEX, brokers’ commissions on transactions will be based on negotiated commission rates at customary levels.
In order to provide investors with a basis to gauge whether the market price of the Shares on the AMEX are approximately consistent with the current value of the assets of the Fund on a per Share basis, an updated Intra-Day Optimized Portfolio Value is disseminated intra-day through the facilities of the Consolidated Tape Association’s Network B. Intra-Day Optimized Portfolio Values are disseminated every 15 seconds during regular AMEX trading hours based on the most recently reported prices of Fund Securities. The Funds are not involved in or responsible for the calculation or dissemination of the Intra-Day Optimized Portfolio Value and make no warranty as to the accuracy of the Intra-Day Optimized Portfolio Value.
The
Intra-Day Optimized Portfolio Value has a net other assets value component,
which is summed and divided by the total estimated Fund Shares outstanding,
including Shares expected to be issued by each Fund on that day, to arrive at
an Intra-Day Optimized Portfolio Value. The net other assets value component
consists of estimates of all other assets and liabilities of the Fund
including, among others, current day estimates of dividend income and expense
accruals.
34
Trustees and Officers of the Trust
The Board has responsibility for the overall management and operations of the Trust, including general supervision of the duties performed by the Adviser and other service providers. The Board currently consists of five Trustees.
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Name,
Address
1
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Position(s)
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Term of
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Principal
Occupation(s)
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Number of
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Other
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David H. Chow 49 * |
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Trustee |
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Since 2006 |
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Chief Investment Officer, Torch Hill Investment Partners (private equity firm), September 2007 to present; Managing Partner, Lithos Capital Partners LLC (private equity firm), January 2006 to September 2007; Managing Director, DanCourt Management LLC (strategy consulting firm), March 1999 to present; Managing Director, AIG Horizon Partners, LLC (venture capital firm), May 2000 to July 2002. |
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13 |
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None. |
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R. Alastair Short 54* |
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Trustee |
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Since 2006 |
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Vice Chairman, W.P. Stewart & Co., Ltd. (asset management firm), September 2007 to present; Managing Director, The GlenRock Group, LLC (private equity investment firm), May 2004 to September 2007; President, Apex Capital Corporation (personal investment vehicle), Jan. 1988 to present; President, Matrix Global Investments, Inc. and predecessor company (private investment company), September 1995 to January 1999. |
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22 |
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None. |
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Richard D. Stamberger 48* |
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Trustee |
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Since 2006 |
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Director, President and CEO, SmartBrief, Inc. |
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22 |
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None. |
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1 |
The address for each Trustee and officer is 99 Park Avenue, 8th Floor, New York, New York 10016. |
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35
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2 |
Each Trustee serves until resignation, death, retirement or removal. Officers are elected yearly by the Trustees. |
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3 |
The Fund Complex consists of the Van Eck Funds, Van Eck Funds, Inc., Van Eck Worldwide Insurance Trust and Market Vectors ETF Trust. |
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* |
Member of the Audit Committee. |
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Name,
Address
1
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Position(s)
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Term of
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Principal
Occupation(s)
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Number of
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Other
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Jan F. van Eck 4 44 |
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Trustee |
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Since 2006 |
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Director and Executive Vice President, Van Eck Associates Corporation; Director, Executive Vice President and Chief Compliance Officer, Van Eck Securities Corporation; Director and President, Van Eck Absolute Return Advisers Corp. |
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22 |
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Director, Greylock Capital Associates LLC. |
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Phillip D. DeFeo 5 61 |
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Chairman
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Since 2006 |
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Managing Director, Lithos Capital Trustee Partners LLC., 2005 to present; Chairman and CEO, Pacific Exchange, Inc., 1999 to 2005. |
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13 |
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Director of Visa USA, Computershare Limited, Reflow, Forward Asset Management, LLC, Berea College and Interactive Brokers LLC. |
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1 |
The address for each Trustee and officer is 99 Park Avenue, 8th Floor, New York, New York 10016. |
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2 |
Each Trustee serves until resignation, death, retirement or removal. Officers are elected yearly by the Trustees. |
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3 |
The Fund Complex consists of the Van Eck Funds, Van Eck Funds, Inc., Van Eck Worldwide Insurance Trust and Market Vectors ETF Trust. |
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4 |
“Interested person” of the Funds within the meaning of the 1940 Act. Mr. van Eck is an officer of the Adviser. |
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5 |
Mr. DeFeo is an “interested person” of the Funds within the meaning of the 1940 Act due to his directorship at Interactive Brokers LLC. |
Officer Information
The
Officers of the Trust, their addresses, positions with the Funds, ages and
principal occupations during the past five years are set forth below.
36
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Name,
Address
1
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Position(s)
Held
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Term of
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Principal Occupation(s) During Past Five Years |
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Charles T. Cameron 47 |
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Vice President |
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Since 2006 |
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Director of Trading, Van Eck Associates Corporation; Co-Portfolio Manager, Worldwide Bond Fund Series; Officer of three other investment companies advised by the Adviser. |
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Keith Carlson 51 |
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Chief Executive
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Since 2006 |
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President, Van Eck Associates Corporation and President, Van Eck Securities Corporation since February 2004; Private Investor, June 2003 – January 2004; Independent Consultant, Waddell & Reed, Inc., April 2003 - May 2003; Senior Vice President, Waddell & Reed, Inc., December 2002 - March 2003; President/Chief Executive Officer/Director/Executive Vice President/Senior Vice President, Mackenzie Investment Management Inc., April 1985-December 2002. President/Chief Executive Officer/Director, Ivy Mackenzie Distributors, Inc., June 1993 - December 2002; Chairman/Director/President, Ivy Mackenzie Services Corporation, June 1993 - December 2002; Chairman/Director/Senior Vice President, Ivy Management Inc., January 1992 - December 2002; Officer of three other investment companies advised by the Adviser. |
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Susan C. Lashley 52 |
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Vice President |
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Since 2006 |
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Vice President, Van Eck Associates Corporation; Vice President, Mutual Fund Operations, Van Eck Securities Corporation; Officer of three other investment companies advised by the Adviser. |
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Thomas K. Lynch 51 |
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Chief Compliance
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Since 2006 |
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Chief Compliance Officer, Van Eck Associates Corporation and Van Eck Absolute Return Advisers Corp., since December 2006; Vice President, Van Eck Associates Corporation and Van Eck Absolute Return Advisers Corp., since April 2005; Second Vice President, Investment Reporting, TIAA-CREF, January 1996 - April 2005; Senior Manager, Audits, Grant Thornton, December 1993 – January 1996; Senior Manager, Audits, McGladrey & Pullen, December 1986 - December 1993; Officer of three other investment companies advised by the Adviser. |
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Name,
Address
1
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Position(s)
Held
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Term of
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Principal Occupation(s) During Past Five Years |
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Joseph J. McBrien 59 |
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Senior Vice
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Since 2006 |
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Senior Vice President, General Counsel and Secretary, Van Eck Associates Corporation, Van Eck Securities Corporation and Van Eck Absolute Return Advisers Corp., since December 2005; Managing Director, Chatsworth Securities LLC, March 2001 - November 2005; Private Investor/Consultant, September 2000 – February 2001; Executive Vice President and General Counsel, Mainstay Management LLC, September 1999 – August 2000; Officer of three other investment companies advised by the Adviser. |
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Alfred J. Ratcliffe 60 |
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Vice President and
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Since 2006 |
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Vice President, Van Eck Associates Corporation since November 2006; Vice President and Director of Mutual Fund Accounting and Administration, PFPC, March 2000 to November 2006; First Vice President and Treasurer, Zweig Mutual Funds, March 1995 to December 1999; Vice President and Director of Mutual Fund Accounting and Administration, The Bank of New York, December 1987 to March 1995; Officer of three other investment companies advised by the Adviser. |
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Jonathan R. Simon 33 |
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Vice President and
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Since 2006 |
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Vice President, Associate General Counsel, Van Eck Associates Corporation, Van Eck Securities Corporation and Van Eck Absolute Return Advisers Corp. since August 2006, Associate, Schulte Roth & Zabel LLP, July 2004 - July 2006; Associate, Carter Ledyard & Milburn LLP, September 2001 - July 2004; Officer of three other investment companies advised by the Adviser. |
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Bruce J. Smith 52 |
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Senior Vice
|
|
Since 2006 |
|
Senior Vice President and Chief Financial Officer, Van Eck Associates Corporation; Senior Vice President, Chief Financial Officer, Treasurer and Controller, Van Eck Securities Corporation and Van Eck Absolute Return Advisers Corp.; Officer of three other investment companies advised by the Adviser. |
38
|
|
|
|
|
|
|
|
|
Name,
Address
1
|
|
Position(s)
Held
|
|
Term of
|
|
Principal Occupation(s) During Past Five Years |
|
|
|
|
|
|
|
|
|
Derek S. van Eck(3) 43 |
|
Executive Vice
|
|
Since 2006 |
|
President of Worldwide Hard Assets Fund series and the Worldwide Real Estate Fund series of Van Eck Worldwide Insurance Trust and the Global Hard Assets Fund series of Van Eck Funds; Director of Van Eck Associates Corporation; Director and Executive Vice President, Van Eck Securities Corporation; Director and Executive Vice President, Van Eck Absolute Return Advisers Corp.; Director, Greylock Capital Associates LLC. |
|
|
|
|
|
|
|
|
|
Jan F. van Eck (3) 44 |
|
Executive Vice
|
|
Since 2006 |
|
Director and Executive Vice President, Van Eck Associates Corporation; Director, Executive Vice President and Chief Compliance Officer, Van Eck Securities Corporation; Director and President, Van Eck Absolute Return Advisers Corporation; Director, Greylock Capital Associates LLC. |
|
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|
|
|
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|
|
|
|
1 |
The address for each Officer is 99 Park Avenue, 8th Floor, New York, New York 10016. |
|
|
|
|
2 |
Officers are elected yearly by the Trustees. |
|
|
|
|
3 |
Messrs. Jan F. van Eck and Derek S. van Eck are brothers. |
The Board of the Trust met four times during the calendar year ended December 31, 2006.
The Board has an Audit Committee, consisting of three Trustees who are not “interested persons” (as defined in the 1940 Act) of the Trust (an “Independent Trustee”). Messrs. Chow, Short and Stamberger currently serve as members of the Audit Committee and each has been designated as an “audit committee financial expert” as defined under Item 407 of Regulation S-K of the Exchange Act. Mr. Short is the Chairman of the Audit Committee. The Audit Committee has the responsibility, among other things, to: (i) oversee the accounting and financial reporting processes of the Trust and its internal control over financial reporting and, as the Audit Committee deems appropriate, to inquire into the internal control over financial reporting of certain third-party service providers, (ii) oversee the quality and integrity of the Trust’s financial statements and the independent audit thereof, (iii) oversee or, as appropriate, assist the Board’s oversight of the Trust’s compliance with legal and regulatory requirements that relate to the Trust’s accounting and financial reporting, internal control over financial reporting and independent audit; (iv) approve prior to appointment the engagement of the Trust’s independent registered public accounting firm and, in connection therewith, to review and evaluate the qualifications, independence and performance of the Trust’s independent registered public accounting firm; and (v) act as a liaison between the Trust’s independent registered public accounting firm and the full Board. The Audit Committee met four times during the calendar year ended December 31, 2006.
The officers and Trustees of the Trust, in the aggregate, own less than 1% of the Shares of each Fund.
For
each Trustee, the dollar range of equity securities beneficially owned by the
Trustee in each Fund and in all registered investment companies overseen by the
Trustee is shown below.
39
|
|
|
|
|
|
|
Name Of Trustee |
|
Dollar
Range of Equity
|
|
Aggregate
Dollar Range Of Equity
|
|
|
||||
|
|
||||
|
David H. Chow |
|
None |
|
None |
|
Phillip D. DeFeo |
|
None |
|
None |
|
R. Alastair Short |
|
None |
|
$10,001 – $50,000 |
|
Richard D. Stamberger |
|
None |
|
Over $100,000 |
|
Jan F. van Eck |
|
None |
|
Over $100,000 |
As to each Independent Trustee and his immediate family members, no person owned beneficially or of record securities in an investment adviser or principal underwriter of the Funds, or a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the investment manager or principal underwriter of the Funds.
The Trust pays each Independent Trustee and Mr. DeFeo an annual retainer of $10,000, a per meeting fee of $5,000 for scheduled quarterly meetings of the Board and each special meeting of the Board and a per meeting fee of $2,500 for telephonic meetings. The Trust pays the Chairman of the Board an annual retainer of $10,000 and each Trustee who acts as chairman of a committee an annual retainer of $5,000. The Trust also reimburses each Trustee for travel and other out-of-pocket expenses incurred in attending such meetings. No pension or retirement benefits are accrued as part of Trustee compensation.
The table below shows the estimated compensation that is contemplated to be paid to the Trustees by the Trust for the fiscal year ending December 31, 2007. Annual Trustee fees may be reviewed periodically and changed by the Trust’s Board.
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
Name of Trustee |
|
Aggregate
|
|
Deferred
|
|
Pension or
Retirement
|
|
Estimated
|
|
Total
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
David H. Chow |
|
$ |
0 |
|
$ |
35,000 |
|
|
N/A |
|
|
N/A |
|
$ |
35,000 |
|
|
Phillip D. DeFeo (3) |
|
$ |
0 |
|
$ |
40,000 |
|
|
N/A |
|
|
N/A |
|
$ |
40,000 |
|
|
R. Alastair Short |
|
$ |
35,000 |
|
$ |
0 |
|
|
N/A |
|
|
N/A |
|
$ |
78,000 |
|
|
Richard D. Stamberger |
|
$ |
26,250 |
|
$ |
8,750 |
|
|
N/A |
|
|
N/A |
|
$ |
85,000 |
|
|
Jan F. van Eck (3) |
|
$ |
0 |
|
$ |
0 |
|
|
N/A |
|
|
N/A |
|
$ |
0 |
|
|
|
|
|
(1) |
The “Fund Complex” consists of Van Eck Funds, Van Eck Funds, Inc., Van Eck Worldwide Insurance Trust and Market Vectors ETF Trust. |
|
|
|
|
(2) |
Because the Funds have different fiscal year ends, the amounts shown are presented on a calendar year basis. |
|
|
|
|
(3) |
“Interested person” under the 1940 Act. |
40
Each Fund’s portfolio holdings are publicly disseminated each day the Fund is open for business through financial reporting and news services, including publicly accessible Internet web sites. In addition, a basket composition file, which includes the security names and share quantities to deliver in exchange for Shares, together with estimates and actual cash components is publicly disseminated daily prior to the opening of the AMEX via the National Securities Clearing Corporation (the “NSCC”), a clearing agency that is registered with the SEC. The basket represents one Creation Unit of each Fund. The Trust, Adviser, Custodian and Distributor will not disseminate non-public information concerning the Trust.
The Trust is required to disclose, after its first and third fiscal quarters, the complete schedule of the Funds’ portfolio holdings with the SEC on Form N-Q. Form N-Q for the Funds will be available on the SEC’s website at http://www.sec.gov. The Funds’ Form N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. and information on the operation of the Public Reference Room may be obtained by calling 202.551.8090. The Funds’ Form N-Q will be available through the Funds’ website, at www.vaneck.com or by writing to 99 Park Avenue, 8th Floor, New York, New York 10016.
The Funds, the Adviser and the Distributor have each adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act, designed to monitor personal securities transactions by their personnel (the “Personnel”). The Code of Ethics requires that all trading in securities that are being purchased or sold, or are being considered for purchase or sale, by the Funds must be approved in advance by the Head of Trading, the Director of Research and the Chief Compliance Officer of the Adviser. Approval will be granted if the security has not been purchased or sold or recommended for purchase or sale for a Fund within seven days, or otherwise if it is determined that the personal trading activity will not have a negative or appreciable impact on the price or market of the security, or is of such a nature that it does not present the dangers or potential for abuses that are likely to result in harm or detriment to the Funds. At the end of each calendar quarter, all Personnel must file a report of all transactions entered into during the quarter. These reports are reviewed by a senior officer of the Adviser.
Generally, all Personnel must obtain approval prior to conducting any transaction in securities. Independent Trustees, however, are not required to obtain prior approval of personal securities transactions. Personnel may purchase securities in an IPO or private placement, provided that he or she obtains preclearance of the purchase and makes certain representations.
P ROXY VOTING POLICIES AND PROCEDURES
The Funds’ proxy voting record will be available upon request and on the SEC’s website at http://www.sec.gov. Proxies for each Fund’s portfolio securities are voted in accordance with the Adviser’s proxy voting policies and procedures, which are set forth in Appendix A to this SAI.
The
Trust is required to disclose annually each Fund’s complete proxy voting record
on Form N-PX covering the period July 1 through June 30 and file it with the
SEC no later than August 31. Form N-PX for the Funds will be available through
the Fund’s website, at www.vaneck.com, or by writing to 99 Park Avenue, 8th
Floor, New York, New York 10016. The Fund’s Form N-PX will also be available on
the SEC’s website at www.sec.gov.
41
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “Management.”
Van
Eck Associates Corporation (the “Adviser”) acts as investment manager to the
Trust and, subject to the supervision of the Board, is responsible for the
day-to-day investment management of the Funds. The Adviser is a private company
with headquarters in New York and manages other mutual funds and separate
accounts.
The
Adviser serves as investment manager to the Funds pursuant to the Investment
Management Agreement between the Trust and the Adviser. Under the Investment
Management Agreement, the Adviser, subject to the supervision of the Board and
in conformity with the stated investment policies of each Fund, manages the
investment of the Funds’ assets. The Adviser is responsible for placing
purchase and sale orders and providing continuous supervision of the investment
portfolio of the Funds.
Pursuant
to the Investment Management Agreement, the Trust has agreed to indemnify the
Adviser for certain liabilities, including certain liabilities arising under
the federal securities laws, unless such loss or liability results from willful
misfeasance, bad faith or gross negligence in the performance of its duties or
the reckless disregard of its obligations and duties.
Compensation.
As compensation for its
services under the
Investment Management Agreement, the Adviser is paid a monthly fee based on a
percentage of each Fund’s average daily net assets at the annual rate of 0.25%
for each Fund other than Market Vectors-Lehman Brothers High Yield Municipal
ETF, for which the annual rate is 0.50%. From time to time, the Adviser may
waive all or a portion of its fees. Until at least May 1, 2008, the Adviser has
contractually agreed to waive fees and/or pay Fund expenses to the extent
necessary to prevent the operating expenses of Market Vectors—Lehman Brothers
AMT-Free Intermediate Municipal ETF, Market Vectors—Lehman Brothers AMT-Free
Long Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Short Municipal
ETF, Market Vectors—Lehman Brothers High Yield Municipal ETF, Market
Vectors—Lehman Brothers AMT-Free California Long Municipal ETF and Market
Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF (excluding
interest expense, offering costs and other trading expenses, taxes and
extraordinary expenses) from exceeding 0.20%, 0.24%, 0.16%, 0.35%, 0.24%, and
0.24%, respectively, of average daily net assets per year. The offering costs
excluded from the expense caps are: (a) legal fees pertaining to a Fund’s
Shares offered for sale; (b) SEC and state registration fees; and (c) initial
fees paid to be listed on an exchange.
Term.
The Investment Management Agreement
continues in effect until May 12, 2008. Thereafter, the Investment Management
Agreement is subject to annual approval by (1) the Board or (2) a vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
each Fund, provided that in either event such continuance also is approved by a
majority of the Board who are not interested persons (as defined in the 1940
Act) of the Trust by a vote cast in person at a meeting called for the purpose
of voting on such approval. The Investment Management Agreement is terminable
without penalty, on 60 days notice, by the Board or by a vote of the holders of
a majority (as defined in the 1940 Act) of a Fund’s outstanding voting
securities. The Investment Management Agreement is also terminable upon 60 days
notice by the Adviser and will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
42
In
July 2004, the Adviser received a “Wells Notice” from the SEC in connection
with the SEC’s investigation of market-timing activities. This Wells Notice
informed the Adviser that the SEC staff is considering recommending that the
SEC bring a civil or administrative action alleging violations of U.S.
securities laws against the Adviser and two of its senior officers. Under SEC
procedures, the Adviser has an opportunity to respond to the SEC staff before
the staff makes a formal recommendation. The time period for the Adviser’s
response has been extended until further notice from the SEC. There cannot be
any assurance that, if the SEC and/or the NYAG were to assess sanctions against
the Adviser, such sanctions would not materially and adversely affect the
Adviser.
Van
Eck Associates Corporation also serves as administrator for the Trust pursuant
to the Investment Management Agreement. Under the Investment Management
Agreement, the Adviser is obligated on a continuous basis to provide such
administrative services as the Board of the Trust reasonably deems necessary
for the proper administration of the Trust and the Funds. The Adviser will generally
assist in all aspects of the Trust’s and the Funds’ operations; supply and
maintain office facilities, statistical and research data, data processing
services, clerical, bookkeeping and record keeping services (including without
limitation the maintenance of such books and records as are required under the
1940 Act and the rules thereunder, except as maintained by other agents),
internal auditing, executive and administrative services, and stationery and
office supplies; prepare reports to shareholders or investors; prepare and file
tax returns; supply financial information and supporting data for reports to
and filings with the SEC and various state Blue Sky authorities; supply
supporting documentation for meetings of the Board; provide monitoring reports
and assistance regarding compliance with the Declaration of Trust, by-laws,
investment objectives and policies and with federal and state securities laws;
arrange for appropriate insurance coverage; calculate NAVs, net income and
realized capital gains or losses; and negotiate arrangements with, and
supervise and coordinate the activities of, agents and others to supply
services.
The
Bank of New York serves as custodian for the Funds pursuant to a Custodian Agreement.
As Custodian, The Bank of New York holds the Funds’ assets. The Bank of New
York serves as Funds’ transfer agent pursuant to a Transfer Agency Agreement.
The Bank of New York may be reimbursed by each Fund for its out-of-pocket
expenses. In addition, The Bank of New York provides various accounting
services to each of the Funds pursuant to a fund accounting agreement.
Van
Eck Securities Corporation (the “Distributor”) is the principal underwriter and
distributor of Shares. Its principal address is 99 Park Avenue, New York, New
York 10016 and investor information can be obtained by calling 1888-MKT-VCTR.
The Distributor has entered into an agreement with the Trust which will
continue from its effective date unless terminated by either party upon 60
days’ prior written notice to the other party by the Trust and the Adviser, or
by the Distributor, or until termination of
43
The
Distributor may also enter into sales and investor services agreements with
broker-dealers or other persons that are Participating Parties and DTC
Participants (as defined below) to provide distribution assistance, including
broker-dealer and shareholder support and educational and promotional services
but must pay such broker-dealers or other persons, out of its own assets.
The
Distribution Agreement provides that it may be terminated at any time, without
the payment of any penalty: (i) by vote of a majority of the Independent
Trustees or (ii) by vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Funds, on at least 60 days written notice
to the Distributor. The Distribution Agreement is also terminable upon 60 days
notice by the Distributor and will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
The
portfolio managers who are currently responsible for the day-to-day management
of the Funds’ portfolios are James T. Colby III and Michael F. Mazier. Mr.
Colby has been employed by the Adviser since September 2007. Prior to joining
the Adviser, Mr. Colby served as Senior Portfolio Manager and Director of
Municipal High Yield for Lord Abbett as well as Director and Senior Portfolio
Manager for Municipal Fixed Income at the John Hancock Funds in Boston. Mr.
Colby graduated from Brown University in 1972 with a Bachelor of Arts in
Economics and International Relations; and from Hofstra University in 1979 with
a Masters of Business Administration in Finance. Mr. Mazier has been employed
by the Adviser since August 2007. Prior to joining the Adviser, Mr. Mazier served
as a bond analyst in the Fixed Income Research department of Morgan Stanley. He
was also Vice President at Merrill Lynch Global Research Department, where he
covered closed-end funds. Mr. Mazier graduated from Syracuse University in 1983
with a Bachelor of Science majoring in Electrical Engineering; graduated from
Villanova University in 1986 with a Master of Science in Computer Engineering;
and graduated from Columbia Business School in 1990 with a Master of Business
Administration. Other than the Funds, Messrs. Colby and Mazier do not manage
any other registered investment companies, pooled investment vehicles or other
accounts.
P
ortfolio Manager Compensation
The
portfolio managers are paid a fixed base salary and a bonus. The bonus is based
upon the quality of investment analysis and the management of the Funds. The
quality of management of the Funds includes issues of replication, rebalancing,
portfolio monitoring, efficient operation, among other factors. Portfolio
managers who oversee accounts with significantly different fee structures are
generally compensated by discretionary bonus rather than a set formula to help
reduce potential conflicts of interest. At times, the Adviser and affiliates
manage accounts with incentive fees.
P
ortfolio Manager Share Ownership
As
of the date of this SAI, Mr. Colby and Mr. Mazier did not own any Shares of the
Funds.
44
When
selecting brokers and dealers to handle the purchase and sale of portfolio securities,
the Adviser looks for prompt execution of the order at a favorable price.
Generally, the Adviser works with recognized dealers in these securities,
except when a better price and execution of the order can be obtained
elsewhere. The Funds will not deal with affiliates in principal transactions
unless permitted by exemptive order or applicable rule or regulation. The
Adviser owes a duty to its clients to provide best execution on trades
effected. Since the investment objective of each Fund is investment performance
that corresponds to that of an Index, the Adviser does not intend to select
brokers and dealers for the purpose of receiving research services in addition
to a favorable price and prompt execution either from that broker or an
unaffiliated third party.
The
Adviser assumes general supervision over placing orders on behalf of the Trust
for the purchase or sale of portfolio securities. If purchases or sales of
portfolio securities of the Trust and one or more other investment companies or
clients supervised by the Adviser are considered at or about the same time,
transactions in such securities are allocated among the several investment
companies and clients in a manner deemed equitable to all by the Adviser. In
some cases, this procedure could have a detrimental effect on the price or
volume of the security so far as the Trust is concerned. However, in other
cases, it is possible that the ability to participate in volume transactions
and to negotiate lower brokerage commissions will be beneficial to the Trust.
The primary consideration is best execution.
Portfolio
turnover may vary from year to year, as well as within a year. High turnover
rates are likely to result in comparatively greater brokerage expenses. The
portfolio turnover rate for each Fund is expected to be under 30%. See “Market
Vectors—Lehman Brothers AMT-Free Intermediate Municipal ETF—Principal
Investment Objective and Strategies,” “Market Vectors—Lehman Brothers AMT-Free
Long Municipal ETF—Principal Investment Objective and Strategies,” “Market
Vectors—Lehman Brothers AMT-Free Short Municipal ETF—Principal Investment
Objective and Strategies,” “Market Vectors—Lehman Brothers High Yield Municipal
ETF—Principal Investment Objective and Strategies,” “Market Vectors—Lehman
Brothers AMT-Free California Long Municipal ETF—Principal Investment Objective
and Strategies” and “Market Vectors—Lehman Brothers AMT-Free New York Municipal
ETF—Principal Investment Objective and Strategies” in the Funds’ Prospectus.
The overall reasonableness of brokerage commissions is evaluated by the Adviser
based upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services.
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “Shareholder Information—Buying and Selling
Exchange-Traded Shares.”
DTC
acts as securities depositary for the Shares. Shares of the Funds are
represented by securities registered in the name of DTC or its nominee and
deposited with, or on behalf of, DTC. Certificates will not be issued for
Shares.
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
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange (“NYSE”),
the
45
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 holdings of each DTC
Participant. The Trust shall inquire of each such DTC Participant as to the
number of Beneficial Owners holding Shares, directly or indirectly, through
such DTC Participant. The Trust shall provide each such DTC Participant with
copies of such notice, statement or other communication, in such form, number
and at such place as such DTC Participant may reasonably request, in order that
such notice, statement or communication may be transmitted by such DTC
Participant, directly or indirectly, to such Beneficial Owners. In addition,
the Trust shall pay to each such DTC Participant a fair and reasonable amount
as reimbursement for the expenses attendant to such transmittal, all subject to
applicable statutory and regulatory requirements.
Share
distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants’ accounts with
payments in amounts proportionate to their respective beneficial interests in
Shares as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts
of customers in bearer form or registered in a “street name,” and will be the
responsibility of such DTC Participants.
The
Trust has no responsibility or liability for any aspects of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such Shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests or for
any other aspect of the relationship between DTC and the DTC Participants or
the relationship between such DTC Participants and the Indirect Participants
and Beneficial Owners owning through such DTC Participants.
DTC
may determine to discontinue providing its service with respect to the Shares
at any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action either to find a replacement for DTC
to perform its functions at a comparable cost or, if such a replacement is
unavailable, to issue and deliver printed certificates representing ownership
of Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the AMEX.
46
The
Trust issues and sells Shares only in Creation Units on a continuous basis
through the Distributor, without an initial sales load, at their NAV next
determined after receipt, on any Business Day (as defined herein), of an order
in proper form.
A
“Business Day” with respect to the Funds is any day on which the NYSE and the
Amex are open for business. As of the date of the Prospectus, the NYSE and the
Amex observe the following holidays: New Year’s Day, Martin Luther King, Jr.
Day, President’s Day (Washington’s Birthday), Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The
consideration for a purchase of Creation Units generally consists of the
in-kind deposit of a portfolio of fixed income securities (the “Deposit
Securities”) and an amount of cash computed as described below (the “Cash
Component”). The specified Deposit Securities generally will correspond, pro
rata, to the extent practicable, to the Component Securities of a Fund.
Together, the Deposit Securities and the Cash Component constitute the “Fund
Deposit,” which represents the minimum initial and subsequent investment amount
for Shares. The Cash Component represents the difference between the NAV of a
Creation Unit and the market value of Deposit Securities and may include a
Dividend Equivalent Payment. The “Dividend Equivalent Payment” enables each
Fund to make a complete distribution of dividends on the next dividend payment
date, and is an amount equal, on a per Creation Unit basis, to the dividends on
all the securities held by the Fund (“Fund Securities”) with ex-dividend dates
within the accumulation period for such distribution (the “Accumulation
Period”), net of expenses and liabilities for such period, as if all of the
Fund Securities had been held by the Trust for the entire Accumulation Period.
The Accumulation Period begins on the ex-dividend date for each Fund and ends
on the next ex-dividend date.
As
described below, the Administrator, through the National Securities Clearing
Corporation (discussed below), makes available on each Business Day,
immediately prior to the opening of business on the AMEX (currently 9:30 a.m.,
New York time), the names and required principal amounts of each Deposit
Security to be included in the current Fund Deposit (based on information at
the end of the previous Business Day) as well as the Cash Component for each
Fund. Such Fund Deposit is applicable, subject to any adjustments as described
below, in order to effect creations of Creation Units of each Fund until such
time as the next-announced Fund Deposit composition is made available.
The
identity and number of shares of the Deposit Securities required for a Fund
Deposit for each Fund changes as rebalancing adjustments and corporate action
events are reflected from time to time by the Adviser with a view to the
investment objective of the Fund. The composition of the Deposit Securities may
also change in response to adjustments to the weighting or composition of the
securities constituting each Fund’s respective benchmark index. 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 which
may, among other reasons, not be available in sufficient quantity for delivery.
Pursuant
to a patent pending process, and subject to the receipt of appropriate
regulatory relief, the Funds may in the future divide the daily list of Deposit
Securities into different “categories,” based on various risk and return
characteristics that may include (but not be limited to): (1) credit rating;
(2) sector
47
Brokerage
commissions incurred in connection with the Trust’s acquisition of Deposit
Securities will be at the expense of each Fund and will affect the value of all
Shares of the Fund; but the Adviser may adjust the transaction fee to the
extent the composition of the Deposit Securities changes or cash in lieu is
added to the Cash Component to protect ongoing shareholders. The adjustments
described above will reflect changes, known to the Adviser on the date of
announcement to be in effect by the time of delivery of the Fund Deposit, in
the composition of the Index or resulting from stock splits and other corporate
actions.
In
addition to the categories of securities constituting the current Deposit
Securities of a Fund Deposit, the Administrator, through the National
Securities Clearing Corporation (discussed below), also makes available (i) on
each Business Day, the Dividend Equivalent Payment, if any, effective through
and including the previous Business Day, per outstanding Shares of the Fund, and
(ii) on a continuous basis throughout the day, the Indicative Per Share
Portfolio Value.
P
rocedures for Creation of Creation Units
To
be eligible to place orders with the Distributor to create Creation Units of
the Funds, an entity or person either must be (1) a “Participating Party,”
i.e.
, a broker-dealer or other participant
through the Continuous Net Settlement System of the NSCC; or (2) a DTC
Participant (see “Book Entry Only System”); and, in either case, must have
executed an agreement with the Trust and with the Distributor with respect to
creations and redemptions of Creation Units (“Participant Agreement”)
(discussed below). A Participating Party and DTC Participant are collectively
referred to as an “Authorized Participant.” All Creation Units of the Funds,
however created, will be entered on the records of the Depository in the name
of Cede & Co. for the account of a DTC Participant.
All
orders to create Creation Units must be placed in multiples of 50,000 Shares (
i.e.
a Creation Unit). All orders to
create Creation Units must be received by the Distributor no later than the
closing time of the regular trading session on the AMEX (“Closing Time”)
(ordinarily 4:00 p.m. New York time) (10:00 a.m. for “Custom Orders” (as defined
below)) in each case on the date such order is placed in order for creation of
Creation Units to be effected based on the NAV of the Funds as determined on
such date. A “Custom Order” may be placed by an Authorized Participant in the
event that the Trust permits or requires the substitution of an amount of cash
to be added to the Cash Component to replace any Deposit Security which may not
be available in sufficient quantity for delivery or which may not be eligible
for trading by such Authorized Participant or the investor for which it is
acting, or other relevant reason. The date on which a creation order (or order
to redeem as discussed below) is placed is herein referred to as the
“Transmittal Date.” Orders must be transmitted by telephone or other transmission
method acceptable to the Distributor pursuant to procedures set forth in the
Participant Agreement, as described below (see “—Placement of Creation
Orders”). Severe economic or market disruptions or changes, or telephone or
other communication failure, may impede the ability to reach the Distributor, a
Participating Party or a DTC Participant.
Creation
Units may be created in advance of the receipt by the Trust of all or a portion
of the Fund Deposit. In such cases, the Participating Party will remain liable
for the full deposit of the missing portion(s) of the Fund Deposit and will be
required to post collateral with the Trust consisting of cash at least equal to
a percentage of the marked-to-market value of such missing portion(s) that is
specified in the Participant Agreement. The Participant Agreement for any
Participating Party intending to follow
48
Orders
to create Creation Units of the Funds shall be placed with a Participating
Party or DTC Participant, as applicable, in the form required by such
Participating Party or DTC Participant. 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 Funds may have to be placed by the
investor’s broker through a Participating Party or a DTC Participant who 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 to create Creation Units of the Funds should afford sufficient
time to permit proper submission of the order to the Distributor prior to the
Closing Time on the Transmittal Date.
Fund
Deposits must be delivered through a DTC Participant that has executed a
Participant Agreement with the Distributor and with the Trust. A DTC
Participant who wishes to place an order creating Creation Units of the Funds
need not be a Participating Party, but such orders must state that the creation
of Creation Units will be effected through a transfer of securities and cash.
The Fund Deposit transfer must be ordered by the DTC Participant 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 4:00 p.m.,
on the Settlement Date. The “Settlement Date” for each Fund is generally the
third Business Day 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 shall be final
and binding. The cash equal to the Cash Component must be transferred directly
to the Distributor through the Federal Reserve wire system in a timely manner
so as to be received by the Distributor no later than 4:00 p.m. on the next
Business Day immediately following the Transmittal Date. An order to create
Creation Units of the Fund 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. Upon written
notice to the Distributor, such cancelled order may be resubmitted the
following Business Day using a Fund Deposit as newly constituted to reflect the
current NAV of the Funds. The delivery of Creation Units so created will occur
no later than the third (3rd) Business Day following the day on which the
creation order is deemed received by the Distributor.
The
Trust reserves the absolute right to reject a creation order transmitted to it
by the Distributor if, for any reason, (a) the order is not in proper form; (b)
the creator or creators, upon obtaining the Shares ordered, would own 80% or
more of the currently outstanding Shares of the Funds; (c) the Deposit
Securities delivered are not as specified by the Administrator, as described
above; (d) acceptance of the Deposit Securities would have certain adverse tax
consequences to the Funds; (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) in the event
that 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
49
All
questions as to the number of shares of each security in the Deposit Securities
and the validity, form, eligibility and acceptance for deposit of any
securities to be delivered shall be determined by the Trust, and the Trust’s
determination shall be final and binding.
Creation Transaction Fee
A
fixed creation transaction fee of $500 payable to the Custodian is imposed on
each creation transaction. In addition, a variable charge for cash creations
currently of up to four times the basic creation fee will be imposed. Where the
Trust permits a creator to substitute cash in lieu of depositing a portion of
the Deposit Securities, the creator will be assessed the additional variable
charge for cash creations on the “cash in lieu” portion of its investment.
Creators of Creation Units are responsible for the costs of transferring the
securities constituting the Deposit Securities to the account of the Trust.
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, only on a
Business Day and only through a Participating Party or DTC Participant who has
executed a Participant Agreement.
The Trust
will not redeem Shares in amounts less than Creation Units
.
Beneficial Owners also may sell Shares in the secondary market, but must
accumulate enough Shares 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. See each Fund’s “Principal Risks of
Investing in the Fund” in the Prospectus.
The
Administrator, through NSCC, makes available immediately prior to the opening
of business on the AMEX (currently 9:30 a.m., Eastern time) on each day that
the AMEX is open for business, the categories Fund Securities that will be
applicable (subject to possible amendment or correction) to redemption requests
received in proper form (as defined below) on that day. The specified Fund
Securities generally will correspond, pro rata, to the extent practicable, to
the Component Securities of a Fund.
As
with respect to the purchase of Creation Units, pursuant to a patent pending
process, the Funds may, in the future, subject to the receipt of appropriate
regulatory relief, divide the daily list of Fund Securities into different
“categories,” based on the same criteria set forth above regarding the division
of each Fund’s Deposit Securities into categories. In determining the Fund
Securities and the order in which they are listed within each category, the
Adviser would seek to construct a redemption basket that will
50
Unless
cash redemptions are available or specified for the Funds, the redemption
proceeds for a Creation Unit generally consist of Fund Securities as announced
by the Administrator on the Business Day of the request for redemption, 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 Fund Securities, less the redemption transaction fee described
below. The redemption transaction fee of $500 is deducted from such redemption
proceeds. Should the Fund Securities have a value greater than the NAV of the
Shares being redeemed, a compensating cash payment to the Trust equal to the
differential plus the applicable redemption fee will be required to be arranged
for by or on behalf of the redeeming shareholder.
The
basic redemption transaction fees are the same no matter how many Creation
Units are being redeemed pursuant to any one redemption request. The Funds may
adjust these fees from time to time based upon actual experience. An additional
charge up to four times the redemption transaction fee may be charged with respect
to cash redemptions or partial cash redemptions (when cash redemptions are
available) may also be imposed. Investors who use the services of a broker or
other such intermediary may be charged a fee for such services.
P
lacement of Redemption Orders
Orders
to redeem Creation Units of the Funds must be delivered through a DTC
Participant that has executed the Participant Agreement with the Distributor
and with the Trust. A DTC Participant who wishes to place an order for
redemption of Creation Units of the Funds to be effected need not be a
Participating Party, but such orders must state that redemption of Creation
Units of the Funds will instead be effected through transfer of Creation Units
of the Funds directly through DTC. An order to redeem Creation Units of the
Funds is deemed received by the Administrator on the Transmittal Date if (i)
such order is received by the Administrator not later than 4:00 p.m. (10:00
a.m. for Custom Orders) on such Transmittal Date; (ii) such order is preceded or
accompanied by the requisite number of Shares of Creation Units specified in
such order, which delivery must be made through DTC to the Administrator no
later than 11:00 a.m. on such Transmittal Date (the “DTC Cut-Off-Time”); and
(iii) all other procedures set forth in the Participant Agreement are properly
followed.
After
the Administrator has deemed an order for redemption received, the
Administrator will initiate procedures to transfer the requisite Fund
Securities (or contracts to purchase such Fund Securities) which are expected
to be delivered within three Business Days and the cash redemption payment to
the redeeming Beneficial Owner by the third Business Day following the
Transmittal Date on which such redemption order is deemed received by the
Administrator.
D
ETERMINATION OF NET ASSET VALUE
The
following information supplements and should be read in conjunction with the
section in the Funds’ Prospectus entitled “Shareholder
Information—Determination of Net Asset Value.”
The
NAV per share for each Fund is computed by dividing the value of the net assets
of the Fund (
i.e.
, the value of
its total assets less total liabilities) by the total number of Shares
outstanding, rounded to the nearest cent. Expenses and fees, including the
management fee, are accrued daily and taken into account for purposes of
determining NAV. The NAV of each Fund is determined as of the close of the
51
Each
Fund’s portfolio securities (except for short-term taxable debt securities and
certain other investments) are valued by an outside independent pricing
service. The service uses a computerized grid matrix of tax-exempt securities
and its evaluations in determining what it believes is the fair value of the
portfolio securities. The Board of Trustees believes that timely and reliable
market quotations are generally not readily available to each Fund to value
tax-exempt securities and the valuations that the pricing service supplies are
more likely to approximate the fair value of the securities.U.S.
municipal securities may be valued as of the announced closing time for trading
in municipal instruments on any day that the Securities Industry and Financial
Markets Association (“SIMFA”) announces an early closing time. Each Fund may
also use fair value pricing in a variety of circumstances, including but not
limited to, situations when the value of a security in a Fund’s portfolio has
been materially affected by events occurring after the close of the market on
which the security is principally traded (such as a corporate action or other
news that may materially affect the price of a security) or trading in a
security has been suspended or halted. Accordingly, a Fund’s NAV is expected to
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 security is materially different than the
value that could be realized upon the sale of the security. In addition, fair
value pricing could result in a difference between the prices used to calculate
a Fund’s NAV and the prices used by the Fund’s benchmark index. This may
adversely affect a Fund’s ability to track its benchmark index.
In
computing each Fund’s NAV, the Fund’s securities holdings are valued based on
market quotations. When market quotations are not readily available for a
portfolio security a Fund must use the security’s fair value as determined in
good faith in accordance with the Fund’s Fair Value Pricing Procedures which
are approved by the Board of Trustees.
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “Shareholder Information—Distributions.”
Dividends
from net investment income are declared and paid at least monthly by each 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 each Fund to improve its Index tracking or to comply with the distribution
requirements of the Internal Revenue Code, in all events in a manner consistent
with the provisions of the 1940 Act. It is currently expected that each Fund
will distribute virtually all of its net income (interest less expenses)
monthly while capital gains distributions will generally occur annually in
December. In addition, the Trust may distribute at least annually amounts
representing the full dividend yield on the underlying portfolio securities of
the Funds, net of expenses of the Funds, as if each 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
52
D
IVIDEND 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 the Funds 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 Funds. 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.
As
of the date of this SAI, the Adviser beneficially owned all of the voting
securities of each Fund.
The
following information also supplements and should be read in conjunction with
the section in the Prospectus entitled “Shareholder Information—Tax Matters.”
Each
Fund intends to qualify for and to elect treatment as a RIC under Subchapter M
of the Internal Revenue Code. To qualify for treatment as a RIC, a company must
annually distribute at least 90% of its net investment company taxable income
(which includes dividends, interest and net short-term capital gains) and at
least 90% of its net tax-exempt interest income, for each tax year, if any, to
its shareholders and meet several other requirements relating to the nature of
its income and the diversification of its assets, among others.
Each
Fund will be subject to a 4% excise tax on certain undistributed income if it
does not distribute to its shareholders in each calendar year at least 98% of
its ordinary income for the calendar year plus 98% of its capital gain net
income for the twelve months ended October 31 of such years. Each Fund intends
to declare and distribute dividends and distributions in the amounts and at the
times necessary to avoid the application of this 4% excise tax.
As
a result of U.S. federal income tax requirements, the Trust on behalf of the
Funds, has the right to reject an order for a creation of Shares if the creator
(or group of creators) would, upon obtaining the Shares so ordered, own 80% or
more of the outstanding Shares of a Fund and if, pursuant to Section 351 of the
Internal Revenue Code, the Funds would have a basis in the Fund 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. See “Creation
and Redemption of Creation Units—Procedures for Creation of Creation Units.”
Each
Fund will report to shareholders annually the amounts of dividends received
from ordinary income, tax-exempt income and the amount of distributions
received from capital gains.
In
general, a sale of Shares results in capital gain or loss, and for individual
shareholders, is taxable at a federal rate dependent upon the length of time
the Shares were held. A redemption of a
53
Special
tax rules may change the normal treatment of gains and losses recognized by the
Fund if and when the Fund invests in options and futures transactions. Those
special tax rules can, among other things, affect the treatment of capital gain
or loss as long-term or short-term and may result in ordinary income or loss
rather than capital gain or loss and may accelerate when the Fund has to take
these items into account. The application of these special rules would
therefore also affect the timing and character of distributions made by the Fund.
If
at the end of each quarter of the taxable year of a RIC, 50% or more of the
assets, by value, of the RIC are state, municipal and other bonds that pay
interest that is exempt from federal income tax, the RIC may designate a
portion of its dividends as exempt-interest dividends. The Funds expect to be
eligible to make such designations with respect to a substantial amount of the
income it receives. The portion of the dividends that are designated as being
exempt-interest dividends generally will be exempt from federal income tax and
may be exempt from state and local taxation. Depending on a shareholder’s state
of residence, exempt-interest dividends paid by the Funds from interest earned
on municipal securities of that state, or its political subdivision, may be
exempt in the hands of such shareholder from income tax in that state and its
localities. However, income from municipal securities of states other than the
shareholder’s state of residence generally will not qualify for this treatment.
Interest
on indebtedness incurred by a shareholder to purchase or carry shares of the
Funds will not be deductible for U.S. federal income tax purposes. If a
shareholder receives exempt-interest dividends with respect to any share of the
Funds and if the share is held by the shareholder for six months or less, then
any loss on the sale or exchange of the share may, to the extent of the
exempt-interest dividends, be disallowed, In addition, the IRS may require a
shareholder in a Fund that receives exempt-interest dividends to treat as
taxable income a portion of certain otherwise non-taxable social security and
railroad retirement benefit payments. Furthermore, a portion of any
exempt-interest dividend paid by the Funds that unexpectedly represents income
derived from certain revenue or private activity bonds held by the Funds may
not retain their tax-exempt status in the hands of a shareholder who is a
“substantial user” of a facility financed by such bonds, or a “related person”
thereof. If addition, the receipt of dividends and distributions from the Funds
may affect a foreign corporate shareholder’s federal “branch profits” tax
liability and the federal “excess net passive income” tax liability of a
shareholder of a Subchapter S corporation. Shareholders should consult their
own tax advisers as to whether they are (i) “substantial users” with respect to
a facility or “related” to such users within the meaning of the IRC or (ii)
subject to the federal “branch profits” tax, or the deferral “excess net
passive income” tax.
Gain
or loss on the sale or redemption of Fund Shares is measured by the difference
between the amount received and the adjusted tax basis of the Shares.
Shareholders should keep records of investments made (including Shares acquired
through reinvestment of dividends and distributions) so they can compute the
tax basis of their Shares.
A
loss realized on a sale or exchange of Shares of a Fund may be disallowed if
other Fund Shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a sixty-one (61) day period beginning thirty
(30) days before and ending thirty (30) days after the date that the Shares are
disposed of. In such a case, the basis of the Shares acquired will be adjusted
to reflect the disallowed loss. Any loss upon the sale or exchange of Shares
held for six (6) months or less will be treated as long-
54
The
Market Vectors–Lehman Brothers High Yield Municipal ETF may invest a portion of
its assets in certain “private activity bonds.” As a result, a portion of the
exempt-interest dividends paid by the Fund will be an item of tax preference to
shareholders subject to the alternative minimum tax. Certain corporations which
are subject to the alternative minimum tax may also have to include exempt-interest
dividends in calculating their alternative minimum taxable income in situations
where the “adjusted current earnings” of the corporation exceeds its
alternative minimum taxable income.
Any
market discount recognized on a bond is taxable as ordinary income. A market
discount bond is a bond acquired in the secondary market at a price below
redemption value or adjusted issue price if issued with original issue
discount. Absent an election by the Funds to include the market discount in
income as it accrues, gain on the Funds’ disposition of such an obligation will
be treated as ordinary income rather than capital gain to the extent of the
accrued market discount.
A
Fund may make investments in which it recognizes income or gain prior to
receiving cash with respect to such investment. For example, under certain tax
rules, a Fund may be required to accrue a portion of any discount at which
certain securities are purchased as income each year even though the Fund
receives no payments in cash on the security during the year. To the extent
that a Fund makes such investments, it generally would be required to pay out
such income or gain as a distribution in each year to avoid taxation at the
Fund level.
Distributions
reinvested in additional Fund Shares through the means of the service (see
“Dividend Reinvestment Service” will nevertheless be taxable dividends to
Beneficial Owners acquiring such additional Shares to the same extent as if
such dividends had been received in cash.
Distributions
of ordinary income paid to shareholders who are nonresident aliens or foreign
entities will be subject to a 30% U.S. withholding tax unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty law.
Nonresident shareholders are urged to consult their own tax advisors concerning
the applicability of the U.S withholding tax. A RIC may, under certain
circumstances, designate all or a portion of a dividend as an “interest-related
dividend” that if received by a nonresident alien or foreign entity generally
would be exempt from the 30% U.S. withholding tax,
provided
that certain other requirements are met. A RIC may
also, under certain circumstances, designate all or a portion of a dividend as
a “short-term capital gain dividend” which if received by a nonresident alien
or foreign entity generally would be exempt from the 30% U.S. withholding tax,
unless the foreign person is a nonresident alien individual present in the
United States for a period or periods aggregating 183 days or more during the
taxable year. The provisions discussed above relating to dividends to foreign
persons apply to dividends with respect to taxable years before January 1,
2008. Prospective investors are urged to consult their tax advisors regarding
the specific tax consequences relating to the rules discussed above.
Some
shareholders may be subject to a withholding tax on distributions of ordinary
income, capital gains and any cash received on redemption of Creation Units
(“backup withholding”). The backup withholding rate for individuals is
currently 28%. Generally, shareholders subject to backup withholding will be
those for whom no certified taxpayer identification number is on file with a
Fund or who, to the Fund’s knowledge, have furnished an incorrect number. When
establishing an account, an investor must certify under penalty of perjury that
such number is correct and that such investor is not otherwise subject to
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld will be allowed as a credit against shareholders’ U.S. federal income
tax liabilities, and may entitle them to a refund,
provided
that the required information is timely furnished
to the Internal Revenue Service.
55
Under
promulgated Treasury regulations, if a shareholder recognizes a loss on
disposition of a Fund’s Shares of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder, the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders
of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a RIC that engaged in
a reportable transaction are not excepted. Future guidance may extend the
current exception from this reporting requirement to shareholders of most or
all RICs. In addition, pursuant to recently enacted legislation, significant
penalties may be imposed for the failure to comply with the reporting
requirements. The fact that a loss is reportable under these regulations does
not affect the legal determination of whether the taxpayer’s treatment of the
loss is proper. Shareholders should consult their tax advisors to determine the
applicability of these regulations in light of their individual circumstances.
C
alifornia State Tax Considerations—Market
Vectors—Lehman Brothers AMT-Free California Long Municipal ETF
To
the extent that dividends from the Market Vectors-Lehman Brothers AMT-Free
California Long Municipal ETF are derived from interest on California
tax-exempt securities and on certain U.S. government securities, such dividends
will also be exempt from California personal income taxes. Under California
law, a fund which qualifies as a regulated investment company must have at
least 50% of its total assets invested in California state and local issues or
in U.S. obligations which pay interest excludable from income or in a
combination of such obligations at the end of each quarter of its taxable year
in order to be eligible to pay dividends which will be exempt from California
personal income taxes.
The
portion of dividends constituting exempt-interest dividends is that portion
derived from interest on obligations which pay interest excludable from
California personal income under California law, and designated by the Fund as
exempt-interest dividends in a written notice to shareholders mailed within 60
days of the close of the Fund’s taxable year. However, the total amount of
dividends paid by the Fund to all of its shareholders with respect to any
taxable year that can be treated as exempt-interest dividends for California
tax purposes cannot exceed the difference between (i) the amount of interest
received by the Fund during such year on obligations which pay interest
excludable from California personal income under California law and (ii) the
expenses of the Fund that would be disallowed under California personal income
tax law as allocable to tax exempt interest if the Fund were an individual. If
the aggregate dividends designated by the Fund as exempt-interest dividends for
a taxable year exceed the amount that may be treated as exempt-interest
dividends for California tax purposes, only that percentage of each dividend
distribution equal to the ratio of aggregate exempt-interest dividends to
aggregate dividends so designated will be treated as an exempt-interest
dividend for California tax purposes.
Unlike
federal law, California law provides that no portion of the exempt-interest
dividends will constitute an item of tax preference for California personal
alternative minimum tax purposes.
56
In
January 2006, the Kentucky Court of Appeals held in Davis v. Dept. of Revenue,
that a provision in Kentucky law which exempts from taxation interest earned on
municipal securities of Kentucky or its political subdivisions, but taxes such
income when it is derived from non-Kentucky municipal securities violates the
Commerce Clause of the United States Constitution. The United States Supreme
Court has agreed to review the decision of the Kentucky Court of Appeals. The
final outcome of Davis presently is unknown and it cannot be predicted whether
similar cases will be filed in other jurisdictions such as California. If a
final adverse decision in the case is rendered, it could impact the tax status
of Fund distributions for state tax purposes and it could negatively impact the
value of securities held by the Fund and, therefore, the value of Fund shares.
Individual
shareholders will normally be subject to federal and California personal income
tax on dividends paid from interest income derived from taxable securities and
distributions of net capital gains. In addition, distributions other than
exempt-interest dividends to such shareholders are includable in income subject
to the California alternative minimum tax. For federal income tax and
California personal income tax purposes, distributions of long-term capital
gains, if any, are taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held shares of the Fund and regardless
of whether the distribution is received in additional shares
or in cash. The maximum federal capital gains rate for individuals is 15% with
respect to capital assets held more than one year. The maximum capital gains
rate for corporate shareholders is the same as the maximum tax rate for
ordinary income. In addition, unlike federal law, the shareholders of the Fund
will not be subject to tax, or receive a credit for tax paid by the Fund, on
undistributed capital gains, if any.
Interest
on indebtedness incurred by shareholders or related parties to purchase or
carry shares of an investment company paying exempt-interest dividends, such as
the Fund, generally will not be deductible by the investor for federal or state
personal income tax purposes. In addition, as a result of California’s
incorporation of certain provisions of the Code, a loss realized by a
shareholder upon the sale of shares held for six months or less may be
disallowed to the extent of any exempt-interest dividends received with respect
to such shares. Moreover, any loss realized upon the redemption of shares
within six months from the date of purchase of such shares and following
receipt of a long-term capital gains distribution will be treated as long-term
capital loss to the extent of such long-term capital gains distribution.
Finally, any loss realized upon the redemption of shares within 30 days before
or after the acquisition of other shares of the Fund may be disallowed under
the “wash sale” rules.
N
ew York State and City Tax—Market Vectors-Lehman
Brothers AMT-Free New York Long Municipal ETF
To
the extent that dividends from the Market Vectors-Lehman Brothers AMT-Free New
York Long Municipal ETF are derived from interest on New York tax-exempt
securities, such dividends will also be exempt from New York State and City
income taxes.
Interest
on indebtedness incurred or continued to purchase or carry shares of an
investment company paying exempt-interest dividends, such as the Fund, may not
be deductible by the investor for State or City income tax purposes.
Shareholders
who are New York residents will normally be subject to federal, New York State
or City income tax on dividends paid from interest income derived from taxable
securities and on distributions of net capital gains. For federal and New York
State or City income tax purposes,
57
C
APITAL STOCK AND SHAREHOLDER REPORTS
The
Trust currently is comprised of thirteen investment funds. The Trust issues
Shares of beneficial interest with no par value. The Board may designate
additional funds of the Trust.
Each
Share issued by the Trust has a pro rata interest in the assets of the
corresponding Fund. Shares have no pre-emptive, exchange, subscription or
conversion rights and are freely transferable. Each Share is entitled to
participate equally in dividends and distributions declared by the Board with
respect to the relevant Fund, and in the net distributable assets of such Fund
on liquidation.
Each
Share has one vote with respect to matters upon which a shareholder vote is
required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all Funds vote together as a single class
except that if the matter being voted on affects only a particular Fund it will
be voted on only by that Fund, and if a matter affects a particular Fund
differently from other Funds, that Fund will vote separately on such matter.
Under Delaware law, the Trust is not required to hold an annual meeting of
shareholders unless required to do so under the 1940 Act. The policy of the
Trust is not to hold an annual meeting of shareholders unless required to do so
under the 1940 Act. All Shares of the Trust have noncumulative voting rights
for the election of Trustees. Under Delaware law, Trustees of the Trust may be
removed by vote of the shareholders.
Under
Delaware law, shareholders of a statutory trust may have similar limitation
liabilities as shareholders of a corporation.
The
Trust will issue through DTC Participants to its shareholders semi-annual
reports containing unaudited financial statements and annual reports containing
financial statements audited by independent auditor approved by the Trust’s
Trustees and by the shareholders when meetings are held and such other
information as may be required by applicable laws, rules and regulations.
Beneficial Owners also receive annually notification as to the tax status of
the Trust’s distributions.
Shareholder
inquiries may be made by writing to the Trust, c/o Van Eck Associates
Corporation, 99 Park Avenue, 8th Floor, New York, NY 10016.
58
Clifford
Chance US LLP is counsel to the Trust and have passed upon the validity of each
Fund’s Shares.
Ernst
& Young LLP serves as the Trust’s independent registered public accounting
firm.
59
Legal Investigations and Proceedings.
In
connection with their investigations of
practices identified as “market timing” and “late trading” of mutual fund
shares, the Office of the New York State Attorney General (“NYAG”) and the SEC
have requested and received information from the Adviser. The Adviser will
cooperate with such investigations. If it is determined that the Adviser or its
affiliates engaged in improper or wrongful activity that caused a loss to a
Fund, the Board of Trustees of the Fund will determine the amount of
restitution that should be made to a Fund or its shareholders. At the present
time, the amount of such restitution, if any, has not been determined.
the Trust or the Funds
offering their Shares, and which is renewable annually thereafter (the “Distribution
Agreement”), pursuant to which it distributes Shares. Shares will be
continuously offered for sale by the Trust through the Distributor only in
Creation Units, as described below under “Creation and Redemption of Creation
Units—Procedures for Creation of Creation Units.” Shares in less than Creation
Units are not distributed by the Distributor. 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 is a broker-dealer registered under the Exchange Act and
a member of the Financial Industry Regulatory Authority (“FINRA”). The
Distributor has no role in determining the investment policies of the Trust or
which securities are to be purchased or sold by the Trust.
AMEX and the NASD. Access to
the DTC system is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
DTC Participant, either directly or indirectly (the “Indirect Participants”).
(e.g., revenue, pre-refunded
or insured bonds); (3) issuer (or state of issuer); (4) call date; (5)
maturity; and (6) coupon yield. With respect to each category, an Authorized
Participant (as defined below) would be required to contribute one bond from
each category in-kind as a Deposit Security in a Portfolio Deposit.
such procedures will contain
terms and conditions permitting the Trust to use such collateral to buy the
missing portion(s) of the Fund Deposit at any time and will subject such
Participating Party to liability for any shortfall between the cost to the
Trust of purchasing such securities and the value of such collateral. The Trust
will have no liability for any such shortfall. The Trust will return any unused
portion of the collateral to the Participating Party once the entire Fund
Deposit has been properly received by the Distributor and deposited into the
Trust.
weather conditions and power
outages resulting in telephone, telecopy and computer failures; market
conditions or activities causing trading halts; systems failures involving
computer or other information systems affecting the Trust, the Adviser, the
Distributor, DTC, NSCC or any other participant in the creation process, and
similar extraordinary events. The Trust shall notify a prospective creator of
its rejection of the order of such person. The Trust and the Distributor are under
no duty, however, to give notification of any defects or irregularities in the
delivery of Fund Deposits nor shall either of them incur any liability for the
failure to give any such notification.
reflect the general
characteristics of the Fund’s portfolio. Upon each request for a redemption of
Creation Units, the Custodian, acting on behalf of the Adviser, would allocate
the first bond on the list from each category (as of the time such redemption
request is received by the Transfer Agent) to such redeemer to receive in-kind.
regular trading session on
the AMEX (ordinarily 4:00 p.m., Eastern time) on each day that such exchange is
open.
imposed by Section 4982 of
the Internal Revenue 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 each Fund as a regulated
investment company (“RIC”) or to avoid imposition of income or excise taxes on
undistributed income.
shareholder’s Fund Shares is
normally treated as a sale for tax purposes. Fund Shares held for a period of
one year or less at the time of such sale or redemption will, for tax purposes,
generally result in short-term capital gains or losses, and those held for more
than one year will generally result in long-term capital gains or losses. Under
current law, the maximum tax rate on long-term capital gains available to
non-corporate shareholders generally is 15%. Without future congressional
action, the maximum tax rate on long-term capital gains will return to 20% for
taxable years beginning on or after January 1, 2011.
term capital loss to the
extent of any capital gain dividends received by the shareholders. Distribution
of ordinary income and capital gains may also be subject to foreign, state and
local taxes.
The
foregoing discussion is a summary only and is not intended as a substitute for
careful tax planning. Purchasers of Shares of the Trust should consult their
own tax advisers as to the tax consequences of investing in such Shares,
including under state, local and other tax laws. Finally, the foregoing
discussion is based on applicable provisions of the Internal Revenue Code,
regulations, judicial authority and administrative interpretations in effect on
the date hereof. Changes in applicable authority could materially affect the
conclusions discussed above, and such changes often occur.
Because,
unlike federal law, California law does not impose personal income tax on an
individual’s Social Security benefits, the receipt of California
exempt-interest dividends will have no effect on an individual’s California
personal income tax.
distributions of net
long-term capital gains, if any, are taxable to shareholders as long-term
capital gains, regardless of how long the shareholder has held the shares of
the Fund and regardless of whether the distribution is received in additional
shares or in cash. Distributions from investment income and capital gains,
including exempt-interest dividends, may be subject to New York franchise taxes
if received by a corporation doing business in New York, to state taxes in
states other then New York and to local taxes.
APPENDIX A
VAN ECK GLOBAL PROXY VOTING POLICIES
Adopted July 30, 2003
Amended April 20, 2004
Amended April 14, 2005
Effective March 10, 2003, the Securities and Exchange Commission (the “Commission”) adopted Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”), requiring each investment adviser registered with the Commission to adopt and implement written policies and procedures for voting client proxies, to disclose information about the procedures to its clients, and to inform clients how to obtain information about how their proxies were voted. The Commission also amended Rule 204-2 under the Advisers Act to require advisers to maintain certain proxy voting records. Both rules apply to all investment advisers registered with the Commission that have proxy voting authority over their clients’ securities. An adviser that exercises voting authority without complying with Rule 206(4)-6 will be deemed to have engaged in a “fraudulent, deceptive, or manipulative” act, practice or course of business within the meaning of Section 206(4) of the Advisers Act.
When an adviser has been granted proxy voting authority by a client, the adviser owes its clients the duties of care and loyalty in performing this service on their behalf. The duty of care requires the adviser to monitor corporate actions and vote client proxies. The duty of loyalty requires the adviser to cast the proxy votes in a manner that is consistent with the best interests of the client.
PROXY VOTING POLICIES AND PROCEDURES
Resolving Material Conflicts of Interest
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A “material conflict” means the existence of a business relationship between a portfolio company or an affiliate and Van Eck Associates Corporation, any affiliate or subsidiary (individually and together, as the context may require, “Adviser”), or an “affiliated person” of a Van Eck mutual fund in excess of $60,000. Examples of when a material conflict exists include the situation where the adviser provides significant investment advisory, brokerage or other services to a company whose management is soliciting proxies; an officer of the Adviser serves on the board of a charitable organization that receives charitable contributions from the portfolio company and the charitable organization is a client of the Adviser; a portfolio company that is a significant selling agent of Van Eck’s products and services solicits proxies; a broker-dealer or insurance company that controls 5% or more of the Adviser’s assets solicits proxies; the Adviser serves as an investment adviser to the pension or other investment account of the portfolio company; the Adviser and the portfolio company have a lending relationship. In each of these situations voting against management may cause the Adviser a loss of revenue or other benefit. |
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Conflict Resolution. When a material conflict exists proxies will be voted in the following manner: |
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Where the written guidelines set out a pre-determined voting policy, proxies will be voted in accordance with that policy, with no deviations (if a deviation is advisable, one of the other methods may be used); |
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Where the guidelines permit discretion and an independent third party has been retained to vote proxies, proxies will be voted in accordance with the predetermined policy based on the recommendations of that party; or |
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The potential conflict will be disclosed to the client (a) with a request that the client vote the proxy, (b) with a recommendation that the client engage another party to determine how the proxy should be voted or (c) if the foregoing are not acceptable to the client disclosure of how VEAC intends to vote and a written consent to that vote by the client. |
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Any deviations from the foregoing voting mechanisms must be approved by the Compliance Officer with a written explanation of the reason for the deviation. |
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When determining whether a vote is in the best interest of the client, the Adviser will use reasonable research efforts. Investment personnel may rely on public documents about the company and other readily available information, which is easily accessible to the investment personnel at the time the vote is cast. Information on proxies by foreign companies may not be readily available. |
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The Adviser generally will vote proxies on behalf of clients, unless clients instruct otherwise. There may be times when refraining from voting a proxy is in a client’s best interest, such as when the Adviser determines that the cost of voting the proxy exceeds the expected benefit to the client. (For example, casting a vote on a foreign security may involve additional costs such as hiring a translator or traveling to a foreign country to vote the security in person.) |
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The portfolio manager or analyst covering the security is responsible for making voting decisions. |
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Portfolio Administration, in conjunction with the portfolio manager and the custodian, is responsible for monitoring corporate actions and ensuring that corporate actions are timely voted. |
All inquiries by clients as to how Van Eck has voted proxies must immediately be forwarded to Portfolio Administration.
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Notification of Availability of Information Client Brochure. |
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The
Client Brochure or Part II of Form ADV will inform clients that they can obtain
information from VEAC on how their proxies were voted. The Client Brochure or
Part II of Form ADV will be mailed to each client annually.
The Legal Department will be responsible for coordinating the mailing with Sales/Marketing Departments.
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Availability of Proxy Voting Information at the client’s request or if the information is not available on VEAC’s website, a hard copy of the account’s proxy votes will be mailed to each client. |
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VEAC will retain the following documentation and information for each matter relating to a portfolio security with respect to which a client was entitled to vote: |
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proxy statements received; |
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identifying number for the portfolio security; |
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shareholder meeting date; |
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brief identification of the matter voted on; |
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whether the vote was cast on the matter and how the vote was cast; |
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how the vote was cast ( e.g. , for or against proposal, or abstain; for or withhold regarding election of directors); |
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records of written client requests for information on how VEAC voted proxies on behalf of the client; |
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a copy of written responses from VEAC to any written or oral client request for information on how VEAC voted proxies on behalf of the client; and |
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any documents prepared by VEAC that were material to the decision on how to vote or that memorialized the basis for the decision, if such documents were prepared. |
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Copies of proxy statements filed on EDGAR, and proxy statements and records of proxy votes maintained with a third party ( i.e. , proxy voting service) need not be maintained. The third party must agree in writing to provide a copy of the documents promptly upon request. |
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If applicable, any document memorializing that the costs of voting a proxy exceed the benefit to the client or any other decision to refrain from voting, and that such abstention was in the client’s best interest. |
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Proxy voting records will be maintained in an easily accessible place for five years, the first two at the office of VEAC. Proxy statements on file with EDGAR or maintained by |
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a third party and proxy votes maintained by a third party are not subject to these particular retention requirements. |
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I. |
General Information |
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Generally, the Adviser will vote in accordance with the following guidelines. Where the proxy vote decision maker determines, however, that voting in such a manner would not be in the best interest of the client, the investment personnel will vote differently.
If there is a conflict of interest on any management or shareholder proposals that are voted on a case by case basis, we will follow the recommendations of an independent proxy service provider.
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C.
Majority of Independent Directors
Vote on a case-by-case basis shareholder proposals that request that the board be comprised of a majority of independent directors.
Vote for shareholder proposals that request that the board audit, compensation and/or nominating committees include independent directors exclusively.
D. Stock Ownership Requirements
Vote on a case-by-case basis shareholder proposals requiring directors to own a minimum amount of company stock in order to qualify as a director, or to remain on the board.
E. Term of Office
Vote on a case-by-case basis shareholder proposals to limit the tenure of outside directors.
F. Director and Officer Indemnification and Liability Protection
Vote on a case-by-case basis proposals concerning director and officer indemnification and liability protection.
Generally, vote against proposals to eliminate entirely director and officer liability for monetary damages for violating the duty of care.
Vote for only those proposals that provide such expanded coverage in cases when a director’s or officer’s legal defense was unsuccessful if: (1) the director was found to have acted in good faith and in a manner that he reasonably believed was in the best interests of the company, AND (2) only if the director’s legal expenses would be covered.
G. Director Nominees in Contested Elections
Vote on a case-by-case basis when the election of directors is contested, examining the following factors:
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long-term financial performance of the target company relative to its industry; |
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management’s track record; |
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background to the proxy contest; |
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qualifications of director nominees (both slates); |
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evaluation of what each side is offering shareholders, as well as the likelihood that the proposed objectives and goals can be met; and |
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stock ownership positions. |
H. Board Structure: Staggered vs. Annual Elections
Generally,
vote against proposals to stagger board elections.
64
Generally,
vote for proposals to repeal classified boards and to elect all directors
annually.
I. Shareholder Ability to Remove Directors
Vote against proposals that provide that directors may be removed only for cause.
Vote for proposals to restore shareholder ability to remove directors with or without cause.
Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies.
Vote for proposals that permit shareholders to elect directors to fill board vacancies.
J. Shareholder Ability to Alter the Size of the Board
Vote for proposals that seek to fix the size of the board.
Vote against proposals that give management the ability to alter the size of the board without shareholder approval.
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III. |
Proxy Contests |
A. Reimburse Proxy Solicitation Expenses
Vote on a case-by-case basis proposals to provide full reimbursement for dissidents waging a proxy contest.
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IV. |
Auditors |
A. Ratifying Auditors
Vote for proposals to ratify auditors, unless information that is readily available to the vote decision-maker demonstrates that an auditor has a financial interest in or association with the company, and is therefore clearly not independent; or such readily available information creates a reasonable basis to believe that the independent auditor has rendered an opinion which is neither accurate nor indicative of the company’s financial position.
Vote for shareholder proposals asking for audit firm rotation unless the rotation period is so short (less than five years) that it would be unduly burdensome to the company.
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Shareholder Voting and Control Issues |
A. Cumulative Voting
Generally, vote against proposals to eliminate cumulative voting.
Generally, vote for proposals to permit cumulative voting.
B. Shareholder Ability to Call Special Meetings
Generally,
vote against proposals to restrict or prohibit shareholder ability to call
special meetings.
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Generally,
vote for proposals that remove restrictions on the right of shareholders to act
independently of management.
C. Shareholder Ability to Act by Written Consent
Generally, vote against proposals to restrict or prohibit shareholder ability to take action by written consent.
Generally, vote for proposals to allow or make easier shareholder action by written consent.
D. Poison Pills
Vote for shareholder proposals that ask a company to submit its poison pill for shareholder ratification. Vote on a case-by-case basis shareholder proposals to redeem a company’s poison pill.
Vote on a case-by-case basis management proposals to ratify a poison pill.
E. Fair Price Provision
Vote on a case-by-case basis when examining fair price proposals, (where market quotations are not readily available) taking into consideration whether the shareholder vote requirement embedded in the provision is no more than a majority of disinterested Shares.
Generally, vote for shareholder proposals to lower the shareholder vote requirement in existing fair price provisions.
F. Greenmail
Generally, vote for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments.
Generally, vote on a case-by-case basis anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
G. Unequal Voting Rights
Vote against dual class exchange offers.
Vote against dual class recapitalizations.
H. Supermajority Shareholder Vote Requirement to Amend the Charter or Bylaws
Vote against management proposals to require a supermajority shareholder vote to approve charter and bylaw amendments.
Vote for shareholder proposals to lower supermajority shareholder vote requirements for charter and bylaw amendments.
I. Supermajority Shareholder Vote Requirement to Approve Mergers
Vote
against management proposals to require a supermajority shareholder vote to
approve mergers and other significant business combinations.
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J.
White Knight Placements
Vote for shareholder proposals to require approval of blank check preferred stock issues for other than general corporate purposes or similar corporate actions.
K. Confidential Voting
Generally, vote for shareholder proposals that request corporations to adopt confidential voting, use independent tabulators and use independent inspectors of election as long as the proposals include clauses for proxy contests as follows: In the case of a contested election, management is permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in place. If the dissidents do not agree, the confidential voting policy is waived.
Generally, vote for management proposals to adopt confidential voting.
L. Equal Access
Generally, vote for shareholders proposals that would allow significant company shareholders equal access to management’s proxy material in order to evaluate and propose voting recommendations on proxy proposals and director nominees, and in order to nominate their own candidates to the board.
M. Bundled Proposals
Generally, vote on a case-by-case basis bundled or “conditioned” proxy proposals. In the case of items that are conditioned upon each other, we examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, we vote against the proposals. If the combined effect is positive, we support such proposals.
N. Shareholder Advisory Committees
Vote on a case-by-case basis proposals to establish a shareholder advisory committee.
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VI. |
Capital Structure |
A. Common Stock Authorization
Vote on a case-by-case basis proposals to increase the number of Shares of common stock authorized for issue.
Generally, vote against proposed common stock authorizations that increase the existing authorization by more than 100% unless a clear need for the excess Shares is presented by the company.
B. Stock Distributions: Splits and Dividends
Generally,
vote for management proposals to increase common share authorization for a
stock split, provided that the split does not result in an increase of
authorized but unissued Shares of more than 100% after giving effect to the
Shares needed for the split.
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C.
Reverse Stock Splits
Generally, vote for management proposals to implement a reverse stock split, provided that the reverse split does not result in an increase of authorized but unissued Shares of more than 100% after giving effect to the Shares needed for the reverse split.
D. Blank Check Preferred Authorization
Generally, vote for proposals to create blank check preferred stock in cases when the company expressly states that the stock will not be used as a takeover defense or carry superior voting rights.
Vote on a case-by-case basis proposals that would authorize the creation of new classes of preferred stock with unspecified voting, conversion, dividend and distribution, and other rights.
Vote on a case-by-case basis proposals to increase the number of authorized blank check preferred Shares.
E. Shareholder Proposals Regarding Blank Check Preferred Stock
Generally, vote for shareholder proposals to have blank check preferred stock placements, other than those Shares issued for the purpose of raising capital or making acquisitions in the normal course of business, submitted for shareholder ratification.
F. Adjust Par Value of Common Stock
Vote on a case-by-case basis management proposals to reduce the par value of common stock.
G. Preemptive Rights
Vote on a case-by-case basis proposals to create or abolish preemptive rights. In evaluating proposals on preemptive rights, we look at the size of a company and the characteristics of its shareholder base.
H. Debt Restructurings
Vote on a case-by-case basis proposals to increase common and/or preferred Shares and to issue Shares as part of a debt restructuring plan. We consider the following issues:
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Dilution - How much will ownership interest of existing shareholders be reduced, and how extreme will dilution to any future earnings be? |
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Change In Control - Will the transaction result in a change in control of the company? |
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Bankruptcy - Is the threat of bankruptcy, which would result in severe losses in shareholder value, the main factor driving the debt restructuring? |
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Generally, we approve proposals that facilitate debt restructurings unless there are clear signs of self-dealing or other abuses. |
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I. Share Repurchase Programs
Vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms.
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Executive Compensation |
In general, we vote on a case-by-case basis on executive compensation plans, with the view that viable compensation programs reward the creation of stockholder wealth by having a high payout sensitivity to increases in shareholder value.
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VIII. |
Compensation Proposals |
A. Amendments That Place a Cap on Annual Grants
Vote for plans that place a cap on the annual grants any one participant may receive.
B. Amend Administrative Features
Vote for plans that simply amend shareholder-approved plans to include administrative features.
C. Amendments to Added Performance-Based Goals
Generally, vote for amendments to add performance goals to existing compensation plans.
D. Amendments to Increase Shares and Retain Tax Deductions
Vote on amendments to existing plans to increase Shares reserved and to qualify the plan for favorable tax treatment should be evaluated on a case-by-case basis.
E. Approval of Cash or Cash-and-Stock Bonus Plans
Vote for cash or cash-and-stock bonus plans to exempt the compensation from taxes.
F. Shareholder Proposals to Limit Executive Pay
Vote on a case-by-case basis all shareholder proposals that seek additional disclosure of executive pay information.
Vote on a case-by-case basis all other shareholder proposals that seek to limit executive pay.
Vote for shareholder proposals to expense options, unless the company has already publicly committed to expensing options by a specific date.
G. Golden and Tin Parachutes
Vote for shareholder proposals to have golden and tin parachutes submitted for shareholder ratification.
Vote
on a case-by-case basis all proposals to ratify or cancel golden or tin
parachutes.
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H.
Employee Stock Ownership Plans (ESOPS)
Vote on a case-by-case basis proposals that request shareholder approval in order to implement an ESOP or to increase authorized Shares for existing ESOPs, except in cases when the number of Shares allocated to the ESOP is “excessive” ( i.e. , generally greater than 5% of outstanding Shares).
I. 401(k) Employee Benefit Plans
Generally, vote for proposals to implement a 401(k) savings plan for employees.
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IX. |
State Of Incorporation |
A. Voting on State Takeover Statutes
Vote on a case-by-case basis proposals to opt in or out of state takeover statutes (including control share acquisition statutes, control share cash-out statutes, freezeout provisions, fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, anti-greenmail provisions, and disgorgement provisions).
B. Voting on Reincorporation Proposals
Vote on a case-by-case basis proposals to change a company’s state of incorporation.
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X. |
Mergers and Corporate Restructurings |
A. Mergers and Acquisitions
Vote on a case-by-case basis proposals related to mergers and acquisitions, taking into account at least the following:
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anticipated financial and operating benefits; |
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offer price (cost vs. premium); |
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prospects of the combined companies; |
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how the deal was negotiated; and |
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changes in corporate governance and their impact on shareholder rights. |
B. Corporate Restructuring
Vote on a case-by-case basis proposals related to a corporate restructuring, including minority squeezeouts, leveraged buyouts, spin-offs, liquidations and asset sales.
C. Spin-Offs
Vote
on a case-by-case basis proposals related to spin-offs depending on the tax and
regulatory advantages, planned use of sale proceeds, market focus and managerial
incentives.
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D.
Asset Sales
Vote on a case-by-case basis proposals related to asset sales after considering the impact on the balance sheet/working capital, value received for the asset, and potential elimination of diseconomies.
E. Liquidations
Vote on a case-by-case basis proposals related to liquidations after reviewing management’s efforts to pursue other alternatives, appraisal value of assets, and the compensation plan for executives managing the liquidation.
F. Appraisal Rights
Vote for proposals to restore, or provide shareholders with, rights of appraisal.
G. Changing Corporate Name
Vote on a case-by-case basis proposal to change the corporate name.
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XI. |
Mutual Fund Proxies |
A. Election of Trustees
Vote on trustee nominees on a case-by-case basis.
B. Investment Advisory Agreement
Vote on investment advisory agreements on a case-by-case basis.
C. Fundamental Investment Restrictions
Vote on amendments to a fund’s fundamental investment restrictions on a case-by-case basis.
D. Distribution Agreements
Vote on distribution agreements on a case-by-case basis.
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XII. |
Social and Environmental Issues |
In general we vote on a case-by-case basis on shareholder social and environmental proposals, on the basis that their impact on share value can rarely be anticipated with any high degree of confidence.
In most cases, however, we vote for disclosure reports that seek additional information, particularly when it appears companies have not adequately addressed shareholders’ social and environmental concerns.
In determining our vote on shareholder social and environmental proposals, we analyze factors such as:
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• |
whether adoption of the proposal would have either a positive or negative impact on the company’s short-term or long-term share value; |
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71
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• |
the percentage of sales, assets and earnings affected; |
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the degree to which the company’s stated position on the issues could affect its reputation or sales, or leave it vulnerable to boycott or selective purchasing; whether the issues presented should be dealt with through government or company-specific action; |
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• |
whether the company has already responded in some appropriate manner to the request embodied in a proposal; |
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whether the company’s analysis and voting recommendation to shareholders is persuasive; |
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• |
what other companies have done in response to the issue; |
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• |
whether the proposal itself is well framed and reasonable; whether implementation of the proposal would achieve the objectives sought in the proposal; and |
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whether the subject of the proposal is best left to the discretion of the board. |
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72
Item 23. Exhibits:
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(a) |
Amended and Restated Declaration of Trust. * |
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(b) |
Bylaws of the Trust. * |
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(c) |
Not applicable. |
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(d)(1) |
Form of Investment Management Agreement between the Trust and Van Eck Associates Corporation (with respect to Market Vectors – Gold Miners ETF). * |
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(d)(2) |
Form of Investment Management Agreement between the Trust and Van Eck Associates Corporation (with respect to all portfolios except for Market Vectors – Gold Miners ETF). *** |
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(e)(1) |
Form of Distribution Agreement between the Trust and Van Eck Securities Corporation. ** |
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(e)(2) |
Form of Participant Agreement. * |
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(f) |
Not applicable. |
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(g) |
Form of Custodian Agreement between the Trust and The Bank of New York. * |
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(h)(1) |
Form of Fund Accounting Agreement between the Trust and The Bank of New York. * |
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(h)(2) |
Form of Transfer Agency Services Agreement between the Trust and The Bank of New York. * |
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(h)(3) |
Form of Sub-License Agreement between the Trust and the Van Eck Associates Corp. * |
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(i)(1) |
Opinion and consent of Clifford Chance US LLP (with respect to Market Vectors – Environmental Services ETF, Market Vectors – Gold Miners ETF and Market Vectors – Steel ETF). *** |
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(i)(2) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors – Global Alternative Energy ETF and Market Vectors – Russia ETF). **** |
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(i)(3) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors – Global Agribusiness ETF and Market Vectors – Global Nuclear Energy ETF). ****** |
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(i)(4) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors—Lehman Brothers AMT- Free Intermediate Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Long Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Short Municipal ETF, Market Vectors—Lehman Brothers High Yield Municipal ETF, Market Vectors—Lehman Brothers AMT-Free California Long Municipal ETF and Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF).† |
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(j)(1) |
Consent of Ernst & Young LLP, independent registered public accounting firm (with respect to Market Vectors – Environmental Services ETF, Market Vectors – Gold Miners ETF and Market Vectors – Steel ETF). **** |
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(j)(2) |
Consent of Ernst & Young LLP, independent registered public accounting firm (with respect to Market Vectors – Global Alternative Energy ETF and Market Vectors – Russia ETF). ***** |
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(j)(3) |
Consent of Ernst & Young LLP, independent registered public accounting firm (with respect to Market Vectors –Agribusiness ETF and Market Vectors –Nuclear Energy ETF). ****** |
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(k) |
Not applicable. |
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(l) |
Not applicable. |
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(m) |
Not applicable. |
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(n) |
Not applicable. |
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(o) |
Not applicable. |
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(p)(1) |
Code of Ethics. *** |
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* |
Incorporated by the reference to the Registrant’s Registration Statement filed on April 28, 2006. |
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** |
Incorporated by reference to the Registrant’s Registration Statement filed on May 11, 2006. |
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*** |
Incorporated by reference to the Registrant’s Registration Statement filed on October 6, 2006. |
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**** |
Incorporated by reference to the Registrant’s Registration Statement filed on April 9, 2007. |
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***** |
Incorporated by reference to the Registrant’s Registration Statement filed on April 27, 2007. |
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****** |
Incorporated by reference to the Registrant’s Registration Statement filed on July 30, 2007. |
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† |
Filed herewith. |
C - 1
None.
Item 25. Indemnification
Pursuant to Section 10.2 of the Amended and Restated Declaration of Trust, all persons that are or have been a Trustee or officer of the Trust (collectively, the “Covered Persons”) shall be indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him 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 being or having been a Trustee or officer and against amounts paid or incurred by him in the settlement thereof. No indemnification will be provided to a Covered Person who shall have been adjudicated by a court or body before which the proceeding was brought to be liable to the Trust or its shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office or not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust; or in the event of a settlement, unless there has been a determination that such Trustee or officer did not engage in willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office.
Article XII of the Trust’s Bylaws, to the maximum extent permitted by Delaware law in effect from time to time, the Trust shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former trustee or officer of the Trust and who is made a party to the proceeding by reason of his or her service in that capacity or (b) any individual who, while a director of the Trust and at the request of the Trust, serves or has served as a trustee, officer, partner or trustee of another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his or her service in that capacity. The Trust may, with the approval of its Board of Trustees, provide such indemnification and advance for expenses to a person who served a predecessor of the Trust in any of the capacities described in (a) or (b) above and to any employee or agent of the Trust or a predecessor of the Trust; provided that no provision of Article XII shall be effective to protect or purport to protect any trustee or officer of the Trust against liability to the Trust or its stockholders to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
The Trust has agreed to indemnify and hold harmless the Trustees against any and all expenses actually and reasonably incurred by the Trustee in any proceeding arising out of or in connection with the Trustee’s service to the Trust, to the fullest extent permitted by the Amended and Restated Agreement and Declaration of Trust and Bylaws of the Fund and Title 12, Part V, Chapter 38 of the Delaware Code, and applicable law.
Item 26. Business and Other Connections of Investment Manager
C - 2
Item 27. Principal Underwriters
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(a) |
Van Eck Securities Corporation is the Trust’s principal underwriter. Van Eck Securities Corporation also acts as a principal underwriter, depositor, or investment manager for the following other investment companies: Van Eck Funds (which is comprised of three series: Emerging Markets Fund, Global Hard Assets Fund and International Investors Gold Fund); Worldwide Insurance Trust (which is comprised of five series: Worldwide Absolute Return Fund, Worldwide Bond Fund, Worldwide Emerging Markets Fund, Worldwide Hard Assets Fund and Worldwide Real Estate Fund); and Van Eck Funds, Inc. (which has one series, Mid Cap Value Fund). |
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(b) |
The following is a list of the executive officers, directors and partners of Van Eck Securities Corporation: |
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Name and Principal
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Positions and
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Keith J.
Carlson
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President |
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Susan Lashey
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Vice President |
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Joseph
McBrien
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Senior Vice President, General Counsel and Secretary |
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Peter
Moeller
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Senior Vice President |
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Jonathan R.
Simon
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Vice President and Associate General Counsel |
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Bruce J.
Smith
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Senior Vice President, Chief Financial Officer, Treasurer and Controller |
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Jan F. van
Eck
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Director, Executive Vice President and Chief Compliance Officer |
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Derek S. van
Eck
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Director and Executive Vice President |
C - 3
All accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act and the Rules thereunder will be maintained at the offices of The Bank of New York, 101 Barclay Street, New York, New York 10286.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
C - 4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York on the 2nd day of November, 2007.
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MARKET VECTORS ETF TRUST |
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By: |
/s/ Keith J. Carlson* |
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Keith J. Carlson |
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President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following person in the capacities and on the date indicated.
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/s/ Phillip D. DeFeo* |
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Chairman |
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November 2, 2007 |
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Phillip D. DeFeo |
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/s/ David H. Chow* |
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Trustee |
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November 2, 2007 |
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David H. Chow |
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/s/ R. Alastair Short* |
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Trustee |
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November 2, 2007 |
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R. Alastair Short |
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/s/ Richard D. Stamberger* |
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Trustee |
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November 2, 2007 |
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Richard D. Stamberger |
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/s/ Jan F. van Eck* |
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Trustee |
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November 2, 2007 |
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Jan F. van Eck |
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/s/ Keith J. Carlson* |
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President
and
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November 2, 2007 |
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Keith J. Carlson |
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/s/ Bruce J. Smith* |
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Chief Financial Officer |
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November 2, 2007 |
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Bruce J. Smith |
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*By: |
/s/ Joseph J. McBrien |
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Joseph J. McBrien |
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Attorney-in-Fact |
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C - 5
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(a) |
Amended and Restated Declaration of Trust. * |
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(b) |
Bylaws of the Trust. * |
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(c) |
Not applicable. |
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(d)(1) |
Form of Investment Management Agreement between the Trust and Van Eck Associates Corporation (with respect to Market Vectors – Gold Miners ETF). * |
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(d)(2) |
Form of Investment Management Agreement between the Trust and Van Eck Associates Corporation (with respect to all portfolios except for Market Vectors – Gold Miners ETF). *** |
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(e)(1) |
Form of Distribution Agreement between the Trust and Van Eck Securities Corporation. ** |
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(e)(2) |
Form of Participant Agreement. * |
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(f) |
Not applicable. |
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(g) |
Form of Custodian Agreement between the Trust and The Bank of New York. * |
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(h)(1) |
Form of Fund Accounting Agreement between the Trust and The Bank of New York. * |
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(h)(2) |
Form of Transfer Agency Services Agreement between the Trust and The Bank of New York. * |
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(h)(3) |
Form of Sub-License Agreement between the Trust and the Van Eck Associates Corp. * |
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(i)(1) |
Opinion and consent of Clifford Chance US LLP (with respect to Market Vectors – Environmental Services ETF, Market Vectors – Gold Miners ETF and Market Vectors – Steel ETF). *** |
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(i)(2) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors – Global Alternative Energy ETF and Market Vectors – Russia ETF). **** |
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(i)(3) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors – Global Agribusiness ETF and Market Vectors – Global Nuclear Energy ETF). ****** |
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(i)(4) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors—Lehman Brothers AMT- Free Intermediate Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Long Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Short Municipal ETF, Market Vectors—Lehman Brothers High Yield Municipal ETF, Market Vectors—Lehman Brothers AMT-Free California Long Municipal ETF and Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF).† |
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(j)(1) |
Consent of Ernst & Young LLP, independent registered public accounting firm (with respect to Market Vectors – Environmental Services ETF, Market Vectors – Gold Miners ETF and Market Vectors – Steel ETF). **** |
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(j)(2) |
Consent of Ernst & Young LLP, independent registered public accounting firm (with respect to Market Vectors – Global Alternative Energy ETF and Market Vectors – Russia ETF). ***** |
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(j)(3) |
Consent of Ernst & Young LLP, independent registered public accounting firm (with respect to Market Vectors –Agribusiness ETF and Market Vectors –Nuclear Energy ETF). ****** |
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(k) |
Not applicable. |
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(l) |
Not applicable. |
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(m) |
Not applicable. |
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(n) |
Not applicable. |
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(o) |
Not applicable. |
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(p)(1) |
Code of Ethics. *** |
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* |
Incorporated by the reference to the Registrant’s Registration Statement filed on April 28, 2006. |
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** |
Incorporated by reference to the Registrant’s Registration Statement filed on May 11, 2006. |
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*** |
Incorporated by reference to the Registrant’s Registration Statement filed on October 6, 2006. |
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**** |
Incorporated by reference to the Registrant’s Registration Statement filed on April 9, 2007. |
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***** |
Incorporated by reference to the Registrant’s Registration Statement filed on April 27, 2007. |
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****** |
Incorporated by reference to the Registrant’s Registration Statement filed on July 30, 2007. |
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† |
Filed herewith |
Exhibit (i)(4)
[LETTERHEAD OF CLIFFORD CHANCE US LLP]
November 2, 2007
Market Vectors ETF Trust
99 Park Avenue, 8
th
Floor
New York, New York 10016
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Re: |
Opinion of Counsel regarding Post-Effective
Amendment No. 14 to the Registration
|
Dear Ladies and Gentlemen:
We have acted as counsel to Market Vectors ETF Trust (the “Fund”), in connection with the above-referenced Registration Statement (as amended, the “Registration Statement”), which relates to the shares of beneficial interest of the Market Vectors—Lehman Brothers AMT- Free Intermediate Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Long Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Short Municipal ETF, Market Vectors—Lehman Brothers High Yield Municipal ETF, Market Vectors—Lehman Brothers AMT-Free California Long Municipal ETF and Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF, no par value (collectively, the “Shares”). This opinion is being delivered to you in connection with the Fund’s filing of Post-Effective Amendment No. 14 to the Registration Statement (the “Amendment”) to be filed with the Securities and Exchange Commission pursuant to Rule 485(a) of the Securities Act of 1933, as amended (the “1933 Act”), and Amendment No. 18 pursuant to the Investment Company Act of 1940, as amended, in connection with the effectiveness of the Market Vectors—Lehman Brothers AMT- Free Intermediate Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Long Municipal ETF, Market Vectors—Lehman Brothers AMT-Free Short Municipal ETF, Market Vectors—Lehman Brothers High Yield Municipal ETF, Market Vectors—Lehman Brothers AMT-Free California Long Municipal ETF and Market Vectors—Lehman Brothers AMT-Free New York Long Municipal ETF. With your permission, all assumptions and statements of reliance herein have been made without any independent investigation or verification on our part except to the extent otherwise expressly stated, and we express no opinion with respect to the subject matter or accuracy of such assumptions or items relied upon. We have reviewed the Fund’s Declaration of Trust, as amended, and such other documents and matters as we have deemed necessary to enable us to render this opinion.
Based upon, and subject to, the foregoing, we are of the opinion that the Shares proposed to be sold pursuant to the Amendment, when effective, will have been duly authorized and, when sold in accordance with the terms of the Amendment and the requirements of applicable federal and state law and delivered by the Fund against receipt of the net asset value of the Shares, will have been legally issued, fully paid and non-assessable by the Fund (except for the potential liability of
Market Vectors ETF Trust
November 2, 2007
Page 2
shareholders described in the Fund’s current Statement of Additional Information under the caption “Capital Stock and Shareholder Reports”).
We are attorneys licensed to practice only in the State of New York. The foregoing opinion is limited to the Federal laws of the United States and the Delaware Statutory Trust Act, and we are expressing no opinion as to the effect of the laws of any other jurisdiction.
We have consented to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the headings “General Information” in the Prospectus and “Counsel and Independent Registered Public Accounting Firm” in the Statement of Additional Information, each forming a part of the Registration Statement. In giving this consent, we do not concede that we are in the category of persons whose consent is required under Section 7 of the 1933 Act.
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Very truly yours, |
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/s/ Clifford Chance US LLP |