PROSPECTUS
JULY
1,
2012
Van Eck Funds
Unconstrained Emerging Markets Bond Fund
Class A: EMBAX / Class C: EMBCX / Class I: EMBUX / Class Y: EMBYX
These securities have not been approved or disapproved either by the Securities and Exchange Commission (SEC) or by any State Securities Commission. Neither the SEC nor any State Commission has passed upon the accuracy or adequacy of this prospectus. Any claim to the contrary is a criminal offense.
TABLE OF CONTENTS
UNCONSTRAINED EMERGING MARKETS BOND FUND (CLASS A, C, I, Y)
SUMMARY INFORMATION
INVESTMENT OBJECTIVE
The Unconstrained Emerging Markets Bond Fund seeks total return, consisting of income and capital appreciation.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for Class A sales charge discounts if you and your family (includes spouse and children under age 21) invest, or agree to invest in the future, at least $25,000, in the aggregate, in Classes A and C of the Van Eck
Funds. More information about these and other discounts is available from your financial professional and in the “Shareholder Information” section of the Fund’s prospectus and in the “Availability of Discounts” and “Breakpoint Linkage Rules for Discounts” sections of the Fund’s Statement of Additional Information (“SAI”).
Shareholder Fees
(fees paid directly from your investment)
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Class A
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Class C
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Class I
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Class Y
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Maximum Sales Charge (load) imposed on purchases (as a percentage of offering price)
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5.75
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%
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0.00
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%
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0.00
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%
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0.00
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%
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Maximum Deferred Sales Charge (load) (as a percentage of the lesser of the net asset value or purchase price)
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0.00
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%
1
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1.00
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%
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0.00
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%
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0.00
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%
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1
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A contingent deferred sales charge for Class A shares of 1.00% for one year applies to redemptions of qualified commissionable shares purchased at or above the $1 million breakpoint level.
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Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
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Class A
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Class C
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Class I
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Class Y
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Management Fees
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0.80
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%
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0.80
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%
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0.80
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%
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0.80
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%
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Distribution and/or Service (12b-1) Fees
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0.25
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%
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1.00
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%
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0.00
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%
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0.00
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%
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Other Expenses
1
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0.86
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%
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0.99
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%
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1.52
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%
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0.85
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%
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Total Annual Fund Operating Expenses
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1.91
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%
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2.79
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%
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2.32
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%
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1.65
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%
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Fees/Expenses Waived or Reimbursed
2
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(0.66
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)%
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(0.84
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)%
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(1.37
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)%
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(0.65
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)%
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Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement
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1.25
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%
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1.95
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%
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0.95
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%
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1.00
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%
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1
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Other expenses are based on estimated amounts for the current fiscal year.
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2
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Van Eck Associates Corporation (the “Adviser”) has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding acquired fund fees and expenses, interest expense, trading expenses, dividends on securities sold short, taxes and extraordinary expenses) from exceeding 1.25% for Class A, 1.95% for Class
C, 0.95% for Class I, and 1.00% for Class Y of the Fund’s average daily net assets per year until May 1, 2014. During such time, the expense limitation is expected to continue until the Board of Trustees acts to discontinue all or a portion of such expense limitation.
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Expense Example
The following example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then either redeem all of your shares at the end of these periods or continue to hold them. The example
also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual expenses may be higher or lower, based on these assumptions, your costs would be:
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Share Status
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1 Year
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3 Years
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Class A
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Sold or Held
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$
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695
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$
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1,080
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Class C
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Sold
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$
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298
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$
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786
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Held
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$
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198
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$
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786
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Class I
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Sold or Held
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$
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97
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$
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593
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Class Y
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Sold or Held
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$
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102
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$
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457
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1
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating
expenses or in the example, affect the Fund’s performance.
PRINCIPAL INVESTMENT STRATEGIES
Under normal conditions, the Fund invests at least 80% of its net assets in emerging market debt securities. An instrument will qualify as an emerging market debt security if it is either (i) issued by an emerging market government, quasi-government or corporate entity (regardless of the currency in which it is denominated) or (ii)
denominated in the currency of an emerging market country (regardless of the location of the issuer). The Fund may also invest in non-emerging market debt securities. There is no limit on the amount the Fund may invest in one country or in securities denominated in one currency. The Fund may also invest in debt securities rated
below investment grade (“junk bonds”). The Fund is considered to be “non-diversified” which means that it may invest in fewer securities than a “diversified” fund.
The Fund invests in debt issued in emerging market and developed market currencies by governments and government-owned, controlled, or related entities (and their agencies and subdivisions), and by corporations. The Fund may invest in corporate bonds, debentures, notes, commercial paper, time deposits, and certificates of
deposit, as well as debt obligations, which may have a call on a common stock or commodity by means of a conversion privilege or attached warrants.
The Fund may also invest in emerging market currencies. The Fund may use derivative instruments denominated in any currency, such as currency forwards, to gain or hedge exposure and may also enter into swap contracts. The notional value of a cash-settled forward currency contract or similar derivative instrument on an emerging
market currency will be treated as an emerging market debt security for purposes of complying with the Fund’s policy of investing at least 80% of its net assets in emerging market debt securities. The Fund may, but is not required to, hedge its exposure to non-U.S. currencies. The Fund may also invest in credit-linked notes.
The Adviser has broad discretion to identify countries that it considers to qualify as emerging markets. The Adviser selects emerging market countries and currencies that the Fund will invest in based on the Adviser’s evaluation of economic fundamentals, legal structure, political developments and other specific factors the Adviser
believes to be relevant. The Fund’s investment strategy normalizes countries’ economic fundamentals and compares them to the valuations of the relevant asset prices, particularly the relevant currency’s valuation, the relevant currency’s interest rate, and the relevant hard-currency security’s credit spread. The Fund may invest in
instruments whose return is based on the return of an emerging market security such as a derivative instrument, rather than investing directly in emerging market securities. While the Fund may purchase securities of any maturity or duration, under normal conditions, the Adviser expects the portfolio’s average duration to range between
two and ten years.
The Fund’s holdings may include issues denominated in currencies of emerging countries, investment companies (like country funds) that invest in emerging countries, and American Depositary Receipts, and similar types of investments, representing emerging markets securities.
The Fund may invest up to 20% of its net assets in securities issued by other investment companies (each an “Underlying Fund”), including exchange-traded funds (“ETFs”). The Fund may also invest in money market funds, but these investments are not subject to this limitation. The Fund may invest in ETFs to participate in, or gain
rapid exposure to, certain market sectors, or when direct investments in certain countries are not permitted. Investment in the securities of an Underlying Fund involves duplication of advisory fees and certain other expenses. By investing in an Underlying Fund, the Fund becomes a shareholder of that Underlying Fund. As a result, the
Fund’s shareholders will indirectly bear the Fund’s proportionate share of the fees and expenses paid by shareholders of the Underlying Fund, in addition to the fees and expenses the Fund’s shareholders directly bear in connection with the Fund’s own operations. The Adviser has agreed to waive the management fee it charges to the
Fund by any amount it collects as a management fee from an Underlying Fund managed by the Adviser, as a result of an investment of the Fund’s assets in such Underlying Fund.
The Adviser may hire and terminate sub-advisers in accordance with the terms of an exemptive order obtained by the Fund and the Adviser from the SEC under which the Adviser is permitted, subject to supervision and approval of the Board of Trustees, to enter into and materially amend sub-advisory agreements without seeking
shareholder approval. The Adviser will furnish shareholders of the Fund with information regarding a new sub-adviser within 90 days of the hiring of the new sub-adviser. Currently, the Adviser has not hired a sub-adviser to assist with the portfolio management of the Fund.
2
PRINCIPAL RISKS
There is no assurance that the Fund will achieve its investment objective. The Fund’s share price and return will fluctuate with changes in the market value of the Fund’s portfolio securities. Accordingly, an investment in the Fund involves the risk of losing money.
Below Investment Grade Securities.
Below investment grade securities (sometimes referred to as “junk bonds”) are more speculative than higher-rated securities. These securities have a much greater risk of default and may be more volatile than higher-rated securities of similar maturity. These securities may be less liquid and more
difficult to value than higher-rated securities.
Debt Securities.
Debt securities are subject to credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a debt security will be unable to make interest payments or repay principal when it becomes due. Interest rate risk refers to fluctuations in the value of a debt security resulting from changes in the general
level of interest rates.
Derivatives.
The use of derivatives, such as currency forwards and swaps, presents risks different from, and possibly greater than, the risks associated with investing directly in traditional securities. The use of derivatives can lead to losses because of adverse movements in the price or value of the underlying security, asset, index or
reference rate. Derivative strategies often involve leverage, which may exaggerate a loss, potentially causing the Fund to lose more money than it would have lost had it invested in the underlying security. Also, a liquid secondary market may not always exist for the Fund’s derivative positions at times when the Fund might wish to
terminate or sell such positions and over the counter instruments may be illiquid.
Emerging Markets Securities.
Emerging markets securities typically present even greater exposure to the risks described under “Foreign Securities” and may be particularly sensitive to certain economic changes. Emerging markets securities are exposed to a number of risks that may make these investments volatile in price or difficult
to trade.
Foreign Currency Transactions.
An investment transacted in a foreign currency may lose value due to fluctuations in the rate of exchange. These fluctuations can make the return on an investment go up or down, entirely apart from the quality or performance of the investment itself.
Foreign Securities.
Foreign investments are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or
political, economic or social instability. Foreign companies also may be subject to significantly higher levels of taxation than U.S. companies, including potentially confiscatory levels of taxation, thereby reducing the earnings potential of such foreign companies.
Investments in Other Investment Companies.
The Fund’s investment in another investment company may subject the Fund indirectly to the underlying risks of the investment company. The Fund also will bear its share of the underlying investment company’s fees and expenses, which are in addition to the Fund’s own fees and
expenses.
Market.
Market risk refers to the risk that the market prices of securities that the Fund holds will rise or fall, sometimes rapidly or unpredictably. In general, equity securities tend to have greater price volatility than debt securities.
Non-Diversification.
A non-diversified fund’s greater investment in a single issuer makes the fund more susceptible to financial, economic or market events impacting such issuer. A decline in the value of or default by a single security in the non-diversified fund’s portfolio may have a greater negative effect than a similar decline or
default by a single security in a diversified portfolio.
PERFORMANCE
The Fund is expected to commence operations on or about July 9, 2012. Accordingly, the Fund does not have a full calendar year of performance.
PORTFOLIO MANAGEMENT
Investment Adviser.
Van Eck Associates Corporation
Portfolio Manager.
Eric Fine,
Portfolio Manager, 2012
3
PURCHASE AND SALE OF FUND SHARES
In general, shares of the Fund may be purchased or redeemed on any business day, primarily through financial representatives such as brokers or advisers, or directly by eligible investors through the Fund’s transfer agent. Purchase minimums for Classes A, C and Y shares are $1000 for an initial purchase and $100 for a subsequent
purchase, with no purchase minimums for any purchase through a retirement or pension plan account, for any “wrap fee” account and similar programs offered without a sales charge by certain financial institutions and third-party recordkeepers and/or administrators, and for any account using the Automatic Investment Plan, or for any
other periodic purchase program. Purchase minimums for Class I shares are $1 million for an initial purchase and no minimum for a subsequent purchase; the initial minimum may be reduced or waived at the Fund’s discretion.
TAX INFORMATION
The Fund normally distributes net investment income and net realized capital gains, if any, to shareholders. These distributions are generally taxable to you as ordinary income or capital gains, unless you are investing through a tax-advantaged retirement account, such as a 401(k) plan or an individual retirement account (IRA).
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and/or its affiliates may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your financial professional
to recommend the Fund over another investment. Ask your financial professional or visit your financial intermediary’s website for more information.
4
II. INVESTMENT OBJECTIVE, STRATEGIES, POLICIES, RISKS AND OTHER INFORMATION
This section states the Fund’s investment objective and describes certain strategies and policies that the Fund may utilize in pursuit of its investment objective. This section also provides additional information about the principal risks associated with investing in the Fund.
1. INVESTMENT OBJECTIVE
The Unconstrained Emerging Markets Bond Fund seeks total return, consisting of income and capital appreciation.
The Fund’s investment objective is non-fundamental and may be changed by the Board of Trustees without shareholder approval. To the extent practicable, the Fund will provide shareholders with 60 days’ prior written notice before changing its investment objective.
2. ADDITIONAL INFORMATION ABOUT PRINCIPAL INVESTMENT STRATEGIES AND RISKS
BELOW INVESTMENT GRADE SECURITIES
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Definition
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Debt securities that are below investment grade (e.g., BB or below by S&P) (sometimes referred to as “junk bonds”).
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Risk
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Below investment grade securities are more speculative than higher-rated securities. These securities have a much greater risk of default (or in the case of bonds currently in default, of not returning principal) and may be more volatile than higher-rated securities of similar maturity. The value of these securities
can be affected by overall economic conditions, interest rates, and the creditworthiness of the individual issuers. Additionally, these securities may be less liquid and more difficult to value than higher-rated securities.
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DEBT SECURITIES
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Definition
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Debt, or fixed-income, securities may include bonds and other forms of debentures or obligations. When an issuer sells debt securities, it sells them for a certain price, and for a certain term. Over the term of the security, the issuer promises to pay the buyer a certain rate of interest, then to repay the principal at
maturity. Debt securities are also bought and sold in the “secondary market”—that is, they are traded by people other than their original issuers.
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Risk
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Debt securities are subject to credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a debt security will be unable to make interest payments or repay principal when it becomes due. Various factors could affect the issuer’s ability to make timely interest or principal payments,
including changes in the issuer’s financial condition or in general economic conditions. Interest rate risk refers to fluctuations in the value of a debt security resulting from changes in the general level of interest rates. When the general level of interest rates rise, the value of debt securities will tend to fall, and if
interest rates fall, the values of debt securities will tend to rise. Changes in the value of a debt security usually will not affect the amount of income the Fund receives from it but may affect the value of the Fund’s shares.
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5
II. INVESTMENT OBJECTIVE, STRATEGIES, POLICIES, RISKS AND OTHER INFORMATION (continued)
DERIVATIVES
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Definition
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The term “derivatives” covers a broad range of financial instruments, including swap agreements, options, warrants, futures contracts, currency forwards and structured notes, whose values are derived, at least in part, from the value of one or more indicators, such as a security, asset, index or reference rate.
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Risk
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The use of derivatives presents risks different from, and possibly greater than, the risks associated with investing directly in traditional securities. The use of derivatives can lead to losses because of adverse movements in the price or value of the underlying security, asset, index or reference rate, which may be
magnified by certain features of the derivatives. Derivative strategies often involve leverage, which may exaggerate a loss, potentially causing the Fund to lose more money than it would have lost had it invested in the underlying security. The values of derivatives may move in unexpected ways, especially in
unusual market conditions, and may result in increased volatility, among other consequences. The use of derivatives may also increase the amount of taxes payable by shareholders. Other risks arise from the Fund’s potential inability to terminate or sell derivative positions. A liquid secondary market may not
always exist for the Fund’s derivative positions at times when the Fund might wish to terminate or sell such positions. Over the counter instruments (investments not traded on an exchange) may be illiquid, and transactions in derivatives traded in the over-the counter market are subject to the risk that the other
party will not meet its obligations. The use of derivatives also involves the risk of mispricing or improper valuation and that changes in the value of the derivative may not correlate perfectly with the underlying security, asset, index or reference rate.
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EMERGING MARKETS SECURITIES
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Definition
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Securities (i) issued by an emerging market government, quasi-government or corporate entity (regardless of the currency in which it is denominated) or (ii) denominated in the currency of an emerging market country (regardless of the location of the issuer).
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Risk
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Emerging markets securities typically present even greater exposure to the risks described under “Foreign Securities” and may be particularly sensitive to certain economic changes. Emerging markets securities are exposed to a number of risks that may make these investments volatile in price or difficult to trade.
Political risks may include unstable governments, nationalization, restrictions on foreign ownership, laws that prevent investors from getting their money out of a country and legal systems that do not protect property rights as well as the laws of the U.S. Market risks may include economies that concentrate in only
a few industries, securities issued that are held by only a few investors, limited trading capacity in local exchanges and the possibility that markets or issues may be manipulated by foreign nationals who have inside information.
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FOREIGN CURRENCY TRANSACTIONS
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Definition
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The contracts involved in buying and selling foreign money in order to buy and sell foreign securities denominated in that money.
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Risk
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An investment transacted in a foreign currency may lose value due to fluctuations in the rate of exchange. These fluctuations can make the return on an investment go up or down, entirely apart from the quality or performance of the investment itself. The Fund may enter into foreign currency transactions either
to facilitate settlement transactions or for purposes of hedging exposure to underlying currencies. To manage currency exposure, the Fund may enter into forward currency contracts to “lock in” the U.S. dollar price of the security. A forward currency contract involves an agreement to purchase or sell a specified
currency at a specified future price set at the time of the contract.
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6
FOREIGN SECURITIES
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Definition
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Securities issued by a foreign government, quasi-government or corporate entity, traded in foreign currencies or issued by companies with most of their business interests in foreign countries.
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Risk
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Foreign investments are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments,
including the takeover of property without adequate compensation or imposition of prohibitive taxation, or political, economic or social instability. Foreign companies also may be subject to significantly higher levels of taxation than U.S. companies, including potentially confiscatory levels of taxation, thereby reducing
the earnings potential of such foreign companies. Some of the risks of investing in foreign securities may be reduced when the Fund invests indirectly in foreign securities through American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), American Depositary Shares (ADSs), Global Depositary
Shares (GDSs), and other securities which are traded on larger, recognized exchanges and in stronger, more recognized currencies.
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INVESTMENTS IN OTHER INVESTMENT COMPANIES
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Definition
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The Fund may invest up to 20% of its net assets in securities issued by other investment companies (excluding money market funds), including open end and closed end funds and ETFs, subject to the limitations under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s investment
in money market funds is not subject to this limitation.
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Risks
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The Fund’s investment in another investment company may subject the Fund indirectly to the underlying risks of the investment company. The Fund also will bear its share of the underlying investment company’s fees and expenses, which are in addition to the Fund’s own fees and expenses. Shares of closed-
end funds and ETFs may trade at prices that reflect a premium above or a discount below the investment company’s net asset value, which may be substantial in the case of closed-end funds. If investment company securities are purchased at a premium to net asset value, the premium may not exist when
those securities are sold and the Fund could incur a loss.
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MARKET
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Definition
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An investment in the Fund involves “market risk”—the risk that securities prices will rise or fall.
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Risk
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Market risk refers to the risk that the market prices of securities that the Fund holds will rise or fall, sometimes rapidly or unpredictably. Security prices may decline over short or even extended periods not only because of company-specific developments but also due to an economic downturn, a change in
interest or currency rates or a change in investor sentiment. In general, equity securities tend to have greater price volatility than debt securities.
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NON-DIVERSIFICATION
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Definition
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A non-diversified fund may invest a larger portion of its assets in a single issuer. A “diversified” fund is required by the 1940 Act, generally, with respect to 75% of its total assets, to invest not more than 5% of such assets in the securities of a single issuer.
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Risk
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A non-diversified fund’s greater investment in a single issuer makes the fund more susceptible to financial, economic or market events impacting such issuer. A decline in the value of or default by a single security in the non-diversified fund’s portfolio may have a greater negative effect than a similar decline or
default by a single security in a diversified portfolio.
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7
II. INVESTMENT OBJECTIVE, STRATEGIES, POLICIES, RISKS AND OTHER INFORMATION (continued)
3. ADDITIONAL INVESTMENT STRATEGIES
INVESTING DEFENSIVELY
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Strategy
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The Fund may take temporary defensive positions in anticipation of or in an attempt to respond to adverse market, economic, political or other conditions. Such a position could have the effect of reducing any benefit the Fund may receive from a market increase.
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SECURITIES LENDING
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Strategy
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The Fund may lend its securities as permitted under the 1940 Act, including by participating in securities lending programs managed by broker-dealers or other institutions. Securities lending allows the Fund to retain ownership of the securities loaned and, at the same time, earn additional income. The borrowings
must be collateralized in full with cash, U.S. government securities or high-quality letters of credit.
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The Fund could experience delays and costs in recovering the securities loaned or in gaining access to the securities lending collateral. If the Fund is not able to recover the securities loaned, the Fund may sell the collateral and purchase a replacement investment in the market. The value of the collateral could
decrease below the value of the replacement investment by the time the replacement investment is purchased. Cash received as collateral and which is invested is subject to market appreciation and depreciation.
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4. OTHER INFORMATION AND POLICIES
CHANGING A FUND’S 80% POLICY
The Fund’s policy of investing “at least 80% of its net assets” (which includes net assets plus any borrowings for investment purposes) may be changed by the Board of Trustees (the “Board”) without a shareholder vote, as long as shareholders are given 60 days notice of the change.
PORTFOLIO HOLDINGS INFORMATION
Generally, it is the Fund’s and Van Eck Associates Corporation’s (the “Adviser”) policy that no current or potential investor, including any Fund shareholder, shall be provided information about the Fund’s portfolio on a preferential basis in advance of the provision of that information to other investors. A complete description of the Fund’s
policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the Fund’s Statement of Additional Information (“SAI”).
Limited portfolio holdings information for the Fund is available to all investors on the Van Eck website at vaneck.com. This information regarding the Fund’s top holdings and country and sector weightings, updated as of each month-end, is located on this website. Generally, this information is posted to the website within 30 days of the
end of the applicable month. This information generally remains available on the website until new information is posted. The Fund reserves the right to exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund, and to discontinue the posting of portfolio holdings information at any
time, without prior notice.
PORTFOLIO INVESTMENTS
The percentage limitations relating to the composition of the Fund’s portfolio apply at the time the Fund acquires an investment. A subsequent increase or decrease in percentage resulting from a change in the value of portfolio securities or the total or net assets of the Fund will not be considered a violation of the restriction.
8
III. SHAREHOLDER INFORMATION
1. HOW TO BUY, SELL, EXCHANGE OR TRANSFER SHARES
The Fund offers Class A, Class C, Class I and Class Y shares. Information related to how to buy, sell, exchange and transfer shares is discussed below. See the “Minimum Purchase” section for information related to initial and subsequent minimum investment amounts. The minimum investment amounts vary by share class.
Through a Financial Intermediary
Primarily, accounts are opened through a financial intermediary (broker, bank, adviser or agent). Please contact your representative for details.
Through the Transfer Agent, DST Systems, Inc. (DST)
You may buy (purchase), sell (redeem), exchange, or transfer ownership of Class A, Class C and Class I shares directly through DST by mail or telephone, as stated below. For Class Y shares, shareholders must open accounts and transact business through a financial intermediary.
The Fund’s mailing address at DST is:
Van Eck Global
P.O. Box 218407
Kansas City, MO 64121-8407
For overnight delivery:
Van Eck Global
210 W. 10th St., 8th Fl.
Kansas City, MO 64105-1802
Non-resident aliens cannot make a direct investment to establish a new account in the Fund, but may invest through their broker or agent and certain foreign financial institutions that have agreements with Van Eck.
To telephone the Fund at DST, call Van Eck’s Account Assistance at 800-544-4653.
Purchase by Mail
To make an initial purchase, complete the Van Eck Account Application and mail it with your check made payable to Van Eck Funds. Subsequent purchases can be made by check with the remittance stub of your account statement. You cannot make a purchase by telephone. We cannot accept third party checks, starter checks,
money orders, travelers checks, cashier checks, checks drawn on a foreign bank, or checks not in U.S. dollars. There are separate applications for Van Eck retirement accounts (see “Retirement Plans” for details). For further details, see the application or call Account Assistance.
Telephone Redemption—Proceeds by Check 800-345-8506
If your account has the optional Telephone Redemption Privilege, you can redeem up to $50,000 per day. The redemption check must be payable to the registered owner(s) at the address of record (which cannot have been changed within the past 30 days). You automatically get the Telephone Redemption Privilege (for eligible
accounts) unless you specifically refuse it on your Account Application, on broker/agent settlement instructions, or by written notice to DST. All accounts are eligible for the privilege except those registered in street, nominee, or corporate name and custodial accounts held by a financial institution, including Van Eck sponsored retirement
plans.
Expedited Redemption—Proceeds by Wire 800-345-8506
If your account has the optional Expedited Redemption Privilege, you can redeem a minimum of $1,000 or more per day by telephone or written request with the proceeds wired to your designated bank account. The Fund reserves the right to waive the minimum amount. This privilege must be established in advance by Application.
For further details, see the Application or call Account Assistance.
Written Redemption
Your written redemption (sale) request must include:
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Fund and account number.
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Number of shares or dollar amount to be redeemed, or a request to sell “all shares.”
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Signatures of all registered account holders, exactly as those names appear on the account registration, including any additional documents concerning authority and related matters in the case of estates, trusts, guardianships, custodianships, partnerships and corporations, as requested by DST.
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9
III. SHAREHOLDER INFORMATION (continued)
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Special instructions, including bank wire information or special payee or address.
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A signature guarantee for each account holder will be required if:
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The redemption is for $50,000 or more.
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The redemption amount is wired.
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The redemption amount is paid to someone other than the registered owner.
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The redemption amount is sent to an address other than the address of record.
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The address of record has been changed within the past 30 days.
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Institutions eligible to provide signature guarantees include banks, brokerages, trust companies, and some credit unions.
Telephone Exchange 800-345-8506
If your account has the optional Telephone Exchange Privilege, you can exchange between Funds of the same Class without any additional sales charge. (Shares originally purchased into the Van Eck Money Fund (the “Money Fund”), which paid no sales charge, may pay an initial sales charge the first time they are exchanged into
another Class A fund.) Exchanges of Class C shares are exempt from the Class C contingent deferred redemption charge (“CDRC”). The new Class C shares received via the exchange will be charged the CDRC applicable to the original Class C shares upon redemption. All accounts are eligible except for omnibus accounts or those
registered in street name and certain custodial retirement accounts held by a financial institution other than Van Eck. For further details regarding exchanges, please see the application, “Limits and Restrictions” and “Unauthorized Telephone Requests” below, or call Account Assistance.
Written Exchange
Written requests for exchange must include:
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The fund and account number to be exchanged out of.
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The fund to be exchanged into.
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Directions to exchange “all shares” or a specific number of shares or dollar amount.
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Signatures of all registered account holders, exactly as those names appear on the account registration, including any additional documents concerning authority and related matters in the case of estates, trusts, guardianships, custodianships, partnerships and corporations, as requested by DST.
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For further details regarding exchanges, please see the applicable information in “Telephone Exchange.”
Certificates
Certificates are not issued for new or existing shares.
Transfer of Ownership
Requests must be in writing and provide the same information and legal documentation necessary to redeem and establish an account, including the social security or tax identification number of the new owner.
Redemption in Kind
The Fund reserves the right to satisfy redemption requests by making payment in securities (known as a redemption in kind). In such case, the Fund may pay all or part of the redemption in securities of equal value as permitted under the 1940 Act, and the rules thereunder. The redeeming shareholder should expect to incur
transaction costs upon the disposition of the securities received.
LIMITS AND RESTRICTIONS
Frequent Trading Policy
The Board has adopted policies and procedures reasonably designed to deter frequent trading in shares of the Fund, commonly referred to as “market timing,” because such activities may be disruptive to the management of the Fund’s portfolio and may increase the Fund’s expenses and negatively impact the Fund’s performance. As
such, the Fund may reject a purchase or exchange transaction or restrict an account from investing in the Fund for any reason if the Adviser, in its sole discretion, believes that a shareholder is engaging in market timing activities that may be harmful to the Fund. The Fund discourages and does not accommodate frequent trading of
shares by its shareholders.
The Fund invests portions of its assets in securities of foreign issuers, and consequently may be subject to an increased risk of frequent trading activities because frequent traders may attempt to take advantage of time zone differences between the foreign markets in which the Fund’s portfolio securities trade and the time as of which
the Fund’s net asset value is calculated (“time-zone arbitrage”). The Fund’s investments in other types of securities may also be susceptible to
10
frequent trading strategies. These investments include securities that are, among other things, thinly traded, traded infrequently, or relatively illiquid, which have the risk that the current market price for the securities may not accurately reflect current market values. The Fund has adopted fair valuation policies and procedures intended to
reduce the Fund’s exposure to potential price arbitrage. However, there is no guarantee that the Fund’s net asset value will immediately reflect changes in market conditions.
The Fund uses a variety of techniques to monitor and detect abusive trading practices, such as monitoring purchases, redemptions and exchanges that meet certain criteria established by the Fund, and making inquiries with respect to such trades. If a transaction is rejected or an account restricted due to suspected market timing, the
investor or his or her financial adviser will be notified.
With respect to trades that occur through omnibus accounts at intermediaries, such as broker-dealers and third party administrators, the Fund requires all such intermediaries to agree to cooperate in identifying and restricting market timers in accordance with the Fund’s policies and will periodically request customer trading activity in the
omnibus accounts based on certain criteria established by the Fund. There is no assurance that the Fund will request such information with sufficient frequency to detect or deter excessive trading or that review of such information will be sufficient to detect or deter excessive trading in omnibus accounts effectively.
Although the Fund will use reasonable efforts to prevent market timing activities in the Fund’s shares, there can be no assurances that these efforts will be successful. As some investors may use various strategies to disguise their trading practices, the Fund’s ability to detect frequent trading activities by investors that hold shares
through financial intermediaries may be limited by the ability and/or willingness of such intermediaries to monitor for these activities.
For further details, contact Account Assistance.
Unauthorized Telephone Requests
Like most financial organizations, Van Eck, the Fund and DST may only be liable for losses resulting from unauthorized transactions if reasonable procedures designed to verify the caller’s identity and authority to act on the account are not followed.
If you do not want to authorize the Telephone Exchange or Redemption privilege on your eligible account, you must refuse it on the Account Application, broker/agent settlement instructions, or by written notice to DST. Van Eck, the Fund, and DST reserve the right to reject a telephone redemption, exchange, or other request without
prior notice either during or after the call. For further details, contact Account Assistance.
AUTOMATIC SERVICES
Automatic Investment Plan
You may authorize DST to periodically withdraw a specified dollar amount from your bank account and buy shares in your Fund account. For further details and to request an Application, contact Account Assistance.
Automatic Exchange Plan
You may authorize DST to periodically exchange a specified dollar amount for your account from one Fund to another Fund. Class C shares are not eligible. For further details and to request an Application, contact Account Assistance.
Automatic Withdrawal Plan
You may authorize DST to periodically withdraw (redeem) a specified dollar amount from your Fund account and mail a check to you for the proceeds. Your Fund account must be valued at $10,000 or more at the current offering price to establish the Plan. Class C shares are not eligible except for automatic withdrawals for the
purpose of retirement account distributions. For further details and to request an Application, contact Account Assistance.
MINIMUM PURCHASE
Each class can set its own transaction minimums and may vary with respect to expenses for distribution, administration and shareholder services.
For Class A, Class C and Class Y shares, an initial purchase of $1,000 and subsequent purchases of $100 or more are required for non-retirement accounts. There are no purchase minimums for any retirement or pension plan account, for any account using the Automatic Investment Plan, or for any other periodic purchase program.
Minimums may be waived for initial and subsequent purchases through “wrap fee” and similar programs offered without a sales charge by certain financial institutions and third-party recordkeepers and/or administrators.
For Class I shares, an initial purchase by an eligible investor of $1 million is required. The minimum initial investment requirement may be waived or aggregated among investors, in the Adviser’s discretion, for investors in certain fee-based,
11
III. SHAREHOLDER INFORMATION (continued)
wrap or other no-load investment programs, and for an eligible Employer-Sponsored Retirement Plan with plan assets of $3 million or more, sponsored by financial intermediaries that have entered into a Class I agreement with Van Eck, as well as for other categories of investors. An “Employer-Sponsored Retirement Plan” includes (a)
an employer sponsored pension or profit sharing plan that qualifies (a “Qualified Plan”) under section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”), including Code section 401(k), money purchase pension, profit sharing and defined benefit plans; (b) an ERISA-covered 403(b) plan; and (c) certain non-qualified
deferred compensation arrangements that operate in a similar manner to a Qualified Plan, such as 457 plans and executive deferred compensation arrangements, but not including employer-sponsored IRAs. In addition, members of the Boards of Trustees of Van Eck Funds and Van Eck VIP Trust and each officer, director and
employee of Van Eck may purchase Class I shares without being subject to the $1 million minimum initial investment requirement. There are no minimum investment requirements for subsequent purchases to existing accounts. To be eligible to purchase Class I shares, you must also qualify as specified in “How to Choose a Class of
Shares.”
ACCOUNT VALUE AND REDEMPTION
If the value of your account falls below $1,000 for Class A, Class C and Class Y shares and below $500,000 for Class I shares after the initial purchase, the Fund reserves the right to redeem your shares after 30 days notice to you.
This does not apply to accounts exempt from purchase minimums as described above.
HOW FUND SHARES ARE PRICED
The Fund buys or sells its shares at its net asset value, or NAV, per share next determined after receipt of a purchase or redemption plus any applicable sales charge. The Fund calculates its NAV every day the New York Stock Exchange (NYSE) is open, as of the close of regular trading on the NYSE, which is normally 4:00 p.m.
Eastern Time.
You may enter a buy or sell order when the NYSE is closed for weekends or holidays. If that happens, your price will be the NAV calculated as of the close of the next regular trading session of the NYSE. The Fund may invest in certain securities which are listed on foreign exchanges that trade on weekends or other days when the
Fund does not price its shares. As a result, the NAV of the Fund’s shares may change on days when shareholders will not be able to purchase or redeem shares.
The Fund’s investments are generally valued based on market quotations. When market quotations are not readily available for a portfolio security, or in the opinion of the Adviser do not reflect the security’s value, the Fund will use the security’s “fair value” as determined in good faith in accordance with the Fund’s Fair Value Pricing
Procedures, which have been approved by the Board. As a general principle, the current fair value of a security is the amount which the Fund might reasonably expect to receive for the security upon its current sale. The Fund’s Pricing Committee, whose members are selected by the senior management of the Adviser, is responsible
for recommending fair value procedures to the Board and for administering the process used to arrive at fair value prices.
Factors that may cause the Fund to use the fair value of a portfolio security to calculate the Fund’s NAV include, but are not limited to: (1) market quotations are not readily available because a portfolio security is not traded in a public market or the principal market in which the security trades is closed, (2) trading in a portfolio security
is limited or suspended and not resumed prior to the time at which the Fund calculates its NAV, (3) the market for the relevant security is thin, or the price is “stale” (
e.g.,
because its price doesn’t change in five consecutive business days), (4) the Adviser determines that a market quotation is inaccurate, for example, because price
movements are highly volatile and cannot be verified by a reliable alternative pricing source, or (5) where a significant event affecting the value of a portfolio security is determined to have occurred between the time of the market quotation provided for a portfolio security and the time at which the Fund calculates its NAV.
In determining the fair value of securities, the Pricing Committee will consider, among other factors, the fundamental analytical data relating to the security, the nature and duration of any restrictions on disposition of the security, and the forces influencing the market in which the security is traded.
Foreign securities in which the Fund invests may be traded in markets that close before the time that the Fund calculates its NAV. Foreign securities are normally priced based upon the market quotation of such securities as of the close of their respective principal markets, as adjusted to reflect the Adviser’s determination of the impact
of events, such as a significant movement in the U.S. markets occurring subsequent to the close of such markets but prior to the time at which the Fund calculates its NAV.
Certain of the Fund’s portfolio securities are valued by an outside pricing service approved by the Board. The pricing service may utilize an automated system incorporating a model based on multiple parameters, including a security’s local closing price (in the case of foreign securities), relevant general and sector indices, currency
fluctuations, and trading in
12
depository receipts and futures, if applicable, and/or research evaluations by its staff, in determining what it believes is the fair valuation of the portfolio securities valued by such pricing service.
There can be no assurance that the Fund could purchase or sell a portfolio security at the price used to calculate the Fund’s NAV. Because of the inherent uncertainty in fair valuations, and the various factors considered in determining value pursuant to the Fund’s fair value procedures, there can be significant deviations between a fair
value price at which a portfolio security is being carried and the price at which it is purchased or sold. Furthermore, changes in the fair valuation of portfolio securities may be less frequent, and of greater magnitude, than changes in the price of portfolio securities valued by an independent pricing service, or based on market quotations.
2. HOW TO CHOOSE A CLASS OF SHARES
The Fund offers four classes of shares with different sales charges and 12b-1 fee schedules, designed to provide you with different purchase options according to your investment needs. Class A and Class C shares are offered to the general public and differ in terms of sales charges and ongoing expenses. Shares of the Money Fund
are not available for exchange with Class C, Class I or Class Y shares. Class C shares automatically convert to Class A shares eight years after each individual purchase. Class I shares are offered to eligible investors primarily through certain financial intermediaries that have entered into a Class I Agreement with Van Eck. The Fund
reserves the right to accept direct investments by eligible investors. Class Y shares are offered only to investors through “wrap fee” and similar programs offered without a sales charge by certain financial intermediaries and third-party recordkeepers and/or administrators that have entered into a Class Y agreement with Van Eck.
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CLASS A Shares
are offered at net asset value plus an initial sales charge at time of purchase of up to 5.75% of the public offering price. The initial sales charge is reduced for purchases of $25,000 or more. For further information regarding sales charges, breakpoints and other discounts, please see below. The 12b-1 fee is
0.25% annually.
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CLASS C Shares
are offered at net asset value with no initial sales charge, but are subject to a contingent deferred redemption charge (“CDRC”) of 1.00% on all redemptions during the first 12 months after purchase. The CDRC may be waived under certain circumstances; please see “Telephone Exchange” and below. The
12b-1 fee is 1.00% annually.
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CLASS I Shares
are offered with no sales charges on purchases, no CDRC, and no 12b-1 fee. To be eligible to purchase Class I (Institutional) shares, you must be an eligible investor that is making or has made a minimum initial investment of at least $1 million (which may be reduced or waived under certain circumstances) in
Class I shares of the Fund. Eligible investors in Class I shares include corporations, foundations, family offices and other institutional organizations; high net worth individuals; or a bank, trust company or similar institution investing for its own account or for the account of a client when such institution has entered into a Class I
agreement with Van Eck and makes Class I shares available to the client’s program or plan.
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CLASS Y Shares
are offered with no sales charges on purchases, no CDRC, and no 12b-1 fee. To be eligible to purchase Class Y shares, you must be an eligible investor in a “wrap-fee” or other fee-based program, including an Employer-Sponsored Retirement Plan, offered through a financial intermediary that has entered into
a Class Y Agreement with Van Eck, and makes Class Y shares available to that program or plan. An “Employer-Sponsored Retirement Plan” includes (a) an employer sponsored pension or profit sharing plan that qualifies (a “Qualified Plan”) under section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”),
including Code section 401(k), money purchase pension, profit sharing and defined benefit plans; (b) an ERISA-covered 403(b) plan; and (c) certain non-qualified deferred compensation arrangements that operate in a similar manner to a Qualified Plan, such as 457 plans and executive deferred compensation arrangements, but
not including employer-sponsored IRAs.
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Financial intermediaries may offer their clients more than one class of shares of the Fund. Shareholders who own shares of one class of a Fund and who are eligible to invest in another class of the same Fund may be eligible to convert their shares from one class to the other. For additional information, please contact your financial
intermediary or see "Class Conversions" in the SAI. Investors should consider carefully the Fund’s share class expenses and applicable sales charges and fees plus any separate transaction and other fees charged by such intermediaries in connection with investing in each available share class before selecting a share class. It is the
responsibility of the financial intermediary and the investor to choose the proper share class and notify DST or Van Eck of that share class at the time of each purchase. More information regarding share class eligibility is available in the “How to Buy, Sell, Exchange, or Transfer Shares” section of the prospectus and in “Purchase of
Shares” in the SAI.
13
III. SHAREHOLDER INFORMATION (continued)
3. SALES CHARGES
Unless you are eligible for a waiver, the public offering price you pay when you buy Class A shares of the Fund is the Net Asset Value (NAV) of the shares plus an initial sales charge. The initial sales charge varies depending upon the size of your purchase, as set forth below. No sales charge is imposed where Class A or Class C
shares are issued to you pursuant to the automatic investment of income dividends or capital gains distribution. It is the responsibility of the financial intermediary to ensure that the investor obtains the proper “breakpoint” discount. Class C, Class I and Class Y do not have an initial sales charge; however, Class A does charge a
contingent deferred sales charge and Class C does charge a contingent deferred redemption charge as set forth below.
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Class A Shares Sales Charges
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Dollar Amount of Purchase
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Sales Charge as a
Percentage of
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Percentage to
Brokers or Agents
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Offering
Price
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Net Amount
Invested
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Less than $25,000
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5.75
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%
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6.10
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%
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5.00
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%
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$25,000 to less than $50,000
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5.00
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%
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5.30
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%
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4.25
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%
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$50,000 to less than $100,000
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4.50
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%
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4.70
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%
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3.90
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%
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$100,000 to less than $250,000
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3.00
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%
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3.10
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%
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2.60
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%
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$250,000 to less than $500,000
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2.50
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%
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2.60
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%
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2.20
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%
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$500,000 to less than $1,000,000
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2.00
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%
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2.00
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%
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1.75
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%
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$1,000,000 and over
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None
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(1)
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Brokers or Agents who receive substantially all of the sales charge for shares they sell may be deemed to be statutory underwriters.
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(2)
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The Distributor may pay a Finder’s Fee of 1.00% to eligible brokers and agents on qualified commissionable shares purchased at or above the $1 million breakpoint level. Such shares may be subject to a 1.00% contingent deferred sales charge if redeemed within one year from the date of purchase. For additional information, see “Contingent Deferred Sales Charge for
Class A Shares” below or contact the Distributor or your financial intermediary.
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Class C Shares Sales Charges
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Year Since Purchase
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Contingent Deferred
Redemption Charge (CDRC)†
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First
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1.00% of the lesser of NAV or purchase price
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Second and thereafter
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None
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Class C Broker/Agent Compensation: 1.00% (0.75 of 1.00% distribution fee and 0.25 of 1.00% service fee) of the amount purchased at time of investment.
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†
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Shares will be redeemed in the following order: (1) shares not subject to the CDRC (dividend reinvestment, etc.), (2) first in, first out.
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CONTINGENT DEFERRED SALES CHARGE FOR CLASS A SHARES
Class A shares purchased at or above the $1 million breakpoint in accordance with the sales load schedule identified above (referred to as “commissionable” shares) that are redeemed within one year of purchase will be subject to a contingent deferred sales charge (“CDSC”) in the amount of 1.00% of the lesser of the current value of
the shares redeemed or the original purchase price of such shares. The CDSC will be paid to the Distributor as reimbursement for any Finder’s Fee previously paid by the Distributor to an eligible broker or agent at the time the commissionable shares were purchased and may be waived by the Distributor if the original purchase did not
result in the payment of a Finder’s Fee. For purposes of calculating the CDSC, shares will be redeemed in the following order: (1) first shares that are not subject to the CDSC (
e.g.
, dividend reinvestment shares and other non-commissionable shares) and (2) then other shares on a first in, first out basis. A CDSC will not be charged in
connection with an exchange of Class A shares into Class A shares (including the Money Fund) of another Van Eck Fund; however, the shares received upon an exchange will be subject to the CDSC if they are subsequently redeemed within one year of the date of the original purchase (subject to the same terms and conditions
described above). For further details regarding eligibility for the $1 million breakpoint, please see Section 3. “Sales Charges—Reduced or Waived Sales Charges” below.
REDUCED OR WAIVED SALES CHARGES
You may qualify for a reduced or waived sales charge as stated below, or under other appropriate circumstances. You (or your broker or agent) must notify DST or Van Eck at the time of each purchase or redemption whenever a reduced or
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waived sales charge is applicable. The term “purchase” refers to a single purchase by an individual (including spouse and children under age 21), corporation, partnership, trustee, or other fiduciary for a single trust, estate, or fiduciary account. For further details, see the SAI. The value of shares owned by an individual in Class A and
Class C of each of the Van Eck Funds may be combined for a reduced sales charge in Class A shares only. (The Money Fund cannot be combined for a reduced sales charge in Class A shares.)
In order to obtain a reduced sales charge (
i.e.
, breakpoint discount) or to meet an eligibility minimum, it will be necessary at the time of purchase for you to inform your broker or agent (or DST or Van Eck), of the existence of other accounts in which there are holdings eligible to be aggregated to meet the sales load breakpoints or
eligibility minimums.
The Fund makes available information regarding applicable sales loads, breakpoint discounts, reduced or waived sales charges and eligibility minimums, on their website at vaneck.com, free of charge.
FOR CLASS A SHARES
Right of Accumulation
When you buy shares, the amount you purchase will be combined with the value, at current offering price, of any existing Fund shares you own. This total will determine the sales charge level for which you qualify.
Combined Purchases
The combined amounts of your multiple purchases in the Fund on a single day determines the sales charge level for which you qualify.
Letter of Intent
If you plan to make purchases in the Fund within a 13 month period that total an amount equal to a reduced sales charge level, you can establish a Letter of Intent (LOI) for that amount. Under the LOI, your initial and subsequent purchases during that period receive the sales charge level applicable to that total amount. For escrow
provisions and details, see the Application and the SAI.
Persons Affiliated with Van Eck
Trustees, officers, and full-time employees (and their families) of the Fund, Adviser or Distributor may buy without a sales charge. Also, employees (and their spouses and children under age 21) of a brokerage firm or bank that has a selling agreement with Van Eck, and other affiliates and agents, may buy without a sales charge.
Load-waived Programs Through Financial Intermediaries
Financial intermediaries that meet certain requirements and: (i) are compensated by their clients on a fee-only basis, including but not limited to Investment Advisors, Financial Planners, and Bank Trust Departments; or (ii) have entered into an agreement with Van Eck to offer Class A shares through a no-load network or platform, may
buy without a sales charge on behalf of their clients.
Foreign Financial Institutions
Certain foreign financial institutions that have international selling agreements with Van Eck may buy shares with a reduced or waived sales charge for their omnibus accounts on behalf of foreign investors. Shareholders who purchase shares through a foreign financial institution at a fixed breakpoint may pay a greater or lesser sales
charge than if they purchased directly through a U.S. dealer.
Institutional Retirement Programs
Certain financial institutions and third-party recordkeepers and/or administrators who have agreements with Van Eck may buy shares without a sales charge for their accounts on behalf of investors in retirement plans and deferred compensation plans other than IRAs.
Buy-back Privilege
You have the right, once a year, to reinvest proceeds of a redemption from Class A shares of the Fund into the Fund or Class A shares of another Fund within 30 days without a sales charge (excluding the Money Fund). If you invest into the same Fund within 30 days before or after you redeem your shares at a loss, the “wash sale”
rules apply to disallow for tax purposes a loss realized upon redemption.
FOR CLASS C SHARES
Death or Disability
The CDRC may be waived upon (1) death or (2) disability as defined by the Internal Revenue Code.
15
III. SHAREHOLDER INFORMATION (continued)
Certain Retirement Distributions
The CDRC may be waived for lump sum or other distributions from IRA, Qualified (Pension and Profit Sharing) Plans, and 403(b) accounts following retirement or at age 70
1
/
2
. It is also waived for distributions from qualified pension or profit sharing plans after employment termination after age 55. In addition, it is waived for shares
redeemed as a tax-free return of an excess contribution.
Automatic Conversion Feature
After eight years, Class C shares of the Fund will convert automatically to Class A shares of the Fund with no initial sales charge. The eight-year period runs from the last day of the month in which the shares were purchased, or in the case of Class C shares acquired through an exchange, from the last day of the month in which the
original Class C shares were purchased. Class C shares held for eight years are converted to Class A shares on the fifth calendar day of the month following their eight-year anniversary (or the next business day thereafter if the fifth is a non-business day).
FOR CLASS I AND CLASS Y SHARES
No initial sales charge, or CDRC fee is imposed on Class I or Class Y shares. Class I and Class Y are no-load share classes.
4. HOUSEHOLDING OF REPORTS AND PROSPECTUSES
If more than one member of your household is a shareholder of any of the funds in the Van Eck Family of Funds, regulations allow us to deliver single copies of your shareholder reports, prospectuses and prospectus supplements to a shared address for multiple shareholders. For example, a husband and wife with separate accounts
in the same fund who have the same shared address generally receive two separate envelopes containing the same report or prospectus. Under the system, known as “householding,” only one envelope containing one copy of the same report or prospectus will be mailed to the shared address for the household. You may benefit from
this system in two ways, a reduction in mail you receive and a reduction in fund expenses due to lower fund printing and mailing costs. However, if you prefer to continue to receive separate shareholder reports and prospectuses for each shareholder living in your household now or at any time in the future, please call Account
Assistance at 800-544-4653.
5. RETIREMENT PLANS
Fund shares may be invested in tax-advantaged retirement plans sponsored by Van Eck or other financial organizations. Retirement plans sponsored by Van Eck use State Street Bank and Trust Company as custodian and must receive investments directly by check or wire using the appropriate Van Eck retirement plan application.
Confirmed trades through a broker or agent cannot be accepted. To obtain applications and helpful information on Van Eck retirement plans, contact your broker or agent or Account Assistance.
Retirement Plans Sponsored by Van Eck:
Traditional IRA
Roth IRA
SEP IRA
Qualified (Pension and Profit Sharing) Plans
6. FEDERAL INCOME TAXES
TAXATION OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS YOU RECEIVE
For tax-reportable accounts, dividends and capital gains distributions are normally taxable even if they are reinvested. Other dividends and short-term capital gains are taxed as ordinary income. Long-term capital gains are taxed at long-term capital gain rates. Tax laws and regulations are subject to change.
TAXATION OF SHARES YOU SELL
For tax-reportable accounts, when you redeem your shares you may incur a capital gain or loss on the proceeds. The amount of gain or loss, if any, is the difference between the amount you paid for your shares (including reinvested dividends and capital gains distributions) and the amount you receive from your redemption. Be sure
to keep your regular statements; they contain the information necessary to calculate the capital gain or loss. An exchange of shares from one Fund to another will be treated as a sale and purchase of Fund shares. It is therefore a taxable event.
16
COST BASIS REPORTING
As required by law, for shares purchased on and after January 1, 2012 in accounts eligible for 1099-B tax reporting by Van Eck Funds for which tax basis information is available (“covered shares”), the Van Eck Funds will provide cost basis information to you and the Internal Revenue Service (“IRS”) for shares using the IRS Tax Form
1099-B. Generally, cost basis is the dollar amount paid to purchase shares, including purchases of shares made by reinvestment of dividends and capital gains distributions, adjusted for various items, such as sales charges and transaction fees, wash sales, and returns of capital.
The cost basis of your shares will be calculated using the Fund’s default cost basis method of Average Cost, and the Fund will deplete your oldest shares first, unless you instruct the Fund to use a different cost basis method. You may elect the cost basis method that best fits your specific tax situation using Van Eck’s Cost Basis
Election Form. It is important that any such election be received in writing from you by the Van Eck Funds before you redeem any covered shares since the cost basis in effect at the time of redemption, as required by law, will be reported to you and the IRS. Particularly, any election or revocation of the Average Cost method must be
received in writing by the Van Eck Funds before you redeem covered shares. The Van Eck Funds will process any of your future redemptions by depleting your oldest shares first (FIFO). If you elect a cost basis method other than Average Cost, the method you chose will not be utilized until shares held prior to January 1, 2012 are
liquidated. Cost basis reporting for non-covered shares will be calculated and reported separately from covered shares. You should carefully review the cost basis information provided by the Fund and make any additional cost basis, holding period, or other adjustments that are required when reporting these amounts on your federal,
state, and local income tax returns. For tax advice specific to your situation, please contact your tax advisor and visit the IRS website at IRS.gov. The Van Eck Funds cannot and do not provide any advice, including tax advice.
To obtain Van Eck’s Cost Basis Election Form and to learn more about the cost basis elections offered by the Van Eck Funds, please go to our website at vaneck.com or call Van Eck Account Services at 800-544-4653.
NON-RESIDENT ALIENS
Dividends and short-term capital gains, if any, paid to non-resident aliens generally are subject to the maximum withholding tax (or lower tax treaty rates for certain countries). The IRS considers these dividends U.S. source income. Currently, the Fund is not required to withhold tax from distributions of long-term capital gains or
redemption proceeds if non-resident alien status is properly certified.
7. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund makes distributions of net investment income monthly. The Fund generally makes distributions of any related net capital gains at least annually in December. See your tax adviser for details. Occasionally, a dividend and/or capital gain distribution may be made outside of the normal schedule.
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Dividends and Capital Gains Distribution Schedule
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Fund
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Dividends
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Distribution of Short-Term
and Long-Term Capital Gains
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Unconstrained Emerging Markets Bond Fund
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Monthly
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December
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Dividends and Capital Gains Distributions Reinvestment Plan
Dividends and/or distributions are automatically reinvested into your account without a sales charge, unless you elect a cash payment. You may elect cash payment either on your original Account Application, or by calling Account Assistance at 800-544-4653.
Divmove
You can have your cash dividends from a Class A Fund automatically invested in Class A shares of another Van Eck Fund. Cash dividends are invested on the payable date, without a sales charge. For details and an Application, call Account Assistance.
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III. SHAREHOLDER INFORMATION (continued)
8. MANAGEMENT OF THE FUND
18
INFORMATION ABOUT FUND MANAGEMENT
INVESTMENT ADVISER
Van Eck Associates Corporation (the “Adviser”), 335 Madison Avenue, New York, New York 10017 has been an investment adviser since 1955 and also acts as adviser or sub-adviser to other mutual funds, exchange-traded funds, other pooled investment vehicles and separate accounts.
John C. van Eck and members of his immediate family own 100% of the voting stock of the Adviser. As of December 31, 2011, the Adviser’s assets under management were approximately $33.1 billion.
Fees paid to the Adviser:
Pursuant to the Advisory Agreement, the Fund pays the Adviser a monthly fee at the annual rate of: (i) 0.80% of the first $1.5 billion of average daily net assets of the Fund and (ii) 0.75% of average daily net assets in excess of $1.5 billion.
The Adviser has agreed to waive fees and/or pay expenses for the Fund to the extent necessary to prevent the operating expenses of the Fund (excluding acquired fund fees and expenses, interest expense, trading expenses, dividends on securities sold short, taxes and extraordinary expenses) from exceeding 1.25% for Class A,
1.95% for Class C, 0.95% for Class I, and 1.00% for Class Y of the Fund’s average daily net assets per year until May 1, 2014. During such time, the expense limitation is expected to continue until the Board acts to discontinue all or a portion of such expense limitation.
The Adviser also has agreed to waive fees and/or pay expenses for the Fund to the extent necessary to prevent the operating expenses of the Fund’s Class Y shares from exceeding the operating expenses of the Fund’s Class A shares.
PORTFOLIO MANAGER
UNCONSTRAINED EMERGING MARKETS BOND FUND
Portfolio Manager
The Fund’s portfolio manager is responsible for the day-to-day portfolio management of the Fund.
Eric Fine.
Mr. Fine is the portfolio manager of the Fund and is a managing director at Van Eck Global. He has been with the Adviser since 2009. Prior to joining the Adviser, Mr. Fine conducted business in emerging markets for 17 years, including 14 years at Morgan Stanley where he ran the Global Emerging Markets Research
Group and founded and managed the Emerging Markets Proprietary Trading Group. Mr. Fine also started and led Morgan Stanley’s Europe/Middle East/Africa Strategy and Economics Research Group and helped start the firm’s emerging markets business in London. Mr. Fine received his undergraduate degree from Duke University in
1987 and his graduate degree from Harvard University in 1989.
The SAI provides additional information about the above Portfolio Manager, his compensation, other accounts he manages, and his securities ownership in the Fund.
PLAN OF DISTRIBUTION (12b-1 PLAN)
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Act that allows the Fund to pay distribution fees for the sale and distribution of its shares. Of the amounts expended under the plan for the fiscal year ended December 31, 2011 for all Van Eck Funds, approximately 87% was paid to Brokers and Agents
who sold shares or serviced accounts of Fund shareholders. The remaining 13% was retained by the Distributor to pay expenses such as printing and mailing prospectuses and sales material. Because these fees are paid out of the Fund’s assets on an on-going basis, over time these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges. Class I and Class Y shares do not have 12b-1 fees. For a complete description of the Plan of Distribution, please see “Plan of Distribution (12B-1 PLAN)” in the SAI.
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Van Eck Funds Annual 12b-1 Schedule
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Fee to Fund
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Payment to Dealer
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Unconstrained Emerging Markets Bond Fund-A
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0.25
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%
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0.25
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%
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Unconstrained Emerging Markets Bond Fund-C
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1.00
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%
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1.00
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%*
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*
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Class C payment to brokers or agents begins to accrue after the 12th month following the purchase trade date. Each purchase must age that long or there is no payment. Shares purchased due to the automatic reinvestment of dividends and capital gains distributions do not age and begin accruing 12b-1 fees immediately.
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19
III. SHAREHOLDER INFORMATION (continued)
THE TRUST
For more information on the Van Eck Funds (the “Trust”), the Trustees and the Officers of the Trust, see “General Information,” “Description of the Trust” and “Trustees and Officers” in the SAI.
EXPENSES
The Fund bears all expenses of its operations other than those incurred by the Adviser or its affiliate under the Advisory Agreement with the Trust. For a more complete description of Fund expenses, please see the SAI.
THE DISTRIBUTOR
Van Eck Securities Corporation, 335 Madison Avenue, New York, NY 10017 (the “Distributor”), a wholly owned subsidiary of the Adviser, has entered into a Distribution Agreement with the Trust.
The Distributor generally sells and markets shares of the Fund through intermediaries, such as broker-dealers. The intermediaries selling the Fund’s shares are compensated from sales charges and from 12b-1 fees and/or shareholder services fees paid directly and indirectly by the Fund.
In addition, the Distributor may pay certain intermediaries, out of its own resources and not as an expense of the Fund, additional cash or non-cash compensation as an incentive to intermediaries to promote and sell shares of the Fund and other mutual funds distributed by the Distributor. These payments are commonly known as
“revenue sharing”. The benefits that the Distributor may receive when it makes these payments include, among other things, placing the Fund on the intermediary’s sales system and/or preferred or recommended fund list, offering the Fund through the intermediary’s advisory or other specialized programs, and/or access (in some cases
on a preferential basis over other competitors) to individual members of the intermediary’s sales force. Such payments may also be used to compensate intermediaries for a variety of administrative and shareholders services relating to investments by their customers in the Fund.
The fees paid by the Distributor to intermediaries may be calculated based on the gross sales price of shares sold by an intermediary, the net asset value of shares held by the customers of the intermediary, or otherwise. These fees, may, but are not normally expected to, exceed in the aggregate 0.50% of the average net assets of
the funds attributable to a particular intermediary on an annual basis.
The Distributor may also provide intermediaries with additional cash and non-cash compensation, which may include financial assistance to intermediaries in connection with conferences, sales or training programs for their employees, seminars for the public and advertising campaigns, technical and systems support, attendance at sales
meetings and reimbursement of ticket charges. In some instances, these incentives may be made available only to intermediaries whose representatives have sold or may sell a significant number of shares.
Intermediaries may receive different payments, based on a number of factors including, but not limited to, reputation in the industry, sales and asset retention rates, target markets, and customer relationships and quality of service. No one factor is determinative of the type or amount of additional compensation to be provided. Financial
intermediaries that sell Fund shares may also act as a broker or dealer in connection with execution of transactions for the Fund’s portfolios. The Fund and the Adviser have adopted procedures to ensure that the sales of the Fund’s shares by an intermediary will not affect the selection of brokers for execution of portfolio transactions.
Not all intermediaries are paid the same to sell mutual funds. Differences in compensation to intermediaries may create a financial interest for an intermediary to sell shares of a particular mutual fund, or the mutual funds of a particular family of mutual funds. Before purchasing shares of the Fund, you should ask your intermediary or
its representative about the compensation in connection with the purchase of such shares, including any revenue sharing payments it receives from the Distributor.
20
IV. FINANCIAL HIGHLIGHTS
Since the Fund is not expected to commence operations until on or about July 9, 2012, no financial highlights are provided for the Fund.
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[THIS PAGE INTENTIONALLY LEFT BLANK]
For more detailed information, see the Statement of Additional Information (SAI), which is legally a part of and is incorporated by reference into this prospectus.
Once available, additional information about the investments will be available in the Fund’s annual and semi-annual reports to shareholders. In the Fund’s annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year. As previously noted, however, this Fund has not yet
commenced operations and thus, no such reports are currently available.
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Call Van Eck at 800.826.1115, or visit the Van Eck website at vaneck.com to request, free of charge, the annual or semi-annual reports (once available), the Statement of Additional Information (SAI), information regarding applicable sales loads, breakpoint discounts, reduced or waived sales charges and eligibility minimums, or other information about the Fund.
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Information about the Fund (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 202.551.8090.
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Reports and other information about the Fund 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 e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.
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Transfer Agent:
DST Systems, Inc.
P.O. Box 218407
Kansas City, Missouri 64121-8407
800.544.4653
vaneck.com
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SEC REGISTRATION NUMBER: 811-04297
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VAN ECK FUNDS
STATEMENT OF ADDITIONAL INFORMATION
Dated July 1, 2012
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UNCONSTRAINED EMERGING MARKETS BOND FUND
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CLASS A: EMBAX / CLASS C: EMBCX / CLASS I:
EMBUX / CLASS Y: EMBYX
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This
statement of additional information (“SAI”) is not a prospectus. It should be
read in conjunction with the prospectus dated July 1, 2012 (the “Prospectus”)
for Van Eck Funds (the “Trust”) relating to the Unconstrained Emerging Markets
Bond Fund (the “Fund”), as it may be revised from time to time. A copy of the
Prospectus and Annual and Semi-Annual Reports (once available) for the Trust,
relating to the Fund, may be obtained without charge by visiting the Van Eck
website at vaneck.com, by calling toll-free 1.800.826.1115 or by writing to the
Trust or Van Eck Securities Corporation, the Fund’s distributor (the
“Distributor”). The Trust’s and the Distributor’s address is 335 Madison
Avenue, 19th Floor, New York, New York 10017. Capitalized terms used herein
that are not defined have the same meaning as in the Prospectus, unless
otherwise noted.
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL
INFORMATION
July 1, 2012
G
ENERAL
INFORMATION
The
Trust is an open-end management investment company organized as a business
trust under the laws of the Commonwealth of Massachusetts on April 3, 1985.
The
Trust currently consists of seven separate series: the Fund, Emerging Markets
Fund, Global Hard Assets Fund, International Investors Gold Fund and
Multi-Manager Alternatives Fund, all of which offer Class A, Class C, Class I
and Class Y shares; and CM Commodity Index Fund and Long/Flat Commodity Index
Fund, both of which offer Class A, Class I and Class Y shares (except that the
Long/Flat Commodity Index Fund has not commenced operations as of the date of
this SAI).
This
SAI only pertains to the Fund. Shares of the other series of the Trust are
offered in separate prospectuses and statements of additional information. The
Board of Trustees of the Trust (the “Board”) has authority, without the
necessity of a shareholder vote, to create additional series or funds, each of
which may issue separate classes of shares.
The
Fund is classified as a non-diversified fund under the Investment Company Act
of 1940 (the “1940 Act”). Van Eck Associates Corporation (the “Adviser”) serves
as investment adviser to the Fund.
I
NVESTMENT
POLICIES AND RISKS
The
following is additional information regarding the investment policies and
strategies used by the Fund in attempting to achieve its objective, and should
be read with the sections of the Fund’s Prospectus titled “Fund Summary
Information – Principal Investment Strategies”, “Fund Summary Information –
Principal Risks” and “Investment Objective, Strategies, Policies, Risks and
Other Information”.
Appendix
B to this SAI contains an explanation of the rating categories of Moody’s
Investors Service Inc. (“Moody’s”) and Standard & Poor’s Corporation
(“S&P”) relating to the fixed-income securities and preferred stocks in
which the Fund may invest.
A
SSET-BACKED
SECURITIES
The
Fund may invest in asset-backed securities. Asset-backed securities, directly
or indirectly, represent interests in, or are secured by and payable from,
pools of consumer loans (generally unrelated to mortgage loans) and most often
are structured as pass-through securities. Interest and principal payments
ultimately depend on payment of the underlying loans, although the securities
may be supported by letters of credit or other credit enhancements. The value
of asset-backed securities may also depend on the creditworthiness of the
servicing agent for the loan pool, the originator of the loans, or the
financial institution providing the credit enhancement.
Asset-backed
securities are subject to certain risks. These risks generally arise out of the
security interest in the assets collateralizing the security. For example,
credit card receivables are generally unsecured and the debtors are entitled to
a number of protections from the state and through federal consumer laws, many
of which give the debtor the right to offset certain amounts of credit card
debts and thereby reducing the amounts due.
B
ELOW
INVESTMENT GRADE SECURITIES
Below
investment grade securities are more speculative than higher-rated securities.
These securities have a much greater risk of default (or in the case of bonds
currently in default, of not returning principal) and may be more volatile than
higher-rated securities of similar maturity. The value of these
4
securities can be affected by overall
economic conditions, interest rates, and the creditworthiness of the individual
issuers. Additionally, these securities may be less liquid and more difficult
to value than higher-rated securities.
B
ORROWING;
LEVERAGE
Borrowing
to invest more is called “leverage.” The Fund may borrow from banks provided
that the amount of borrowing is no more than one third of the net assets of the
Fund plus the amount of the borrowings. The Fund is required to be able to
restore borrowing to its permitted level within three days, if it should
increase to more than one-third as stated above. Methods that may be used to
restore borrowings in this context include selling securities, even if the sale
hurts the Fund’s investment performance. Leverage exaggerates the effect of
rises or falls in prices of securities bought with borrowed money. Borrowing
also costs money, including fees and interest. The Fund expects to borrow only
through negotiated loan agreements with commercial banks or other institutional
lenders.
C
OMMERCIAL
PAPER
The
Fund may invest in commercial paper that is indexed to certain specific foreign
currency exchange rates. The terms of such commercial paper provide that its
principal amount is adjusted upwards or downwards (but not below zero) at maturity
to reflect changes in the exchange rate between two currencies while the
obligation is outstanding. The Fund will purchase such commercial paper with
the currency in which it is denominated and, at maturity, will receive interest
and principal payments thereon in that currency, but the amount or principal
payable by the issuer at maturity will change in proportion to the change (if
any) in the exchange rate between two specified currencies between the date the
instrument is issued and the date the instrument matures. While such commercial
paper entails the risk of loss of principal, the potential for realizing gains
as a result of changes in foreign currency exchange rates enables the Fund to
hedge or cross-hedge against a decline in the U.S. dollar value of investments
denominated in foreign currencies while providing an attractive money market
rate of return. The Fund will purchase such commercial paper for hedging
purposes only, not for speculation.
For
hedging purposes only, the Fund may invest in commercial paper with the
principal amount indexed to the difference, up or down, in value between two
foreign currencies. The Fund segregate asset accounts with an equivalent amount
of cash, U.S. government securities or other highly liquid securities equal in
value to this commercial paper. Principal may be lost, but the potential for
gains in principal and interest may help the Fund cushion against the potential
decline of the U.S. dollar value of foreign-denominated investments. At the
same time, this commercial paper may provide an attractive money market rate of
return.
C
ONVERTIBLE
SECURITIES
The
Fund may invest in securities that are convertible into common stock or other
securities of the same or a different issuer or into cash within a particular
period of time at a specified price or formula. Convertible securities are
generally fixed income securities (but may include preferred stock) and
generally rank senior to common stocks in a corporation’s capital structure
and, therefore, entail less risk than the corporation’s common stock. The value
of a convertible security is a function of its “investment value” (its value as
if it did not have a conversion privilege), and its “conversion value” (the
security’s worth if it were to be exchanged for the underlying security, at
market value, pursuant to its conversion privilege).
To
the extent that a convertible security’s investment value is greater than its
conversion value, its price will be primarily a reflection of such investment
value and its price will be likely to increase when interest rates fall and
decrease when interest rates rise, as with a fixed-income security (the credit
standing of the issuer and other factors may also have an effect on the
convertible security’s value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, will sell at some premium over its conversion value.
(This premium
5
represents the price investors are willing to
pay for the privilege of purchasing a fixed-income security with a possibility
of capital appreciation due to the conversion privilege.) At such times the
price of the convertible security will tend to fluctuate directly with the
price of the underlying equity security. Convertible securities may be
purchased by the Fund at varying price levels above their investment values
and/or their conversion values in keeping with the Fund’s objective.
D
EBT
SECURITIES
The
Fund may invest in debt securities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer and the value of a hard asset if linked to the value
of a hard asset. Debt securities with similar maturities may have different
yields, depending upon several factors, including the relative financial
condition of the issuers. A description of debt securities ratings is contained
in Appendix B to the SAI. High grade means a rating of A or better by Moody’s
or S&P, or of comparable quality in the judgment of the Adviser or if no
rating has been given by either service. Many securities of foreign issuers are
not rated by these services. Therefore, the selection of such issuers depends
to a large extent on the credit analysis performed by the Adviser. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the Fund’s net asset value. Debt securities with similar
maturities may have different yields, depending upon several factors, including
the relative financial condition of the issuers. For example, higher yields are
generally available from securities in the lower rating categories of S&P
or Moody’s.
However,
the values of lower-rated securities generally fluctuate more than those of
high-grade securities. Many securities of foreign issuers are not rated by
these services. Therefore the selection of such issuers depends to a large
extent on the credit analysis performed by the Adviser.
New
issues of certain debt securities are often offered on a when-issued basis.
That is, the payment obligation and the interest rate are fixed at the time the
buyer enters into the commitment, but delivery and payment for the securities
normally take place after the date of the commitment to purchase. The value of
when-issued securities may vary prior to and after delivery depending on market
conditions and changes in interest rate levels. However, the Fund does not
accrue any income on these securities prior to delivery. The Fund will maintain
in a segregated account with its Custodian an amount of cash or high quality
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities. The Fund may also invest in
low rated or unrated debt securities. Low rated debt securities present a
significantly greater risk of default than do higher rated securities, in times
of poor business or economic conditions, the Fund may lose interest and/or
principal on such securities.
The
Fund may also invest in various money market securities for cash management
purposes or when assuming a temporary defensive position. Money market
securities may include commercial paper, bankers’ acceptances, bank
obligations, corporate debt securities, certificates of deposit, U.S.
government securities and obligations of savings institutions.
D
EPOSITARY
RECEIPTS
The
Fund may invest in Depositary Receipts, which represent an ownership interest
in securities of foreign companies (an “underlying issuer”) that are deposited
with a depositary. Depositary Receipts are not necessarily denominated in the
same currency as the underlying securities. Depositary Receipts include
American Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) and
other types of Depositary Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as “Depositary Receipts”). ADRs are
dollar-denominated Depositary Receipts typically issued by a U.S. financial
institution which evidence an ownership interest in a security or pool of
securities issued by a foreign issuer. ADRs are listed and traded in the United
States. GDRs and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they also may be issued by
6
U.S. financial institutions, and evidence
ownership interests in a security or pool of securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary Receipts
in bearer form are designed for use in securities markets outside the United
States.
Depositary
Receipts may be “sponsored” or “unsponsored.” Sponsored Depositary Receipts are
established jointly by a depositary and the underlying issuer, whereas
unsponsored Depositary Receipts may be established by a depositary without
participation by the underlying issuer. Holders of unsponsored Depositary
Receipts generally bear all the costs associated with establishing unsponsored
Depositary Receipts. In addition, the issuers of the securities underlying
unsponsored Depository Receipts are not obligated to disclose material
information in the United States and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between
such information and the market value of the Depositary Receipts.
D
ERIVATIVES
The
Fund may also use futures contracts and options, forward contracts and swaps as
part of various investment techniques and strategies, such as creating
non-speculative “synthetic” positions (covered by segregation of liquid assets)
or implementing “cross-hedging” strategies. A “synthetic” position is the
duplication of cash market transaction when deemed advantageous by the Adviser
for cost, liquidity or transactional efficiency reasons. A cash market
transaction is the purchase or sale of the security or other asset for cash.
“Cross-hedging” involves the use of one currency to hedge against the decline
in the value of another currency. The use of such instruments as described
herein involves several risks. First, there can be no assurance that the prices
of such instruments and the hedge security or the cash market position will
move as anticipated. If prices do not move as anticipated, the Fund may incur a
loss on its investment, may not achieve the hedging protection it anticipated
and/or may incur a loss greater than if it had entered into a cash market
position. Second, investments in such instruments may reduce the gains which
would otherwise be realized from the sale of the underlying securities or
assets which are being hedged. Third, positions in such instruments can be
closed out only on an exchange that provides a market for those instruments.
There can be no assurance that such a market will exist for a particular
futures contract or option. If the Fund cannot close out an exchange traded
futures contract or option which it holds, it would have to perform its
contract obligation or exercise its option to realize any profit and would
incur transaction cost on the sale of the underlying assets. In addition, the use
of derivative instruments involves the risk that a loss may be sustained as a
result of the failure of the counterparty to the derivatives contract to make
required payments or otherwise comply with the contract’s terms.
When
the Fund intends to acquire securities for its portfolio, it may use call
options or futures contracts as a means of fixing the price of the security it
intends to purchase at the exercise price (in the case of an option) or
contract price (in the case of futures contracts). An increase in the
acquisition cost would be offset, in whole or part, by a gain on the option or
futures contract. Options and futures contracts requiring delivery of a
security may also be useful to the Fund in purchasing a large block of securities
that would be more difficult to acquire by direct market purchases. If the Fund
holds a call option rather than the underlying security itself, the Fund is
partially protected from any unexpected decline in the market price of the
underlying security and in such event could allow the call option to expire,
incurring a loss only to the extent of the premium paid for the option. Using a
futures contract would not offer such partial protection against market
declines and the Fund would experience a loss as if it had owned the underlying
security.
F
OREIGN
SECURITIES
Foreign
securities include securities issued by a foreign
government, quasi-government or
corporate entity
, traded in foreign currencies or issued by companies
with most of their business interests in foreign countries.
Investors should recognize that
investing in foreign securities involves certain special considerations that
are not typically associated with investing in United States
7
securities. Since investments in foreign
companies will frequently involve currencies of foreign countries, and since
the Fund may hold securities and funds in foreign currencies, the Fund may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, if any, and may incur costs in connection with conversions
between various currencies. Most foreign stock markets, while growing in volume
of trading activity, have less volume than the New York Stock Exchange
(“NYSE”), and securities of some foreign companies are less liquid and more
volatile than securities of comparable domestic companies. Similarly, volume
and liquidity in most foreign bond markets are less than in the United States,
and at times volatility of price can be greater than in the United States.
Fixed commissions on foreign securities exchanges are generally higher than
negotiated commissions on United States exchanges, although the Fund endeavors
to achieve the most favorable net results on their portfolio transactions. There
is generally less government supervision and regulation of securities
exchanges, brokers and listed companies in foreign countries than in the United
States. In addition, with respect to certain foreign countries, there is the
possibility of exchange control restrictions, expropriation or confiscatory
taxation, political, economic or social instability, which could affect
investments in those countries. Foreign securities such as those purchased by
the Fund may be subject to foreign government taxes, higher custodian fees,
higher brokerage commissions and dividend collection fees which could reduce
the yield on such securities.
Trading
in futures contracts traded on foreign commodity exchanges may be subject to
the same or similar risks as trading in foreign securities.
F
OREIGN
SECURITIES - EMERGING MARKETS SECURITIES
Under
normal conditions, the Fund invests at least 80% of its net assets (plus
borrowings for investment purposes) in emerging market debt securities. An
instrument will qualify as an emerging market debt security if it is either (i)
issued by an emerging market government, quasi-government or corporate entity
(regardless of the currency in which it is denominated) or (ii) denominated in
the currency of an emerging market country (regardless of the location of the
issuer). The Adviser has broad discretion to identify countries that it
considers to qualify as emerging markets. The Adviser selects emerging
market countries and currencies that the Fund will invest in based
on the Adviser’s evaluation of economic fundamentals, legal
structure, political developments and other specific factors the Adviser
believes to be relevant.
Investing
in the equity and fixed income markets of developing countries involves
exposure to potentially unstable governments, the risk of nationalization of
businesses, restrictions on foreign ownership, prohibitions on repatriation of
assets and a system of laws that may offer less protection of property rights.
Emerging market economies may be based on only a few industries, may be highly
vulnerable to changes in local and global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation rates.
The
securities markets in emerging markets are substantially smaller, less liquid
and more volatile than the major securities markets in the United States. A
high proportion of the shares of many issuers may be held by a limited number
of persons and financial institutions, which may limit the number of shares
available for investment by the portfolio. Similarly, volume and liquidity in
the bond markets in Asia, Eastern and Central Europe and other emerging markets
are less than in the United States and, at times, price volatility can be greater
than in the United States. A limited number of issuers in Asian and emerging
market securities markets may represent a disproportionately large percentage
of market capitalization and trading value. The limited liquidity of securities
markets in these regions may also affect the Fund’s ability to acquire or
dispose of securities at the price and time it wishes to do so. Accordingly,
during periods of rising securities prices in the more illiquid regions’
securities markets, the Fund’s ability to participate fully in such price
increases may be limited by its investment policy of investing not more than
15% of its net assets in illiquid securities. Conversely, the inability of the
Fund to dispose fully and promptly of positions in declining markets will cause
the Fund’s net asset values to decline as the values of the unsold positions
are marked to lower prices. In addition, these securities markets are
susceptible to being influenced by large investors trading significant blocks
of securities. Also, stockbrokers and other intermediaries in emerging markets
may not perform in the way their counterparts in the United States
8
and other more developed securities markets
do. The prices at which the Fund may acquire investments may be affected by
trading by persons with material non-public information and by securities
transactions by brokers in anticipation of transactions by the Fund in
particular securities.
The
Russian, Eastern and Central European, Chinese and Taiwanese stock markets are undergoing
a period of growth and change which may result in trading volatility and
difficulties in the settlement and recording of transactions, and in
interpreting and applying the relevant law and regulations.
Certain
Risks of Investing in Asia-Pacific Countries
. In addition to the risks of
foreign investing and the risks of investing in developing markets, the
developing market Asia-Pacific countries in which the Fund may invest are
subject to certain additional or specific risks. The Fund may make substantial
investments in Asia-Pacific countries. In many of these markets, there is a
high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a
high concentration of investors and financial intermediaries. Many of these
markets also may be affected by developments with respect to more established
markets in the region such as in Japan and Hong Kong. Brokers in developing
market Asia-Pacific countries typically are fewer in number and less well
capitalized than brokers in the United States. These factors, combined with the
U.S. regulatory requirements for open-end investment companies, result in
potentially fewer investment opportunities for the Fund and may have an adverse
impact on the investment performance of the Fund.
Many
of the developing market Asia-Pacific countries may be subject to a greater
degree of economic, political and social instability than is the case in the
United States and Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v)
ethnic, religious and racial disaffection. In addition, the governments of many
of such countries, such as Indonesia, have a substantial role in regulating and
supervising the economy. Another risk common to most such countries is that the
economy is heavily export oriented and, accordingly, is dependent upon
international trade. The existence of overburdened infrastructure and obsolete
financial systems also presents risks in certain countries, as do environmental
problems. Certain economies also depend to a significant degree upon exports of
primary commodities and, therefore, are vulnerable to changes in commodity
prices that, in turn, may be affected by a variety of factors.
Governments
of many developing market Asia-Pacific countries have exercised and continue to
exercise substantial influence over many aspects of the private sector. In
certain cases, the government owns or controls many companies, including the
largest in the country. Accordingly, government actions in the future could
have a significant effect on economic conditions in developing market
Asia-Pacific countries, which could affect private sector companies and the
Fund itself, as well as the value of securities in the Fund’s portfolio. In
addition, economic statistics of developing market Asia-Pacific countries may
be less reliable than economic statistics of more developed nations.
Certain
Risks of Investing in Russia
. Settlement, clearing and registration of securities
in Russia is in an underdeveloped state. Ownership of shares (except those held
through depositories that meet the requirements of the Act) is defined
according to entries in the issuer’s share register and normally evidenced by
extracts from that register, which have no legal enforceability. Furthermore,
share registration is carried out either by the issuer or registrars located throughout
Russia, which are not necessarily subject to effective government supervision.
To reasonably ensure that its ownership interest continues to be appropriately
recorded, the Fund will invest only in those Russian companies whose registrars
have entered into a contract with the Fund’s Russian sub-custodian, which gives
the sub-custodian the right, among others, to inspect the share register and to
obtain extracts of share registers through regular audits. While these
procedures reduce the risk of loss, there can be no assurance that they will be
effective. This limitation may prevent the Fund from investing in the
securities of certain Russian issuers otherwise deemed suitable by the Adviser.
9
F
OREIGN
SECURITIES - FOREIGN CURRENCY TRANSACTIONS
Under
normal circumstances, consideration of the prospects for currency exchange
rates will be incorporated into the long-term investment decisions made for the
Fund with regard to overall diversification strategies. Although the Fund
values its assets daily in terms of U.S. dollars, it does not intend physically
to convert its holdings of foreign currencies into U.S. dollars on a daily
basis. The Fund will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the “spread”) between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. The Fund will use forward contracts, along
with futures contracts and put and call options (all types of derivatives), to “lock
in” the U.S. Dollar price of a security bought or sold and as part of their
overall hedging strategy. The Fund will conduct its foreign currency exchange
transactions, either on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market, or through purchasing put and call
options on, or entering into futures contracts or forward contracts to purchase
or sell foreign currencies. See “Futures and Options Transactions.”
Changes
in currency exchange rates may affect the Fund’s net asset value and
performance. There can be no assurance that the Adviser will be able to
anticipate currency fluctuations in exchange rates accurately. The Fund may
invest in a variety of derivatives and enter into hedging transactions to
attempt to moderate the effect of currency fluctuations. The Fund may purchase
and sell put and call options on, or enter into futures contracts or forward
contracts to purchase or sell foreign currencies. This may reduce the Fund’s
losses on a security when a foreign currency’s value changes. Hedging against a
change in the value of a foreign currency does not eliminate fluctuations in
the prices of portfolio securities or prevent losses if the prices of such
securities decline. Furthermore, such hedging transactions reduce or preclude
the opportunity for gain if the value of the hedged currency should change
relative to the other currency. Finally, when the Fund uses options and futures
in anticipation of the purchase of a portfolio security to hedge against
adverse movements in the security’s underlying currency, but the purchase of
such security is subsequently deemed undesirable, the Fund may incur a gain or
loss on the option or futures contract.
The
Fund may enter into forward contracts to duplicate a cash market transaction.
See also “Futures and Options Transactions”.
In
those situations where foreign currency options or futures contracts, or
options on futures contracts may not be readily purchased (or where they may be
deemed illiquid) in the primary currency in which the hedge is desired, the
hedge may be obtained by purchasing or selling an option, futures contract or
forward contract on a secondary currency. The secondary currency will be
selected based upon the Adviser’s belief that there exists a significant
correlation between the exchange rate movements of the two currencies. However,
there can be no assurances that the exchange rate or the primary and secondary
currencies will move as anticipated, or that the relationship between the
hedged security and the hedging instrument will continue. If they do not move
as anticipated or the relationship does not continue, a loss may result to the
Fund on its investments in the hedging positions.
A
forward foreign currency contract, like a futures contract, involves an
obligation to purchase or sell a specific amount of currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. Unlike foreign
currency futures contracts which are standardized exchange-traded contracts,
forward currency contracts are usually traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for such trades.
It
is impossible to forecast the market value of a particular portfolio security
at the expiration of the contract. Accordingly, if a decision is made to sell
the security and make delivery of the foreign currency it may be necessary for
the Fund to purchase additional foreign currency on the spot market
10
(and bear the expense of such purchase) if
the market value of the security is less than the amount of foreign currency
that the Fund is obligated to deliver.
If
the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
O
PTIONS,
FUTURES, WARRANTS AND SUBSCRIPTION RIGHTS
Options
Transactions
. The Fund may purchase and sell (write)
exchange-traded and over-the-counter (“OTC”) call and put options on
domestic and foreign securities, foreign currencies, stock and bond indices and
financial futures contracts.
Purchasing
Call and Put Options
. The Fund may invest up to 5% of its
total assets in premiums on call and put options. The purchase of a call option
would enable the Fund, in return for the premium paid, to lock in a purchase
price for a security or currency during the term of the option. The purchase
of a put option would enable the Fund, in return for a premium paid, to lock
in a price at which it may sell a security or currency during the term of the
option. OTC options are purchased from or sold (written) to dealers or financial
institutions which have entered into direct agreements with the Fund. With OTC
options, such variables as expiration date, exercise price and premium will be
agreed upon between the Fund and the transacting dealer.
The
principal factors affecting the market value of a put or a call option include
supply and demand, interest rates, the current market price of the underlying
security or index in relation to the exercise price of the option, the
volatility of the underlying security or index, and the time remaining until
the expiration date. Accordingly, the successful use of options depends on the
ability of the Adviser to forecast correctly interest rates, currency exchange
rates and/or market movements.
When
the Fund sells put or call options it has previously purchased, the Fund may
realize a net gain or loss, depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. There is no assurance that a liquid secondary
market will exist for options, particularly in the case of OTC options. In the
event of the bankruptcy of a broker through which the Fund engages in
transactions in options, such Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. In the case of OTC
options, if the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option, due to insolvency or otherwise, the Fund would lose the premium
paid for the option as well as any anticipated benefit of the transaction. If
trading were suspended in an option purchased by the Fund, the Fund would not
be able to close out the option. If restrictions on exercise were imposed, the
Fund might be unable to exercise an option it has purchased.
A
call option on a foreign currency gives the purchaser of the option the right
to purchase the currency at the exercise price until the option expires. A put
option on a foreign currency gives the purchaser of the option the right to
sell a foreign currency at the exercise price until the option expires. The
markets in foreign currency options are relatively new and the Fund’s ability
to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Currency options traded on U.S. or
other exchanges may be subject to position limits, which may limit the ability
of the Fund to reduce foreign currency risk using such options.
Writing
Covered Call and Put Options
. The Fund may write covered
call options on portfolio securities to the extent that the value of all securities
with respect to which covered calls are written does not exceed 10% of the Fund’s
net asset value. When the Fund writes a covered call option, the Fund incurs
an obligation to sell the security underlying the option to the purchaser of
the call, at the option’s
11
exercise price at any time during the option
period, at the purchaser’s election. When the Fund writes a put option, the
Fund incurs an obligation to buy the security underlying the option from the
purchaser of the put, at the option’s exercise price at any time during the
option period, at the purchaser’s election. In each case, the Fund will receive
from the purchaser a “premium” (i.e., the price of the option).
The
Fund may be required, at any time during the option period, to deliver the
underlying security (or currency) against payment of the exercise price on any
calls it has written, or to make payment of the exercise price against delivery
of the underlying security (or currency) on any puts it has written. This
obligation is terminated upon the expiration of the option period or at such
earlier time as the writer effects a closing purchase transaction. A closing
purchase transaction is accomplished by purchasing an option of the same series
as the option previously written. However, once the Fund has been assigned an
exercise notice, the Fund will be unable to effect a closing purchase
transaction.
A
call option is “covered” if the Fund owns the underlying security subject to
the option or has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional consideration (in
cash, Treasury bills or other liquid portfolio securities) held in a segregated
account on the Fund’s books) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the Fund holds a call
on the same security as the call written where the exercise price of the call
held is (i) equal to or less than the exercise price of the call written or
(ii) greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, Treasury bills or other liquid portfolio
securities in a segregated account on the Fund’s books. A put option is
“covered” if the Fund maintains cash, Treasury bills or other liquid portfolio
securities with a value equal to the exercise price in a segregated account on
the Fund’s books, or holds a put on the same security as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written.
Receipt
of premiums from writing call and put options may provide the Fund with a higher
level of current income than it would earn from holding the underlying
securities alone, and the premium received will offset a portion of the
potential loss incurred by the Fund if the securities underlying the option
decline in value. However, during the option period, the Fund gives up, in
return for the premium on the option, the opportunity for capital appreciation
above the exercise price should the market price of the underlying security (or
the value of its denominated currency) increase, but retains the risk of loss
should the price of the underlying security (or the value of its denominated
currency) decline.
Futures
Contracts
.
The Fund may buy and sell financial futures contracts which may include
security and interest-rate futures, stock and bond index futures contracts and
foreign currency futures contracts. A futures contract is an agreement between
two parties to buy and sell a security for a set price on a future date. An
interest rate, commodity, foreign currency or index futures contract provides
for the future sale by one party and purchase by another party of a specified
quantity of a financial instrument, commodity, foreign currency or the cash
value of an index at a specified price and time.
Futures
contracts and options on futures contracts may be used reduce the Fund’s
exposure to fluctuations in the prices of portfolio securities and may prevent
losses if the prices of such securities decline. Similarly, such investments
may protect the Fund against fluctuation in the value of securities in which
the Fund is about to invest.
The
Fund may purchase and write (sell) call and put options on futures contracts
and enter into closing transactions with respect to such options to terminate
an existing position. An option on a futures contract gives the purchaser the
right (in return for the premium paid), and the writer the obligation, to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put) at a specified exercise price
at any time during the term of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option is accompanied by delivery of the accumulated balance in the
writer’s futures margin account, which represents the amount by which the
market price of the futures contract at the time of exercise exceeds (in the
case of a call) or is less than (in the case of a put) the exercise price of
the option contract.
12
Future
contracts are traded on exchanges, so that, in most cases, either party can
close out its position on the exchange for cash, without delivering the
security or commodity. However, there is no assurance that the Fund will be
able to enter into a closing transaction.
When
the Fund enters into a futures contract, it is initially required to deposit an
“initial margin” of cash, Treasury securities or other liquid portfolio
securities ranging from approximately 2% to 5% of the contract amount. The
margin deposits made are marked-to-market daily and the Fund may be required to
make subsequent deposits of cash, U.S. government securities or other liquid
portfolio securities, called “variation margin,” which are reflective of price
fluctuations in the futures contract.
Pursuant
to a notice of eligibility claiming exclusion from the definition of Commodity
Pool Operator filed with the National Futures Association on behalf of the
Fund, neither the Trust nor any of the individual Funds is deemed to be a
“commodity pool operator” under the Commodity Exchange Act (“CEA”), and,
accordingly, they are not subject to registration or regulation as such under
the CEA.
Risks
of Transactions in Futures Contracts and Related Options
. There are several risks associated
with the use of futures contracts and futures options as hedging techniques. A
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. There can be no guarantee that there
will be a correlation between price movements in the hedging vehicle and in the
Fund securities being hedged. In addition, there are significant differences
between the securities and futures markets that could result in an imperfect
correlation between the markets, causing a given hedge not to achieve its
objectives. As a result, a hedge may be unsuccessful because of market behavior
or unexpected interest rate trends.
Futures
exchanges may limit the amount of fluctuation permitted in certain futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day’s settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and therefore does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
There
can be no assurance that a liquid market will exist at a time when the Fund
seeks to close out a futures or a futures option position, and that Fund would
remain obligated to meet margin requirements until the position is closed. In
addition, many of the contracts discussed above are relatively new instruments
without a significant trading history. As a result, there can be no assurance
that an active secondary market will develop or continue to exist.
Warrants
and Subscription Rights
. The Fund may invest in warrants, which are
instruments that permit, but do not obligate, the holder to subscribe for other
securities. Subscription rights are similar to warrants, but normally have a
short duration and are distributed directly by the issuer to its shareholders.
Warrants and rights are not dividend-paying investments and do not have voting
rights like common stock. They also do not represent any rights in the assets
of the issuer. As a result, warrants and rights may be considered more
speculative than direct equity investments. In addition, the value of warrants
and rights do not necessarily change with the value of the underlying
securities and may cease to have value if they are not exercised prior to their
expiration dates.
13
I
NDEXED
SECURITIES AND STRUCTURED NOTES
The
Fund may invest in indexed securities, i.e., structured notes securities and
index options, whose value is linked to one or more currencies, interest rates,
commodities, or financial or commodity indices. An indexed security enables the
investor to purchase a note whose coupon and/or principal redemption is linked
to the performance of an underlying asset. Indexed securities may be positively
or negatively indexed (i.e., their value may increase or decrease if the
underlying instrument appreciates). Indexed securities may have return
characteristics similar to direct investments in the underlying instrument or
to one or more options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself, and present many of the
same risks as investing in futures and options. Indexed securities are also
subject to credit risks associated with the issuer of the security with respect
to both principal and interest. Only securities linked to one or more
non-agriculture commodities or commodity indices will be considered a hard
asset security.
Indexed
securities may be publicly traded or may be two-party contracts (such two-party
agreements are referred to hereafter collectively as structured notes). When
the Fund purchases a structured note, it will make a payment of principal to
the counterparty. Some structured notes have a guaranteed repayment of
principal while others place a portion (or all) of the principal at risk. The
Fund will purchase structured notes only from counterparties rated A or better
by S&P, Moody’s or another nationally recognized statistical rating
organization. The Adviser will monitor the liquidity of structured notes under
the supervision of the Board. Notes determined to be illiquid will be
aggregated with other illiquid securities and will be subject to the Fund’s
limitations on illiquid securities.
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Credit
Linked Notes
. The Fund may invest in credit linked securities or credit linked
notes (“CLNs”). CLNs are typically issued by a limited purpose trust or other
vehicle (the “CLN trust”) that, in turn, invests in a derivative or basket of
derivatives instruments, such as credit default swaps, interest rate swaps
and/or other securities, in order to provide exposure to certain high yield,
sovereign debt, emerging markets, or other fixed income markets. Generally,
investments in CLNs represent the right to receive periodic income payments
(in the form of distributions) and payment of principal at the end of the
term of the CLN. However, these payments are conditioned on the CLN trust’s
receipt of payments from, and the CLN trust’s potential obligations, to the
counterparties to the derivative instruments and other securities in which
the CLN trust invests. For example, the CLN trust may sell one or more credit
default swaps, under which the CLN trust would receive a stream of payments
over the term of the swap agreements provided that no event of default has
occurred with respect to the referenced debt obligation upon which the swap
is based. If a default were to occur, the stream of payments may stop and the
CLN trust would be obligated to pay the counterparty the par (or other agreed
upon value) of the referenced debt obligation. This, in turn, would reduce
the amount of income and principal that the Fund would receive as an investor
in the CLN trust. The Fund may also enter in CLNs to gain access to sovereign
debt and securities in emerging markets particularly in markets where the Fund
is not able to purchase securities directly due to domicile restrictions or
tax restrictions or tariffs. In such an instance, the issuer of the CLN may
purchase the reference security directly and/or gain exposure through a
credit default swap or other derivative. The Fund’s investments in CLNs is
subject to the risks associated with the underlying reference obligations and
derivative instruments.
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I
NVESTMENTS
IN OTHER INVESTMENT COMPANIES
The
Fund may invest up to 20% of its net assets in securities issued by other
investment companies (excluding money market funds), including open end and
closed end funds and exchange-traded funds (“ETFs”), subject to the limitations
under the 1940 Act. The Fund’s investments in money market funds are not
subject to this limitation. The Fund may invest in investment companies which
are sponsored or advised by the Adviser and/or its affiliates (each, a “Van Eck
Investment Company”). However, in no event will the Fund invest more than 5% of
its net assets in any single Van Eck Investment Company.
The
Fund’s investment in another investment company may subject the Fund indirectly
to the underlying risks of the investment company. The Fund also will bear its
share of the underlying
14
investment company’s fees and expenses, which
are in addition to the Fund’s own fees and expenses. Shares of closed-end funds
and ETFs may trade at prices that reflect a premium above or a discount below
the investment company’s net asset value, which may be substantial in the case
of closed-end funds. If investment company securities are purchased at a
premium to net asset value, the premium may not exist when those securities are
sold and the Fund could incur a loss.
P
ARTLY
PAID SECURITIES
Securities
paid for on an installment basis. A partly paid security trades net of
outstanding installment payments—the buyer “takes over payments.” The buyer’s
rights are typically restricted until the security is fully paid. If the value
of a partly-paid security declines before the Fund finishes paying for it, the
Fund will still owe the payments, but may find it hard to sell and as a result
will incur a loss.
R
EAL
ESTATE SECURITIES
The
Fund may not purchase or sell real estate, except that the Fund may invest in
securities of issuers that invest in real estate or interests therein. These
include equity securities of REITs and other real estate industry companies or
companies with substantial real estate investments.
REITs
are pooled investment vehicles whose assets consist primarily of interests in
real estate and real estate loans. REITs are generally classified as equity
REITs, mortgage REITs or hybrid REITs. Equity REITs own interest in property
and realize income from the rents and gain or loss from the sale of real estate
interests. Mortgage REITs invest in real estate mortgage loans and realize
income from interest payments on the loans. Hybrid REITs invest in both equity
and debt. Equity REITs may be operating or financing companies. An operating
company provides operational and management expertise to and exercises control
over, many if not most operational aspects of the property. REITS are not taxed
on income distributed to shareholders, provided they comply with several
requirements of the Internal Revenue Code of 1986, as amended (the “Code”).
Investing
in REITs involves certain unique risks in addition to those risks associated
with investing in the real estate industry in general. Equity REITs may be
affected by changes in the value of the underlying property owned by the REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified, and are
subject to the risks of financing projects. REITs are subject to heavy cash
flow dependency, default by borrowers, self-liquidation and the possibilities
of failing to qualify for the exemption from tax for distributed income under
the Code. REITs (especially mortgage REITs) are also subject to interest rate
risk (i.e., as interest rates rise, the value of the REIT may decline).
R
EPURCHASE
AGREEMENTS
The
Fund may enter into a repurchase agreement. It is the current policy of the
Fund not to invest in repurchase agreements that do not mature within seven days
if any such investment, together with any other illiquid assets held by the
Fund, amounts to more than 15% of its net assets.
Repurchase
agreements, which may be viewed as a type of secured lending by the Fund,
typically involve the acquisition by the Fund of debt securities from a selling
financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Fund will sell back to the
institution, and that the institution will repurchase, the underlying security
serving as collateral at a specified price and at a fixed time in the future,
usually not more than seven days from the date of purchase. The collateral will
be marked-to-market daily to determine that the value of the collateral, as specified
in the agreement, does not decrease below the purchase price plus accrued
interest. If such decrease occurs, additional collateral will be requested and,
when received, added to the account to maintain full collateralization. The
Fund will accrue interest from the institution until the time when the
repurchase is to occur. While repurchase agreements involve certain risks not
associated with direct investments in debt securities, the Fund will only enter
into a repurchase agreement where (i) the
15
underlying securities are of the type which
the Fund’s investment policies would allow it to purchase directly, (ii) the
market value of the underlying security, including accrued interest, will be at
all times be equal to or exceed the value of the repurchase agreement, and
(iii) payment for the underlying securities is made only upon physical delivery
or evidence of book-entry transfer to the account of the custodian or a bank
acting as agent.
R
ULE
144A AND SECTION 4(2) SECURITIES
The
Fund may invest in securities which are subject to restrictions on resale
because they have not been registered under the Securities Act of 1933, or
which are otherwise not readily marketable.
Rule
144A under the Securities Act of 1933 allows a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A establishes a “safe harbor” from the registration
requirements of the Securities Act of 1933 of resale of certain securities to
qualified institutional buyers.
The
Adviser will monitor the liquidity of restricted securities in the Fund’s
holdings under the supervision of the Board. In reaching liquidity decisions,
the Adviser will consider, among other things, the following factors: (1) the
frequency of trades and quotes for the security; (2) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanisms of the transfer).
In
addition, commercial paper may be issued in reliance on the “private placement”
exemption from registration afforded by Section 4(2) of the Securities Act of
1933. Such commercial paper is restricted as to disposition under the federal
securities laws and, therefore, any resale of such securities must be effected
in a transaction exempt from registration under the Securities Act of 1933.
Such commercial paper is normally resold to other investors through or with the
assistance of the issuer or investment dealers who make a market in such
securities, thus providing liquidity.
Securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933 and
commercial paper issued in reliance on the Section 4(2) exemption under the
1940 Act may be determined to be liquid in accordance with guidelines
established by the Board for purposes of complying with investment restrictions
applicable to investments by the Fund in illiquid securities. To the extent
such securities are determined to be illiquid, they will be aggregated with
other illiquid investments for purposes of the limitation on illiquid
investments.
S
HORT
SALES
The
Fund may make short sales of equity securities. The Fund will establish a
segregated account with respect to their short sales and maintain in the
account cash not available for investment or U.S. Government securities or
other liquid, high-quality securities having a value equal to the difference
between (i) the market value of the securities sold short at the time they were
sold short and (ii) any cash, U.S. Government securities or other liquid,
high-quality securities required to be deposited as collateral with the broker
in connection with the short sale (not including the proceeds from the short
sale). The segregated account will be marked to market daily, so that (i) the
amount in the segregated account plus the amount deposited with the broker as
collateral equals the current market value of the securities sold short and
(ii) in no event will the amount in the segregated account plus the amount
deposited with the broker as collateral fall below the original value of the
securities at the time they were sold short.
S
ECURITIES
LENDING
The
Fund may lend securities to parties such as broker-dealers or other
institutions. Securities lending allows the Fund to retain ownership of the
securities loaned and, at the same time, earn
16
additional income. The borrower provides the
Fund with collateral in an amount at least equal to the value of the securities
loaned. The Fund maintains the ability to obtain the right to vote or consent
on proxy proposals involving material events affecting securities loaned. If
the borrower defaults on its obligation to return the securities loaned because
of insolvency or other reasons, the Fund could experience delays and costs in
recovering the securities loaned or in gaining access to the collateral. These
delays and costs could be greater for foreign securities. If the Fund is not
able to recover the securities loaned, the Fund may sell the collateral and
purchase a replacement investment in the market. The value of the collateral
could decrease below the value of the replacement investment by the time the
replacement investment is purchased. Cash received as collateral through loan
transactions will generally be invested in shares of a money market fund.
Investing this cash subjects that investment, as well as the securities loaned,
to market appreciation or depreciation
S
WAPS
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The Fund
may enter into swap agreements. A swap is a derivative in the form of an
agreement to exchange the return generated by one instrument for the return
generated by another instrument. The payment streams are calculated by
reference to a specified index and agreed upon notional amount. The term
“specified index” includes currencies, fixed interest rates, prices, total
return on interest rate indices, fixed income indices, stock indices and
commodity indices (as well as amounts derived from arithmetic operations on
these indices). For example, the Fund may agree to swap the return generated
by a fixed income index for the return generated by a second fixed income
index. The currency swaps in which the Fund may enter will generally involve
an agreement to pay interest streams in one currency based on a specified
index in exchange for receiving interest streams denominated in another
currency. Such swaps may involve initial and final exchanges that correspond
to the agreed upon notional amount. The Fund may also enter into credit
default swaps, which may have as reference obligations one or more securities
or a basket of securities that are or are not currently held by the Fund. The
protection “buyer” in a credit default contract is generally obligated to pay
the protection “seller” an upfront or a periodic stream of payments over the
term of the contract provided that no credit event, such as a default, on a
reference obligation has occurred. If a credit event occurs, the seller
generally must pay the buyer the “par value” (full notional value) of the
swap in exchange for an equal face amount of deliverable obligations of the
reference entity described in the swap, or the seller may be required to
deliver the related net cash amount, if the swap is cash settled. The swaps
in which the Fund may engage also include rate caps, floors and collars under
which one party pays a single or periodic fixed amount(s) (or premium), and
the other party pays periodic amounts based on the movement of a specified
index.
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Swaps
do not involve the delivery of securities, other underlying assets, or
principal. Accordingly, the risk of loss with respect to swaps is limited to
the net amount of payments that the Fund is contractually obligated to make. If
the other party to a swap defaults, the Fund’s risk of loss consists of the net
amount of payments that the Fund is contractually entitled to receive. Currency
swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Therefore,
the entire principal value of a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations.
If there is a default by the counterparty, the Fund may have contractual
remedies pursuant to the agreements related to the transaction.
The
use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary fund
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Fund would be less favorable than it would have been if this investment
technique were not used.
W
HEN,
AS AND IF ISSUED SECURITIES
The
Fund may purchase securities on a “when, as and if issued” basis, under which
the issuance of the security depends upon the occurrence of a subsequent event,
such as approval of a merger, corporate reorganization or debt restructuring.
The commitment for the purchase of any such security will not be recognized by
the Fund until the Adviser determines that issuance of the security is
probable. At
17
that time, the Fund will record the
transaction and, in determining its net asset value, will reflect the value of
the security daily. At that time, the Fund will also earmark or establish a
segregated account on the Fund’s books in which it will maintain cash, cash
equivalents or other liquid portfolio securities equal in value to recognized
commitments for such securities. The value of the Fund’s commitments to
purchase the securities of any one issuer, together with the value of all
securities of such issuer owned by the Fund, may not exceed 5% (2% in the case
of warrants which are not listed on an exchange) of the value of the Fund’s
total assets at the time the initial commitment to purchase such securities is
made. An increase in the percentage of the Fund assets committed to the
purchase of securities on a “when, as and if issued” basis may increase the
volatility of its net asset value. The Fund may also sell securities on a
“when, as and if issued” basis provided that the issuance of the security will
result automatically from the exchange or conversion of a security owned by the
Fund at the time of sale.
F
UNDAMENTAL
INVESTMENT RESTRICTIONS
The
following investment restrictions are in addition to those described in the
Prospectus. These investment restrictions are “fundamental” and may be changed
with respect to the Fund only with the approval of the holders of a majority of
the Fund’s “outstanding voting securities” as defined in the 1940 Act. As to
any of the following investment restrictions, if a percentage restriction is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from a change in value of portfolio securities or amount
of net assets will not be considered a violation of the investment restriction.
In the case of borrowing, however, the Fund will promptly take action to reduce
the amount of the Fund’s borrowings outstanding if, because of changes in the
net asset value of the Fund due to market action, the amount of such borrowings
exceeds one-third of the value of the Fund’s net assets. The fundamental
investment restrictions are as follows:
The Fund may
not:
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1.
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Borrow money,
except as permitted under the 1940 Act, as amended and as interpreted or
modified by regulation from time to time.
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2.
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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 in the disposition of restricted securities or in
connection with its investments in other investment companies.
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3.
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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 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.
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4.
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Issue senior
securities, except as permitted under the 1940 Act, as amended and as
interpreted or modified by regulation from time to time.
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5.
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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.
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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.
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7.
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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, provided that this restriction does not limit the
Fund’s investments in (i) securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or (ii) securities of other
investment companies.
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For
the purposes of Restriction 7, companies in different geographical locations
will not be deemed to be in the same industry if the investment risks
associated with the securities of such companies are substantially different.
For example, although generally considered to be “interest rate-sensitive,”
investing in banking institutions in different countries is generally dependent
upon substantially different risk factors, such as the condition and prospects
of the economy in a particular country and in particular industries, and
political conditions.
P
ORTFOLIO
HOLDINGS DISCLOSURE
The
Fund has adopted policies and procedures governing the disclosure of
information regarding the Fund’s portfolio holdings. They are reasonably
designed to prevent selective disclosure of the Fund’s portfolio holdings to
third parties, other than disclosures that are consistent with the best
interests of the Fund’s shareholders. The Board is responsible for overseeing
the implementation of these policies and procedures, and will review them
annually to ensure their adequacy.
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These
policies and procedures apply to employees of the Adviser, administrator,
principal underwriter, and all other service providers to the Fund that, in
the ordinary course of their activities, come into possession of information
about the Fund’s portfolio holdings. These policies and procedures are made
available to each service provider.
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The
following outlines the policies and procedures adopted by the Fund regarding
the disclosure of portfolio related information:
Generally,
it is the policy of the Fund that no current or potential investor (or their
representative), including any Fund shareholder (collectively, “Investors”),
shall be provided information about the Fund’s portfolio on a preferential
basis in advance of the provision of that same information to other investors.
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Disclosure
to Investors:
Limited portfolio holdings information for the
Fund is available to all investors on the Van Eck website at vaneck.com.
Information regarding the Fund’s top holdings and country and sector
weightings, updated as of each month-end, is located on this website.
Generally, this information is posted to the website within 30 days of the
end of the applicable month. The Fund may also publish a detailed list of the
securities held by the Fund, generally updated as of the most recent calendar
quarter. This information generally remains available on the website until
new information is posted. The Fund reserves the right to exclude any portion
of these portfolio holdings from publication when deemed in the best interest
of the Fund, and to discontinue the posting of portfolio holdings information
at any time, without prior notice.
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Best Interest of the Fund:
Information regarding the Fund’s specific security holdings, sector weightings,
geographic distribution, issuer allocations and related information
(“Portfolio-Related Information”), shall be disclosed to the public only (i) as
required by applicable laws, rules or regulations, (ii) pursuant to the Fund’s
Portfolio-Related Information disclosure policies and procedures, or (iii)
otherwise when the disclosure of such information is determined by the Trust’s
officers to be in the best interest of Fund shareholders.
Conflicts of Interest:
Should a conflict of interest arise between the Fund and any of the Fund’s
service providers regarding the possible disclosure of Portfolio-Related
Information, the Trust’s officers shall resolve any conflict of interest in
favor of the Fund’s interest. In the event that an officer of the Fund is
unable to resolve such a conflict of interest, the matter shall be referred to
the Trust’s Audit Committee for resolution.
19
Equality
of Dissemination:
Shareholders of the Fund shall be treated alike in
terms of access to the Fund’s portfolio holdings. With the exception of certain
selective disclosures, noted in the paragraph below, Portfolio-Related
Information, with respect to the Fund, shall not be disclosed to any Investor
prior to the time the same information is disclosed publicly (e.g., posted on
the Fund’s website). Accordingly, all Investors will have equal access to such
information.
Selective
Disclosure of Portfolio-Related Information in Certain Circumstances:
In some
instances, it may be appropriate for the Fund to selectively disclose the
Fund’s Portfolio-Related Information (e.g., for due diligence purposes,
disclosure to a newly hired adviser or sub-adviser, or disclosure to a rating
agency) prior to public dissemination of such information.
Conditional
Use of Selectively-Disclosed Portfolio-Related Information:
To the
extent practicable, each of the Trust’s officers shall condition the receipt of
Portfolio-Related Information upon the receiving party’s written agreement to
both keep such information confidential and not to trade Fund shares based on
this information.
Compensation:
No
person, including officers of the Fund or employees of other service providers
or their affiliates, shall receive any compensation in connection with the
disclosure of Portfolio-Related Information. Notwithstanding the foregoing, the
Fund reserves the right to charge a nominal processing fee, payable to the
Fund, to non-shareholders requesting Portfolio Related Information. This fee is
designed to offset the Fund’s costs in disseminating such information.
Source
of Portfolio Related Information:
All Portfolio-Related
Information shall be based on information provided by the Fund’s
administrator(s)/accounting agent.
The
Fund may provide non-public portfolio holdings information to third parties in
the normal course of their performance of services to the Fund, including to
the Fund’s auditors; custodian; financial printers; counsel to the Fund or
counsel to the Fund’s independent trustees; regulatory authorities; and
securities exchanges and other listing organizations. In addition, the Fund may
provide non-public portfolio holdings information to data providers, fund
ranking/rating services, and fair valuation services. The entities to which the
Fund voluntarily discloses portfolio holdings information are required, either
by explicit agreement or by virtue of their respective duties to the Fund, to
maintain the confidentiality of the information disclosed. Generally,
information that is provided to these parties, in the ordinary course of
business, is provided on a quarterly basis, with at least a 30 day lag period.
There
can be no assurance that the Fund’s policies and procedures regarding selective
disclosure of the Fund’s portfolio holdings will protect the Fund from
potential misuse of that information by individuals or entities to which it is
disclosed.
The
Board shall be responsible for overseeing the implementation of these policies
and procedures. These policies and procedures shall be reviewed by the Board on
an annual basis for their continuing appropriateness.
Additionally,
the Fund shall maintain and preserve permanently in an easily accessible place
a written copy of these policies and procedures. The Fund shall also maintain
and preserve, for a period not less than six years (the first two years in an
easily accessible place), all Portfolio-Related Information disclosed to the
public.
Currently,
there are no agreements in effect where non-public information is disclosed or
provided to a third party. Should the Fund or Adviser establish such an
agreement with another party, the agreement shall bind the party to
confidentiality requirements and the duty not to trade on non-public
information.
20
I
NVESTMENT
ADVISORY SERVICES
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “Shareholder Information – Management of the
Fund.”
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 Fund. The Adviser is a private company
with headquarters in New York and acts as adviser or sub-adviser to other
mutual funds, ETFs, other pooled investment vehicles and separate accounts.
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The
Adviser serves as investment adviser to the Fund pursuant to the Advisory
Agreement between the Trust and the Adviser. The advisory fee is computed daily
and paid monthly to the Adviser by the Fund at an annual rate of 0.80% of the
first $1.5 billion of average daily net assets of the Fund and 0.75% of
average daily net assets of the Fund in excess of $1.5 billion. Under the
Advisory Agreement, the Adviser, subject to the supervision of the Board and
in conformity with the stated investment policies of the Fund, manages the
investment of the Fund’s assets. The Adviser is responsible for placing
purchase and sale orders and providing continuous supervision of the
investment portfolio of the Fund.
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Pursuant to
the Advisory 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.
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The
Fund is expected to commence operations on or about July 9, 2012. Accordingly,
as of the date of this SAI, no management fees have been paid to the Adviser
for the past fiscal year. In addition, the Adviser assumed no expenses for
the same period.
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The Advisory
Agreement provides that it shall continue in effect from year to year as long
as it is approved at least annually by (1) the Board or (2) a vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the 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 Advisory 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 the Fund’s outstanding voting
securities. The Advisory 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).
T
HE
DISTRIBUTOR
Shares
of the Fund are offered on a continuous basis and are distributed through Van
Eck Securities Corporation, the Distributor, 335 Madison Avenue, New York, New
York, a wholly owned subsidiary of the Adviser. The Board has approved a
Distribution Agreement appointing the Distributor as distributor of shares of
the Fund. The Trust has authorized one or more intermediaries (who are
authorized to designate other intermediaries) to accept purchase and redemption
orders on the Trust’s behalf. The Trust will be deemed to have received a
purchase or redemption order when the authorized broker or its designee accepts
the order. Orders will be priced at the net asset value next computed after
they are accepted by the authorized broker or its designee.
The
Distribution Agreement provides that the Distributor will pay all fees and
expenses in connection with printing and distributing prospectuses and reports
for use in offering and selling shares of the Fund and preparing, printing and
distributing advertising or promotional materials. The Fund will pay all fees
and expenses in connection with registering and qualifying their shares under
federal and state securities laws. The Distribution Agreement is reviewed and
approved annually by the Board.
21
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The
Fund is expected to commence operations on or about July 9, 2012. Accordingly, as of the date of
this SAI, the Distributor retained no distributing commissions on sales of
shares of the Fund.
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P
LAN
OF DISTRIBUTION (12B-1 PLAN)
The
Fund (Class A and Class C) has adopted a plan pursuant to Rule 12b-1 (a “Plan”)
which provides for the compensation of brokers and dealers who sell shares of
the Fund and/or provide servicing. The Plan is a compensation-type plan with a
carry-forward provision, which provide that the Distributor recoup distribution
expenses in the event the Plan is terminated. Pursuant to the Plan, the
Distributor provides the Fund at least quarterly with a written report of the
amounts expended under the Plan and the purpose for which such expenditures
were made. The Board reviews such reports on a quarterly basis.
The
Plan is reapproved annually for the Fund, by the Board, including a majority of
the Trustees who are not “interested persons” of the Fund and who have no
direct or indirect financial interest in the operation of the Plan.
The
Plan shall continue in effect as to the Fund, provided such continuance is
approved annually by a vote of the Board in accordance with the 1940 Act. The
Plan may not be amended to increase materially the amount to be spent for the
services described therein without approval of the shareholders of the Fund,
and all material amendments to the Plan must also be approved by the Board in
the manner described above. The Plan may be terminated at any time, without
payment of any penalty, by vote of a majority of the Trustees who are not
“interested persons” of the Fund and who have no direct or indirect financial
interest in the operation of the Plan, or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Act) on written
notice to any other party to the Plan. The Plan will automatically terminate in
the event of its assignment (as defined in the 1940 Act). So long as the Plan
is in effect, the election and nomination of Trustees who are not “interested
persons” of the Trust shall be committed to the discretion of the Trustees who
are not “interested persons.” The Trustees have determined that, in their
judgment, there is a reasonable likelihood that the Plan will benefit the Fund
and their shareholders. The Fund will preserve copies of the Plan and any
agreement or report made pursuant to Rule 12b-1 under the Act, for a period of
not less than six years from the date of the Plan or such agreement or report,
the first two years in an easily accessible place. For additional information
regarding the Plan, see the Prospectus.
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The
Fund is expected to commence operations on or about July 9, 2012. Accordingly, as of the date of
this SAI, no distribution expenses have been paid pursuant to the Plan.
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A
DMINISTRATIVE
AND PROCESSING SUPPORT PAYMENTS
The
Fund may make payments (either directly or as reimbursement to the Distributor
or an affiliate of the Distributor for payments made by the Distributor) to
financial intermediaries (such as brokers or third party administrators) for
providing the types of services that would typically be provided by the Fund’s
transfer agent, including sub-accounting, sub-transfer agency or similar
recordkeeping services, shareholder reporting, shareholder transaction
processing, and/or the provision of call center support. These payments will be
in lieu of, and may differ from, amounts paid to the Fund’s transfer agent for
providing similar services to other accounts. These payments may be in addition
to any amounts the intermediary may receive as compensation for distribution or
shareholder servicing pursuant to the Plan or as part of any revenue sharing or
similar arrangement with the Distributor or its affiliates, as described
elsewhere in the Prospectus.
P
ORTFOLIO
MANAGERS
The
Adviser’s portfolio managers are paid a fixed base salary and a bonus. The
bonus is based upon the quality of investment analysis and management of the
funds for which they serve as portfolio manager. Portfolio managers who oversee
accounts with significantly different fee structures are
22
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.
The
Adviser’s portfolio managers may serve as portfolio managers to other clients.
Such “Other Clients” may have investment objectives or may implement investment
strategies similar to those of the Fund. When the portfolio managers implement
investment strategies for Other Clients that are similar or directly contrary
to the positions taken by the Fund, the prices of the Fund’s securities may be
negatively affected. The compensation that the Fund’s portfolio manager
receives for managing other client accounts may be higher than the compensation
the portfolio manager receives for managing the Fund. The portfolio manager
does not believe that his activities materially disadvantage the Fund. The
Adviser has implemented procedures to monitor trading across funds and its
Other Clients.
P
ORTFOLIO
MANAGER SHARE OWNERSHIP
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The Fund
is expected to commence operations on or about July 9, 2012. Accordingly, as
of the date of this SAI, the Fund’s Portfolio Manager did not own any shares
of the Fund.
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O
THER
ACCOUNTS MANAGED BY THE PORTFOLIO MANAGER
Below
is a table of the number of other accounts managed within each of the following
categories and the total assets in the accounts managed within each category,
as of April 30, 2012.
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|
Name of
Portfolio
Manager
|
Category of
Account
|
Other Accounts Managed
(As of April 30, 2012)
|
Accounts with
respect to which the advisory
fee is based on the performance of the account
|
|
Number of
Accounts
|
Total Assets in
Accounts
|
Number of Accounts
|
Total Assets in
Accounts
|
|
Eric Fine
(portfolio
manager)
|
Registered
investment
companies
|
0
|
$0
|
0
|
$0
|
|
Other pooled
investment vehicles
|
3
|
$9.41 million
|
2
|
$9.41 million
|
|
Other accounts
|
0
|
$0
|
0
|
$0
|
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|
P
ORTFOLIO
TRANSACTIONS AND BROKERAGE
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 Fund 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.
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.
The portfolio managers may deem it
appropriate for one fund or account they manage to sell a security while
another fund or account they manage is purchasing the same security. Under such
circumstances, the portfolio managers may arrange to have the purchase and sale
transactions effected
23
directly between the funds and/or accounts
(“cross transactions”). Cross transactions will be effected in accordance with
procedures adopted pursuant to Rule 17a-7 under the 1940 Act.
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
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
Adviser may cause the Fund to pay a broker-dealer who furnishes brokerage
and/or research services, a commission that is in excess of the commission
another broker-dealer would have received for executing the transaction, if it
is determined that such commission is reasonable in relation to the value of
the brokerage and/or research services as defined in Section 28(e) of the
Securities Exchange Act of 1934, as amended, which have been provided. Such
research services may include, among other things, analyses and reports
concerning issuers, industries, securities, economic factors and trends and
portfolio strategy. Any such research and other information provided by brokers
to the Adviser is considered to be in addition to and not in lieu of services
required to be performed by the Adviser under its Advisory Agreement with the
Trust. The research services provided by broker-dealers can be useful to the
Adviser in serving its other clients or clients of the Adviser’s affiliates.
The Board periodically reviews the Adviser’s performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund. The Board also reviews the commissions paid by the Fund
over representative periods of time to determine if they are reasonable in
relation to the benefits to the Fund.
The
Adviser does not consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute portfolio transactions for the Fund. The
Adviser has implemented policies and procedures pursuant to Rule 12b-1(h) that
are reasonably designed to prevent the consideration of the sales of fund
shares when selecting broker-dealers to execute trades.
Due
to the potentially high rate of turnover, the Fund may pay a greater amount in
brokerage commissions than a similar size fund with a lower turnover rate. The
portfolio turnover rates of the Fund may vary greatly from year to year.
T
RUSTEES
AND OFFICERS
LEADERSHIP STRUCTURE AND THE BOARD
The
Board has general oversight responsibility with respect to the operation of the
Trust and the Fund. The Board has engaged the Adviser to manage the Fund and is
responsible for overseeing the Adviser and other service providers to the Trust
and the Fund in accordance with the provisions of the 1940 Act and other
applicable laws. The Board is currently composed of six (6) Trustees, each of
whom is an Independent Trustee. In addition to five (5) regularly scheduled
meetings per year, the Independent Trustees meet regularly in executive
sessions among themselves and with their counsel to consider a variety of
matters affecting the Trust. These sessions generally occur prior to, or
during, scheduled Board meetings and at such other times as the Independent
Trustees may deem necessary. Each Trustee attended at least 75% of the total
number of meetings of the Board in the year ending December 31, 2011. As
discussed in further detail below, the Board has established two (2) standing
committees to assist the Board in performing its oversight responsibilities.
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|
The Board
has determined that the Board’s leadership structure is appropriate in light
of the characteristics and circumstances of the Trust and each of the funds
in the Fund Complex, including factors such as the number of series or
portfolios that comprise the Trust and the Fund Complex, the variety of asset
classes those series reflect, the net assets of the Fund, the committee
structure of the Trust, and the management, distribution and other service
arrangements of the Fund. In connection with its determination, the Board
considered that the Board is comprised of only Independent Trustees, and thus
the Chairperson of the Board and the Chairperson of each Board committee is
an Independent Trustee. In addition, to further align the Independent
Trustees interests with those of Fund shareholders,
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24
the Board has, among other things, adopted a
policy requiring each Independent Trustee to maintain a minimum direct or
indirect investment in the Fund.
|
|
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|
The
Chairperson presides at all meetings of the Board and participates in the
preparation of the agenda for such meetings. He also serves as a liaison with
management, service providers, officers, attorneys, and the other Independent
Trustees generally between meetings. The Chairperson may also perform other
such functions as may be delegated by the Board from time to time. The
Independent Trustees believe that the Chairperson’s independence facilitates
meaningful dialogue between the Adviser and the Independent Trustees. Except
for any duties specified herein or pursuant to the Trust’s charter document,
the designation of Chairperson does not impose on such Independent Trustee
any duties, obligations or liability that is greater than the duties,
obligations or liability imposed on such person as a member of the Board,
generally.
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|
The
Independent Trustees regularly meet outside the presence of management and are
advised by independent legal counsel. The Board has determined that its
committees help ensure that the Trust has effective and independent governance
and oversight. The Board also believes that its leadership structure
facilitates the orderly and efficient flow of information to the Independent
Trustees from management of the Trust, including the Adviser.
RISK OVERSIGHT
The
Fund and the Trust are subject to a number of risks, including investment,
compliance, operational, and valuation risks. Day-to-day risk management
functions are within the responsibilities of the Adviser, the Distributor and
the other service providers (depending on the nature of the risk) that carry
out the Fund’s investment management, distribution and business affairs. Each
of the Adviser, the Distributor and the other service providers have their own,
independent interests and responsibilities in risk management, and their
policies and methods of carrying out risk management functions will depend, in
part, on their individual priorities, resources and controls.
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|
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|
Risk
oversight forms part of the Board’s general oversight of the Fund and the
Trust and is addressed as part of various activities of the Board and its
Committees. As part of its regular oversight of the Fund and Trust, the
Board, directly or through a Committee, meets with representatives of various
service providers and reviews reports from, among others, the Adviser, the
Distributor, the Chief Compliance Officer of the Fund, and the independent
registered public accounting firm for the Fund regarding risks faced by the
Fund and relevant risk management functions. The Board, with the assistance
of management, reviews investment policies and risks in connection with its review
of the Fund’s performance. The Board has appointed a Chief Compliance Officer
for the Fund who oversees the implementation and testing of the Fund’s
compliance program and reports to the Board regarding compliance matters for
the Fund and its principal service providers. The Chief Compliance Officer’s
designation, removal and compensation must be approved by the Board,
including a majority of the Independent Trustees. Material changes to the
compliance program are reviewed by and approved by the Board. In addition, as
part of the Board’s periodic review of the Fund’s advisory, distribution and
other service provider agreements, the Board may consider risk management
aspects of their operations and the functions for which they are responsible,
including the manner in which such service providers implement and administer
their codes of ethics and related policies and procedures. For certain of its
service providers, such as the Adviser and Distributor, the Board also
reviews business continuity and disaster recovery plans. With respect to
valuation, the Board approves and periodically reviews valuation policies and
procedures applicable to valuing the Fund’s shares. The Adviser is
responsible for the implementation and day-to-day administration of these valuation
policies and procedures and provides reports periodically to the Board
regarding these and related matters. In addition, the Board or the Audit
Committee of the Board receives reports at least annually from the
independent registered public accounting firm for the Fund regarding tests
performed by such firm on the valuation of all securities. Reports received
from the Adviser and the independent registered public accounting firm assist
the Board in performing its oversight function of valuation activities and
related risks.
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25
The
Board recognizes that not all risks that may affect the Trust can be
identified, that it may not be practical or cost-effective to eliminate or
mitigate certain risks, that it may be necessary to bear certain risks to
achieve the Trust’s goals, and that the processes, procedures and controls
employed to address certain risks may be limited in their effectiveness.
Moreover, reports received by the Board that may relate to risk management
matters are typically summaries of the relevant information. As a result of the
foregoing and other factors, the function of the Board with respect to risk
management is one of oversight and not active involvement in, or coordination
of, day-to-day-day risk management activities for the Trust. The Board may, at any
time and in its discretion, change the manner in which it conducts its risk
oversight role.
T
RUSTEE
INFORMATION
The
Trustees of the Trust, their address, position with the Trust, age and
principal occupations during the past five years are set forth below.
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|
TRUSTEE
’
S
NAME,
ADDRESS(1)
AND AGE
|
|
|
POSITION(S) HELD
WITH TRUST TERM OF
OFFICE(2) AND LENGTH OF
TIME SERVED
|
|
|
PRINCIPAL
OCCUPATION(S)
DURING PAST
FIVE YEARS
|
|
|
NUMBER OF
PORTFOLIOS
IN FUND
COMPLEX(3)
OVERSEEN BY
TRUSTEE
|
|
|
OTHER
DIRECTORSHIPS
HELD OUTSIDE THE
FUND COMPLEX(3)
DURING THE PAST
FIVE YEARS
|
|
INDEPENDENT
TRUSTEES:
|
|
Jon Lukomnik
56 (A)(G)
|
|
|
Trustee since March 2006
|
|
|
Managing Partner, Sinclair Capital LLC (consulting firm),
2000 to present; Executive Director, Investor Responsibility Research Center
Institute, 2008 to present.
|
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11
|
|
|
Chairman of the Board of the New
York Classical Theatre; formerly Director of The Governance Fund, LLC;
formerly Director of Sears Canada, Inc.
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Jane DiRenzo Pigott
55 (A)(G)
|
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|
Trustee since July 2007; Currently, Chairperson of the
Governance Committee
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|
Managing Director, R3 Group LLC (consulting firm), 2002 to
present.
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11
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|
Director and Chair of Audit
Committee of 3E Company (environmental services); formerly Director of MetLife
Investment Funds, Inc.
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Wayne H.
Shaner
64 (A)(G)
|
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|
Trustee since March 2006
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|
Managing Partner, Rockledge Partners LLC, 2003 to present
(investment adviser); Public Member of the Investment Committee, Maryland
State Retirement System since 1991.
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11
|
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|
Director, The Torray Funds (2
portfolios), since 1993 (Chairman of the Board since December 2005).
|
|
R. Alastair Short
58 (A)(G)
|
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|
Trustee since June 2004; Currently, Vice Chairperson of
the Board and Chairperson of the Audit Committee
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|
President, Apex Capital Corporation (personal investment
vehicle), January 1988 to present; Vice Chairman, W. P. Stewart & Co.,
Ltd. (asset management firm), September 2007 to September 2008; Managing
Director, The GlenRock Group, LLC (private equity investment firm), May 2004
to September 2007.
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64
|
|
|
Chairman and Independent Director,
EULAV Asset Management; Independent Director, Tremont offshore funds;
Director, Kenyon Review; formerly Director of The Medici Archive Project.
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26
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TRUSTEE
’
S
NAME,
ADDRESS(1)
AND AGE
|
|
|
POSITION(S) HELD
WITH TRUST TERM OF
OFFICE(2) AND LENGTH OF
TIME SERVED
|
|
|
PRINCIPAL
OCCUPATION(S)
DURING PAST
FIVE YEARS
|
|
|
NUMBER OF
PORTFOLIOS
IN FUND
COMPLEX(3)
OVERSEEN BY
TRUSTEE
|
|
|
OTHER
DIRECTORSHIPS
HELD OUTSIDE THE
FUND COMPLEX(3)
DURING THE PAST
FIVE YEARS
|
|
INDEPENDENT
TRUSTEES:
|
|
Richard D.
Stamberger
53 (A)(G)
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Trustee since 1995; Currently, Chairperson of the Board
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President and CEO, SmartBrief, Inc. (business media
company), 1999 to present.
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64
|
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|
Director, SmartBrief, Inc.
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Robert L. Stelzl
66 (A)(G)
|
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Trustee since July 2007
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Trustee, Joslyn Family Trusts, 2003 to present; President,
Rivas Capital, Inc. (real estate property management services company), 2004
to present.
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11
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Lead Independent Director,
Brookfield Properties, Inc.; Director and Chairman, Brookfield Residential
Properties, Inc.
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(1)
|
The address for each Trustee and
officer is 335 Madison Avenue, 19th Floor, New York, New York 10017.
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(2)
|
Each Trustee
serves until resignation, death, retirement or removal. The Board established
a mandatory retirement policy applicable to all Independent Trustees, which
provides that Independent Trustees shall resign from the Board on December 31
of the year such Trustee reaches the age of 75.
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(3)
|
The Fund Complex consists of Van
Eck Funds, Van Eck VIP Trust and Market Vectors ETF Trust.
|
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(A)
|
Member of the Audit Committee.
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(G)
|
Member of the Governance
Committee.
|
Set
forth below is additional information relating to the professional experience,
attributes and skills of each Trustee relevant to such individual’s
qualifications to serve as a Trustee:
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Jon Lukomnik
has
extensive business and financial experience, particularly in the investment
management industry. He currently serves as Managing Partner of Sinclair
Capital LLC, a consulting firm to the investment management industry and is
Executive Director for Investor Responsibility Research Center Institute, a
not-for-profit organization that funds research on corporate responsibility
and investing.
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|
Jane DiRenzo
Pigott
has extensive business and financial experience and serves as
Managing Director of R3 Group LLC, a firm specializing in providing
leadership, change and diversity/inclusion consulting services. Ms. Pigott
has prior experience as an independent trustee of other mutual funds and
previously served as chair of the global Environmental Law practice group at
Winston & Strawn LLP.
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Wayne Shaner
has extensive business and
financial experience, particularly in the investment management industry. He
currently serves as the Managing Partner of Rockledge Partners LLC, a
registered investment adviser and as a Public Member of the Investment
Committee of the Maryland State Retirement System. Mr. Shaner also has
experience as an independent trustee of another mutual funds.
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Alastair
Short
has extensive business and financial experience, particularly in the
investment management industry. He has served as a president, board member or
executive officer of various businesses, including asset management and
private equity investment firms. Mr. Short also serves as an independent
director of an offshore investment company.
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Richard
Stamberger
has extensive business and financial experience and serves as the
president, chief executive officer and board member of SmartBrief Inc., a
media company. Mr. Stamberger has experience as a member of the board of
directors of numerous not-for-profit organizations and has more than 15 years
of experience as a member of the Board of the Trust.
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27
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Robert
Stelzl
has extensive business and financial experience, particularly in the
investment management and real estate industries. He currently serves as a
court-appointed trustee for a number of family trusts for which he provides
investment management services.
|
The
forgoing information regarding the experience, qualifications, attributes and
skills of Trustees is provided pursuant to requirements of the SEC, and does
not constitute holding out of the Board or any Trustee as having any special
expertise or experience, and shall not impose any greater responsibility or
liability on any such person or on the Board by reason thereof.
COMMITTEE
STRUCTURE
The
Board has established a standing Audit Committee and a standing Governance
Committee to assist the Board in the oversight and direction of the business
and affairs of the Trust. Each Committee is comprised of all of the members of
the Board, all of whom are Independent Trustees.
Audit Committee
. This Committee met two times during 2011. The
duties of this Committee include meeting with representatives of the Trust’s
independent registered public accounting firm to review fees, services,
procedures, conclusions and recommendations of independent registered public
accounting firms and to discuss the Trust’s system of internal controls.
Thereafter, the Committee reports to the Board the Committee’s findings and
recommendations concerning internal accounting matters as well as its
recommendation for retention or dismissal of the auditing firm. Mr. Short has
served as the Chairperson of the Audit Committee since January 1, 2006. Except
for any duties specified herein or pursuant to the Trust’s charter document,
the designation of Chairperson of the Audit Committee does not impose on such
Independent Trustee any duties, obligations or liability that is greater than
the duties, obligations or liability imposed on such person as a member of the
Board, generally.
Governance
Committee.
This Committee met two times during 2011. The duties of this Committee
include consideration of recommendations on nominations for Trustees, review of
the composition of the Board, and recommendations of meetings, compensation and
similar matters. In addition, on an annual basis, the Governance Committee
conducts an evaluation of the performance of the Board and its Committees,
including the effectiveness of the Board’s Committee structure and the number of
funds on whose Board each Trustee serves. When considering potential nominees
for election to the Board and to fill vacancies occurring on the Board, where
shareholder approval is not required, and as part of the annual
self-evaluation, the Governance Committee reviews the mix of skills and other
relevant experiences of the Trustees. Currently, Ms. Pigott serves as the
Chairperson of the Governance Committee.
The
Independent Trustees shall, when identifying candidates for the position of Independent
Trustee, consider candidates recommended by a shareholder of the Fund if such
recommendation provides sufficient background information concerning the
candidate and evidence that the candidate is willing to serve as an Independent
Trustee if selected, and is received in a sufficiently timely manner.
Shareholders should address recommendations in writing to the attention of the
Governance Committee, c/o the Secretary of the Trust. The Secretary shall
retain copies of any shareholder recommendations which meet the foregoing
requirements for a period of not more than 12 months following receipt. The
Secretary shall have no obligation to acknowledge receipt of any shareholder
recommendations.
OFF
ICER
INFORMATION
The
executive officers of the Trust, their age and address, the positions they hold
with the Trust, their term of office and length of time served and their
principal business occupations during the past five years are shown below.
28
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|
OFFICER’S NAME,
ADDRESS (1)
AND AGE
|
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POSITION(S) HELD
WITH TRUST
|
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TERM OF
OFFICE AND
LENGTH OF TIME
SERVED (2)
|
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|
PRINCIPAL OCCUPATIONS
DURING THE PAST FIVE YEARS
|
|
Russell
G. Brennan,
47
|
|
|
Assistant Vice President and
Assistant Treasurer
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|
Since 2008
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Assistant
Vice President of the Adviser, Van Eck Associates Corporation (Since 2008);
Manager (Portfolio Administration) of the Adviser (September 2005-October
2008); Officer of other investment companies advised by the Adviser.
|
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Charles
T.
Cameron, 53
|
|
|
Vice President
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Since 1996
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Director
of Trading (Since 1995) and Portfolio Manager (Since 1997) for the Adviser;
Officer of other investment companies advised by the Adviser.
|
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John J.
Crimmins,
54
|
|
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Vice President, Treasurer, Chief
Financial Officer and Principal Accounting Officer
|
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Since 2009 (Treasurer); since
2012 (Vice President, Chief Financial Officer and Principal Accounting
Officer)
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Vice
President of Portfolio Administration of the Adviser (Since 2009); Vice
President of Van Eck Securities Corporation (VESC) and Van Eck Absolute
Return Advisers (VEARA) (Since 2009); Chief Financial, Operating and
Compliance Officer, Kern Capital Management LLC (September 1997-February
2009); Officer of other investment companies advised by the Adviser.
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Wu-Kwan
Kit, 30
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Assistant Vice President and
Assistant Secretary
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Since 2011
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Assistant
Vice President, Associate General Counsel and Assistant Secretary of the
Adviser, VESC and VEARA (Since 2011); Associate, Schulte Roth & Zabel LLP
(September 2007-August 2011)
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Susan C.
Lashley,
57
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Vice President
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Since 1998
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Vice
President of the Adviser and VESC; Officer of other investment companies
advised by the Adviser.
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Thomas K.
Lynch,
55
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Vice President and Chief
Compliance Officer
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Since 2007
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Chief
Compliance Officer of the Adviser and VEARA (Since December 2006) and VESC
(Since August 2008); Officer of other investment companies advised by the
Adviser.
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Laura I.
Martínez, 32
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|
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Assistant Vice President and
Assistant Secretary
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Since 2008
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Assistant
Vice President, Associate General Counsel and Assistant Secretary of the
Adviser, VESC and VEARA (Since 2008); Associate, Davis Polk & Wardwell
(October 2005-June 2008); Officer of other investment companies advised by
the Adviser.
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Joseph J.
McBrien,
64
|
|
|
Senior Vice President, Secretary
and Chief Legal Officer
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Since 2005
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Senior
Vice President, General Counsel and Assistant Secretary of the Adviser, VESC
and VEARA (Since December 2005); Director of VESC and VEARA (since October
2010); Officer of other investment companies advised by the Adviser.
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Jonathan
R. Simon,
37
|
|
|
Vice President and Assistant
Secretary
|
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Since 2006
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Vice
President, Associate General Counsel and Assistant Secretary of the Adviser,
VESC and VEARA (Since 2006); Officer of other investment companies advised by
the Adviser.
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Bruce J.
Smith, 57
|
|
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Senior Vice President
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Since 1985
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Senior
Vice President, Chief Financial Officer, Treasurer and Controller of the
Adviser, VESC and VEARA (Since 1997); Director of the Adviser, VESC and VEARA
(Since October 2010); Officer of other investment companies advised by the
Adviser.
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Jan F.
van Eck, 48
|
|
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Chief Executive Officer and
President
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Since 2005 (serves as Chief
Executive Officer and President since 2010, prior thereto served as Executive
Vice President)
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Director
and Owner of the Adviser (Since July 1993); Executive Vice President of the
Adviser (January 1985 - October 2010); Director (Since November 1985),
President (Since October 2010) and Executive Vice President (June 1991 -
October 2010) of VESC; Director and President of VEARA; Trustee, President
and Chief Executive Officer of Market Vectors ETF Trust; Officer of other
investment companies advised by the Adviser.
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(1)
|
The address for each Executive
Officer is 335 Madison Avenue, 19th Floor, New York, NY 10017.
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(2)
|
Officers are elected yearly by
the Trustees.
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29
T
RUSTEE
SHARE OWNERSHIP
For
each Trustee, the dollar range of equity securities beneficially owned by the
Trustee in the Fund and in all registered investment companies advised by the
Adviser (“Family of Investment Companies”) that are overseen by the Trustee is
shown below.
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Name of Trustee
|
|
Dollar Range of Equity Securities in
the Fund
(As of December 31, 2011)
|
|
Aggregate Dollar Range of Equity
Securities in all Registered Investment
Companies Overseen By Trustee In
Family of Investment Companies
(As of December 31, 2011)*
|
|
|
|
|
|
|
Jon Lukomnik
|
|
None
|
|
Over $100,000
|
|
Jane DiRenzo
Pigott
|
|
None
|
|
Over $100,000
|
|
Wayne H. Shaner
|
|
None
|
|
$1 - $10,000
|
|
R. Alastair Short
|
|
None
|
|
Over $100,000
|
|
Richard D.
Stamberger
|
|
None
|
|
Over $100,000
|
|
Robert L. Stelzl
|
|
None
|
|
Over $100,000
|
|
|
* Includes
shares which may be deemed to be beneficially owned through the Trustee
Deferred Compensation Plan.
As of 30
days prior to the date of filing this SAI, all of the Trustees and Officers as
a group owned less than 1% of shares outstanding of the Fund and each class of
the Fund.
As to each
Independent Trustee and his/her immediate family members, no person owned
beneficially or of record securities in an investment manager or principal
underwriter of the Fund, 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 Fund.
2
012
COMPENSATION TABLE
The
Trustees are paid for services rendered to the Trust and Van Eck VIP Trust (the
“Van Eck Trusts”), each a registered investment company managed by the Adviser,
which are allocated to each series of the Van Eck Trusts based on their average
daily net assets. Each Independent Trustee is paid an annual retainer of
$50,000, a per meeting fee of $7,500 for scheduled quarterly meetings of the
Board and each special meeting of the Board and a per meeting fee of $5,000 for
telephonic meetings. The Van Eck Trusts pay the Chairperson of the Board an
annual retainer of $20,000, the Chairperson of the Audit Committee an annual
retainer of $10,000 and the Chairperson of the Governance Committee an annual
retainer of $10,000. The Van Eck Trusts also reimburse 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 compensation paid to the Trustees for the fiscal year
ended December 31, 2011. Annual Trustee fees may be reviewed periodically and
changed by the Board.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jon
Lukomnik
|
|
Jane DiRenzo
Pigott
|
|
Wayne
Shaner
|
|
R. Alastair
Short
|
|
Richard D.
Stamberger
|
|
Robert
Stelzl
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Compensation from the Van Eck Trusts
|
|
$
|
100,000
|
|
$
|
90,000
|
|
$
|
90,000
|
|
$
|
100,000
|
|
$
|
110,000
|
|
$
|
90,000
|
|
|
Aggregate
Deferred Compensation from the Van Eck Trusts
|
|
$
|
50,000
|
|
$
|
90,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
27,500
|
|
$
|
45,000
|
|
|
Pension
or Retirement Benefits Accrued as Part of the Van Eck Trusts’ Expenses
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Estimated
Annual Benefits Upon Retirement
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Total Compensation
From the Van Eck Trusts and the Fund Complex
(1)
Paid to Trustee
|
|
$
|
100,000
|
|
$
|
90,000
|
|
$
|
90,000
|
|
$
|
255,875
|
|
$
|
249,750
|
|
$
|
90,000
|
|
|
|
|
|
(1)
|
The “Fund Complex” consists of
the Van Eck Trusts and Market Vectors ETF Trust.
|
|
|
30
P
RINCIPAL
SHAREHOLDERS
As of 30
days prior to the date of filing this SAI
, no person owned directly or through one or more
controlled companies 5% or more of the Fund or any class of the Fund’s
outstanding shares.
P
OTENTIAL
CONFLICTS OF INTEREST
The
Adviser (and its principals, affiliates or employees) may serve as investment
adviser to other client accounts and conduct investment activities for their
own accounts. Such “Other Clients” may have investment objectives or may
implement investment strategies similar to those of the Fund. When the Adviser
implements investment strategies for Other Clients that are similar or directly
contrary to the positions taken by the Fund, the prices of the Fund’s
securities may be negatively affected. For example, when purchase or sales
orders for the Fund are aggregated with those of other funds and/or Other
Clients and allocated among them, the price that the Fund pays or receives may
be more in the case of a purchase or less in a sale than if the Adviser served as
adviser to only the Fund. When Other Clients are selling a security that the
Fund owns, the price of that security may decline as a result of the sales. The
compensation that the Adviser receives from other clients may be higher than
the compensation paid by the Fund to the Adviser. The Adviser does not believe
that its activities materially disadvantage the Fund. The Adviser has
implemented procedures to monitor trading across funds and its Other Clients.
P
ROXY
VOTING POLICIES AND PROCEDURES
The Fund’s
proxy voting record is available upon request and on the SEC’s website at
http://www.sec.gov
.
Proxies for the 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 the 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 Fund is available through the Fund’s
website, at vaneck.com, or by writing to 335 Madison Avenue, 19th Floor, New
York, New York 10017. The Fund’s Form N-PX is also available on the SEC’s
website at www.sec.gov.
C
ODE
OF ETHICS
The Fund,
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 Fund 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 the Fund on the day that the
personnel of the Adviser requests pre-clearance, 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 Fund. 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.
31
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. A Personnel member may purchase
securities in an IPO or private placement, provided that he or she obtains
pre-clearance of the purchase and makes certain representations.
P
URCHASE OF
SHARES
The Fund
may invest in securities or futures contracts listed on foreign exchanges which
trade on Saturdays or other customary United States national business holidays
(i.e., days on which the Fund is not open for business). Consequently, since
the Fund will compute its net asset values only Monday through Friday,
exclusive of national business holidays, the net asset values of shares of the
Fund may be significantly affected on days when an investor has no access to
the Fund. The sale of shares will be suspended during any period when the
determination of net asset value is suspended, and may be suspended by the
Board whenever the Board judges it is in the Fund’s best interest to do so.
Certificates
for shares of the Fund will not be issued.
If you
purchase shares through a financial intermediary, different purchase minimums
may apply. Van Eck reserves the right to waive the investment minimums under
certain circumstances.
The Fund
may reject a purchase order for any reason, including an exchange purchase,
either before or after the purchase.
Van Eck
reserves the right to allow a financial intermediary that has a Class I
Agreement with Van Eck to purchase shares for its own omnibus account and for
its clients’ accounts in Class I shares of the Fund on behalf of its eligible
clients which are Employer-Sponsored Retirement Plans with plan assets of $3
million or more.
A
VAILABILITY OF
DISCOUNTS
An investor
or the Broker or Agent must notify DST or the Distributor at the time of
purchase whenever a quantity discount or reduced sales charge is applicable to
a purchase. Quantity discounts described above may be modified or terminated at
any time without prior notice.
B
REAKPOINT
LINKAGE RULES FOR DISCOUNTS
The term
“spouse” also includes civil union and common law marriage as defined by the
state laws of residence. The term “child” also includes stepchild. Trust
accounts may be linked by trustee if the primary owner or family member is
related, by trustee, by grantor and by beneficiary.
V
ALUATION OF
SHARES
The net
asset value per share of the Fund is computed by dividing the value of all of
the Fund’s securities plus cash and other assets, less liabilities, by the
number of shares outstanding. The net asset value per share is computed as of
the close of the NYSE, usually 4:00 p.m. New York time, Monday through Friday,
exclusive of national business holidays. The Fund will be closed on the
following national business holidays: New Year’s Day, Martin Luther King Jr.
Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day (or the days on which these holidays are observed).
Shares of
the Fund are sold at the public offering price, which is determined once each
day the Fund is open for business and is the net asset value per share. The net
asset values need not be computed on a day in which no orders to purchase, sell
or redeem shares of the Fund have been received.
32
Dividends
paid by the Fund with respect to Class A, Class C, Class I and Class Y shares
will be calculated in the same manner, at the same time and on the same day and
will be in the same amount, except that the higher distribution services fee
and any incremental transfer agency and registration costs relating to Class C
shares will be borne exclusively by that Class. The Board has determined that
currently no conflict of interest exists between the Class A, Class C, Class I
and Class Y shares. On an ongoing basis, the Board, pursuant to their fiduciary
duties under the 1940 Act and state laws, will seek to ensure that no such
conflict arises.
Class A
shares of the Fund are sold at the public offering price, which is determined
once each day the Fund is open for business and is the net asset value per
share plus a sales charge in accordance with the schedule set forth in the
Prospectus.
In
determining whether a deferred sales charge is applicable to Class C shares,
the calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first from any Class A shares in the shareholder’s Fund account (unless a
specific request is made to redeem a specific class of shares), Class C shares
held for over one year and shares attributable to appreciation or shares
acquired pursuant to reinvestment, and third of any Class C shares held longest
during the applicable period.
The value
of a financial futures or commodity futures contract equals the unrealized gain
or loss on the contract that is determined by marking it to the current
settlement price for a like contract acquired on the day on which the commodity
futures contract is being valued. A settlement price may not be used if the
market makes a limit move with respect to a particular commodity. Securities or
futures contracts for which market quotations are readily available are valued
at market value, which is currently determined using the last reported sale
price. If no sales are reported as in the case of most securities traded
over-the-counter, securities are valued at the mean of their bid and asked
prices at the close of trading on the NYSE. In cases where securities are
traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board as the primary market.
Short-term investments having a maturity of 60 days or less are valued at
amortized cost, which approximates market. Options are valued at the last sales
price unless the last sales price does not fall within the bid and ask prices
at the close of the market, at which time the mean of the bid and ask prices is
used. All other securities are valued at their fair value as determined in good
faith by the Board. Foreign securities or futures contracts quoted in foreign
currencies are valued at appropriately translated foreign market closing prices
or as the Board may prescribe.
Generally,
trading in foreign securities and futures contracts, as well as corporate
bonds, United States Government securities and money market instruments, is
substantially completed each day at various times prior to the close of the
NYSE. The values of such securities used in determining the net asset value of
the shares of the Fund may be computed as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the NYSE.
Occasionally, events affecting the value of such securities and such exchange
rates may occur between such times and the close of the NYSE which will not be
reflected in the computation of the Fund’s net asset values. If events
materially affecting the value of such securities occur during such period,
then these securities may be valued at their fair value as determined in good
faith by the Board.
The Fund’s
investments are generally valued based on market quotations. When market
quotations are not readily available for a portfolio security, the 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. As a
general principle, the current fair value of a security is the amount which the
Fund might reasonably expect to receive for the security upon its current sale.
The Fund’s Pricing Committee, whose members are selected by the senior
management of the Adviser, is responsible for recommending fair value
procedures to the Board and for administering the process used to arrive at
fair value prices. Factors that may cause the Fund to use the fair value of a
portfolio security to calculate the Fund’s NAV include, but are not limited to:
(1) market quotations are not readily available because a portfolio security is
not traded in a public market or the principal market in which the security
trades is closed, (2) trading in a portfolio security is limited or suspended
and not resumed prior to the time at
33
which the Fund calculates its NAV, (3) the market for the relevant
security is thin, or “stale” because its price doesn’t change in 5 consecutive
business days, (4) the Investment Adviser determines that a market quotation is
inaccurate, for example, because price movements are highly volatile and cannot
be verified by a reliable alternative pricing source, or (5) where a
significant event affecting the value of a portfolio security is determined to
have occurred between the time of the market quotation provided for a portfolio
security and the time at which the Fund calculates its NAV.
In
determining the fair value of securities, the Pricing Committee will consider,
among other factors, the fundamental analytical data relating to the security,
the nature and duration of any restrictions on disposition of the security, and
the forces influencing the market in which the security is traded.
Foreign
securities in which the Fund invest may be traded in markets that close before
the time that the Fund calculates its NAV. Foreign securities are normally
priced based upon the market quotation of such securities as of the close of
their respective principal markets, as adjusted to reflect the Investment
Adviser’s determination of the impact of events, such as a significant movement
in the U.S. markets occurring subsequent to the close of such markets but prior
to the time at which the Fund calculates its NAV. In such cases, the Pricing
Committee will apply a fair valuation formula to all foreign securities based
on the Committee’s determination of the effect of the U.S. significant event
with respect to each local market.
The Board
authorized the Adviser to retain an outside pricing service to value certain
portfolio securities. The pricing service uses an automated system
incorporating a model based on multiple parameters, including a security’s
local closing price (in the case of foreign securities), relevant general and
sector indices, currency fluctuations, and trading in depositary receipts and
futures, if applicable, and/or research evaluations by its staff, in
determining what it believes is the fair valuation of the portfolio securities
valued by such pricing service.
There can
be no assurance that the Fund could purchase or sell a portfolio security at
the price used to calculate the Fund’s NAV. Because of the inherent uncertainty
in fair valuations, and the various factors considered in determining value
pursuant to the Fund’s fair value procedures, there can be significant
deviations between a fair value price at which a portfolio security is being
carried and the price at which it is purchased or sold. Furthermore, changes in
the fair valuation of portfolio securities may be less frequent, and of greater
magnitude, than changes in the price of portfolio securities valued by an
independent pricing service, or based on market quotations.
E
XCHANGE
PRIVILEGE
Shareholders
of the Fund may exchange their shares for shares of the same class of other
funds in the Trust. The Exchange Privilege will not be available if the
proceeds from a redemption of shares of the Fund whose shares qualify are paid
directly to the shareholder. The Exchange Privilege is not available for shares
which are not on deposit with DST or State Street Bank and Trust Company
(“SSBT”), or shares which are held in escrow pursuant to a Letter of Intent. If
certificates representing shares of the Fund accompany a written exchange request,
such shares will be deposited into an account with the same registration as the
certificates upon receipt by DST.
The Fund
reserves the right to (i) charge a fee of not more than $5.00 per exchange
payable to the Fund or charge a fee reasonably intended to cover the costs
incurred in connection with the exchange; (ii) establish a limit on the number
and amount of exchanges made pursuant to the Exchange Privilege, as disclosed
in the Prospectus and (iii) terminate the Exchange Privilege without written
notice. In the event of such termination, shareholders who have acquired their
shares pursuant to the Exchange Privilege will be afforded the opportunity to
re-exchange such shares for shares of the Fund originally purchased without
sales charge, for a period of not less than three (3) months.
By
exercising the Exchange Privilege, each shareholder whose shares are subject to
the Exchange Privilege will be deemed to have agreed to indemnify and hold
harmless the Trust and each of
34
its series, their Adviser, sub-investment adviser (if any),
distributor, transfer agent, SSBT and the officers, directors, employees and
agents thereof against any liability, damage, claim or loss, including
reasonable costs and attorneys’ fees, resulting from acceptance of, or acting
or failure to act upon, or acceptance of unauthorized instructions or
non-authentic telephone instructions given in connection with, the Exchange
Privilege, so long as reasonable procedures are employed to confirm the
authenticity of such communications. (For more information on the Exchange
Privilege, see the Prospectus).
Eligible
shareholders may convert their shares from one class to another class within
the same Fund, without any conversion fee, upon request by such shareholders or
their financial intermediaries. For federal income tax purposes, a same-fund
conversion from one class to another is not expected to result in the
realization by the shareholder of a capital gain or loss (non-taxable conversion).
Generally, Class C shares subject to a contingent deferred redemption charge
(“CDRC”) and Class A shares subject to a contingent deferred sales charge
(“CDSC”) are not eligible for conversion until the applicable CDRC or CDSC
period has expired. Not all share classes are available through all financial
intermediaries or all their account types or programs. To determine whether you
are eligible to invest in a specific class of shares, see the section of the
Prospectus entitled “Shareholder Information - How to Choose a Class of Shares”
and contact your financial intermediary for additional information.
I
NVESTMENT
PROGRAMS
Dividend
Reinvestment Plan
. Reinvestments of dividends of the Fund will occur
on a date selected by the Board.
Automatic
Exchange Plan
. Investors may arrange under the Automatic
Exchange Plan to have DST collect a specified amount once a month or quarter
from the investor’s account in the Fund and purchase full and fractional shares
of another Fund in the same class at the public offering price next computed
after receipt of the proceeds. Further details of the Automatic Exchange Plan
are given in the application which is available from DST or the Fund. Class C
shares are not eligible.
An
investor should realize that he is investing his funds in securities subject to
market fluctuations, and accordingly the Automatic Exchange Plan does not
assure a profit or protect against depreciation in declining markets. The
Automatic Exchange Plan contemplates the systematic purchase of securities at
regular intervals regardless of price levels.
The
expenses of the Automatic Exchange Plan are general expenses of the Fund and
will not involve any direct charge to the participating shareholder. The
Automatic Exchange Plan is completely voluntary and may be terminated on
fifteen days’ notice to DST.
Letter
of Intent (“LOI” or “Letter”)
. For LOIs, out of an initial purchase (or
subsequent purchases if necessary), 5% of the specified dollar amount of an LOI
will be held in escrow by DST in a shareholder’s account until the
shareholder’s total purchases of the Fund (except the Money Fund) pursuant to
the LOI plus a shareholder’s accumulation credit (if any) equal the amount
specified in the Letter. A purchase not originally made pursuant to an LOI may
be included under a backdated Letter executed within 90 days of such purchase
(accumulation credit). If total purchases pursuant to the Letter plus any
accumulation credit are less than the specified amount of the Letter, the
shareholder must remit to the Distributor an amount equal to the difference in
the dollar amount of sales charge the shareholder actually paid and the amount
of sales charge which the shareholder would have paid on the aggregate
purchases if the total of such purchases had been made at a single time. If the
shareholder does not within 20 business days after written request by the
dealer or bank or by the Distributor pay such difference in sales charge, DST,
upon instructions from the Distributor, is authorized to cause to be
repurchased (liquidated) an appropriate number of the escrowed shares in order
to realize such difference. A shareholder irrevocably constitutes and appoints
DST, as escrow agent, to surrender for repurchase any or all escrowed shares
with full power of substitution in the premises and agree to the
35
terms and conditions set forth in the Prospectus
and SAI. A LOI is not effective until it is accepted by the Distributor.
Automatic
Investment Plan
. Investors may arrange under the Automatic
Investment Plan to have DST collect a specified amount once a month or quarter
from the investor’s checking account and purchase full and fractional shares of
the Fund at the public offering price next computed after receipt of the
proceeds. Further details of the Automatic Investment Plan are given in the
application which is available from DST or the Fund.
An
investor should realize that he is investing his funds in securities subject to
market fluctuations, and accordingly the Automatic Investment Plan does not
assure a profit or protect against depreciation in declining markets. The
Automatic Investment Plan contemplates the systematic purchase of securities at
regular intervals regardless of price levels.
The
expenses of the Automatic Investment Plan are general expenses of the Fund and
will not involve any direct charge to the participating shareholder. The
Automatic Investment Plan is completely voluntary. The Automatic Investment
Plan may be terminated on thirty days’ notice to DST.
Automatic
Withdrawal Plan
. The Automatic Withdrawal Plan is designed to
provide a convenient method of receiving fixed redemption proceeds at regular
intervals from shares of the Fund deposited by the investor under this Plan.
Class C share are not eligible, except for automatic withdrawals for the
purpose of retirement account distributions. Further details of the Automatic
Withdrawal Plan are given in the application, which is available from DST or
the Fund.
In
order to open an Automatic Withdrawal Plan, the investor must complete the
Application and deposit or purchase for deposit, with DST, the agent for the
Automatic Withdrawal Plan, shares of the Fund having a total value of not less
than $10,000 based on the offering price on the date the Application is
accepted, except for automatic withdrawals for the purpose of retirement
account distributions.
Income
dividends and capital gains distributions on shares under an Automatic
Withdrawal Plan will be credited to the investor’s Automatic Withdrawal Plan
account in full and fractional shares at the net asset value in effect on the
reinvestment date.
Periodic
checks for a specified amount will be sent to the investor, or any person
designated by him, monthly or quarterly (January, April, July and October). The
Fund will bear the cost of administering the Automatic Withdrawal Plan.
Redemption
of shares of the Fund deposited under the Automatic Withdrawal Plan may deplete
or possibly use up the initial investment plus income dividends and
distributions reinvested, particularly in the event of a market decline. In
addition, the amounts received by an investor cannot be considered an actual yield
or income on his investment, since part of such payments may be a return of his
capital. The redemption of shares under the Automatic Withdrawal Plan may give
rise to a taxable event.
The
maintenance of an Automatic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge payable with respect to such purchases. An investor may not have an
Automatic Withdrawal Plan in effect and at the same time have in effect an
Automatic Investment Plan or an Automatic Exchange Plan. If an investor has an
Automatic Investment Plan or an Automatic Exchange Plan, such service must be
terminated before an Automatic Withdrawal Plan may take effect.
The
Automatic Withdrawal Plan may be terminated at any time (1) on 30 days notice
to DST or from DST to the investor, (2) upon receipt by DST of appropriate
evidence of the investor’s death or (3) when all shares under the Automatic
Withdrawal Plan have been redeemed. Upon termination, unless otherwise
requested, certificates representing remaining full shares, if any, will be
delivered to the investor or his duly appointed legal representatives.
36
S
HARES PURCHASED
BY NON-U.S. FINANCIAL INSTITUTIONS
Class A
shares of the Fund which are sold with a sales charge may be purchased by a
foreign bank or other foreign fiduciary account, with an international selling
agreement, for the benefit of foreign investors at the sales charge applicable
to the Fund’s $500,000 breakpoint level, in lieu of the sales charge in the
above scale. The Distributor has entered into arrangements with foreign
financial institutions pursuant to which such institutions may be compensated
by the Distributor from its own resources for assistance in distributing Fund
shares. Clients of Netherlands’ insurance companies who are not U.S. citizens
or residents may purchase shares without a sales charge. Clients of fee-only
advisors that purchase shares through a foreign bank or other foreign fiduciary
account for the benefit of foreign investors may purchase shares without a
sales charge.
T
AXES
The
following summary outlines certain federal income tax considerations relating
to an investment in the Fund by a taxable U.S. investor (as defined below). This
summary is intended only to provide general information to U.S. investors that
hold the shares as a capital asset, is not intended as a substitute for careful
tax planning, does not address any foreign, state or local tax consequences of
an investment in the Fund, and does not address the tax considerations that may
be relevant to investors subject to special treatment under the Code. This
summary should not be construed as legal or tax advice. This summary is based
on the provisions of the Code, applicable U.S. Treasury regulations,
administrative pronouncements of the Internal Revenue Service and judicial
decisions in effect as of March 2012. Those authorities may be changed,
possibly retroactively, or may be subject to differing interpretations so as to
result in U.S. federal income tax consequences different from those summarized
herein. Prospective investors should consult their own tax advisors concerning
the potential federal, state, local and foreign tax consequences of an
investment in the Fund, with specific reference to their own tax situation.
As used
herein, the term “U.S. investor” means an investor that, for U.S. federal
income tax purposes, is (1) an individual who is a citizen or resident of the
U.S., (2) a corporation, or other entity taxable as a corporation, that is
created or organized in or under the laws of the U.S. or of any political
subdivision thereof, (3) an estate, the income of which is subject to U.S.
federal income tax regardless of its source, or (4) a trust if (i) it is
subject to the primary supervision of a court within the U.S. and one or more
U.S. persons as described in Code Section 7701(a)(30) have the authority to
control all substantial decisions of the trust or (ii) it has a valid election
in effect under applicable U.S. Treasury regulations to be treated as a U.S.
person. If a partnership or other entity treated as a partnership holds the
shares, the tax treatment of a partner in such partnership or equity owner in
such other entity generally will depend on the status of the partner or equity
owner and the activities of the partnership or other entity.
TAXATION OF THE FUND IN
GENERAL
The Fund
intends to continue to qualify and elect to be treated each taxable year as a
“regulated investment company” under Subchapter M of the Code. To so qualify,
the Fund must, among other things, (a) derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock, securities or foreign currencies, or
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; and (b) satisfy certain diversification requirements.
As a
regulated investment company, the Fund will not be subject to federal income
tax on its net investment income and capital gain net income (net long-term
capital gains in excess of net short-term capital losses) that it distributes
to shareholders if at least 90% of its net investment company taxable income
for the taxable year is distributed. However, if for any taxable year the Fund
does not satisfy the requirements of Subchapter M of the Code, all of its
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distribution to shareholders, and such distributions
37
will be taxable to shareholders as dividend income to the extent of the
Fund’s current or accumulated earnings or profits.
The Fund
will be liable for a nondeductible 4% excise tax on amounts not distributed on
a timely basis in accordance with a calendar year distribution requirement. To
avoid the tax, during each calendar year the Fund must distribute, or be deemed
to have distributed, (i) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (ii) at least 98.2%
of its capital gains in excess of its capital losses (adjusted for certain
ordinary losses) for the twelve month period ending on October 31 (or December
31, if the Fund so elects), and (iii) all ordinary income and capital gains for
previous years that were not distributed during such years. For this purpose,
any income or gain retained by the Fund that is subject to corporate tax will
be considered to have been distributed by year-end. The Fund intends to make
sufficient distributions to avoid this 4% excise tax.
TAXATION OF THE FUND’S
INVESTMENTS
Original
Issue Discount and Market Discount.
For federal
income tax purposes, debt securities purchased by the Fund may be treated as
having original issue discount. Original issue discount represents interest for
federal income tax purposes and can generally be defined as the excess of the
stated redemption price at maturity of a debt obligation over the issue price.
Original issue discount is treated for federal income tax purposes as income
earned by the Fund, whether or not any income is actually received, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount included in the income of the Fund each
year is determined on the basis of a constant yield to maturity which takes
into account the compounding of accrued interest. Because the Fund must include
original issue discount in income, it will be more difficult for the Fund to
make the distributions required for it to maintain its status as a regulated
investment company under Subchapter M of the Code or to avoid the 4% excise tax
described above.
Debt
securities may be purchased by the Fund at a discount which exceeds the
original issue discount remaining on the securities, if any, at the time the
Fund purchased the securities. This additional discount represents market
discount for federal income tax purposes. In the case of any debt security
issued after July 18, 1984, having a fixed maturity date of more than one year
from the date of issue and having market discount, the gain realized on
disposition will be treated as interest to the extent it does not exceed the
accrued market discount on the security (unless the Fund elect to include such
accrued market discount in income in the tax years to which it is
attributable). Generally, market discount is accrued on a daily basis. The Fund
may be required to capitalize, rather than deduct currently, part or all of any
direct interest expense incurred or continued to purchase or carry any debt
security having market discount, unless it makes the election to include market
discount currently.
Options
and Futures Transactions.
Certain of the Fund’s investments may be
subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund’s income for purposes of the 90% test, the excise
tax and the distribution requirements applicable to regulated investment
companies, (ii) defer recognition of realized losses, and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to options and futures contracts. The
extent to which the Fund makes such investments may be materially limited by
these provisions of the Code.
Foreign
Currency Transactions.
Under Section 988 of the Code, special
rules are provided for certain foreign currency transactions. Foreign currency
gains or losses from foreign currency contracts (whether or not traded in the
interbank market), from futures contracts on foreign currencies that are not
“regulated futures contracts,” and from unlisted or equity options are treated
as ordinary income or loss under Section 988. The Fund may elect to have
foreign currency-related regulated futures contracts and listed non-equity
options be subject to ordinary income or loss treatment under Section 988. In
addition, in certain circumstances, the Fund may elect capital gain or loss
treatment for foreign currency transactions. The rules under Section 988 may
also affect the timing of income recognized by the Fund. Under future Treasury
Regulations, any such transactions that are not directly related to the Fund’s
investment in stock or securities (or its options contracts or futures
contracts with respect to stock or
38
securities) may have to be limited in order to
enable the Fund to satisfy the qualifying income test described above.
TAXATION OF THE
SHAREHOLDERS
Dividends
of net investment income and the excess of net short-term capital gain over net
long-term capital loss are generally taxable as ordinary income to
shareholders. However, for taxable years beginning before January 1, 2013, a
portion of the dividend income received by the Fund may constitute qualified
dividend income eligible for a maximum rate of tax of 15% to individuals,
trusts and estates. If the aggregate amount of qualified dividend income
received by the Fund during any taxable year is less than 95% of the Fund’s
gross income (as specifically defined for that purpose), the qualified dividend
rule applies only if and to the extent reported by the Fund as qualified dividend
income. The Fund may report such dividends as qualified dividend income only to
the extent the Fund itself has qualified dividend income for the taxable year
with respect to which such dividends are made. Qualified dividend income is
generally dividend income from taxable domestic corporations and certain
foreign corporations (e.g., foreign corporations incorporated in a possession
of the United States or in certain countries with comprehensive tax treaties
with the United States, or the stock of which is readily tradable on an
established securities market in the United States), provided the Fund has held
the stock in such corporations for more than 60 days during the 121 day period
beginning on the date which is 60 days before the date on which such stock
becomes ex-dividend with respect to such dividend (the “holding period
requirement”). In order to be eligible for the 15% maximum rate on dividends
from the Fund attributable to qualified dividends, shareholders must separately
satisfy the holding period requirement with respect to their Fund shares.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) that are properly reported by the Fund as
such are taxable to shareholders as long-term capital gain, regardless of the
length of time the shares of the Fund have been held by such shareholders,
except to the extent of gain from a sale or disposition of collectibles, such
as precious metals, taxable currently at a 28% rate. Any loss realized upon a
taxable disposition of shares within a year from the date of their purchase
will be treated as a long-term capital loss to the extent of any long-term
capital gain distributions received by shareholders during such period.
Dividends
of net investment income and distributions of net capital gain will be taxable
as described above whether received in cash or reinvested in additional shares.
When distributions are received in the form of shares issued by the Fund, the
amount of the dividend/distribution deemed to have been received by
participating shareholders generally is the amount of cash which would
otherwise have been received. In such case, participating shareholders will
have a basis for federal income tax purposes in each share received from the
Fund equal to such amount of cash.
Dividends
and/or distributions by the Fund result in a reduction in the net asset value
of the Fund’s shares. Should a dividend/distribution reduce the net asset value
below a shareholder’s cost basis, such dividend/distribution nevertheless would
be taxable to the shareholder as ordinary income or long-term capital gain as
described above, even though, from an investment standpoint, it may constitute
a partial return of capital. In particular, investors should be careful to
consider the tax implications of buying shares just prior to a
dividend/distribution. The price of shares purchased at that time includes the
amount of any forthcoming dividend/distribution. Those investors purchasing
shares just prior to a dividend/distribution will then receive a return of
their investment upon payment of such dividend/distribution which will
nevertheless be taxable to them.
If the
Fund’s distributions exceed its taxable income and capital gains realized
during a taxable year, all or a portion of the distributions made in the same
taxable year may be recharacterized as a return of capital to shareholders. A
return of capital distribution will generally not be taxable, but will reduce
each shareholder’s cost basis in the Fund and result in a higher reported
capital gain or lower reported capital loss when those shares on which the
distribution was received are sold.
39
If a
shareholder (i) incurs a sales load in acquiring shares in the Fund, and (ii)
by reason of incurring such charge or making such acquisition acquires the
right to acquire shares of one or more regulated investment companies without
the payment of a load or with the payment of a reduced load (“reinvestment
right”), and (iii) disposes of the shares before the 91st day after the date on
which the shares were acquired, and (iv) subsequently acquires shares in that
regulated investment company or in another regulated investment company and the
otherwise applicable load charge is reduced pursuant to the reinvestment right,
then the load charge will not be taken into account for purposes of determining
the shareholder’s gain or loss on the disposition. For sales charges incurred
in taxable years beginning after December 22, 2010, this sales charge deferral
rule shall apply only when a shareholder makes such new acquisition of Fund
shares or shares of a different regulated investment company during the period
beginning on the date the original Fund shares are disposed of and ending on
January 31 of the calendar year following the calendar year of the disposition
of the original Fund shares. To the extent such charge is not taken into
account in determining the amount of gain or loss, the charge will be treated
as incurred in connection with the subsequently acquired shares and will have a
corresponding effect on the shareholder’s basis in such shares.
The Fund
may be subject to a tax on dividend or interest income received from securities
of a non-U.S. issuer withheld by a foreign country at the source. The U.S. has
entered into tax treaties with many foreign countries that entitle the Fund to
a reduced rate of tax or exemption from tax on such income. It is impossible to
determine the effective rate of foreign tax in advance since the amount of the
Fund’s assets to be invested within various countries is not known. If more
than 50% of the value of the Fund’s total assets at the close of a taxable year
consists of stocks or securities in foreign corporations, and the Fund satisfies
the holding period requirements, the Fund may elect to pass through to its
shareholders the foreign income taxes paid thereby. In such case, the
shareholders would be treated as receiving, in addition to the distributions
actually received by the shareholders, their proportionate share of foreign
income taxes paid by the Fund, and will be treated as having paid such foreign
taxes. The shareholders generally will be entitled to deduct or, subject to
certain limitations, claim a foreign tax credit with respect to such foreign
income taxes. A foreign tax credit may be allowed for shareholders who hold
shares of the Fund for at least 16 days during the 31-day period beginning on
the date that is 15 days before the ex-dividend date. Under certain circumstances,
individual shareholders who have been passed through foreign tax credits of no
more than $300 ($600 in the case of married couples filing jointly) during a
tax year can elect to claim the foreign tax credit for these amounts directly
on their federal income tax returns (IRS Forms 1040) without having to file a
separate Form 1116 or having to comply with most foreign tax credit
limitations, provided certain other requirements are met.
The Fund
may be required to backup withhold federal income tax at a current rate of 28%
from dividends paid to any shareholder who fails to furnish a certified
taxpayer identification number (“TIN”) or who fails to certify that he or she
is exempt from such withholding, or who the Internal Revenue Service notifies
the Fund as having provided the Fund with an incorrect TIN or failed to
properly report interest or dividends for federal income tax purposes. Any such
withheld amount will be fully creditable on the shareholder’s U.S. federal
income tax return, provided certain requirements are met. If a shareholder
fails to furnish a valid TIN upon request, the shareholder can also be subject
to IRS penalties. The rate of backup withholding is set to increase to 31% for
amounts distributed or paid after December 31, 2012.
New
Legislation
. For taxable years beginning after
January 1, 2013, a 3.8% Medicare contribution tax will be imposed on the net
investment income of certain high-income individuals, trusts and estates. For
this purpose, net investment income generally includes, among other things,
distributions paid by the Fund, including capital gain dividends (but excluding
exempt interest dividends), and any net gain from the sale of Fund shares.
FOREIGN
ACCOUNT TAX COMPLIANCE ACT
The Foreign Account Tax Compliance Act (or “FATCA”) may impose
withholding taxes on certain types of U.S. source income “withholdable
payments” (including dividends, rents, gains from the sale of equity securities
and certain interest payments) made to “foreign financial institutions” and
certain other non-financial foreign entities unless (i) the foreign financial
institution undertakes certain diligence and
40
reporting obligations or (ii) the non-financial foreign entity either
certifies it does not have any substantial U.S. owners or furnishes identifying
information regarding each substantial U.S. owner. To avoid withholding upon
receipt of payments, a foreign financial institution must enter into an
agreement with the U.S. Treasury requiring, among other things, that it
undertake to identify accounts held by certain U.S. persons or U.S.-owned
foreign entities, annually report certain information about such accounts, and
withhold 30% on payments to account holders whose actions prevent it from
complying with these reporting and other requirements. Withholding under this
legislation on withholdable payments to foreign financial institutions and
non-financial foreign entities is expected to apply after December 31, 2014
with respect to gross proceeds of a disposition of property that can produce
U.S. source interest or dividends and after December 31, 2013 with respect to
other withholdable payments (although the legislation may apply sooner for such
other withholdable payments made to non-financial foreign entities).
Prospective investors should consult their own tax advisors regarding this new
legislation.
TAXATION OF NON-U.S.
INVESTORS
The
foregoing summary of certain federal income tax considerations does not apply
to potential investors in the Fund that are not U.S. investors (“Non-U.S.
investors”). Distributions of ordinary income paid to Non-U.S. investors
generally will be subject to a 30% U.S. withholding tax unless a reduced rate
of withholding or a withholding exemption is provided under an applicable
treaty. Prospective investors are urged to consult their tax advisors regarding
the specific tax consequences discussed above.
R
EDEMPTIONS IN
KIND
The Trust
has elected to have the ability to redeem its shares in kind, committing itself
to pay in cash all requests for redemption by any shareholder of record limited
in amount with respect to each shareholder of record during any ninety-day
period to the lesser of (i) $250,000 or (ii) 1% of the net asset value of such
company at the beginning of such period.
A
DDITIONAL
PURCHASE AND REDEMPTION INFORMATION
Dealers and
intermediaries may charge their customers a processing or service fee in
connection with the purchase or redemption of fund shares. The amount and
applicability of such a fee is determined and disclosed to its customers by
each individual dealer. Processing or service fees typically are fixed, nominal
dollar amounts and are in addition to the sales and other charges described in
the Prospectus and this SAI. Your dealer will provide you with specific
information about any processing or service fees you will be charged.
D
ESCRIPTION OF
THE TRUST
The Trust
is an open-end management investment company organized as a business trust
under the laws of the Commonwealth of Massachusetts on April 3, 1985. The
Trustees of the Trust have authority to issue an unlimited number of shares of
beneficial interest of the Fund, $.001 par value. The Trust currently consists
of seven separate series: Emerging Markets Fund, Global Hard Assets Fund,
International Investors Gold Fund, Multi-Manager Alternatives Fund, Long/Flat
Commodity Index Fund, CM Commodity Index Fund and the Fund.
The Fund is
classified as a non-diversified fund under the 1940 Act. A diversified fund is
a fund which meets the following requirements: At least 75% of the value of its
total assets is represented by cash and cash items (including receivables),
Government securities, securities of other investment companies and other
securities for the purpose of this calculation limited in respect of any one
issuer to an amount not greater than 5% of the value of the Fund’s total
assets, and to not more than 10% of the outstanding voting securities of such
issuer. A non-diversified fund is any fund other than a diversified fund. This
means that the Fund at the close of each quarter of its taxable year must, in
general, limit its investment in the securities of a single issuer to (i) no
more than 25% of its assets, (ii) with respect to 50% of the Fund’s assets, no
more than 5% of its assets, and (iii) the Fund will not own more than 10% of
41
outstanding voting securities. The Fund is a separate pool of assets of
the Trust which is separately managed and which may have a different investment
objective from that of another Fund. The Board has the authority, without the
necessity of a shareholder vote, to create any number of new series.
Each share
of the Fund has equal dividend, redemption and liquidation rights and when
issued is fully paid and non-assessable by the Trust. Under the Trust’s Amended
and Restated Master Trust Agreement, as amended (“Master Trust Agreement”), no
annual or regular meeting of shareholders is required. Thus, there will
ordinarily be no shareholder meetings unless required by the 1940 Act. The
Trustees are a self-perpetuating body unless and until fewer than 50% of the
Trustees, then serving as Trustees, are Trustees who were elected by
shareholders. At that time a meeting of shareholders will be called to elect
additional Trustees. On any matter submitted to the shareholders, the holder of
each Trust share is entitled to one vote per share (with proportionate voting
for fractional shares). Under the Master Trust Agreement, any Trustee may be
removed by vote of two-thirds of the outstanding Trust shares, and holders of
ten percent or more of the outstanding shares of the Trust can require Trustees
to call a meeting of shareholders for purposes of voting on the removal of one
or more trustees. Shares of the Fund vote as a separate class, except with
respect to the election of Trustees and as otherwise required by the 1940 Act.
On matters affecting an individual Fund, a separate vote of that Fund is
required. Shareholders of the Fund are not entitled to vote on any matter not
affecting that Fund. In accordance with the 1940 Act, under certain
circumstances, the Trust will assist shareholders in communicating with other
shareholders in connection with calling a special meeting of shareholders.
Under
Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liability for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by the
Trust or the Trustees. The Master Trust Agreement provides for indemnification
out of the Trust’s property of all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations. The Adviser believes that, in view of the above, the risk of
personal liability to shareholders is remote.
42
A
DDITIONAL
INFORMATION
Custodian
. State Street
Bank and Trust Company, One Lincoln Street, Boston, MA 02111 is the custodian
of the Trust’s portfolio securities, cash, coins and bullion. The Custodian is
authorized, upon the approval of the Trust, to establish credits or debits in
dollars or foreign currencies with, and to cause portfolio securities of the
Fund to be held by its overseas branches or subsidiaries, and foreign banks and
foreign securities depositories which qualify as eligible foreign custodians
under the rules adopted by the SEC.
Transfer
Agent
. DST Systems, Inc., 210 West 10th Street, Kansas City, MO 64105 serves
as transfer agent for the Trust.
Independent
Registered Public Accounting Firm
. Ernst & Young LLP, Five Times Square,
New York, NY 10036 serves as independent registered public accounting firm for
the Trust.
Counsel
. Goodwin Procter
LLP, Exchange Place, Boston, MA 02109 serves as counsel to the Trust.
F
INANCIAL
STATEMENTS
The Fund
currently does not have audited financial statements.
43
A
PPENDIX A:
ADVISER’S PROXY VOTING POLICIES
VAN ECK
GLOBAL PROXY VOTING POLICIES
Van Eck Global (the “Adviser”) has adopted
the following policies and procedures which are reasonably designed to ensure
that proxies are voted in a manner that is consistent with the best interests
of its clients in accordance with its fiduciary duties and Rule 206(4)-6 under
the Investment Advisers Act of 1940. 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.
Rule 206(4)-6 also requires the Adviser to
disclose information about the proxy voting procedures to its clients and to
inform clients how to obtain information about how their proxies were voted. Additionally,
Rule 204-2 under the Advisers Act requires the Adviser to maintain certain
proxy voting records.
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.
The Adviser intends to vote all proxies in
accordance with applicable rules and regulations, and in the best interests of
clients without influence by real or apparent conflicts of interest. To assist
in its responsibility for voting proxies and the overall voting process, the
Adviser has engaged an independent third party proxy voting specialist, Glass
Lewis & Co., LLC. The services provided by Glass Lewis include in-depth
research, global issuer analysis, and voting recommendations as well as vote
execution, reporting and recordkeeping.
Resolving Material Conflicts of Interest
When a material conflict of interest exists,
proxies will be voted in the following manner:
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1.
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Strict adherence
to the Glass Lewis guidelines , or
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2.
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The potential
conflict will be disclosed to the client:
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a.
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with a request
that the client vote the proxy,
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b.
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with a
recommendation that the client engage another party to determine how the
proxy should be voted or
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c.
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if the foregoing
are not acceptable to the client, disclosure of how Van Eck 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 Chief Compliance Officer with a written
explanation of the reason for the deviation.
A-1
A
material conflict of interest
means the
existence of a business relationship between a portfolio company or an
affiliate and the Adviser, any affiliate or subsidiary, or an “affiliated
person” of a Van Eck mutual fund. Examples of when a material conflict of
interest exists include a 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 the Adviser’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.
Client Inquiries
All inquiries by clients as to how the
Adviser has voted proxies must immediately be forwarded to Portfolio
Administration.
Disclosure to Clients:
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Notification of
Availability of Information
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a.
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Client Brochure -
The Client Brochure or Part II of Form ADV will inform clients that they can
obtain information from the Adviser 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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2.
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Availability of
Proxy Voting Information
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a.
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At the client’s
request or if the information is not available on the Adviser’s website, a
hard copy of the account’s proxy votes will be mailed to each client.
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Recordkeeping
Requirements
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1.
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Van Eck 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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a.
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proxy statements
received;
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b.
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identifying number
for the portfolio security;
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c.
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shareholder
meeting date;
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d.
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brief
identification of the matter voted on;
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e.
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whether the vote
was cast on the matter;
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f.
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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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g.
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records of written
client requests for information on how the Adviser voted proxies on behalf of
the client;
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A-2
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h.
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a copy of written
responses from the Adviser to any written or oral client request for
information on how the Adviser voted proxies on behalf of the client; and any
documents prepared by the Adviser 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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2.
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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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3.
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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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4.
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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
the Adviser. Proxy statements on file with EDGAR or maintained by a third party
and proxy votes maintained by a third party are not subject to these
particular retention requirements.
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Voting Foreign Proxies
At times the Adviser may determine that, in
the best interests of its clients, a particular proxy should not be voted. This
may occur, for example, when the cost of voting a foreign proxy (translation,
transportation, etc.) would exceed the benefit of voting the proxy or voting
the foreign proxy may cause an unacceptable limitation on the sale of the
security. Any such instances will be documented by the Portfolio Manager and
reviewed by the Chief Compliance Officer.
Securities Lending
Certain portfolios managed by the Adviser
participate in securities lending programs to generate additional revenue.
Proxy voting rights generally pass to the borrower when a security is on loan.
The Adviser will use its best efforts to recall a security on loan and vote
such securities if the Portfolio Manager determines that the proxy involves a
material event.
Proxy Voting Policy
The Adviser has reviewed the Glass Lewis
Proxy Guidelines (“Guidelines”) and has determined that the Guidelines are
consistent with the Adviser’s proxy voting responsibilities and its fiduciary
duty with respect to its clients. The Adviser will review any material
amendments to
A-3
the Guidelines.
While it is the Adviser’s policy to generally
follow the Guidelines, the Adviser retains the right, on any specific proxy, to
vote differently from the Guidelines, if the Adviser believes it is in the best
interests of its clients. Any such exceptions will be documented by the Adviser
and reviewed by the Chief Compliance Officer.
The portfolio manager or analyst covering the
security is responsible for making proxy voting decisions. 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.
A-4
Proxy Paper
Guidelines
2012 Proxy
Season
An Overview
of the Glass Lewis Approach to Proxy Advice
United States
A-5
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I. A Board of
Directors That Serves the Interests of Shareholders
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Election of Directors
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The purpose of Glass Lewis’
proxy research and advice is to facilitate shareholder voting in favor of
governance structures that will drive performance, create shareholder value
and maintain a proper tone at the top. Glass Lewis looks for talented boards
with a record of protecting shareholders and delivering value over the
medium- and long-term. We believe that boards working to protect and enhance
the best interests of shareholders are independent, have directors with
diverse backgrounds, have a record of positive performance, and have members
with a breadth and depth of relevant experience.
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Independence
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The independence of directors,
or lack thereof, is ultimately demonstrated through the decisions they make.
In assessing the independence of directors, we will take into consideration,
when appropriate, whether a director has a track record indicative of making
objective decisions. Likewise, when assessing the independence of directors
we will also examine when a director’s service track record on multiple
boards indicates a lack of objective decision-making. Ultimately, we believe
the determination of whether a director is independent or not must take into
consideration both compliance with the applicable independence listing
requirements as well as judgments made by the director.
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We look at each director nominee
to examine the director’s relationships with the company, the company’s
executives, and other directors. We do this to evaluate whether personal,
familial, or financial relationships (not including director compensation)
may impact the director’s decisions. We believe that such relationships make
it difficult for a director to put shareholders’ interests above the
director’s or the related party’s interests. We also believe that a director
who owns more than 20% of a company can exert disproportionate influence on
the board and, in particular, the audit committee.
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Thus, we put directors into
three categories based on an examination of the type of relationship they
have with the company:
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A-6
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Independent Director – An independent director has no material
financial, familial or other current relationships with the company, its
executives, or other board members, except for board service and standard
fees paid for that service. Relationships that existed within three to five
years
1
before the inquiry are usually considered “current” for purposes of this
test.
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In our view, a director who is currently serving in an interim
management position should be considered an insider, while a director who
previously served in an interim management position for less than one year
and is no longer serving in such capacity is considered independent.
Moreover, a director who previously served in an interim management position
for over one year and is no longer serving in such capacity is considered an
affiliate for five years following the date of his/her resignation or
departure from the interim management position. Glass Lewis applies a
three-year look-back period to all directors who have an affiliation with the
company other than former employment, for which we apply a five-year
look-back.
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Affiliated Director – An affiliated director has a material
financial, familial or other relationship with the company or its executives,
but is not an employee of the company.
2
This
includes directors whose employers have a material financial relationship
with the company.
3
In addition, we view a director who owns or controls 20% or more of the
company’s voting stock as an affiliate.
4
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1
NASDAQ originally proposed
a five-year look-back period but both it and the NYSE ultimately settled on a
three-year look-back prior to finalizing their rules. A five-year standard is
more appropriate, in our view, because we believe that the unwinding of
conflicting relationships between former management and board members is more
likely to be complete and final after five years. However, Glass Lewis does
not apply the five-year look-back period to directors who have previously
served as executives of the company on an interim basis for less than one
year.
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2
If a company classifies one
of its non-employee directors as non-independent, Glass Lewis will classify
that director as an affiliate.
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3
We allow a five-year grace
period for former executives of the company or merged companies who have
consulting agreements with the surviving company. (We do not automatically
recommend voting against directors in such cases for the first five years.)
If the consulting agreement persists after this five-year grace period, we
apply the materiality thresholds outlined in the definition of “material.”
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4
This includes a director who
serves on a board as a representative (as part of his or her basic
responsibilities) of an investment firm with greater than 20% ownership. However,
while we will generally consider him/her to be affiliated, we will not
recommend voting against unless (i) the
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A-7
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We view 20% shareholders as affiliates because they typically have
access to and involvement with the management of a company that is
fundamentally different from that of ordinary shareholders. More importantly,
20% holders may have interests that diverge from those of ordinary holders,
for reasons such as the liquidity (or lack thereof) of their holdings,
personal tax issues, etc.
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Definition of “Material”: A material relationship is one in which the
dollar value exceeds:
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$50,000 (or where no amount is disclosed) for directors who are paid
for a service they have agreed to perform for the company, outside of their
service as a director, including professional or other services; or
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$120,000 (or where no amount is disclosed) for those directors
employed by a professional services firm such as a law firm, investment bank,
or consulting firm where the company pays the firm, not the individual, for
services. This dollar limit would also apply to charitable contributions to
schools where a board member is a professor; or charities where a director
serves on the board or is an executive;
5
and any
aircraft and real estate dealings between the company and the director’s
firm; or
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1% of either company’s consolidated gross revenue for other business
relationships (e.g., where the director is an executive officer of a company
that provides services or products to or receives services or products from
the company).
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Definition of “Familial”: Familial relationships include a person’s
spouse, parents, children, siblings, grandparents, uncles, aunts, cousins,
nieces, nephews, in-laws, and anyone (other than domestic employees) who
shares such person’s home. A director is an affiliate if the director has a
family member who is employed by the company and who receives compensation of
$120,000 or more per year or the compensation is not disclosed.
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investment firm
has disproportionate board representation or (ii) the director serves on the
audit committee.
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5
We will generally take into
consideration the size and nature of such charitable entities in relation to
the company’s size and industry along with any other relevant factors such as
the director’s role at the charity. However, unlike for other types of
related party transactions, Glass Lewis generally does not apply a look-back
period to affiliated relationships involving charitable contributions; if the
relationship ceases, we will consider the director to be independent.
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A-8
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Definition of “Company”: A company includes any parent or subsidiary
in a group with the company or any entity that merged with, was acquired by,
or acquired the company.
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Inside Director – An inside director simultaneously serves as a
director and as an employee of the company. This category may include a
chairman of the board who acts as an employee of the company or is paid as an
employee of the company. In our view, an inside director who derives a
greater amount of income as a result of affiliated transactions with the
company rather than through compensation paid by the company (i.e., salary,
bonus, etc. as a company employee) faces a conflict between making decisions
that are in the best interests of the company versus those in the director’s
own best interests. Therefore, we will recommend voting against such a
director.
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Voting Recommendations on the Basis of Board Independence
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Glass Lewis believes a board will be most effective in protecting
shareholders’ interests if it is at least two-thirds independent. We note
that each of the Business Roundtable, the Conference Board, and the Council
of Institutional Investors advocates that two-thirds of the board be
independent. Where more than one-third of the members are affiliated or
inside directors, we typically
6
recommend voting against some of the inside and/or affiliated directors in
order to satisfy the two-thirds threshold.
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In the case of a less than two-thirds independent board, Glass Lewis
strongly supports the existence of a presiding or lead director with
authority to set the meeting agendas and to lead sessions outside the insider
chairman’s presence.
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In addition, we scrutinize avowedly “independent” chairmen and lead
directors. We believe that they should be unquestionably independent or the
company should not tout them as such.
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Committee Independence
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We believe that
only
independent directors should serve on a company’s audit, compensation,
nominating, and governance committees.
7
We
typically
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6
With a staggered board, if the
affiliates or insiders that we believe should not be on the board are not up
for election, we will express our concern regarding those directors, but we
will not recommend voting against the other affiliates or insiders who are up
for election just to achieve two-thirds independence. However, we will
consider recommending voting against the directors subject to our concern at
their next election if the concerning issue is not resolved.
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7
We will recommend voting
against an audit committee member who owns 20% or more of the
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A-9
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recommend that shareholders vote against any affiliated or inside
director seeking appointment to an audit, compensation, nominating, or
governance committee, or who has served in that capacity in the past year.
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Independent Chairman
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Glass Lewis believes that separating the roles of CEO (or, more
rarely, another executive position) and chairman creates a better governance
structure than a combined CEO/chairman position. An executive manages the
business according to a course the board charts. Executives should report to
the board regarding their performance in achieving goals the board set. This
is needlessly complicated when a CEO chairs the board, since a CEO/chairman
presumably will have a significant influence over the board.
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It can become difficult for a board to fulfill its role of overseer
and policy setter when a CEO/chairman controls the agenda and the boardroom
discussion. Such control can allow a CEO to have an entrenched position,
leading to longer-than-optimal terms, fewer checks on management, less
scrutiny of the business operation, and limitations on independent,
shareholder-focused goal-setting by the board.
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A CEO should set the strategic course for the company, with the
board’s approval, and the board should enable the CEO to carry out the CEO’s
vision for accomplishing the board’s objectives. Failure to achieve the
board’s objectives should lead the board to replace that CEO with someone in
whom the board has confidence.
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Likewise, an independent chairman can better oversee executives and
set a pro-shareholder agenda without the management conflicts that a CEO and
other executive insiders often face. Such oversight and concern for
shareholders allows for a more proactive and effective board of directors
that is better able to look out for the interests of shareholders.
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Further, it is the board’s responsibility to select a chief executive
who can best serve a company and its shareholders and to replace this person
when his or her duties have not been appropriately fulfilled. Such a
replacement becomes more difficult and happens less frequently when the chief
executive is also in the position of overseeing the board.
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company’s stock,
and we believe that there should be a maximum of one director (or no
directors if the committee is comprised of less than three directors) who
owns 20% or more of the company’s stock on the compensation, nominating, and
governance committees.
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A-10
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Glass Lewis believes that the installation of an independent chairman
is almost always a positive step from a corporate governance perspective and
promotes the best interests of shareholders. Further, the presence of an
independent chairman fosters the creation of a thoughtful and dynamic board,
not dominated by the views of senior management. Encouragingly, many
companies appear to be moving in this direction—one study even indicates that
less than 12 percent of incoming CEOs in 2009 were awarded the chairman
title, versus 48 percent as recently as 2002.
8
Another
study finds that 41 percent of S&P 500 boards now separate the CEO and
chairman roles, up from 26 percent in 2001, although the same study found
that of those companies, only 21 percent have truly independent chairs..
9
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We do not recommend that shareholders vote against CEOs who chair the
board. However, we typically encourage our clients to support separating the
roles of chairman and CEO whenever that question is posed in a proxy
(typically in the form of a shareholder proposal), as we believe that it is
in the long-term best interests of the company and its shareholders.
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Performance
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The most
crucial test of a board’s commitment to the company and its shareholders lies
in the actions of the board and its members. We look at the performance of
these individuals as directors and executives of the company and of other
companies where they have served.
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Voting Recommendations on the Basis of Performance
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We disfavor directors who have a record of not fulfilling their
responsibilities to shareholders at any company where they have held a board
or executive position. We typically recommend voting against:
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1.
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A director who fails to attend a minimum of 75% of board and
applicable committee meetings, calculated in the aggregate.
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8
Ken Favaro, Per-Ola Karlsson and
Gary Neilson. “CEO Succession 2000-2009: A Decade of Convergence and Compression.”
Booz & Company (from Strategy+Business, Issue 59, Summer 2010).
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9
Spencer Stuart Board Index,
2011, p. 6.
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10
However, where a director
has served for less than one full year, we will typically not recommend
voting against for failure to attend 75% of meetings. Rather, we will note
the poor attendance with a recommendation to track this issue going forward.
We will also refrain from recommending to vote against directors when the
proxy discloses that the director missed the meetings due to serious illness
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A-11
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2.
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A director who belatedly filed a significant form(s) 4 or 5, or who
has a pattern of late filings if the late filing was the director’s fault (we
look at these late filing situations on a case-by-case basis).
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3.
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A director who is also the CEO of a company where a serious and
material restatement has occurred after the CEO had previously certified the
pre-restatement financial statements.
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4.
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A director who has received two against recommendations from Glass
Lewis for identical reasons within the prior year at different companies (the
same situation must also apply at the company being analyzed).
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5.
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All directors who served on the board if, for the last three years,
the company’s performance has been in the bottom quartile of the sector and
the directors have not taken reasonable steps to address the poor
performance.
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Audit Committees and Performance
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Audit committees play an integral role in overseeing the financial
reporting process because “[v]ibrant and stable capital markets depend on,
among other things, reliable, transparent, and objective financial
information to support an efficient and effective capital market process. The
vital oversight role audit committees play in the process of producing
financial information has never been more important.”
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When assessing an audit committee’s performance, we are aware that an
audit committee does not prepare financial statements, is not responsible for
making the key judgments and assumptions that affect the financial
statements, and does not audit the numbers or the disclosures provided to
investors. Rather, an audit committee member monitors and oversees the
process and procedures that management and auditors perform. The 1999 Report
and Recommendations of the Blue Ribbon Committee on Improving the
Effectiveness of Corporate Audit Committees stated it best:
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A proper and well-functioning system exists, therefore, when the
three main groups responsible for financial reporting – the full board
including the audit committee, financial
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or other
extenuating circumstances.
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11
Audit Committee Effectiveness –
What Works Best.” PricewaterhouseCoopers. The Institute of Internal Auditors
Research Foundation. 2005.
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A-12
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management including the internal auditors, and the outside auditors
– form a ‘three legged stool’ that supports responsible financial disclosure
and active participatory oversight. However, in the view of the Committee,
the audit committee must be ‘first among equals’ in this process, since the
audit committee is an extension of the full board and hence the ultimate
monitor of the process.
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Standards for Assessing the Audit Committee
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For an audit committee to function effectively on investors’ behalf,
it must include members with sufficient knowledge to diligently carry out
their responsibilities. In its audit and accounting recommendations, the
Conference Board Commission on Public Trust and Private Enterprise said
“members of the audit committee must be independent and have both knowledge
and experience in auditing financial matters.”
12
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We are skeptical of audit committees where there are members that
lack expertise as a Certified Public Accountant (CPA), Chief Financial
Officer (CFO) or corporate controller or similar experience. While we will
not necessarily vote against members of an audit committee when such
expertise is lacking, we are more likely to vote against committee members
when a problem such as a restatement occurs and such expertise is lacking.
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Glass Lewis generally assesses audit committees against the decisions
they make with respect to their oversight and monitoring role. The quality
and integrity of the financial statements and earnings reports, the
completeness of disclosures necessary for investors to make informed
decisions, and the effectiveness of the internal controls should provide
reasonable assurance that the financial statements are materially free from
errors. The independence of the external auditors and the results of their
work all provide useful information by which to assess the audit committee.
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When assessing the decisions and actions of the audit committee, we
typically defer to its judgment and would vote in favor of its members, but
we would recommend voting against the following members under the following
circumstances:
13
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12
Commission on Public Trust and
Private Enterprise. The Conference Board. 2003.
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13
Where the recommendation is to
vote against the committee chair but the chair is not up for election because
the board is staggered, we do not recommend voting against the members of the
committee who are up for election; rather, we will simply express our concern
with regard to the committee chair.
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A-13
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1.
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All members of the audit committee when options were backdated, there
is a lack of adequate controls in place, there was a resulting restatement,
and disclosures indicate there was a lack of documentation with respect to
the option grants.
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2.
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The audit committee chair, if the audit committee does not have a
financial expert or the committee’s financial expert does not have a
demonstrable financial background sufficient to understand the financial
issues unique to public companies.
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3.
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The audit committee chair, if the audit committee did not meet at
least 4 times during the year.
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4.
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The audit committee chair, if the committee has less than three
members.
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5.
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Any audit committee member who sits on more than three public company
audit committees, unless the audit committee member is a retired CPA, CFO,
controller or has similar experience, in which case the limit shall be four
committees, taking time and availability into consideration including a
review of the audit committee member’s attendance at all board and committee
meetings.
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6.
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All members of an audit committee who are up for election and who
served on the committee at the time of the audit, if audit and audit-related
fees total one-third or less of the total fees billed by the auditor.
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7.
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The audit committee chair when tax and/or other fees are greater than
audit and audit-related fees paid to the auditor for more than one year in a
row (in which case we also recommend against ratification of the auditor).
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8.
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All members of an audit committee where non-audit fees include fees
for tax services (including, but not limited to, such things as tax avoidance
or shelter schemes) for senior executives of the company. Such services are
now prohibited by the Public Company Accounting Oversight Board (“PCAOB”).
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9.
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All members of an audit committee that reappointed an auditor that we
no longer consider to be independent for reasons unrelated to fee
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14
Glass Lewis may exempt certain
audit committee members from the above threshold if, upon further analysis of
relevant factors such as the director’s experience, the size, industry-mix
and location of the companies involved and the director’s attendance at all
the companies, we can reasonably determine that the audit committee member is
likely not hindered by multiple audit committee commitments.
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A-14
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proportions.
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10.
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All members of an audit committee when audit fees are excessively
low, especially when compared with other companies in the same industry.
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11.
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The audit committee chair
15
if the
committee failed to put auditor ratification on the ballot for shareholder
approval. However, if the non-audit fees or tax fees exceed audit plus
audit-related fees in either the current or the prior year, then Glass Lewis
will recommend voting against the entire audit committee.
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12.
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All members of an audit committee where the auditor has resigned and
reported that a section 10A
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letter has been issued.
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13.
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All members of an audit committee at a time when material accounting
fraud occurred at the company.
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14.
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All members of an audit committee at a time when annual and/or
multiple quarterly financial statements had to be restated, and any of the
following factors apply:
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The restatement involves fraud or manipulation by insiders;
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The restatement is accompanied by an SEC inquiry or investigation;
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The restatement involves revenue recognition;
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The restatement results in a greater than 5% adjustment to costs of
goods sold, operating expense, or operating cash flows; or
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15
In all cases, if the chair of the
committee is not specified, we recommend voting against the director who has
been on the committee the longest.
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16
Auditors are required to report
all potential illegal acts to management and the audit committee unless they
are clearly inconsequential in nature. If the audit committee or the board
fails to take appropriate action on an act that has been determined to be a violation
of the law, the independent auditor is required to send a section 10A letter
to the SEC. Such letters are rare and therefore we believe should be taken
seriously.
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17
Recent research indicates that
revenue fraud now accounts for over 60% of SEC fraud cases, and that
companies that engage in fraud experience significant negative abnormal stock
price declines—facing bankruptcy, delisting, and material asset sales at much
higher rates than do non-fraud firms (Committee of Sponsoring Organizations
of the Treadway Commission. “Fraudulent Financial Reporting: 1998-2007.” May
2010).
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A-15
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•
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The restatement results in a greater than 5% adjustment to net
income, 10% adjustment to assets or shareholders equity, or cash flows from
financing or investing activities.
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15.
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All members of an audit committee if the company repeatedly fails to
file its financial reports in a timely fashion. For example, the company has
filed two or more quarterly or annual financial statements late within the
last 5 quarters.
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16.
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All members of an audit committee when it has been disclosed that a
law enforcement agency has charged the company and/or its employees with a
violation of the Foreign Corrupt Practices Act (FCPA).
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17.
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All members of an audit committee when the company has aggressive
accounting policies and/or poor disclosure or lack of sufficient transparency
in its financial statements.
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18.
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All members of the audit committee when there is a disagreement with
the auditor and the auditor resigns or is dismissed.
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19.
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All members of the audit committee if the contract with the auditor
specifically limits the auditor’s liability to the company for damages.
18
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20.
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All members of the audit committee who served since the date of the
company’s last annual meeting, and when, since the last annual meeting, the
company has reported a material weakness that has not yet been corrected, or,
when the company has an ongoing material weakness from a prior year that has
not yet been corrected.
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We also take a dim view of audit committee reports that are
boilerplate, and which provide little or no information or transparency to
investors. When a problem such as a material weakness, restatement or late
filings occurs, we take into consideration, in forming our judgment with
respect to the audit committee, the transparency of the audit committee
report.
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Compensation Committee Performance
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Compensation committees have the final say in determining the
compensation of executives. This includes deciding the basis on which
compensation is determined, as well as the amounts and types of compensation
to be paid. This process begins with the hiring and initial establishment of
employment agreements, including the terms for such items as pay, pensions
and severance
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18
The Council of Institutional
Investors. “Corporate Governance Policies,” p. 4, April 5, 2006; and “Letter
from Council of Institutional Investors to the AICPA,” November 8, 2006.
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A-16
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arrangements. It is important in establishing compensation
arrangements that compensation be consistent with, and based on the long-term
economic performance of, the business’s long-term shareholders returns.
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Compensation committees are also responsible for the oversight of the
transparency of compensation. This oversight includes disclosure of
compensation arrangements, the matrix used in assessing pay for performance,
and the use of compensation consultants. In order to ensure the independence of
the compensation consultant, we believe the compensation committee should
only engage a compensation consultant that is not also providing any services
to the company or management apart from their contract with the compensation
committee. It is important to investors that they have clear and complete
disclosure of all the significant terms of compensation arrangements in order
to make informed decisions with respect to the oversight and decisions of the
compensation committee.
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Finally, compensation committees are responsible for oversight of
internal controls over the executive compensation process. This includes
controls over gathering information used to determine compensation,
establishment of equity award plans, and granting of equity awards. Lax
controls can and have contributed to conflicting information being obtained,
for example through the use of nonobjective consultants. Lax controls can
also contribute to improper awards of compensation such as through granting
of backdated or spring-loaded options, or granting of bonuses when triggers
for bonus payments have not been met.
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Central to understanding the actions of a compensation committee is a
careful review of the Compensation Discussion and Analysis (CD&A) report
included in each company’s proxy. We review the CD&A in our evaluation of
the overall compensation practices of a company, as overseen by the
compensation committee. The CD&A is also integral to the evaluation of
compensation proposals at companies, such as advisory votes on executive
compensation, which allow shareholders to vote on the compensation paid to a
company’s top executives.
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When assessing the performance of compensation committees, we will
recommend voting against for the following:
19
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19
Where the recommendation is to
vote against the committee chair and the chair is not up for election because
the board is staggered, we do not recommend voting against any members of the
committee who are up for election; rather, we will simply express our concern
with regard to the
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A-17
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1.
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All members of the compensation committee who are up for election and
served at the time of poor pay-for-performance (e.g., a company receives an F
grade in our pay-for-performance analysis) when shareholders are not provided
with an advisory vote on executive compensation at the annual meeting.
20
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2.
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Any member of the compensation committee who has served on the
compensation committee of at least two other public companies that received F
grades in our pay-for-performance model and who is also suspect at the
company in question.
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3.
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The compensation committee chair if the company received two D grades
in consecutive years in our pay-for-performance analysis, and if during the
past year the Company performed the same as or worse than its peers.
21
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4.
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All members of the compensation committee (during the relevant time
period) if the company entered into excessive employment agreements and/or
severance agreements.
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5.
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All members of the compensation committee when performance goals were
changed (i.e., lowered) when employees failed or were unlikely to meet
original goals, or performance-based compensation was paid despite goals not
being attained.
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committee chair.
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20
Where there are multiple CEOs in
one year, we will consider not recommending against the compensation
committee but will defer judgment on compensation policies and practices
until the next year or a full year after arrival of the new CEO. In addition,
if a company provides shareholders with a Say-on-Pay proposal and receives an
F grade in our pay-for-performance model, we will recommend that shareholders
only vote against the Say-on-Pay proposal rather than the members of the
compensation committee, unless the company exhibits egregious practices.
However, if the company receives successive F grades, we will then recommend
against the members of the compensation committee in addition to recommending
voting against the Say-on-Pay proposal.
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21
In cases where the company
received two D grades in consecutive years, but during the past year the
company performed better than its peers or improved from an F to a D grade
year over year, we refrain from recommending to vote against the compensation
chair. In addition, if a company provides shareholders with a Say-on-Pay
proposal in this instance, we will consider voting against the advisory vote
rather than the compensation committee chair unless the company exhibits
unquestionably egregious practices.
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A-18
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6.
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All members of the compensation committee if excessive employee
perquisites and benefits were allowed.
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7.
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The compensation committee chair if the compensation committee did
not meet during the year, but should have (e.g., because executive
compensation was restructured or a new executive was hired).
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8.
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All members of the compensation committee when the company repriced
options or completed a “self tender offer” without shareholder approval
within the past two years.
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9.
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All members of the compensation committee when vesting of
in-the-money options is accelerated or when fully vested options are granted.
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10.
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All members of the compensation committee when option exercise prices
were backdated. Glass Lewis will recommend voting against an executive
director who played a role in and participated in option backdating.
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11.
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All members of the compensation committee when option exercise prices
were spring-loaded or otherwise timed around the release of material
information.
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12.
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All members of the compensation committee when a new employment
contract is given to an executive that does not include a clawback provision
and the company had a material restatement, especially if the restatement was
due to fraud.
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13.
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The chair of the compensation committee where the CD&A provides
insufficient or unclear information about performance metrics and goals,
where the CD&A indicates that pay is not tied to performance, or where
the compensation committee or management has excessive discretion to alter
performance terms or increase amounts of awards in contravention of
previously defined targets.
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14.
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All members of the compensation committee during whose tenure the
committee failed to implement a shareholder proposal regarding a
compensation-related issue, where the proposal received the affirmative vote
of a majority of the voting shares at a shareholder meeting, and when a
reasonable analysis suggests that the compensation committee (rather than the
governance committee) should have taken steps to implement the request.
22
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22
In all other instances (i.e. a
non-compensation-related shareholder proposal should have been implemented)
we recommend that shareholders vote against the members of the governance
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A-19
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15.
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All members of a compensation committee during whose tenure the
committee failed to address shareholder concerns following majority
shareholder rejection of the Say-on-Pay proposal in the previous year. Where
the proposal was approved but there was a significant shareholder vote (i.e.,
greater than 25% of votes cast) against the Say-on-Pay proposal in the prior
year, if there is no evidence that the board responded accordingly to the
vote including actively engaging shareholders on this issue, we will also
consider recommending voting against the chairman of the compensation
committee or all members of the compensation committee, depending on the
severity and history of the compensation problems and the level of vote
against.
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Nominating and Governance Committee Performance
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The nominating and governance committee, as an agency for the
shareholders, is responsible for the governance by the board of the company
and its executives. In performing this role, the board is responsible and
accountable for selection of objective and competent board members. It is
also responsible for providing leadership on governance policies adopted by
the company, such as decisions to implement shareholder proposals that have
received a majority vote.
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Consistent with Glass Lewis’ philosophy that boards should have
diverse backgrounds and members with a breadth and depth of relevant
experience, we believe that nominating and governance committees should
consider diversity when making director nominations within the context of
each specific company and its industry. In our view, shareholders are best
served when boards make an effort to ensure a constituency that is not only
reasonably diverse on the basis of age, race, gender and ethnicity, but also
on the basis of geographic knowledge, industry experience and culture.
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Regarding the nominating and or governance committee, we will
recommend voting against the following:
23
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1.
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All members of the governance committee
24
during
whose tenure the
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committee.
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23
Where we would recommend to vote
against the committee chair but the chair is not up for election because the
board is staggered, we do not recommend voting against any members of the
committee who are up for election; rather, we will simply express our concern
regarding the committee chair.
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24
If the board does not have a
governance committee (or a committee that serves such a purpose), we
recommend voting against the entire board on this basis.
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A-20
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board failed to implement a shareholder proposal with a direct and
substantial impact on shareholders and their rights - i.e., where the
proposal received enough shareholder votes (at least a majority) to allow the
board to implement or begin to implement that proposal.
25
Examples
of these types of shareholder proposals are majority vote to elect directors
and to declassify the board.
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2.
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The governance committee chair,
26
when the
chairman is not independent and an independent lead or presiding director has
not been appointed.
27
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3.
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In the absence of a nominating committee, the governance committee
chair when there are less than five or the whole nominating committee when
there are more than 20 members on the board.
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4.
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The governance committee chair, when the committee fails to meet at
all during the year.
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5.
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The governance committee chair, when for two consecutive years the
company provides what we consider to be “inadequate” related party
transaction disclosure (i.e. the nature of such transactions and/or the
monetary amounts involved are unclear or excessively vague, thereby
preventing an average shareholder from being able to reasonably interpret the
independence status of multiple directors above and beyond what the company
maintains is compliant with SEC or applicable stock-exchange listing
requirements).
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6.
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The governance committee chair, when during the past year the board
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25
Where a compensation-related
shareholder proposal should have been implemented, and when a reasonable analysis
suggests that the members of the compensation committee (rather than the
governance committee) bear the responsibility for failing to implement the
request, we recommend that shareholders only vote against members of the
compensation committee.
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26
If the committee chair is not
specified, we recommend voting against the director who has been on the
committee the longest. If the longest-serving committee member cannot be
determined, we will recommend voting against the longest-serving board member
serving on the committee.
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27
We believe that one independent
individual should be appointed to serve as the lead or presiding director.
When such a position is rotated among directors from meeting to meeting, we
will recommend voting against as if there were no lead or presiding director.
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A-21
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adopted a forum selection clause (i.e. an exclusive forum provision)
28
without shareholder approval, or, if the board is currently seeking
shareholder approval of a forum selection clause pursuant to a bundled bylaw
amendment rather than as a separate proposal.
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Regarding the nominating committee, we will recommend voting against
the following:
29
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1.
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All members of the nominating committee, when the committee nominated
or renominated an individual who had a significant conflict of interest or
whose past actions demonstrated a lack of integrity or inability to represent
shareholder interests.
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2.
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The nominating committee chair, if the nominating committee did not
meet during the year, but should have (i.e., because new directors were
nominated or appointed since the time of the last annual meeting).
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3.
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In the absence of a governance committee, the nominating committee
chair
30
when the chairman is not independent, and an independent lead or presiding
director has not been appointed.
31
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4.
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The nominating committee chair, when there are less than five or the
whole nominating committee when there are more than 20 members on the board.
32
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28
A forum selection clause is a
bylaw provision stipulating that a certain state, typically Delaware, shall
be the exclusive forum for all intra-corporate disputes (e.g. shareholder
derivative actions, assertions of claims of a breach of fiduciary duty,
etc.). Such a clause effectively limits a shareholder’s legal remedy
regarding appropriate choice of venue and related relief offered under that
state’s laws and rulings.
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29
Where we would recommend to vote
against the committee chair but the chair is not up for election because the
board is staggered, we do not recommend voting against any members of the
committee who are up for election; rather, we will simply express our concern
regarding the committee chair.
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30
If the committee chair is not
specified, we will recommend voting against the director who has been on the
committee the longest. If the longest-serving committee member cannot be
determined, we will recommend voting against the longest-serving board member
on the committee.
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31
In the absence of both a
governance and a nominating committee, we will recommend voting against the
chairman of the board on this basis.
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32
In the absence of both a
governance and a nominating committee, we will recommend voting against the
chairman of the board on this basis.
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A-22
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5.
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The nominating committee chair, when a director received a greater
than 50% against vote the prior year and not only was the director not
removed, but the issues that raised shareholder concern were not corrected.
33
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Board-level Risk Management Oversight
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Glass Lewis evaluates the risk management function of a public
company board on a strictly case-by-case basis. Sound risk management, while
necessary at all companies, is particularly important at financial firms
which inherently maintain significant exposure to financial risk. We believe
such financial firms should have a chief risk officer reporting directly to
the board and a dedicated risk committee or a committee of the board charged
with risk oversight. Moreover, many non-financial firms maintain strategies
which involve a high level of exposure to financial risk. Similarly, since
many non-financial firm have significant hedging or trading strategies,
including financial and non-financial derivatives, those firms should also
have a chief risk officer and a risk committee.
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Our views on risk oversight are consistent with those expressed by
various regulatory bodies. In its December 2009 Final Rule release on Proxy
Disclosure Enhancements, the SEC noted that risk oversight is a key
competence of the board and that additional disclosures would improve
investor and shareholder understanding of the role of the board in the organization’s
risk management practices. The final rules, which became effective on
February 28, 2010, now explicitly require companies and mutual funds to
describe (while allowing for some degree of flexibility) the board’s role in
the oversight of risk.
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When analyzing the risk management practices of public companies, we
take note of any significant losses or writedowns on financial assets and/or
structured transactions. In cases where a company has disclosed a sizable
loss or writedown, and where we find that the company’s board-level risk
committee contributed to the loss through poor oversight, we would recommend
that shareholders vote against such committee members on that basis. In
addition, in cases where a company maintains a significant level of financial
risk exposure but fails to disclose any explicit form of board-level risk
oversight (committee or
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33
Considering that shareholder
discontent clearly relates to the director who received a greater than 50%
against vote rather than the nominating chair, we review the validity of the
issue(s) that initially raised shareholder concern, follow-up on such
matters, and only recommend voting against the nominating chair if a
reasonable analysis suggests that it would be most appropriate. In rare
cases, we will consider recommending against the nominating chair when a
director receives a substantial (i.e., 25% or more) vote against based on the
same analysis.
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A-23
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otherwise)
34
,
we will consider recommending to vote against the chairman of the board on
that basis. However, we generally would not recommend voting against a
combined chairman/CEO except in egregious cases.
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Experience
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We find
that a director’s past conduct is often indicative of future conduct and
performance. We often find directors with a history of overpaying executives
or of serving on boards where avoidable disasters have occurred appearing at
companies that follow these same patterns. Glass Lewis has a proprietary
database of directors serving at over 8,000 of the most widely held U.S.
companies. We use this database to track the performance of directors across
companies.
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Voting Recommendations on the Basis of Director Experience
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We typically recommend that shareholders vote against directors who
have served on boards or as executives of companies with records of poor
performance, inadequate risk oversight, overcompensation, audit- or
accounting-related issues, and/or other indicators of mismanagement or actions
against the interests of shareholders.
35
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Likewise, we examine the backgrounds of those who serve on key board
committees to ensure that they have the required skills and diverse
backgrounds to make informed judgments about the subject matter for which the
committee is responsible.
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Other Considerations
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In
addition to the three key characteristics – independence, performance,
experience – that we use to evaluate board members, we consider
conflict-of-interest issues as well as the size of the board of directors
when making voting recommendations.
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Conflicts of Interest
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34
A committee responsible for risk
management could be a dedicated risk committee, or another board committee,
usually the audit committee but occasionally the finance committee, depending
on a given company’s board structure and method of disclosure. At some
companies, the entire board is charged with risk management.
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35
We typically apply a three-year
look-back to such issues and also research to see whether the responsible
directors have been up for election since the time of the failure, and if so,
we take into account the percentage of support they received from
shareholders.
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A-24
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We believe board members should be wholly free of identifiable and
substantial conflicts of interest, regardless of the overall level of
independent directors on the board. Accordingly, we recommend that
shareholders vote against the following types of affiliated or inside directors:
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1.
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A CFO who is on the board: In our view, the CFO holds a unique
position relative to financial reporting and disclosure to shareholders.
Because of the critical importance of financial disclosure and reporting, we
believe the CFO should report to the board and not be a member of it.
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2.
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A director who is on an excessive number of boards: We will typically
recommend voting against a director who serves as an executive officer of any
public company while serving on more than two other public company boards and
any other director who serves on more than six public company boards
typically receives an against recommendation from Glass Lewis. Academic
literature suggests that one board takes up approximately 200 hours per year
of each member’s time. We believe this limits the number of boards on which
directors can effectively serve, especially executives at other companies.
36
Further, we note a recent study has shown that the average number of outside
board seats held by CEOs of S&P 500 companies is 0.6, down from 0.8 in
2006 and 1.2 in 2001.
37
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3.
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A director, or a director who has an immediate family member,
providing material consulting or other material professional services to the
company: These services may include legal, consulting, or financial services.
We question the need for the company to have consulting relationships with
its directors. We view such relationships as creating conflicts for
directors, since they may be forced to weigh their own interests against
shareholder interests when making board decisions. In addition, a company’s
decisions regarding where to turn for the best professional services may be
compromised when doing business with the professional services firm of one of
the company’s directors.
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36
Our guidelines are similar to the
standards set forth by the NACD in its “Report of the NACD Blue Ribbon
Commission on Director Professionalism,” 2001 Edition, pp. 14-15 (also cited
approvingly by the Conference Board in its “Corporate Governance Best Practices:
A Blueprint for the Post-Enron Era,” 2002, p. 17), which suggested that CEOs
should not serve on more than 2 additional boards, persons with full-time
work should not serve on more than 4 additional boards, and others should not
serve on more than six boards.
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37
Spencer Stuart Board Index, 2011,
p. 8.
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A-25
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4.
|
A director, or a director who has an immediate family member,
engaging in airplane, real estate, or similar deals, including
perquisite-type grants from the company, amounting to more than $50,000:
Directors who receive these sorts of payments from the company will have to
make unnecessarily complicated decisions that may pit their interests against
shareholder interests.
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5.
|
Interlocking directorships: CEOs or other top executives who serve on
each other’s boards create an interlock that poses conflicts that should be
avoided to ensure the promotion of shareholder interests above all else.
38
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6.
|
All board members who served at a time when a poison pill was adopted
without shareholder approval within the prior twelve months.
39
In the event a board is classified and shareholders are therefore unable to
vote against all directors, we will recommend voting against the remaining
directors the next year they are up for a shareholder vote.
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Size of the Board of Directors
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While we do not believe there is a universally applicable optimum
board size, we do believe boards should have at least five directors to
ensure sufficient diversity in decision-making and to enable the formation of
key board committees with independent directors. Conversely, we believe that
boards with more than 20 members will typically suffer under the weight of
“too many cooks in the kitchen” and have difficulty reaching consensus and
making timely decisions. Sometimes the presence of too many voices can make
it difficult to draw on the wisdom and experience in the room by virtue of
the need to limit the discussion so that each voice may be heard.
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To that end, we typically recommend voting against the chairman of
the nominating committee at a board with fewer than five directors. With
boards consisting of more than 20 directors, we typically recommend voting
against all members of the nominating committee (or the governance committee,
in the absence of a nominating committee).
40
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38
We do not apply a look-back period
for this situation. The interlock policy applies to both public and private
companies. We will also evaluate multiple board interlocks among non-insiders
(i.e. multiple directors serving on the same boards at other companies), for
evidence of a pattern of poor oversight.
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39
Refer to
Section
IV. Governance Structure and the Shareholder Franchise
for further
discussion of our policies regarding anti-takeover measures, including poison
pills.
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40
The Conference Board, at p. 23 in
its May 2003 report “Corporate Governance Best Practices, Id.,” quotes one of
its roundtable participants as stating, “[w]hen you’ve got a 20 or 30 person
corporate
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A-26
Controlled Companies
Controlled
companies present an exception to our independence recommendations. The board’s
function is to protect shareholder interests; however, when an individual or
entity owns more than 50% of the voting shares, the interests of the majority
of shareholders
are
the interests
of that entity or individual. Consequently, Glass Lewis does not apply our
usual two-thirds independence rule and therefore we will not recommend voting
against boards whose composition reflects the makeup of the shareholder
population.
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Independence Exceptions
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The independence exceptions that we make for controlled companies are
as follows:
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1.
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We do not require that controlled companies have boards that are at
least two-thirds independent. So long as the insiders and/or affiliates are
connected with the controlling entity, we accept the presence of
non-independent board members.
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2.
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The compensation committee and nominating and governance committees
do not need to consist solely of independent directors.
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a.
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We believe that standing nominating and corporate governance
committees at controlled companies are unnecessary. Although having a
committee charged with the duties of searching for, selecting, and nominating
independent directors can be beneficial, the unique composition of a
controlled company’s shareholder base makes such committees weak and
irrelevant.
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b.
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Likewise, we believe that independent compensation committees at
controlled companies are unnecessary. Although independent directors are the
best choice for approving and monitoring senior executives’ pay, controlled
companies serve a unique shareholder population whose voting power ensures
the protection of its interests. As such, we believe that having affiliated
directors on a controlled company’s compensation committee is acceptable.
However, given that a controlled company has certain obligations to minority
shareholders we feel that an insider should not serve on the compensation
committee. Therefore, Glass Lewis will recommend voting against any insider
(the CEO or otherwise) serving on the compensation committee.
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board, it’s one way of assuring
that nothing is ever going to happen that the CEO doesn’t want to happen.”
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A-27
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3.
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Controlled companies do not need an independent chairman or an
independent lead or presiding director. Although an independent director in a
position of authority on the board – such as chairman or presiding director –
can best carry out the board’s duties, controlled companies serve a unique
shareholder population whose voting power ensures the protection of its
interests.
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Size of the Board of Directors
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We have no board size requirements for controlled companies.
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Audit Committee Independence
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We believe that audit committees should consist solely of independent
directors. Regardless of a company’s controlled status, the interests of all
shareholders must be protected by ensuring the integrity and accuracy of the
company’s financial statements. Allowing affiliated directors to oversee the
preparation of financial reports could create an insurmountable conflict of
interest.
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Unofficially Controlled Companies and 20-50%
Beneficial Owners
Where an individual or entity owns more than 50% of a company’s voting
power but the company is not a “controlled” company as defined by relevant
listing standards, we apply a lower independence requirement of a majority of
the board but believe the company should otherwise be treated like another
public company; we will therefore apply all other standards as outlined above.
Similarly, where an individual or entity holds between 20-50% of a company’s
voting power, but the company is not “controlled” and there is not a “majority”
owner, we believe it is reasonable to allow proportional representation on the
board and committees (excluding the audit committee) based on the individual or
entity’s percentage of ownership.
Exceptions for Recent IPOs
We believe companies that have recently completed an initial public
offering (“IPO”) should be allowed adequate time to fully comply with
marketplace listing requirements as well as to meet basic corporate governance
standards. We believe a one-year grace period immediately following the date of
a company’s IPO is sufficient time for most companies to comply with all
relevant regulatory requirements and to meet such corporate governance
standards. Except in egregious cases, Glass Lewis refrains from issuing voting
recommendations on the basis of corporate governance best practices (eg. board
independence, committee membership and structure, meeting attendance, etc.)
during the one-year period following an IPO.
A-28
However, two specific cases warrant strong shareholder action against
the board of a company that completed an IPO within the past year:
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1.
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Adoption of a poison pill: in cases where a board implements a poison
pill preceding an IPO, we will consider voting against the members of the
board who served during the period of the poison pill’s adoption if the board
(i) did not also commit to submit the poison pill to a shareholder vote
within 12 months of the IPO or (ii) did not provide a sound rationale for
adopting the pill and the pill does not expire in three years or less. In our
view, adopting such an anti-takeover device unfairly penalizes future
shareholders who (except for electing to buy or sell the stock) are unable to
weigh in on a matter that could potentially negatively impact their ownership
interest. This notion is strengthened when a board adopts a poison pill with
a 5-10 year life immediately prior to having a public shareholder base so as
to insulate management for a substantial amount of time while postponing
and/or avoiding allowing public shareholders the ability to vote on the
pill’s adoption. Such instances are indicative of boards that may subvert
shareholders’ best interests following their IPO.
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2.
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Adoption of an exclusive forum provision: consistent with our general
approach to boards that adopt exclusive forum provisions without shareholder
approval (refer to our discussion of nominating and governance committee
performance in Section I of the guidelines), in cases where a board adopts
such a provision for inclusion in a company’s charter or bylaws before the
company’s IPO, we will recommend voting against the chairman of the
governance committee, or, in the absence of such a committee, the chairman of
the board, who served during the period of time when the provision was
adopted.
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Further, shareholders should also be wary of companies in this category
that adopt supermajority voting requirements before their IPO. Absent explicit
provisions in the articles or bylaws stipulating that certain policies will be
phased out over a certain period of time (e.g. a predetermined declassification
of the board, a planned separation of the chairman and CEO, etc.) long-term
shareholders could find themselves in the predicament of having to attain a
supermajority vote to approve future proposals seeking to eliminate such
policies.
Mutual Fund Boards
Mutual funds, or investment companies, are structured differently from
regular public companies (i.e., operating companies). Typically, members of a
fund’s adviser are on the board and management takes on a different role from
that of regular public companies.
A-29
Thus, we focus on a short list of
requirements, although many of our guidelines remain the same.
The following mutual fund policies are
similar to the policies for regular public companies:
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1.
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Size of the board of directors: The board should be made up of
between five and twenty directors.
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2.
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The CFO on the board: Neither the CFO of the fund nor the CFO of the
fund’s registered investment adviser should serve on the board.
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3.
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Independence of the audit committee: The audit committee should
consist solely of independent directors.
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4.
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Audit committee financial expert: At least one member of the audit
committee should be designated as the audit committee financial expert.
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The following differences from regular public companies apply at
mutual funds:
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1.
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Independence of the board: We believe that three-fourths of an
investment company’s board should be made up of independent directors. This
is consistent with a proposed SEC rule on investment company boards. The
Investment Company Act requires 40% of the board to be independent, but in
2001, the SEC amended the Exemptive Rules to require that a majority of a
mutual fund board be independent. In 2005, the SEC proposed increasing the
independence threshold to 75%. In 2006, a federal appeals court ordered that
this rule amendment be put back out for public comment, putting it back into
“proposed rule” status. Since mutual fund boards play a vital role in
overseeing the relationship between the fund and its investment manager,
there is greater need for independent oversight than there is for an
operating company board.
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2.
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When the auditor is not up for ratification: We do not recommend
voting against the audit committee if the auditor is not up for ratification
because, due to the different legal structure of an investment company
compared to an operating company, the auditor for the investment company
(i.e., mutual fund) does not conduct the same level of financial review for
each investment company as for an operating company.
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3.
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Non-independent chairman: The SEC has proposed that the chairman of
the fund board be independent. We agree that the roles of a mutual fund’s
chairman and CEO should be separate. Although we believe this would be best
at all companies, we recommend voting against the chairman of an investment
company’s nominating committee as well as the chairman of the board if the
chairman and CEO of a mutual fund are the same person and the fund does not
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A-30
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have an independent lead or presiding director. Seven former SEC
commissioners support the appointment of an independent chairman and we agree
with them that “an independent board chairman would be better able to create
conditions favoring the long-term interests of fund shareholders than would a
chairman who is an executive of the adviser.” (See the comment letter sent to
the SEC in support of the proposed rule at
http://sec.gov/rules/proposed/s70304/s70304-179.pdf)
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Declassified Boards
Glass Lewis favors the repeal of staggered boards and the annual
election of directors. We believe staggered boards are less accountable to
shareholders than boards that are elected annually. Furthermore, we feel the
annual election of directors encourages board members to focus on shareholder
interests.
Empirical studies have shown: (i) companies with staggered boards
reduce a firm’s value; and (ii) in the context of hostile takeovers, staggered
boards operate as a takeover defense, which entrenches management, discourages
potential acquirers, and delivers a lower return to target shareholders.
In our view, there is no evidence to demonstrate that staggered boards
improve shareholder returns in a takeover context. Research shows that shareholders
are worse off when a staggered board blocks a transaction. A study by a group
of Harvard Law professors concluded that companies whose staggered boards
prevented a takeover “reduced shareholder returns for targets ... on the order
of eight to ten percent in the nine months after a hostile bid was announced.”
41
When a staggered board negotiates a friendly transaction, no statistically
significant difference in premiums occurs.
42
Further, one of those
same professors found that charter-based staggered boards “reduce the market
value of a firm by 4% to 6% of its market capitalization” and that “staggered
boards bring about and not merely reflect this reduction in market value.”
43
A subsequent study reaffirmed that classified boards reduce shareholder value,
finding
41
Lucian
Bebchuk, John Coates IV, Guhan Subramanian, “The Powerful Antitakeover Force of
Staggered Boards: Further Findings and a Reply to Symposium Participants,” 55
Stanford Law Review
885-917 (2002), page
1.
42
Id. at 2
(“Examining a sample of seventy-three negotiated transactions from 2000 to
2002, we find no systematic benefits in terms of higher premia to boards that
have [staggered structures].”).
43
Lucian
Bebchuk, Alma Cohen, “The Costs of Entrenched Boards” (2004).
A-31
“that the ongoing process of dismantling staggered boards, encouraged by
institutional investors, could well contribute to increasing shareholder
wealth.”
44
Shareholders have increasingly come to agree with this view. In 2011
more than 75% of S&P 500 companies had declassified boards, up from
approximately 41% a decade ago.
45
Clearly, more shareholders have
supported the repeal of classified boards. Resolutions relating to the repeal
of staggered boards garnered on average over 70% support among shareholders in
2008, whereas in 1987, only 16.4% of votes cast favored board declassification.
46
Given the empirical evidence suggesting staggered boards reduce a
company’s value and the increasing shareholder opposition to such a structure,
Glass Lewis supports the declassification of boards and the annual election of
directors.
Mandatory Director Term and Age limits
Glass Lewis believes that director age and term limits typically are
not in shareholders’ best interests. Too often age and term limits are used by
boards as a crutch to remove board members who have served for an extended
period of time. When used in that fashion, they are indicative of a board that
has a difficult time making “tough decisions.”
Academic literature suggests that there is no evidence of a correlation
between either length of tenure or age and director performance. On occasion,
term limits can be used as a means to remove a director for boards that are
unwilling to police their membership and to enforce turnover. Some shareholders
support term limits as a way to force change when boards are unwilling to do
so.
While we understand that age limits can be a way to force change where
boards are unwilling to make changes on their own, the long-term impact of age
limits restricts experienced and potentially valuable board members from
service through an arbitrary means. Further, age limits unfairly imply that
older (or, in rare cases, younger) directors cannot contribute to company
oversight.
44
Lucian
Bebchuk, Alma Cohen and Charles C.Y. Wang, “Staggered Boards and the Wealth of
Shareholders:
Evidence from a Natural Experiment,” SSRN:
http://ssrn.com/abstract=1706806 (2010), p. 26.
45
Spencer
Stuart Board Index, 2011, p. 14
46
Lucian
Bebchuk, John Coates IV and Guhan Subramanian, “The Powerful Antitakeover Force
of Staggered Boards: Theory, Evidence, and Policy,”
54 Stanford Law Review
887-951 (2002).
A-32
In our view, a director’s experience can be a valuable asset to
shareholders because of the complex, critical issues that boards face. However,
we support periodic director rotation to ensure a fresh perspective in the
boardroom and the generation of new ideas and business strategies. We believe
the board should implement such rotation instead of relying on arbitrary
limits. When necessary, shareholders can address the issue of director rotation
through director elections.
We believe that shareholders are better off monitoring the board’s
approach to corporate governance and the board’s stewardship of company
performance rather than imposing inflexible rules that don’t necessarily
correlate with returns or benefits for shareholders.
However, if a board adopts term/age limits, it should follow through
and not waive such limits. If the board waives its term/age limits, Glass Lewis
will consider recommending shareholders vote against the nominating and/or
governance committees, unless the rule was waived with sufficient explanation,
such as consummation of a corporate transaction like a merger.
Requiring Two or More Nominees per Board Seat
In an attempt to address lack of access to the ballot, shareholders
sometimes propose that the board give shareholders a choice of directors for
each open board seat in every election. However, we feel that policies
requiring a selection of multiple nominees for each board seat would discourage
prospective directors from accepting nominations. A prospective director could
not be confident either that he or she is the board’s clear choice or that he or
she would be elected. Therefore, Glass Lewis generally will vote against such
proposals.
Shareholder Access
We expect to see a number of shareholder proposals regarding this topic
in 2012. For a discussion of recent regulatory events in this area, along with
a detailed overview of the Glass Lewis approach to Shareholder Proposals
regarding Proxy Access, refer to
Section V. Compensation, Environmental, Social and
Governance Shareholder Initiatives
.
Majority Vote for the Election of Directors
In stark contrast to the failure of shareholder access to gain
acceptance, majority voting for the election of directors is fast becoming the
de facto
standard in corporate board
elections. In our view, the majority voting proposals are an effort to make the
case for shareholder impact on director elections on a company-specific basis.
A-33
While this proposal would not give shareholders the opportunity to
nominate directors or lead to elections where shareholders have a choice among
director candidates, if implemented, the proposal would allow shareholders to
have a voice in determining whether the nominees proposed by the board should
actually serve as the overseer-representatives of shareholders in the
boardroom. We believe this would be a favorable outcome for shareholders.
During 2011, Glass Lewis tracked over 40 proposals seeking to require a
majority vote to elect directors at annual meetings in the U.S., a slight
increase over 2010 when we tracked just under 35 proposals, but a sharp contrast
to the 147 proposals tracked during 2006. The large drop in the number of
proposals being submitted in recent years compared to 2006 is a result of many
companies having already adopted some form of majority voting, including
approximately 79% of companies in the S&P 500 index, up from 56% in 2008.
47
During 2009 these proposals received on average 59% shareholder support (based
on for and against votes), up from 54% in 2008.
The plurality vote standard
Today, most US companies still elect directors by a plurality vote
standard. Under that standard, if one shareholder holding only one share votes
in favor of a nominee (including himself, if the director is a shareholder),
that nominee “wins” the election and assumes a seat on the board. The common
concern among companies with a plurality voting standard was the possibility
that one or more directors would not receive a majority of votes, resulting in
“failed elections.” This was of particular concern during the 1980s, an era of
frequent takeovers and contests for control of companies.
Advantages of a majority vote standard
If a majority vote standard were implemented, a nominee would have to
receive the support of a majority of the shares voted in order to be elected.
Thus, shareholders could collectively vote to reject a director they believe
will not pursue their best interests. We think that this minimal amount of
protection for shareholders is reasonable and will not upset the corporate
structure nor reduce the willingness of qualified shareholder-focused directors
to serve in the future.
We believe that a majority vote standard will likely lead to more
attentive directors. Occasional use of this power will likely prevent the
election of directors with a record of ignoring shareholder interests in favor
of other interests that conflict with those of
47
Spencer
Stuart Board Index, 2011, p. 14
A-34
investors. Glass Lewis will generally support proposals calling for the
election of directors by a majority vote except for use in contested director
elections.
In response to the high level of support majority voting has garnered,
many companies have voluntarily taken steps to implement majority voting or
modified approaches to majority voting. These steps range from a modified approach
requiring directors that receive a majority of withheld votes to resign (e.g.,
Ashland Inc.) to actually requiring a majority vote of outstanding shares to
elect directors (e.g., Intel).
We feel that the modified approach does not go far enough because
requiring a director to resign is not the same as requiring a majority vote to
elect a director and does not allow shareholders a definitive voice in the
election process. Further, under the modified approach, the corporate
governance committee could reject a resignation and, even if it accepts the
resignation, the corporate governance committee decides on the director’s
replacement. And since the modified approach is usually adopted as a policy by
the board or a board committee, it could be altered by the same board or
committee at any time.
II. Transparency and Integrity of Financial Reporting
Auditor Ratification
The auditor’s role as gatekeeper is crucial in ensuring the integrity
and transparency of the financial information necessary for protecting
shareholder value. Shareholders rely on the auditor to ask tough questions and
to do a thorough analysis of a company’s books to ensure that the information
provided to shareholders is complete, accurate, fair, and that it is a
reasonable representation of a company’s financial position. The only way
shareholders can make rational investment decisions is if the market is
equipped with accurate information about a company’s fiscal health. As stated
in the October 6, 2008 Final Report of the Advisory Committee on the Auditing
Profession to the U.S. Department of the Treasury:
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“The auditor is
expected to offer critical and objective judgment on the financial matters
under consideration, and actual and perceived absence of conflicts is
critical to that expectation. The Committee believes that auditors,
investors, public companies, and other market participants must understand
the independence requirements and their objectives, and that auditors must
adopt a mindset of
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A-35
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skepticism when
facing situations that may compromise their independence.”
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As such, shareholders should demand an objective, competent and
diligent auditor who performs at or above professional standards at every
company in which the investors hold an interest. Like directors, auditors
should be free from conflicts of interest and should avoid situations requiring
a choice between the auditor’s interests and the public’s interests. Almost
without exception, shareholders should be able to annually review an auditor’s
performance and to annually ratify a board’s auditor selection. Moreover, in
October 2008, the Advisory Committee on the Auditing Profession went even
further, and recommended that “to further enhance audit committee oversight and
auditor accountability ... disclosure in the company proxy statement regarding
shareholder ratification [should] include the name(s) of the senior auditing
partner(s) staffed on the engagement.”
48
Most recently on August 16, 2011, the PCAOB issued a Concept Release
seeking public comment on ways that auditor independence, objectivity and
professional skepticism could be enhanced, with a specific emphasis on
mandatory audit firm rotation. The PCAOB will convene a public roundtable
meeting in March 2012 to further discuss such matters. Glass Lewis believes
auditor rotation can ensure both the independence of the auditor and the
integrity of the audit; we will typically recommend supporting proposals to
require auditor rotation when the proposal uses a reasonable period of time
(usually not less than 5-7 years) particularly at companies with a history of
accounting problems.
Voting Recommendations on Auditor Ratification
We generally support management’s choice of auditor except when we
believe the auditor’s independence or audit integrity has been compromised.
Where a board has not allowed shareholders to review and ratify an auditor, we
typically recommend voting against the audit committee chairman. When there
have been material restatements of annual financial statements or material weakness
in internal controls, we usually recommend voting against the entire audit
committee.
Reasons why we may not recommend ratification of an auditor include:
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When audit fees
plus audit-related fees total less than the tax fees and/or other non-audit
fees.
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2.
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Recent material
restatements of annual financial statements, including those
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48
“Final
Report of the Advisory Committee on the Auditing Profession to the U.S.
Department of the Treasury.” p. VIII:20, October 6, 2008.
A-36
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resulting in the
reporting of material weaknesses in internal controls and including late
filings by the company where the auditor bears some responsibility for the
restatement or late filing.
49
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3.
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When the auditor
performs prohibited services such as tax-shelter work, tax services for the
CEO or CFO, or contingent-fee work, such as a fee based on a percentage of
economic benefit to the company.
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4.
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When audit fees
are excessively low, especially when compared with other companies in the
same industry.
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5.
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When the company
has aggressive accounting policies.
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6.
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When the company
has poor disclosure or lack of transparency in its financial statements.
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7.
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Where the auditor
limited its liability through its contract with the company or the audit
contract requires the corporation to use alternative dispute resolution
procedures without adequate justification.
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8.
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We also look for
other relationships or concerns with the auditor that might suggest a conflict
between the auditor’s interests and shareholder interests.
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Pension Accounting Issues
A pension accounting question often raised in proxy proposals is what
effect, if any, projected returns on employee pension assets should have on a
company’s net income. This issue often arises in the executive-compensation
context in a discussion of the extent to which pension accounting should be
reflected in business performance for purposes of calculating payments to
executives.
Glass Lewis believes that pension credits should not be included in
measuring income that is used to award performance-based compensation. Because
many of the assumptions used in accounting for retirement plans are subject to
the company’s discretion, management would have an obvious conflict of interest
if pay were tied to pension income. In our view, projected income from pensions
does not truly reflect a company’s performance.
49
An
auditor does not audit interim financial statements. Thus, we generally do not
believe that an auditor should be opposed due to a restatement of interim
financial statements unless the nature of the misstatement is clear from a
reading of the incorrect financial statements.
A-37
III. The Link Between Compensation and Performance
Glass
Lewis carefully reviews the compensation awarded to senior executives, as we
believe that this is an important area in which the board’s priorities are
revealed. Glass Lewis strongly believes executive compensation should be linked
directly with the performance of the business the executive is charged with
managing. We believe the most effective compensation arrangements provide for
an appropriate mix of performance-based short- and long-term incentives in
addition to base salary.
Glass
Lewis believes that comprehensive, timely and transparent disclosure of
executive pay is critical to allowing shareholders to evaluate the extent to
which the pay is keeping pace with company performance. When reviewing proxy
materials, Glass Lewis examines whether the company discloses the performance
metrics used to determine executive compensation. We recognize performance
metrics must necessarily vary depending on the company and industry, among
other factors, and may include items such as total shareholder return, earning
per share growth, return on equity, return on assets and revenue growth.
However, we believe companies should disclose why the specific performance
metrics were selected and how the actions they are designed to incentivize will
lead to better corporate performance.
Moreover,
it is rarely in shareholders’ interests to disclose competitive data about
individual salaries below the senior executive level. Such disclosure could
create internal personnel discord that would be counterproductive for the
company and its shareholders. While we favor full disclosure for senior
executives and we view pay disclosure at the aggregate level (e.g., the number
of employees being paid over a certain amount or in certain categories) as
potentially useful, we do not believe shareholders need or will benefit from
detailed reports about individual management employees other than the most
senior executives.
Advisory Vote on Executive Compensation (“Say-on-Pay”)
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”) required most companies
50
to hold an advisory vote on
executive compensation at the first shareholder meeting that occurs six months
after enactment of the bill (January 21, 2011).
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50
Small reporting companies (as defined by the SEC as below $75,000,000 in market capitalization)
received a two-year reprieve and will only be subject to say-on-pay
requirements beginning at meetings held on or after January 21, 2013.
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This
practice of allowing shareholders a non-binding vote on a company’s
compensation report is standard practice in many non-US countries, and has been
a requirement for most companies in the United Kingdom since 2003 and in
Australia since 2005. Although Say-on-Pay proposals are non-binding, a high
level of “against” or “abstain” votes indicate substantial shareholder concern
about a company’s compensation policies and procedures.
Given the
complexity of most companies’ compensation programs, Glass Lewis applies a
highly nuanced approach when analyzing advisory votes on executive
compensation. We review each company’s compensation on a case-by-case basis,
recognizing that each company must be examined in the context of industry,
size, maturity, performance, financial condition, its historic pay for
performance practices, and any other relevant internal or external factors.
We believe
that each company should design and apply specific compensation policies and
practices that are appropriate to the circumstances of the company and, in
particular, will attract and retain competent executives and other staff, while
motivating them to grow the company’s long-term shareholder value.
Where we
find those specific policies and practices serve to reasonably align compensation
with performance, and such practices are adequately disclosed, Glass Lewis will
recommend supporting the company’s approach. If, however, those specific
policies and practices fail to demonstrably link compensation with performance,
Glass Lewis will generally recommend voting against the say-on-pay proposal.
Glass
Lewis focuses on four main areas when reviewing Say-on-Pay proposals:
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The overall design
and structure of the Company’s executive compensation program including
performance metrics;
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The quality and
content of the Company’s disclosure;
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The quantum paid
to executives; and
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The link between
compensation and performance as indicated by the Company’s current and past
pay-for-performance grades
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We also
review any significant changes or modifications, and rationale for such
changes, made to the Company’s compensation structure or award amounts,
including base salaries.
Say-on-Pay Voting Recommendations
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In cases
where we find deficiencies in a company’s compensation program’s design,
implementation or management, we will recommend that shareholders vote against
the Say-on-Pay proposal. Generally such instances include evidence of a pattern
of poor pay-for-performance practices (i.e., deficient or failing pay for
performance grades), unclear or questionable disclosure regarding the overall
compensation structure (e.g., limited information regarding benchmarking
processes, limited rationale for bonus performance metrics and targets, etc.),
questionable adjustments to certain aspects of the overall compensation
structure (e.g., limited rationale for significant changes to performance
targets or metrics, the payout of guaranteed bonuses or sizable retention
grants, etc.), and/or other egregious compensation practices.
Although
not an exhaustive list, the following issues when weighed together may cause
Glass Lewis to recommend voting against a say-on-pay vote:
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Inappropriate peer
group and/or benchmarking issues
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Inadequate or no
rationale for changes to peer groups
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Egregious or
excessive bonuses, equity awards or severance payments, including golden
handshakes and golden parachutes
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Guaranteed bonuses
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Targeting overall
levels of compensation at higher than median without adequate justification
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Bonus or long-term
plan targets set at less than mean or negative performance levels
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Performance
targets not sufficiently challenging, and/or providing for high potential
payouts
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Performance
targets lowered, without justification
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Discretionary
bonuses paid when short- or long-term incentive plan targets were not met
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Executive pay high
relative to peers not justified by outstanding company performance
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The terms of the
long-term incentive plans are inappropriate (please see “Long-Term
Incentives” below)
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In the
instance that a company has simply failed to provide sufficient disclosure of
its policies, we may recommend shareholders vote against this proposal solely
on this basis, regardless of the appropriateness of compensation levels.
A-40
Additional Scrutiny for Companies with
Significant Opposition in 2011
At
companies that received a significant shareholder vote (anything greater than
25%) against their say on pay proposal in 2011, we believe the board should
demonstrate some level of engagement and responsiveness to the shareholder
concerns behind the discontent. While we recognize that sweeping changes cannot
be made to a compensation program without due consideration and that a majority
of shareholders voted in favor of the proposal, we will look for disclosure in
the proxy statement and other publicly-disclosed filings that indicates the
compensation committee is responding to the prior year’s vote results including
engaging with large shareholders to identify the concerns causing the
substantial vote against. In the absence of any evidence that the board is
actively engaging shareholders on this issue and responding accordingly, we
will recommend holding compensation committee members accountable for a failure
to respond in consideration of the level of the vote against and the severity
and history of the compensation problems.
Where we
identify egregious compensation practices, we may also recommend voting against
the compensation committee based on the practices or actions of its members
during the year, such as approving large one-off payments, the inappropriate,
unjustified use of discretion, or sustained poor pay for performance practices.
Short-Term Incentives
A
short-term bonus or incentive (“STI”) should be demonstrably tied to
performance. Whenever possible, we believe a mix of corporate and individual
performance measures is appropriate. We would normally expect performance
measures for STIs to be based on internal financial measures such as net profit
after tax, EPS growth and divisional profitability as well as non-financial
factors such as those related to safety, environmental issues, and customer
satisfaction. However, we accept variations from these metrics if they are tied
to the Company’s business drivers.
Further,
the target and potential maximum awards that can be achieved under STI awards
should be disclosed. Shareholders should expect stretching performance targets
for the maximum award to be achieved. Any increase in the potential maximum
award should be clearly justified to shareholders.
Glass
Lewis recognizes that disclosure of some measures may include commercially
confidential information. Therefore, we believe it may be reasonable to exclude
such information in some cases as long as the company provides sufficient
justification for non-disclosure. However, where a short-term bonus has been
paid, companies should disclose the extent to which performance has been
achieved against relevant targets, including disclosure of the actual target
achieved.
A-41
Where
management has received significant STIs but short-term performance as measured
by such indicators as increase in profit and/or EPS growth over the previous
year
prima facie
appears to be
poor or negative, we believe the company should provide a clear explanation why
these significant short-term payments were made.
Long-Term Incentives
Glass
Lewis recognizes the value of equity-based incentive programs. When used
appropriately, they can provide a vehicle for linking an executive’s pay to
company performance, thereby aligning their interests with those of
shareholders. In addition, equity-based compensation can be an effective way to
attract, retain and motivate key employees.
There are
certain elements that Glass Lewis believes are common to most well-structured
long-term incentive (“LTI”) plans. These include:
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No re-testing or
lowering of performance conditions
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Performance
metrics that cannot be easily manipulated by management
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Two or more
performance metrics
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At least one
relative performance metric that compares the company’s performance to a
relevant peer group or index
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Performance
periods of at least three years
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Stretching metrics
that incentivize executives to strive for outstanding performance
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Individual limits
expressed as a percentage of base salary
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Performance
measures should be carefully selected and should relate to the specific
business/industry in which the company operates and, especially, the key value
drivers of the company’s business.
Glass
Lewis believes that measuring a company’s performance with multiple metrics
serves to provide a more complete picture of the company’s performance than a
single metric, which may focus too much management attention on a single target
and is therefore more susceptible to manipulation. External benchmarks should
be disclosed and transparent, such as total shareholder return (“TSR”) against
a well-selected sector index, peer group or other performance hurdle. The
rationale behind the selection of a specific index or peer group should be
disclosed. Internal benchmarks (e.g. earnings per share growth) should also be
disclosed and transparent, unless a cogent case for confidentiality is made and
fully explained.
A-42
We also
believe shareholders should evaluate the relative success of a company’s
compensation programs, particularly existing equity-based incentive plans, in
linking pay and performance in evaluating new LTI plans to determine the impact
of additional stock awards. We will therefore review the company’s
pay-for-performance grade, see below for more information, and specifically the
proportion of total compensation that is stock-based.
Pay for Performance
Glass
Lewis believes an integral part of a well-structured compensation package is a
successful link between pay and performance. Therefore, Glass Lewis developed a
proprietary pay-for-performance model to evaluate the link between pay and
performance of the top five executives at US companies. Our model benchmarks
these executives’ pay and company performance against four peer groups and
across seven performance metrics. Using a forced curve and a school
letter-grade system, we grade companies from A-F according to their pay-for-performance
linkage. The grades guide our evaluation of compensation committee
effectiveness and we generally recommend voting against compensation committee
of companies with a pattern of failing our pay-for-performance analysis.
We also
use this analysis to inform our voting decisions on say-on-pay proposals. As
such, if a company receives a failing grade from our proprietary model, we are
likely to recommend shareholders to vote against the say-on-pay proposal.
However, there may be exceptions to this rule such as when a company makes
significant enhancements to its compensation programs.
Recoupment (“Clawback”) Provisions
Section
954 of the Dodd-Frank Act requires the SEC to create a rule requiring listed
companies to adopt policies for recouping certain compensation during a
three-year look-back period. The rule applies to incentive-based compensation
paid to current or former executives if the company is required to prepare an
accounting restatement due to erroneous data resulting from material non-compliance
with any financial reporting requirements under the securities laws.
These
recoupment provisions are more stringent than under Section 304 of the
Sarbanes-Oxley Act in three respects: (i) the provisions extend to current or
former executive officers rather than only to the CEO and CFO; (ii) it has a
three-year look-back period (rather than a twelve-month look-back period); and
(iii) it allows for recovery of compensation based upon a financial restatement
due to erroneous data, and therefore does not require misconduct on the part of
the executive or other employees.
A-43
Frequency of Say-on-Pay
The
Dodd-Frank Act also requires companies to allow shareholders a non-binding vote
on the frequency of say-on-pay votes, i.e. every one, two or three years.
Additionally, Dodd-Frank requires companies to hold such votes on the frequency
of say-on-pay votes at least once every six years.
We believe
companies should submit say-on-pay votes to shareholders every year. We believe
that the time and financial burdens to a company with regard to an annual vote
are relatively small and incremental and are outweighed by the benefits to
shareholders through more frequent accountability. Implementing biannual or
triennial votes on executive compensation limits shareholders’ ability to hold
the board accountable for its compensation practices through means other than
voting against the compensation committee. Unless a company provides a
compelling rationale or unique circumstances for say-on-pay votes less frequent
than annually, we will generally recommend that shareholders support annual
votes on compensation.
Vote on Golden Parachute Arrangements
The
Dodd-Frank Act also requires companies to provide shareholders with a separate
non-binding vote on approval of golden parachute compensation arrangements in
connection with certain change-in-control transactions. However, if the golden
parachute arrangements have previously been subject to a say-on-pay vote which
shareholders approved, then this required vote is waived.
Glass
Lewis believes the narrative and tabular disclosure of golden parachute
arrangements will benefit all shareholders. Glass Lewis will analyze each
golden parachute arrangement on a case-by-case basis, taking into account,
among other items: the ultimate value of the payments particularly compared to
the value of the transaction, the tenure and position of the executives in
question, and the type of triggers involved (single vs double).
Equity-Based Compensation Plan Proposals
We believe
that equity compensation awards are useful, when not abused, for retaining
employees and providing an incentive for them to act in a way that will improve
company performance. Glass Lewis evaluates equity-based compensation plans
using a detailed model and analytical review.
Equity-based
compensation programs have important differences from cash compensation plans
and bonus programs. Accordingly, our model and analysis takes into account
factors such as plan administration, the method and terms of exercise,
A-44
repricing
history, express or implied rights to reprice, and the presence of evergreen
provisions.
Our
analysis is primarily quantitative and focused on the plan’s cost as compared
with the business’s operating metrics. We run twenty different analyses,
comparing the program with absolute limits we believe are key to equity value
creation and with a carefully chosen peer group. In general, our model seeks to
determine whether the proposed plan is either absolutely excessive or is more
than one standard deviation away from the average plan for the peer group on a
range of criteria, including dilution to shareholders and the projected annual
cost relative to the company’s financial performance. Each of the twenty
analyses (and their constituent parts) is weighted and the plan is scored in
accordance with that weight.
In our
analysis, we compare the program’s expected annual expense with the business’s
operating metrics to help determine whether the plan is excessive in light of
company performance. We also compare the option plan’s expected annual cost to
the enterprise
value of the firm rather than to market capitalization because the employees,
managers and directors of the firm contribute to the creation of enterprise
value but not necessarily market capitalization (the biggest difference is seen
where cash represents the vast majority of market capitalization). Finally, we
do not rely exclusively on relative comparisons with averages because, in
addition to creeping averages serving to inflate compensation, we believe that
some absolute limits are warranted.
We
evaluate equity plans based on certain overarching principles:
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Companies should
seek more shares only when needed.
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Requested share
amounts should be small enough that companies seek shareholder approval every
three to four years (or more frequently).
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3.
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If a plan is
relatively expensive, it should not grant options solely to senior executives
and board members.
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4.
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Annual net share
count and voting power dilution should be limited.
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5.
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Annual cost of the
plan (especially if not shown on the income statement) should be reasonable
as a percentage of financial results and should be in line with the peer
group.
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6.
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The expected
annual cost of the plan should be proportional to the business’s value.
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The intrinsic
value that option grantees received in the past should be reasonable compared
with the business’s financial results.
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Plans should
deliver value on a per-employee basis when compared with
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A-45
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programs at peer companies.
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9.
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Plans should not
permit re-pricing of stock options.
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10.
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Plans should not
contain excessively liberal administrative or payment terms.
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11.
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Selected
performance metrics should be challenging and appropriate, and should be
subject to relative performance measurements.
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Stock grants
should be subject to minimum vesting and/or holding periods sufficient to
ensure sustainable performance and promote retention.
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Option Exchanges
Glass
Lewis views option repricing plans and option exchange programs with great
skepticism. Shareholders have substantial risk in owning stock and we believe
that the employees, officers, and directors who receive stock options should be
similarly situated to align their interests with shareholder interests.
We are
concerned that option grantees who believe they will be “rescued” from
underwater options will be more inclined to take unjustifiable risks. Moreover,
a predictable pattern of repricing or exchanges substantially alters a stock
option’s value because options that will practically never expire deeply out of
the money are worth far more than options that carry a risk of expiration.
In short,
repricings and option exchange programs change the bargain between shareholders
and employees after the bargain has been struck.
There is
one circumstance in which a repricing or option exchange program is acceptable:
if macroeconomic or industry trends, rather than specific company issues, cause
a stock’s value to decline dramatically and the repricing is necessary to
motivate and retain employees. In this circumstance, we think it fair to
conclude that option grantees may be suffering from a risk that was not
foreseeable when the original “bargain” was struck. In such a circumstance, we
will recommend supporting a repricing only if the following conditions are
true:
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Officers and board
members cannot participate in the program;
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The stock decline
mirrors the market or industry price decline in terms of timing and
approximates the decline in magnitude;
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3.
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The exchange is
value-neutral or value-creative to shareholders using very conservative
assumptions and with a recognition of the adverse selection problems inherent
in voluntary programs; and
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4.
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Management and the
board make a cogent case for needing to motivate and
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A-46
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retain existing
employees, such as being in a competitive employment market.
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Option Backdating, Spring-Loading, and
Bullet-Dodging
Glass
Lewis views option backdating, and the related practices of spring-loading and
bullet-dodging, as egregious actions that warrant holding the appropriate
management and board members responsible. These practices are similar to
re-pricing options and eliminate much of the downside risk inherent in an
option grant that is designed to induce recipients to maximize shareholder
return.
Backdating
an option is the act of changing an option’s grant date from the actual grant
date to an earlier date when the market price of the underlying stock was
lower, resulting in a lower exercise price for the option. Since 2006, Glass
Lewis has identified over 270 companies that have disclosed internal or
government investigations into their past stock-option grants.
Spring-loading
is granting stock options while in possession of material, positive information
that has not been disclosed publicly. Bullet-dodging is delaying the grants of
stock options until after the release of material, negative information. This can
allow option grants to be made at a lower price either before the release of
positive news or following the release of negative news, assuming the stock’s
price will move up or down in response to the information. This raises a
concern similar to that of insider trading, or the trading on material
non-public information.
The
exercise price for an option is determined on the day of grant, providing the
recipient with the same market risk as an investor who bought shares on that
date. However, where options were backdated, the executive or the board (or the
compensation committee) changed the grant date retroactively. The new date may
be at or near the lowest price for the year or period. This would be like
allowing an investor to look back and select the lowest price of the year at
which to buy shares.
A 2006
study of option grants made between 1996 and 2005 at 8,000 companies found that
option backdating can be an indication of poor internal controls. The study
found that option backdating was more likely to occur at companies without a
majority independent board and with a long-serving CEO; both factors, the study
concluded, were associated with greater CEO influence on the company’s
compensation and governance practices.
51
Where a
company granted backdated options to an executive who is also a director, Glass
Lewis will recommend voting against that executive/director, regardless of who
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51
Lucian
Bebchuk, Yaniv Grinstein and Urs Peyer. “LUCKY CEOs.” November, 2006.
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A-47
decided to
make the award. In addition, Glass Lewis will recommend voting against those
directors who either approved or allowed the backdating. Glass Lewis feels that
executives and directors who either benefited from backdated options or
authorized the practice have breached their fiduciary responsibility to
shareholders.
Given the
severe tax and legal liabilities to the company from backdating, Glass Lewis
will consider recommending voting against members of the audit committee who
served when options were backdated, a restatement occurs, material weaknesses
in internal controls exist and disclosures indicate there was a lack of
documentation. These committee members failed in their responsibility to ensure
the integrity of the company’s financial reports.
When a company
has engaged in spring-loading or bullet-dodging, Glass Lewis will consider
recommending voting against the compensation committee members where there has
been a pattern of granting options at or near historic lows. Glass Lewis will
also recommend voting against executives serving on the board who benefited
from the spring-loading or bullet-dodging.
162(m) Plans
Section
162(m) of the Internal Revenue Code allows companies to deduct compensation in
excess of $1 million for the CEO and the next three most highly compensated
executive officers, excluding the CFO, upon shareholder approval of the excess
compensation. Glass Lewis recognizes the value of executive incentive programs
and the tax benefit of shareholder-approved incentive plans.
We believe
the best practice for companies is to provide robust disclosure to shareholders
so that they can make fully-informed judgments about the reasonableness of the
proposed compensation plan. To allow for meaningful shareholder review, we
prefer that disclosure should include specific performance metrics, a maximum
award pool, and a maximum award amount per employee. We also believe it is
important to analyze the estimated grants to see if they are reasonable and in
line with the company’s peers.
We
typically recommend voting against a 162(m) plan where: a company fails to
provide at least a list of performance targets; a company fails to provide one
of either a total pool or an individual maximum; or the proposed plan is
excessive when compared with the plans of the company’s peers.
The
company’s record of aligning pay with performance (as evaluated using our
proprietary pay-for-performance model) also plays a role in our recommendation.
Where a company has a record of setting reasonable pay relative to business
A-48
performance,
we generally recommend voting in favor of a plan even if the plan caps seem
large relative to peers because we recognize the value in special pay
arrangements for continued exceptional performance.
As with
all other issues we review, our goal is to provide consistent but contextual
advice given the specifics of the company and ongoing performance. Overall, we
recognize that it is generally not in shareholders’ best interests to vote
against such a plan and forgo the potential tax benefit since shareholder
rejection of such plans will not curtail the awards; it will only prevent the
tax deduction associated with them.
Director Compensation Plans
Glass
Lewis believes that non-employee directors should receive reasonable and
appropriate compensation for the time and effort they spend serving on the
board and its committees. Director fees should be competitive in order to
retain and attract qualified individuals. But excessive fees represent a
financial cost to the company and threaten to compromise the objectivity and
independence of non-employee directors. Therefore, a balance is required. We
will consider recommending supporting compensation plans that include option
grants or other equity-based awards that help to align the interests of outside
directors with those of shareholders. However, equity grants to directors
should not be performance-based to ensure directors are not incentivized in the
same manner as executives but rather serve as a check on imprudent risk-taking in
executive compensation plan design.
Glass
Lewis uses a proprietary model and analyst review to evaluate the costs of
equity plans compared to the plans of peer companies with similar market
capitalizations. We use the results of this model to guide our voting
recommendations on stock-based director compensation plans.
IV. G
OVERNANCE
S
TRUCTURE AND THE
S
HAREHOLDER
F
RANCHISE
Anti-Takeover Measures
Poison Pills (Shareholder Rights Plans)
Glass
Lewis believes that poison pill plans are not generally in shareholders’ best
interests. They can reduce management accountability by substantially limiting
opportunities for corporate takeovers. Rights plans can thus prevent
shareholders from receiving a buy-out premium for their stock. Typically we
recommend that shareholders
A-49
vote
against these plans to protect their financial interests and ensure that they
have an opportunity to consider any offer for their shares, especially those at
a premium.
We believe
boards should be given wide latitude in directing company activities and in
charting the company’s course. However, on an issue such as this, where the
link between the shareholders’ financial interests and their right to consider
and accept buyout offers is substantial, we believe that shareholders should be
allowed to vote on whether they support such a plan’s implementation. This
issue is different from other matters that are typically left to board
discretion. Its potential impact on and relation to shareholders is direct and
substantial. It is also an issue in which management interests may be different
from those of shareholders; thus, ensuring that shareholders have a voice is
the only way to safeguard their interests.
In certain
circumstances, we will support a poison pill that is limited in scope to
accomplish a particular objective, such as the closing of an important merger,
or a pill that contains what we believe to be a reasonable qualifying offer
clause. We will consider supporting a poison pill plan if the qualifying offer
clause includes each of the following attributes:
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The form of offer is not
required to be an all-cash transaction;
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2.
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The offer is not required to
remain open for more than 90 business days;
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3.
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The offeror is permitted to
amend the offer, reduce the offer, or otherwise change the terms;
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4.
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There is no fairness opinion
requirement; and
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5.
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There is a low to no premium
requirement.
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Where
these requirements are met, we typically feel comfortable that shareholders
will have the opportunity to voice their opinion on any legitimate offer.
NOL Poison Pills
Similarly,
Glass Lewis may consider supporting a limited poison pill in the unique event
that a company seeks shareholder approval of a rights plan for the express
purpose of preserving Net Operating Losses (NOLs). While companies with NOLs
can generally carry these losses forward to offset future taxable income,
Section 382 of the Internal Revenue Code limits companies’ ability to use NOLs
in the event of a “change of ownership.”
52
In this case, a company
may adopt or amend a poison pill (“NOL pill”) in
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52
Section 382 of the Internal
Revenue Code refers to a “change of ownership” of more than 50 percentage
points by one or more 5% shareholders within a three-year period. The statute
is intended to deter the “trafficking” of net operating losses.
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A-50
order to
prevent an inadvertent change of ownership by multiple investors purchasing
small chunks of stock at the same time, and thereby preserve the ability to
carry the NOLs forward. Often such NOL pills have trigger thresholds much lower
than the common 15% or 20% thresholds, with some NOL pill triggers as low as
5%.
Glass
Lewis evaluates NOL pills on a strictly case-by-case basis taking into
consideration, among other factors, the value of the NOLs to the company, the
likelihood of a change of ownership based on the size of the holding and the
nature of the larger shareholders, the trigger threshold and whether the term
of the plan is limited in duration (i.e., whether it contains a reasonable
“sunset” provision) or is subject to periodic board review and/or shareholder
ratification. However, we will recommend that shareholders vote against a
proposal to adopt or amend a pill to include NOL protective provisions if the
company has adopted a more narrowly tailored means of preventing a change in
control to preserve its NOLs. For example, a company may limit share transfers
in its charter to prevent a change of ownership from occurring.
Furthermore,
we believe that shareholders should be offered the opportunity to vote on any
adoption or renewal of a NOL pill regardless of any potential tax benefit that
it offers a company. As such, we will consider recommending voting against
those members of the board who served at the time when an NOL pill was adopted
without shareholder approval within the prior twelve months and where the NOL
pill is not subject to shareholder ratification.
Fair Price Provisions
Fair price
provisions, which are rare, require that certain minimum price and procedural
requirements be observed by any party that acquires more than a specified
percentage of a corporation’s common stock. The provision is intended to
protect minority shareholder value when an acquirer seeks to accomplish a
merger or other transaction which would eliminate or change the interests of
the minority stockholders. The provision is generally applied against the
acquirer unless the takeover is approved by a majority of “continuing
directors” and holders of a majority, in some cases a supermajority as high as
80%, of the combined voting power of all stock entitled to vote to alter,
amend, or repeal the above provisions.
The effect of a fair price provision is to require approval of any
merger or business combination with an “interested stockholder” by 51% of the
voting stock of the company, excluding the shares held by the interested
stockholder. An interested stockholder is generally considered to be a holder
of 10% or more of the company’s outstanding stock, but the trigger can vary.
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Generally, provisions are put in place for the ostensible purpose of
preventing a back-end merger where the interested stockholder would be able to
pay a lower price for the remaining shares of the company than he or she paid
to gain control. The effect of a fair price provision on shareholders, however,
is to limit their ability to gain a premium for their shares through a partial
tender offer or open market acquisition which typically raise the share price,
often significantly. A fair price provision discourages such transactions
because of the potential costs of seeking shareholder approval and because of
the restrictions on purchase price for completing a merger or other transaction
at a later time.
Glass Lewis believes that fair price provisions, while sometimes
protecting shareholders from abuse in a takeover situation, more often act as
an impediment to takeovers, potentially limiting gains to shareholders from a
variety of transactions that could significantly increase share price. In some
cases, even the independent directors of the board cannot make exceptions when
such exceptions may be in the best interests of shareholders. Given the
existence of state law protections for minority shareholders such as Section
203 of the Delaware Corporations Code, we believe it is in the best interests
of shareholders to remove fair price provisions.
Reincorporation
In general, Glass Lewis believes that the board is in the best position
to determine the appropriate jurisdiction of incorporation for the company. When
examining a management proposal to reincorporate to a different state or
country, we review the relevant financial benefits, generally related to
improved corporate tax treatment, as well as changes in corporate governance
provisions, especially those relating to shareholder rights, resulting from the
change in domicile. Where the financial benefits are
de minimis
and there is a decrease in shareholder rights, we
will recommend voting against the transaction.
However, costly, shareholder-initiated reincorporations are typically
not the best route to achieve the furtherance of shareholder rights. We believe
shareholders are generally better served by proposing specific shareholder
resolutions addressing pertinent issues which may be implemented at a lower
cost, and perhaps even with board approval. However, when shareholders propose
a shift into a jurisdiction with enhanced shareholder rights, Glass Lewis
examines the significant ways would the Company benefit from shifting
jurisdictions including the following:
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1.
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Is the board
sufficiently independent?
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2.
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Does the Company
have anti-takeover protections such as a poison pill or classified board in
place?
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3.
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Has the board been
previously unresponsive to shareholders (such as failing to implement a
shareholder proposal that received majority shareholder support)?
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4.
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Do shareholders
have the right to call special meetings of shareholders?
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5.
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Are there other
material governance issues at the Company?
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6.
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Has the Company’s
performance matched or exceeded its peers in the past one and three years?
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7.
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How has the
Company ranked in Glass Lewis’ pay-for-performance analysis during the last
three years?
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8.
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Does the company
have an independent chairman?
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We note, however, that we will only support shareholder proposals to
change a company’s place of incorporation in exceptional circumstances.
EXCLUSIVE FORUM PROVISIONS
Glass Lewis believes that charter or bylaw provisions limiting a
shareholder’s choice of legal venue are not in the best interests of
shareholders. Such clauses may effectively discourage the use of shareholder
derivative claims by increasing their associated costs and making them more
difficult to pursue. As such, shareholders should be wary about approving any
limitation on their legal recourse including limiting themselves to a single
jurisdiction (e.g. Delaware) without compelling evidence that it will benefit
shareholders.
For this reason, we recommend that shareholders vote against any bylaw
or charter amendment seeking to adopt an exclusive forum provision. Moreover,
in the event a board seeks shareholder approval of a forum selection clause
pursuant to a bundled bylaw amendment rather than as a separate proposal, we will
weigh the importance of the other bundled provisions when determining the vote
recommendation on the proposal. We will nonetheless recommend voting against
the chairman of the governance committee for bundling disparate proposals into
a single proposal (refer to our discussion of nominating and governance
committee performance in Section I of the guidelines).
Authorized Shares
Glass Lewis believes that adequate capital stock is important to a
company’s operation. When analyzing a request for additional shares, we
typically review four common reasons why a company might need additional
capital stock:
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1.
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Stock Split – We
typically consider three metrics when evaluating whether we think a stock
split is likely or necessary: The historical stock pre-split price, if any;
the current price relative to the company’s most common trading price over the
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past 52 weeks; and some absolute limits on stock price that, in our view,
either always make a stock split appropriate if desired by management or would
almost never be a reasonable price at which to split a stock.
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2.
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Shareholder
Defenses – Additional authorized shares could be used to bolster takeover
defenses such as a poison pill. Proxy filings often discuss the usefulness of
additional shares in defending against or discouraging a hostile takeover as
a reason for a requested increase. Glass Lewis is typically against such
defenses and will oppose actions intended to bolster such defenses.
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3.
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Financing for
Acquisitions – We look at whether the company has a history of using stock
for acquisitions and attempt to determine what levels of stock have typically
been required to accomplish such transactions. Likewise, we look to see
whether this is discussed as a reason for additional shares in the proxy.
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4.
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Financing for
Operations – We review the company’s cash position and its ability to secure
financing through borrowing or other means. We look at the company’s history
of capitalization and whether the company has had to use stock in the recent
past as a means of raising capital.
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Issuing additional shares can dilute existing holders in limited
circumstances. Further, the availability of additional shares, where the board
has discretion to implement a poison pill, can often serve as a deterrent to
interested suitors. Accordingly, where we find that the company has not
detailed a plan for use of the proposed shares, or where the number of shares
far exceeds those needed to accomplish a detailed plan, we typically recommend
against the authorization of additional shares.
While we think that having adequate shares to allow management to make
quick decisions and effectively operate the business is critical, we prefer
that, for significant transactions, management come to shareholders to justify
their use of additional shares rather than providing a blank check in the form
of a large pool of unallocated shares available for any purpose.
Advance Notice Requirements
We typically recommend that shareholders vote against proposals that
would require advance notice of shareholder proposals or of director nominees.
These proposals typically attempt to require a certain amount of notice
before shareholders are allowed to place proposals on the ballot. Notice
requirements typically range between three to six months prior to the annual
meeting. Advance notice requirements typically make it impossible for a
shareholder who misses the deadline to present a shareholder proposal or a
director nominee that might be in the best interests of the company and its
shareholders.
A-54
We believe shareholders should be able to review and vote on all
proposals and director nominees. Shareholders can always vote against proposals
that appear with little prior notice. Shareholders, as owners of a business,
are capable of identifying issues on which they have sufficient information and
ignoring issues on which they have insufficient information. Setting arbitrary
notice restrictions limits the opportunity for shareholders to raise issues that
may come up after the window closes.
Voting Structure
Cumulative Voting
Cumulative voting increases the ability of minority shareholders to
elect a director by allowing shareholders to cast as many shares of the stock
they own multiplied by the number of directors to be elected. As companies
generally have multiple nominees up for election, cumulative voting allows
shareholders to cast all of their votes for a single nominee, or a smaller
number of nominees than up for election, thereby raising the likelihood of
electing one or more of their preferred nominees to the board. It can be
important when a board is controlled by insiders or affiliates and where the
company’s ownership structure includes one or more shareholders who control a
majority-voting block of company stock.
Glass Lewis believes that cumulative voting generally acts as a
safeguard for shareholders by ensuring that those who hold a significant
minority of shares can elect a candidate of their choosing to the board. This
allows the creation of boards that are responsive to the interests of all
shareholders rather than just a small group of large holders.
However, academic literature indicates that where a highly independent
board is in place and the company has a shareholder-friendly governance
structure, shareholders may be better off without cumulative voting. The
analysis underlying this literature indicates that shareholder returns at firms
with good governance structures are lower and that boards can become
factionalized and prone to evaluating the needs of special interests over the
general interests of shareholders collectively.
We review cumulative voting proposals on a case-by-case basis,
factoring in the independence of the board and the status of the company’s governance
structure. But we typically find these proposals on ballots at companies where
independence is lacking and where the appropriate checks and balances favoring
shareholders are not in place. In those instances we typically recommend in
favor of cumulative voting.
Where a company has adopted a true majority vote standard (i.e., where
a director must receive a majority of votes cast to be elected, as opposed to a
modified policy
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indicated by a resignation policy only), Glass Lewis will recommend
voting against cumulative voting proposals due to the incompatibility of the
two election methods. For companies that have not adopted a true majority
voting standard but have adopted some form of majority voting, Glass Lewis will
also generally recommend voting against cumulative voting proposals if the
company has not adopted antitakeover protections and has been responsive to
shareholders.
Where a company has not adopted a majority voting standard and is
facing both a shareholder proposal to adopt majority voting and a shareholder
proposal to adopt cumulative voting, Glass Lewis will support only the majority
voting proposal. When a company has both majority voting and cumulative voting
in place, there is a higher likelihood of one or more directors not being
elected as a result of not receiving a majority vote. This is because
shareholders exercising the right to cumulate their votes could unintentionally
cause the failed election of one or more directors for whom shareholders do not
cumulate votes.
Supermajority Vote Requirements
Glass Lewis believes that supermajority vote requirements impede
shareholder action on ballot items critical to shareholder interests. An
example is in the takeover context, where supermajority vote requirements can
strongly limit the voice of shareholders in making decisions on such crucial
matters as selling the business. This in turn degrades share value and can
limit the possibility of buyout premiums to shareholders. Moreover, we believe
that a supermajority vote requirement can enable a small group of shareholders
to overrule the will of the majority shareholders. We believe that a simple
majority is appropriate to approve all matters presented to shareholders.
Transaction of Other Business
We typically recommend that shareholders not give their proxy to
management to vote on any other business items that may properly come before an
annual or special meeting. In our opinion, granting unfettered discretion is
unwise.
Anti-Greenmail Proposals
Glass Lewis will support proposals to adopt a provision preventing the
payment of greenmail, which would serve to prevent companies from buying back
company stock at significant premiums from a certain shareholder. Since a large
or majority shareholder could attempt to compel a board into purchasing its
shares at a large premium, the anti-greenmail provision would generally require
that a majority of shareholders other than the majority shareholder approve the
buyback.
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Mutual
Funds: Investment Policies and Advisory Agreements
Glass Lewis believes that decisions about a fund’s structure and/or a
fund’s relationship with its investment advisor or sub-advisors are generally
best left to management and the members of the board, absent a showing of
egregious or illegal conduct that might threaten shareholder value. As such, we
focus our analyses of such proposals on the following main areas:
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The terms of any
amended advisory or sub-advisory agreement;
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Any changes in the
fee structure paid to the investment advisor; and
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Any material
changes to the fund’s investment objective or strategy.
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We generally support amendments to a fund’s investment advisory
agreement absent a material change that is not in the best interests of
shareholders. A significant increase in the fees paid to an investment advisor
would be reason for us to consider recommending voting against a proposed
amendment to an investment advisory agreement. However, in certain cases, we
are more inclined to support an increase in advisory fees if such increases
result from being performance-based rather than asset-based. Furthermore, we
generally support sub-advisory agreements between a fund’s advisor and
sub-advisor, primarily because the fees received by the sub-advisor are paid by
the advisor, and not by the fund.
In matters pertaining to a fund’s investment objective or strategy, we
believe shareholders are best served when a fund’s objective or strategy
closely resembles the investment discipline shareholders understood and selected
when they initially bought into the fund. As such, we generally recommend
voting against amendments to a fund’s investment objective or strategy when the
proposed changes would leave shareholders with stakes in a fund that is
noticeably different than when originally contemplated, and which could
therefore potentially negatively impact some investors’ diversification
strategies.
V. C
OMPENSATION
, E
NVIRONMENTAL
, S
OCIAL AND
G
OVERNANCE
S
HAREHOLDER
I
NITIATIVES
Glass Lewis typically prefers to leave decisions regarding day-to-day
management and policy decisions, including those related to social,
environmental or political issues, to management and the board, except when
there is a clear link between the proposal and value enhancement or risk mitigation.
We feel strongly that shareholders should not attempt to micromanage the
company, its businesses or its executives through the
A-57
shareholder initiative process. Rather, we believe shareholders should
use their influence to push for governance structures that protect shareholders
and promote director accountability. Shareholders should then put in place a
board they can trust to make informed decisions that are in the best interests
of the business and its owners, and then hold directors accountable for
management and policy decisions through board elections. However, we recognize
that support of appropriately crafted shareholder initiatives may at times
serve to promote or protect shareholder value.
To this end, Glass Lewis evaluates shareholder proposals on a
case-by-case basis. We generally recommend supporting shareholder proposals
calling for the elimination of, as well as to require shareholder approval of,
antitakeover devices such as poison pills and classified boards. We generally recommend
supporting proposals likely to increase and/or protect shareholder value and
also those that promote the furtherance of shareholder rights. In addition, we
also generally recommend supporting proposals that promote director
accountability and those that seek to improve compensation practices,
especially those promoting a closer link between compensation and performance.
The following is a discussion of Glass Lewis’ approach to certain
common shareholder resolutions. We note that the following is not an exhaustive
list of all shareholder proposals.
Compensation
Glass Lewis carefully reviews executive compensation since we believe
that this is an important area in which the board’s priorities and
effectiveness are revealed. Executives should be compensated with appropriate
base salaries and incentivized with additional awards in cash and equity only
when their performance and that of the company warrants such rewards.
Compensation, especially when also in line with the compensation paid by the
company’s peers, should lead to positive results for shareholders and ensure
the use of appropriate incentives that drives those results over time.
However, as a general rule, Glass Lewis does not believe shareholders
should be involved in the approval and negotiation of compensation packages.
Such matters should be left to the board’s compensation committee, which can be
held accountable for its decisions through the election of directors.
Therefore, Glass Lewis closely scrutinizes shareholder proposals relating to
compensation to determine if the requested action or disclosure has already
accomplished or mandated and whether it allows sufficient, appropriate
discretion to the board to design and implement reasonable compensation
programs.
A-58
Disclosure of Individual Compensation
Glass Lewis believes that disclosure of information regarding
compensation is critical to allowing shareholders to evaluate the extent to
which a company’s pay is based on performance. However, we recognize that the
SEC currently mandates significant executive compensation disclosure. In some
cases, providing information beyond that which is required by the SEC, such as
the details of individual employment agreements of employees below the senior
level, could create internal personnel tension or put the company at a
competitive disadvantage, prompting employee poaching by competitors. Further,
it is difficult to see how this information would be beneficial to
shareholders. Given these concerns, Glass Lewis typically does not believe that
shareholders would benefit from additional disclosure of individual
compensation packages beyond the significant level that is already required; we
therefore typically recommend voting against shareholder proposals seeking such
detailed disclosure. We will, however, review each proposal on a case by basis,
taking into account the company’s history of aligning executive compensation
and the creation of shareholder value.
Linking Pay with Performance
Glass Lewis views performance-based compensation as an effective means
of motivating executives to act in the best interests of shareholders. In our
view, an executive’s compensation should be specific to the company and its
performance, as well as tied to the executive’s achievements within the company.
However, when firms have inadequately linked executive compensation and
company performance we will consider recommending supporting reasonable
proposals seeking that a percentage of equity awards be tied to performance
criteria. We will also consider supporting appropriately crafted proposals
requesting that the compensation committee include multiple performance metrics
when setting executive compensation, provided that the terms of the shareholder
proposal are not overly prescriptive. Though boards often argue that these
types of restrictions unduly hinder their ability to attract talent we believe
boards can develop an effective, consistent and reliable approach to
remuneration utilizing a wide range (and an appropriate mix) of fixed and
performance-based compensation.
Retirement Benefits & Severance
As a general rule, Glass Lewis believes that shareholders should not be
involved in the approval of individual severance plans. Such matters should be
left to the board’s compensation committee, which can be held accountable for
its decisions through the election of its director members.
A-59
However, when proposals are crafted to only require approval if the
benefit exceeds 2.99 times the amount of the executive’s base salary plus
bonus, Glass Lewis typically supports such requests. Above this threshold,
based on the executive’s average annual compensation for the most recent five
years, the company can no longer deduct severance payments as an expense, and
thus shareholders are deprived of a valuable benefit without an offsetting
incentive to the executive. We believe that shareholders should be consulted
before relinquishing such a right, and we believe implementing such policies
would still leave companies with sufficient freedom to enter into appropriate
severance arrangements.
Following the passage of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank”), the SEC proposed rules that would require that
public companies hold advisory shareholder votes on compensation arrangements
and understandings in connection with merger transactions, also known as
“golden parachute” transactions. Effective April 4, 2011, the SEC requires that
companies seeking shareholder approval of a merger or acquisition transaction
must also provide disclosure of certain “golden parachute” compensation
arrangements and, in certain circumstances, conduct a separate shareholder
advisory vote to approve golden parachute compensation arrangements.
Bonus Recoupments (“Clawbacks”)
We believe it is prudent for boards to adopt detailed and stringent
policies whereby, in the event of a restatement of financial results, the board
will review all performance related bonuses and awards made to senior
executives during the period covered by a restatement and will, to the extent
feasible, recoup such bonuses to the extent that performance goals were not
achieved. While the Dodd-Frank Act mandates that all companies adopt clawback
policies that will require companies to develop a policy to recover compensation
paid to current and former executives erroneously paid during the three year
prior to a restatement, the SEC has yet to finalize the relevant rules. As a
result, we expect to see shareholder proposals regarding clawbacks in the
upcoming proxy season.
When examining proposals requesting that companies adopt recoupment
policies, Glass Lewis will first review any relevant policies currently in
place. When the board has already committed to a proper course, and the current
policy covers the major tenets of the proposal, we see no need for further
action. Further, in some instances, shareholder proposals may call for board
action that contravenes legal obligations under existing employment agreements.
In other cases proposals may excessively limit the board’s ability to exercise
judgment and reasonable discretion, which may or may not be warranted,
depending on the specific situation of the company in question. We believe
A-60
it is reasonable that a mandatory recoupment policy should only affect senior
executives and those directly responsible for the company’s accounting errors.
We note that where a company is entering into a new executive
employment contract that does not include a clawback provision and the company
has had a material restatement in the recent past, Glass Lewis will recommend
voting against the responsible members of the compensation committee. The
compensation committee has an obligation to shareholders to include reasonable
controls in executive contracts to prevent payments in the case of
inappropriate behavior.
Golden Coffins
Glass Lewis does not believe that the payment of substantial, unearned
posthumous compensation provides an effective incentive to executives or aligns
the interests of executives with those of shareholders. Glass Lewis firmly
believes that compensation paid to executives should be clearly linked to the
creation of shareholder value. As such, Glass Lewis favors compensation plans
centered on the payment of awards contingent upon the satisfaction of sufficiently
stretching and appropriate performance metrics. The payment of posthumous
unearned and unvested awards should be subject to shareholder approval, if not
removed from compensation policies entirely. Shareholders should be skeptical
regarding any positive benefit they derive from costly payments made to
executives who are no longer in any position to affect company performance.
To that end, we will consider supporting a reasonably crafted
shareholder proposal seeking to prohibit, or require shareholder approval of,
the making or promising of any survivor benefit payments to senior executives’
estates or beneficiaries. We will not recommend supporting proposals that
would, upon passage, violate existing contractual obligations or the terms of
compensation plans currently in effect.
Retention of Shares until Retirement
We strongly support the linking of executive pay to the creation of
long-term sustainable shareholder value and therefore believe shareholders
should encourage executives to retain some level of shares acquired through
equity compensation programs to provide continued alignment with shareholders.
However, generally we do not believe that requiring senior executives to retain
all or an unduly high percentage of shares acquired through equity compensation
programs following the termination of their employment is the most effective or
desirable way to accomplish this goal. Rather, we believe that restricting
executives’ ability to exercise all or a supermajority of otherwise vested
equity awards until they leave the company may hinder the ability of the
compensation committee to both attract and retain executive talent. In our
view, otherwise qualified and willing candidates could be dissuaded from
accepting
A-61
employment if he/she believes that his/her compensation could be
dramatically affected by financial results unrelated to their own personal
performance or tenure at the company. Alternatively, an overly strict policy
could encourage existing employees to quit in order to realize the value locked
in their incentive awards. As such, we will not typically recommend supporting
proposals requiring the retention of significant amounts of equity compensation
following termination of employment at target firms.
Tax Gross-Ups
Tax gross-ups can act as an anti-takeover measure, as larger payouts to
executives result in larger gross-ups, which could artificially inflate the
ultimate purchase price under a takeover or merger scenario. Additionally,
gross-ups can result in opaque compensation packages where shareholders are
unlikely to be aware of the total compensation an executive may receive.
Further, we believe that in instances where companies have severance agreements
in place for executives, payments made pursuant to such arrangements are often
large enough to soften the blow of any additional excise taxes. Finally, such
payments are not performance based, providing no incentive to recipients and,
if large, can be a significant cost to companies.
Given the above, we will typically recommend supporting proposals
requesting that a compensation committee adopt a policy that it will not make
or promise to make to its senior executives any tax gross-up payments, except
those applicable to management employees of the company generally, such as a
relocation or expatriate tax equalization policy.
Linking Executive Pay to Environmental and Social Criteria
We recognize that a company’s involvement in environmentally sensitive
and labor-intensive industries influences the degree to which a firm’s overall
strategy must weigh environmental and social concerns. However, we also
understand that the value generated by incentivizing executives to prioritize
environmental and social issues is difficult to quantify and therefore measure,
and necessarily varies among industries and companies.
When reviewing such proposals seeking to tie executive compensation to
environmental or social practices, we will review the target firm’s compliance
with (or contravention of) applicable laws and regulations, and examine any
history of environmental and social related concerns including those resulting
in material investigations, lawsuits, fines and settlements. We will also
review the firm’s current compensation policies and practice. However, with
respect to executive compensation, Glass Lewis generally believes that such
policies should be left to the compensation committee.
A-62
Governance
Declassification of the Board
Glass Lewis believes that classified boards (or “staggered boards”) do
not serve the best interests of shareholders. Empirical studies have shown
that: (i) companies with classified boards may show a reduction in firm value;
(ii) in the context of hostile takeovers, classified boards operate as a
takeover defense, which entrenches management, discourages potential acquirers
and delivers less return to shareholders; and (iii) companies with classified
boards are less likely to receive takeover bids than those with single class
boards. Annual election of directors provides increased accountability and
requires directors to focus on the interests of shareholders. When companies
have classified boards shareholders are deprived of the right to voice annual
opinions on the quality of oversight exercised by their representatives.
Given the above, Glass Lewis believes that classified boards are not in
the best interests of shareholders and will continue to recommend shareholders
support proposals seeking their repeal.
Right of Shareholders to Call a Special Meeting
Glass Lewis strongly believes that shareholders should have the ability
to call meetings of shareholders between annual meetings to consider matters
that require prompt attention. However, in order to prevent abuse and waste of
corporate resources by a small minority of shareholders, we believe that
shareholders representing at least a sizable minority of shares must support
such a meeting prior to its calling. Should the threshold be set too low,
companies might frequently be subjected to meetings whose effect could be the
disruption of normal business operations in order to focus on the interests of
only a small minority of owners. Typically we believe this threshold should not
fall below 10-15% of shares, depending on company size.
In our case-by-case evaluations, we consider the following:
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Company size
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Shareholder base
in both percentage of ownership and type of shareholder (e.g., hedge fund,
activist investor, mutual fund, pension fund, etc.)
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Responsiveness
of board and management to shareholders evidenced by progressive shareholder
rights policies (e.g., majority voting, declassifying boards, etc.) and
reaction to shareholder proposals
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Company
performance and steps taken to improve bad performance (e.g., new
executives/directors, spin-offs, etc.)
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Existence of
anti-takeover protections or other entrenchment devices
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Opportunities
for shareholder action (e.g., ability to act by written consent)
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Existing ability
for shareholders to call a special meeting
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Right of Shareholders to Act by Written Consent
Glass Lewis strongly supports shareholders’ right to act by written
consent. The right to act by written consent enables shareholders to take
action on important issues that arise between annual meetings. However, we
believe such rights should be limited to at least the minimum number of votes
that would be necessary to authorize the action at a meeting at which all
shareholders entitled to vote were present and voting.
In addition to evaluating the threshold for which written consent may
be used (e.g. majority of votes cast or outstanding), we will consider the
following when evaluating such shareholder proposals:
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Company size
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Shareholder base
in both percentage of ownership and type of shareholder (e.g., hedge fund,
activist investor, mutual fund, pension fund, etc.)
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Responsiveness
of board and management to shareholders evidenced by progressive shareholder
rights policies (e.g., majority voting, declassifying boards, etc.) and
reaction to shareholder proposals
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Company
performance and steps taken to improve bad performance (e.g., new
executives/directors, spin offs, etc.)
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Existence of
anti-takeover protections or other entrenchment devices
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Opportunities
for shareholder action (e.g., ability and threshold to call a special
meeting)
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Existing ability
for shareholders to act by written consent
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Board Composition
Glass Lewis believes the selection and screening process for
identifying suitably qualified candidates for a company’s board of directors is
one which requires the judgment of many factors, including the balance of
skills and talents, the breadth of experience and diversity of candidates and
existing board members. Diversity of skills, abilities and points of view can
foster the development of a more creative, effective and dynamic board. In
general, however, we do not believe that it is in the best interests of
shareholders for firms to be beholden to arbitrary rules regarding its board,
or committee, composition. We believe such matters should be left to a board’s
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nominating committee, which is generally responsible for establishing
and implementing policies regarding the composition of the board. Members of
this committee may be held accountable through the director election process.
However, we will consider supporting reasonable, well-crafted proposals to
increase board diversity where there is evidence a board’s lack of diversity
lead to a decline in shareholder value.
Reimbursement of Solicitation Expenses
Where a dissident shareholder is seeking reimbursement for expenses
incurred in waging a contest or submitting a shareholder proposal and has
received the support of a majority of shareholders, Glass Lewis generally will
recommend in favor of reimbursing the dissident for reasonable expenses. In
those rare cases where a shareholder has put his or her own time and money into
organizing a successful campaign to unseat a poorly performing director (or
directors) or sought support for a shareholder proposal, we feel that the
shareholder should be entitled to reimbursement of expenses by other
shareholders, via the company. We believe that, in such cases, shareholders
express their agreement by virtue of their majority vote for the dissident (or
the shareholder proposal) and will share in the expected improvement in company
performance.
Majority Vote for the Election of Directors
If a majority vote standard were implemented, shareholders could
collectively vote to reject a director they believe will not pursue their best
interests. We think that this minimal amount of protection for shareholders is
reasonable and will not upset the corporate structure nor reduce the
willingness of qualified shareholder-focused directors to serve in the future.
We believe that a majority vote standard will likely lead to more
attentive directors. Further, occasional use of this power will likely prevent
the election of directors with a record of ignoring shareholder interests.
Glass Lewis will generally support shareholder proposals calling for the
election of directors by a majority vote, except for use in contested director
elections.
Cumulative Vote for the Election of Directors
Glass Lewis believes that cumulative voting generally acts as a
safeguard for shareholders by ensuring that those who hold a significant
minority of shares can elect a candidate of their choosing to the board. This
allows the creation of boards that are responsive to the interests of all
shareholders rather than just a small group of large holders. However, when a
company has both majority voting and cumulative voting in place, there is a
higher likelihood of one or more directors not being elected as a result
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of not receiving a majority vote. This is because shareholders
exercising the right to cumulate their votes could unintentionally cause the
failed election of one or more directors for whom shareholders do not cumulate
votes.
Given the above, where a company (i) has adopted a true majority vote
standard; (ii) has simultaneously proposed a management-initiated true majority
vote standard; or (iii) is simultaneously the target of a true majority vote
standard shareholder proposal, Glass Lewis will recommend voting against
cumulative voting proposals due to the potential incompatibility of the two
election methods.
For companies that have not adopted a true majority voting standard but
have adopted some form of majority voting, Glass Lewis will also generally
recommend voting against cumulative voting proposals if the company has not
adopted antitakeover protections and has been responsive to shareholders.
Supermajority Vote Requirements
We believe that a simple majority is appropriate to approve all matters
presented to shareholders, and will recommend that shareholders vote
accordingly. Glass Lewis believes that supermajority vote requirements impede
shareholder action on ballot items critical to shareholder interests. In a
takeover context supermajority vote requirements can strongly limit the voice
of shareholders in making decisions on crucial matters such as selling the
business. These limitations in turn may degrade share value and can reduce the
possibility of buyout premiums for shareholders. Moreover, we believe that a
supermajority vote requirement can enable a small group of shareholders to
overrule the will of the majority of shareholders.
Independent Chairman
Glass Lewis views an independent chairman as better able to oversee the
executives and set a pro-shareholder agenda in the absence of the conflicts
that a CEO, executive insider, or close company affiliate may face. Separating
the roles of CEO and chairman may lead to a more proactive and effective board
of directors. The presence of an independent chairman fosters the creation of a
thoughtful and dynamic board, not dominated by the views of senior management.
We believe that the separation of these two key roles eliminates the conflict
of interest that inevitably occurs when a CEO, or other executive, is
responsible for self-oversight. As such, we will typically support reasonably
crafted shareholder proposals seeking the installation of an independent
chairman at a target company. However, we will not support proposals that
include overly prescriptive definitions of “independent.”
Proxy Access
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Shareholders have consistently sought mechanisms through which they
could secure a meaningful voice in director elections in recent years. While
many of these efforts have centered on regulatory changes at the SEC, the
United States Congress and the Obama Administration have placed “Proxy Access”
in the spotlight of the U.S. Government’s most recent corporate governance-related
financial reforms. Regulations allowing or mandating the reimbursement of
solicitation expenses for successful board candidates exist and further
regulation is pending. A 2009 amendment to the Delaware Corporate Code allows
companies to adopt bylaw provisions providing shareholders proxy access.
Further, in July 2010, President
Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act
, (the “Dodd-Frank Act”). This
Act provides the SEC with the authority to adopt rules permitting shareholders
to use issuer proxy solicitation materials to nominate director candidates. The
SEC received over 500 comments regarding proposed proxy access, some of which
questioned the agency’s authority to adopt such a rule. Nonetheless, in August
2010, the SEC adopted final Rule
14a-11
, which under certain circumstances,
gives shareholders (and shareholder groups) who have collectively held at least
3% of the voting power of a company’s securities continuously for at least
three years, the right to nominate up to 25% of a board’s directors and have
such nominees included on a company’s ballot and described in its proxy
statement. While final Rule 14a-11 was originally scheduled to take effect on
November 15, 2010, on October 4, 2010, the SEC announced that it would delay
the rule’s implementation following the filing of a lawsuit by the U.S. Chamber
Of Commerce and the Business Roundtable. In July 2011, the United States Court
of Appeals for the District of Columbia ruled against the SEC based on what it
perceived to be the SEC’s failure to fully consider the costs and the benefits
of the proxy access rules. On September 6, 2011, the SEC announced that it
would not be seeking rehearing of the decision. However, while rule 14a-11 was
vacated, the U.S. Court of Appeals issued a stay on the “private ordering”
amendments to Rule 14a-8, meaning that companies are no longer able to exclude
shareholder proposals requesting that they adopt procedures to allow for
shareholder nominees to be included in proxy statements (“Statement by SEC
Chairman Mary L. Schapiro on Proxy Access Ligation.”
SEC Press Release
. September 6, 2011).
Glass Lewis will consider supporting well-crafted and reasonable
proposals requesting proxy access, as we believe that in some cases, adoption
of this provision allows for improved shareholder rights and ensures that
shareholders who maintain a long-term interest in the target company have an
ability to nominate candidates for the board. Glass Lewis reviews proposals
requesting proxy access on a case-by-case basis, and will consider the
following in our analysis:
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Company size;
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The shareholder
proponent and their reasoning for putting forth the proposal at the target
company;
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The percentage
ownership requested and holding period requirement;
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Shareholder base
in both percentage of ownership and type of shareholder (e.g., hedge fund,
activist investor, mutual fund, pension fund, etc.);
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Responsiveness of
board and management to shareholders evidenced by progressive shareholder
rights policies (e.g., majority voting, declassifying boards, etc.) and
reaction to shareholder proposals;
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Company
performance and steps taken to improve bad performance (e.g., new
executives/directors, spin-offs, etc.);
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Existence of
anti-takeover protections or other entrenchment devices; and
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Opportunities for
shareholder action (e.g., ability to act by written consent or right to call
a special meeting).
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Environment
There are significant financial, legal and reputational risks to
companies resulting from poor environmental practices or negligent oversight
thereof. We believe part of the board’s role is to ensure that management
conducts a complete risk analysis of company operations, including those that
have environmental implications. Directors should monitor management’s
performance in mitigating environmental risks attendant with operations in
order to eliminate or minimize the risks to the company and shareholders.
When management and the board have displayed disregard for
environmental risks, have engaged in egregious or illegal conduct, or have
failed to adequately respond to current or imminent environmental risks that
threaten shareholder value, we believe shareholders should hold directors
accountable. When a substantial environmental risk has been ignored or
inadequately addressed, we may recommend voting against responsible members of
the governance committee, or members of a committee specifically charged with
sustainability oversight.
With respect to environmental risk, Glass Lewis believes companies
should actively consider their exposure to:
Direct environmental risk
: Companies should evaluate
financial exposure to direct environmental risks associated with their operations.
Examples of direct environmental risks are those associated with spills,
contamination, hazardous leakages, explosions, or
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reduced water or air quality, among others. Further, firms should
consider their exposure to environmental risks emanating from systemic change
over which they may have only limited control, such as insurance companies
affected by increased storm severity and frequency resulting from climate
change.
Risk due to legislation/regulation
: Companies should evaluate their
exposure to shifts or potential shifts in environmental regulation that affect
current and planned operations. Regulation should be carefully monitored in all
jurisdictions within which the company operates. We look closely at relevant
and proposed legislation and evaluate whether the company has responded
appropriately.
Legal and reputational risk
: Failure to take action on
important issues may carry the risk of damaging negative publicity and
potentially costly litigation. While the effect of high-profile campaigns on
shareholder value may not be directly measurable, in general we believe it is
prudent for firms to evaluate social and environmental risk as a necessary part
in assessing overall portfolio risk.
If there is a clear showing that a company has inadequately addressed
these risks, Glass Lewis may consider supporting appropriately crafted
shareholder proposals requesting increased disclosure, board attention or, in
limited circumstances, specific actions. In general, however, we believe that
boards and management are in the best position to address these important
issues, and will only rarely recommend that shareholders supplant their
judgment regarding operations.
Climate Change and Green House Gas Emission Disclosure
Glass Lewis will consider recommending a vote in favor of a reasonably
crafted proposal to disclose a company’s climate change and/or greenhouse gas
emission strategies when (i) a company has suffered financial impact from
reputational damage, lawsuits and/or government investigations, (ii) there is a
strong link between climate change and its resultant regulation and shareholder
value at the firm, and/or (iii) the company has inadequately disclosed how it
has addressed climate change risks. Further, we will typically recommend
supporting proposals seeking disclosure of greenhouse gas emissions at
companies operating in carbon- or energy- intensive industries, such basic
materials, integrated oil and gas, iron and steel, transportation, utilities,
and construction. We are not inclined, however, to support proposals seeking
emissions reductions, or proposals seeking the implementation of prescriptive
policies relating to climate change.
Sustainability and other Environmentally-Related Reports
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When evaluating requests that a firm produce an environmentally-related
report, such as a sustainability report or a report on coal combustion waste or
hydraulic fracturing, we will consider, among other things:
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The financial
risk to the company from the firm’s environmental practices and/or
regulation;
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The relevant
company’s current level of disclosure;
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The level of
sustainability information disclosed by the firm’s peers;
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The industry in
which the firm operates;
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The level and
type of sustainability concerns/controversies at the relevant firm, if any;
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The time frame
within which the relevant report is to be produced; and
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The level of
flexibility granted to the board in the implementation of the proposal.
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In general, we believe that firms operating in extractive industries
should produce reports regarding the risks presented by their environmental
activities, and will consider recommending a vote for reasonably crafted
proposals requesting that such a report be produced; however, as with all
shareholder proposals, we will evaluate these report requests on a case by case
basis.
Oil Sands
The procedure required to extract usable crude from oil sands emits
significantly more greenhouse gases than do conventional extraction methods. In
addition, development of the oil sands has a deleterious effect on the local
environment, such as Canada’s boreal forests which sequester significant levels
of carbon.
We believe firms should strongly consider and evaluate exposure to
financial, legal and reputational risks associated with investment in oil
sands. We believe firms should adequately disclose their involvement in the oil
sands, including a discussion of exposure to sensitive political and
environmental areas. Firms should broadly outline the scope of oil sands
operations, describe the commercial methods for producing oil, and discuss the
management of greenhouse gas emissions. However, we believe that detailed
disclosure of investment assumptions could unintentionally reveal sensitive
information regarding operations and business strategy, which would not serve
shareholders’ interest. We will review all proposals seeking increased
disclosure of oil sands operations in the above context, but will typically not
support proposals seeking cessation or curtailment of operations.
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Sustainable Forestry
Sustainable forestry provides for the long-term sustainable management
and use of trees and other non-timber forest products. Retaining the economic
viability of forests is one of the tenets of sustainable forestry, along with
encouraging more responsible corporate use of forests. Sustainable land use and
the effective management of land are viewed by some shareholders as important
in light of the impact of climate change. Forestry certification has emerged as
a way that corporations can address prudent forest management. There are
currently several primary certification schemes such as the Sustainable
Forestry Initiative (“SFI”) and the Forest Stewardship Council (“FSC”).
There are nine main principles that comprise the SFI: (i) sustainable
forestry; (ii) responsible practices; (iii) reforestation and productive
capacity; (iv) forest health and productivity; (v) long-term forest and soil
productivity; (vi) protection of water resources; (vii) protection of special
sites and biodiversity; (viii) legal compliance; and (ix) continual
improvement.
The FSC adheres to ten basic principles: (i) compliance with laws and
FSC principles; (ii) tenure and use rights and responsibilities; (iii)
indigenous peoples’ rights; (iv) community relations and workers’ rights; (v)
benefits from the forest; (vi) environmental impact; (vii) management plan;
(viii) monitoring and assessment; (ix) maintenance of high conservation value
forests; and (x) plantations.
Shareholder proposals regarding sustainable forestry have typically
requested that the firm comply with the above SFI or FSC principles as well as
to assess the feasibility of phasing out the use of uncertified fiber and
increasing the use of certified fiber. We will evaluate target firms’ current
mix of certified and uncertified paper and the firms’ general approach to
sustainable forestry practices, both absolutely and relative to its peers but
will only support proposals of this nature when we believe that the proponent
has clearly demonstrated that the implementation of this proposal is clearly
linked to an increase in shareholder value.
Social Issues
Non-Discrimination Policies
Companies with records of poor labor relations may face lawsuits,
efficiency-draining turnover, poor employee performance, and/or distracting,
costly investigations. Moreover, as an increasing number of companies adopt
inclusive EEO policies, companies without comprehensive policies may face
damaging recruitment, reputational and legal risks. We believe that a pattern
of making financial settlements as a result of lawsuits based on discrimination
could indicate investor exposure to ongoing
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financial risk. Where there is clear evidence of employment practices
resulting in negative economic exposure, Glass Lewis may support shareholder
proposals addressing such risks.
MacBride Principles
To promote peace, justice and equality regarding employment in Northern
Ireland, Dr. Sean MacBride, founder of Amnesty International and Nobel Peace
laureate, proposed the following equal opportunity employment principles:
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Increasing the
representation of individuals from underrepresented religious groups in the
workforce including managerial, supervisory, administrative, clerical and
technical jobs;
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2.
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Adequate
security for the protection of minority employees both at the workplace and
while traveling to and from work;
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3.
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The banning of
provocative religious or political emblems from the workplace;
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All job
openings should be publicly advertised and special recruitment efforts should
be made to attract applicants from underrepresented religious groups;
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5.
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Layoff, recall, and termination procedures should not, in practice, favor particular
religious groupings;
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6.
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The abolition
of job reservations, apprenticeship restrictions, and differential employment
criteria, which discriminate on the basis of religion or ethnic origin;
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The development
of training programs that will prepare substantial numbers of current
minority employees for skilled jobs, including the expansion of existing
programs and the creation of new programs to train, upgrade, and improve the
skills of minority employees;
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8.
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The
establishment of procedures to assess, identify and actively recruit minority
employees with potential for further advancement; and
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9.
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The appointment
of senior management staff member to oversee the company’s affirmative action
efforts and setting up of timetables to carry out affirmative action
principles.
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Proposals requesting the implementation of the above principles are
typically proposed at firms that operate, or maintain subsidiaries that
operate, in Northern Ireland. In each case, we will examine the company’s
current equal employment opportunity policy and the extent to which the company
has been subject to protests, fines, or litigation regarding discrimination in
the workplace, if any. Further, we will examine any evidence of the firm’s
specific record of labor concerns in Northern Ireland.
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Human Rights
Glass Lewis believes explicit policies set out by companies’ boards of
directors on human rights provides shareholders with the means to evaluate
whether the company has taken steps to mitigate risks from its human rights
practices. As such, we believe that it is prudent for firms to actively
evaluate risks to shareholder value stemming from global activities and human
rights practices along entire supply chains. Findings and investigations of human
rights abuses can inflict, at a minimum, reputational damage on targeted
companies and have the potential to dramatically reduce shareholder value. This
is particularly true for companies operating in emerging market countries in
extractive industries and in politically unstable regions. As such, while we
typically rely on the expertise of the board on these important policy issues,
we recognize that, in some instances, shareholders could benefit from increased
reporting or further codification of human rights policies.
Military and US Government Business Policies
Glass Lewis believes that disclosure to shareholders of information on
key company endeavors is important. However, we generally do not support
resolutions that call for shareholder approval of policy statements for or
against government programs, most of which are subject to thorough review by
the federal government and elected officials at the national level. We also do
not support proposals favoring disclosure of information where similar
disclosure is already mandated by law, unless circumstances exist that warrant
the additional disclosure.
Foreign Government Business Policies
Where a corporation operates in a foreign country, Glass Lewis believes
that the company and board should maintain sufficient controls to prevent
illegal or egregious conduct with the potential to decrease shareholder value,
examples of which include bribery, money laundering, severe environmental
violations or proven human rights violations. We believe that shareholders
should hold board members, and in particular members of the audit committee and
CEO, accountable for these issues when they face reelection, as these concerns
may subject the company to financial risk. In some instances, we will support
appropriately crafted shareholder proposals specifically addressing concerns
with the target firm’s actions outside its home jurisdiction.
Health Care Reform Principles
Health care reform in the United States has long been a contentious
political issue and Glass Lewis therefore believes firms must evaluate and
mitigate the level of risk to which they may be exposed regarding potential
changes in health care legislation. Over
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the last several years, Glass Lewis has reviewed multiple shareholder
proposals requesting that boards adopt principles for comprehensive health
reform, such as the following based upon principles reported by the Institute
of Medicine:
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Health care
coverage should be universal;
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Health care
coverage should be continuous;
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Health care
coverage should be affordable to individuals and families;
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The health
insurance strategy should be affordable and sustainable for society; and
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Health insurance
should enhance health and well-being by promoting access to high-quality care
that is effective, efficient, safe, timely, patient-centered and equitable.
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In general, Glass Lewis believes that individual corporate board rooms
are not the appropriate forum in which to address evolving and contentious
national policy issues. The adoption of a narrow set of principles could limit
the board’s ability to comply with new regulation or to appropriately and
flexibly respond to health care issues as they arise. As such, barring a
compelling reason to the contrary, we typically do not support the
implementation of national health care reform principles at the company level.
Tobacco
Glass Lewis recognizes the contentious nature of the production,
procurement, marketing and selling of tobacco products. We also recognize that
tobacco companies are particularly susceptible to reputational and regulatory
risk due to the nature of its operations. As such, we will consider supporting
uniquely tailored and appropriately crafted shareholder proposals requesting
increased information or the implementation of suitably broad policies at
target firms on a case-by-case basis. However, we typically do not support
proposals requesting that firms shift away from, or significantly alter, the
legal production or marketing of core products.
Reporting Contributions and Political Spending
While corporate contributions to national political parties and
committees controlled by federal officeholders are prohibited under federal
law, corporations can legally donate to state and local candidates,
organizations registered under 26 USC Sec. 527 of the Internal Revenue Code and
state-level political committees. There is, however, no standardized manner in
which companies must disclose this information. As such, shareholders often
must search through numerous campaign finance reports and detailed tax
documents to ascertain even limited information. Corporations also
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frequently use trade associations, which are not required to report
funds they receive for or spend on political activity, as a means for corporate
political action.
Further, in 2010 the Citizens United v. Federal Election Commission
decision by the Supreme Court affirmed that corporations are entitled to the
same free speech laws as individuals and that it is legal for a corporation to
donate to political causes without monetary limit. While the decision did not
remove bans on direct contributions to candidates, companies are now able to
contribute indirectly, and substantially, to candidates through political
organizations. Therefore, it appears companies will enjoy greater latitude in
their political actions by this recent decision.
When evaluating whether a requested report would benefit shareholders,
Glass Lewis seeks answers to the following three key questions:
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Is the Company’s
disclosure comprehensive and readily accessible?
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How does the
Company’s political expenditure policy and disclosure compare to its peers?
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What is the Company’s current level of oversight?
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Glass Lewis will consider supporting a proposal seeking increased
disclosure of corporate political expenditure and contributions if the firm’s
current disclosure is insufficient, or if the firm’s disclosure is
significantly lacking compared to its peers. Further, we will typically
recommend voting for proposals requesting reports on lobbying or political
contributions and expenditures when there is no explicit board oversight or
there is evidence of inadequate board oversight. Given that political donations
are strategic decisions intended to increase shareholder value and have the
potential to negatively affect the company, we believe the board should either
implement processes and procedures to ensure the proper use of the funds or
closely evaluate the process and procedures used by management. We will also
consider supporting such proposals when there is verification, or credible
allegations, that the company is mismanaging corporate funds through political
donations. If Glass Lewis discovers particularly egregious actions by the
company, we will consider recommending voting against the governance committee
members or other responsible directors.
Animal Welfare
Glass Lewis believes that it is prudent for management to assess
potential exposure to regulatory, legal and reputational risks associated with
all business practices, including those related to animal welfare. A
high-profile campaign launched against a company could result in shareholder
action, a reduced customer base, protests and potentially
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costly litigation. However, in general, we believe that the board and
management are in the best position to determine policies relating to the care
and use of animals. As such, we will typically vote against proposals seeking
to eliminate or limit board discretion regarding animal welfare unless there is
a clear and documented link between the board’s policies and the degradation of
shareholder value.
Internet Censorship
Legal and ethical questions regarding the use and management of the
Internet and the worldwide web have been present since access was first made
available to the public almost twenty years ago. Prominent among these debates
are the issues of privacy, censorship, freedom of expression and freedom of
access. Glass Lewis believes that it is prudent for management to assess its
potential exposure to risks relating to the internet management and censorship
policies. As has been seen at other firms, perceived violation of user privacy
or censorship of Internet access can lead to high-profile campaigns that could
potentially result in decreased customer bases or potentially costly
litigation. In general, however, we believe that management and boards are best
equipped to deal with the evolving nature of this issue in various
jurisdictions of operation.
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International
Proxy Paper Policy Guidelines
An Overview of the Glass Lewis Approach to International Proxy Advice for 2012
Please note: Glass Lewis creates separate proxy voting policies
designed specifically for each individual country. The following is a
distillation of the various country-specific policies.
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I. ELECTION OF
DIRECTORS
Board of Directors
Boards are put in place to represent shareholders and protect their
interests. Glass Lewis seeks boards with a proven record of protecting shareholders
and delivering value over the medium- and long-term. In our view, boards
working to protect and enhance the best interests of shareholders typically
include some independent directors (the percentage will vary by local market
practice and regulations), boast a record of positive performance, have
directors with diverse backgrounds, and appoint directors with a breadth and
depth of experience.
Board Composition
When companies disclose sufficient relevant information, we look at
each individual on the board and examine his or her relationships with the
company, the company’s executives and with other board members. The purpose of
this inquiry is to determine whether pre-existing personal, familial or
financial relationships are likely to impact the decisions of that board
member. Where the company does not disclose the names and backgrounds of
director nominees with sufficient time in advance of the shareholder meeting to
evaluate their independence and performance, we will consider recommending
abstaining on the directors’ election.
We vote in favor of governance structures that will drive positive
performance and enhance shareholder value. The most crucial test of a board’s
commitment to the company and to its shareholders is the performance of the
board and its members. The performance of directors in their capacity as board
members and as executives of the company, when applicable, and in their roles
at other companies where they serve is critical to this evaluation.
We believe a director is independent if he or she has no material
financial, familial or other current relationships with the company, its
executives or other board members except for service on the board and standard
fees paid for that service. Relationships that have existed within the three-five
years prior to the inquiry are usually considered to be “current” for purposes
of this test.
In our view, a director is affiliated if he or she has a material
financial, familial or other relationship with the company or its executives,
but is not an employee of the company. This includes directors whose employers
have a material financial relationship with the Company. This also includes a
director who owns or controls 10-20% or more of the company’s voting stock.
We define an inside director as one who simultaneously serves as a
director and as an employee of the company. This category may include a
chairman of the board who acts as an employee of the company or is paid as an
employee of the company.
Although we typically vote for the election of directors, we will
recommend voting against directors for the following reasons:
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A director who
attends less than 75% of the board and applicable committee meetings.
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A director who is
also the CEO of a company where a serious restatement has occurred after the
CEO certified the pre-restatement financial statements.
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We also feel that
the following conflicts of interest may hinder a director’s performance and
will therefore recommend voting against a:
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CFO who presently
sits on the board.
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Director who
presently sits on an excessive number of boards.
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Director, or a
director whose immediate family member, provides material professional
services to the company at any time during the past five years.
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Director, or a
director whose immediate family member, engages in airplane, real estate or
other similar deals, including perquisite type grants from the company.
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Director with an
interlocking directorship.
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Slate Elections
In some countries, companies elect their board members as a slate,
whereby shareholders are unable to vote on the election of each individual
director, but rather are limited to voting for or against the board as a whole.
If significant issues exist concerning one or more of the nominees or in
markets where directors are generally elected individually, we will recommend
voting against the entire slate of directors.
Board Committee Composition
We believe that independent directors should serve on a company’s
audit, compensation, nominating and governance committees. We will support
boards with such a structure and encourage change where this is not the case.
Review of Risk Management
Controls
We believe companies, particularly financial firms, should have a
dedicated risk committee, or a committee of the board charged with risk
oversight, as well as a chief risk officer who reports directly to that
committee, not to the CEO or another executive. In cases where a company has
disclosed a sizable loss or writedown, and where a reasonable analysis
indicates that the company’s board-level risk committee should be held
accountable for poor oversight, we would recommend that shareholders vote
against such committee members on that basis. In addition, in cases where a
company maintains a significant level of financial risk exposure but fails to
disclose any explicit form of board-level risk oversight (committee or
otherwise), we will consider recommending to vote against the chairman of the
board on that basis.
Classified Boards
Glass Lewis favors the repeal of staggered boards in favor of the
annual election of directors.
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We believe that staggered boards are less accountable to shareholders
than annually elected boards. Furthermore, we feel that the annual election of
directors encourages board members to focus on protecting the interests of
shareholders.
II. FINANCIAL
REPORTING
Accounts and Reports
Many countries require companies to submit the annual financial
statements, director reports and independent auditors’ reports to shareholders
at a general meeting. Shareholder approval of such a proposal does not
discharge the board or management. We will usually recommend voting in favor of
these proposals except when there are concerns about the integrity of the
statements/reports. However, should the audited financial statements, auditor’s
report and/or annual report not be published at the writing of our report, we
will recommend that shareholders abstain from voting on this proposal.
Income Allocation (Distribution of Dividend)
In many countries, companies must submit the allocation of income for
shareholder approval. We will generally recommend voting for such a proposal.
However, we will give particular scrutiny to cases where the company’s dividend
payout ratio is exceptionally low or excessively high relative to its peers and
the company has not provided a satisfactory explanation.
Appointment of Auditors and Authority to Set
Fees
We believe that role of the auditor is crucial in protecting
shareholder value. Like directors, auditors should be free from conflicts of
interest and should assiduously avoid situations that require them to make
choices between their own interests and the interests of the shareholders.
We generally support management’s recommendation regarding the
selection of an auditor and support granting the board the authority to fix
auditor fees except in cases where we believe the independence of an incumbent
auditor or the integrity of the audit has been compromised.
However, we recommend voting against ratification of the auditor and/or
authorizing the board to set auditor fees for the following reasons:
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When audit fees
added to audit-related fees total less than one-half of total fees.
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When there have
been any recent restatements or late filings by the company where the auditor
bears some responsibility for the restatement or late filing (e.g., a
restatement due to a reporting error).
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When the company
has aggressive accounting policies.
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When the company
has poor disclosure or lack of transparency in financial statements.
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When there are
other relationships or issues of concern with the auditor that might suggest
a conflict between the interest of the auditor and the interests of
shareholders.
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When the company
is changing auditors as a result of a disagreement between the company and
the auditor on a matter of accounting principles or practices, financial
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statement
disclosure or auditing scope or procedures.
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III. COMPENSATION
Compensation Report/Compensation Policy
We closely review companies’ remuneration practices and disclosure as
outlined in company filings to evaluate management-submitted advisory
compensation report and policy vote proposals. In evaluating these proposals,
which can be binding or non-binding depending on the country, we examine how
well the company has disclosed information pertinent to its compensation
programs, the extent to which overall compensation is tied to performance, the
performance metrics selected by the company and the levels of remuneration in
comparison to company performance and that of its peers.
We will usually recommend voting against approval of the compensation
report or policy when the following occur:
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Gross disconnect
between pay and performance;
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Performance goals
and metrics are inappropriate or insufficiently challenging;
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Lack of disclosure
regarding performance metrics and goals as well as the extent to which the
performance metrics, targets and goals are implemented to enhance company
performance and encourage prudent risk-taking;
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Excessive
discretion afforded to or exercised by management or the compensation
committee to deviate from defined performance metrics and goals in making
awards;
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Ex gratia or other
non-contractual payments have been made and the reasons for making the
payments have not been fully explained or the explanation is unconvincing;
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Guaranteed bonuses
are established;
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There is no
clawback policy; or
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Egregious or
excessive bonuses, equity awards or severance payments.
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Long Term Incentive Plans
Glass Lewis recognizes the value of equity-based incentive programs.
When used appropriately, they can provide a vehicle for linking an employee’s
pay to a company’s performance, thereby aligning their interests with those of
shareholders. Tying a portion of an employee’s compensation to the performance
of the Company provides an incentive to maximize share value. In addition,
equity-based compensation is an effective way to attract, retain and motivate
key employees.
In order to allow for meaningful shareholder review, we believe that
incentive programs should generally include: (i) specific and appropriate
performance goals; (ii) a maximum award pool; and (iii) a maximum award amount
per employee. In addition, the payments made should be reasonable relative to
the performance of the business and total compensation to those covered by the
plan should be in line with compensation paid by the Company’s peers.
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Performance-Based
Equity Compensation
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Glass Lewis
believes in performance-based equity compensation plans for senior
executives. We feel that executives should be compensated with equity when
their performance and that of the company warrants such rewards. While we do
not believe that equity-based compensation plans for all employees need to be
based on overall company performance, we do support such limitations for
grants to senior executives (although even some equity-based compensation of
senior executives without performance criteria is acceptable, such as in the
case of moderate incentive grants made in an initial offer of employment).
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Boards often argue
that such a proposal would hinder them in attracting talent. We believe that
boards can develop a consistent, reliable approach, as boards of many
companies have, that would still attract executives who believe in their
ability to guide the company to achieve its targets. We generally recommend
that shareholders vote in favor of performance-based option requirements.
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There should be no
retesting of performance conditions for all share- and option- based
incentive schemes. We will generally recommend that shareholders vote against
performance-based equity compensation plans that allow for re-testing.
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Director Compensation
Glass Lewis believes that non-employee directors should receive
appropriate types and levels of compensation for the time and effort they spend
serving on the board and its committees. Director fees should be reasonable in
order to retain and attract qualified individuals. In particular, we support
compensation plans that include non performance-based equity awards, which help
to align the interests of outside directors with those of shareholders.
Glass Lewis compares the costs of these plans to the plans of peer
companies with similar market capitalizations in the same country to help
inform its judgment on this issue.
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Retirement Benefits for Directors
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We will typically
recommend voting against proposals to grant retirement benefits to
non-executive directors. Such extended payments can impair the objectivity
and independence of these board members. Directors should receive adequate
compensation for their board service through initial and annual fees.
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Limits on Executive Compensation
As a general rule, Glass Lewis believes that shareholders should not be
involved in setting executive compensation. Such matters should be left to the
board’s compensation committee. We view the election of directors, and specifically
those who sit on the compensation committee, as the appropriate mechanism for
shareholders to express their disapproval or support of board
A-82
policy on this issue. Further, we believe that companies whose
pay-for-performance is in line with their peers should be granted the
flexibility to compensate their executives in a manner that drives growth and
profit.
However, Glass Lewis favors performance-based compensation as an
effective means of motivating executives to act in the best interests of
shareholders. Performance-based compensation may be limited if a chief
executive’s pay is capped at a low level rather than flexibly tied to the
performance of the company.
IV. GOVERNANCE STRUCTURE
Amendments to the Articles of Association
We will evaluate proposed amendments to a company’s articles of
association on a case-by-case basis. We are opposed to the practice of bundling
several amendments under a single proposal because it prevents shareholders
from evaluating each amendment on its own merits. In such cases, we will
analyze each change individually and will recommend voting for the proposal
only when we believe that the amendments on balance are in the best interests
of shareholders.
Anti-Takeover Measures
Poison Pills (Shareholder Rights Plans)
Glass Lewis believes that poison pill plans generally are not in the
best interests of shareholders. Specifically, they can reduce management
accountability by substantially limiting opportunities for corporate takeovers.
Rights plans can thus prevent shareholders from receiving a buy-out premium for
their stock.
We believe that boards should be given wide latitude in directing the
activities of the company and charting the company’s course. However, on an
issue such as this where the link between the financial interests of
shareholders and their right to consider and accept buyout offers is so
substantial, we believe that shareholders should be allowed to vote on whether
or not they support such a plan’s implementation.
In certain limited circumstances, we will support a limited poison pill
to accomplish a particular objective, such as the closing of an important
merger, or a pill that contains what we believe to be a reasonable ‘qualifying
offer’ clause.
Supermajority Vote Requirements
Glass Lewis favors a simple majority voting structure. Supermajority
vote requirements act as impediments to shareholder action on ballot items that
are critical to our interests. One key example is in the takeover context where
supermajority vote requirements can strongly limit shareholders’ input in
making decisions on such crucial matters as selling the business.
Increase in Authorized Shares
A-83
Glass Lewis believes that having adequate capital stock available for
issuance is important to the operation of a company. We will generally support
proposals when a company could reasonably use the requested shares for
financing, stock splits and stock dividends. While we think that having
adequate shares to allow management to make quick decisions and effectively operate
the business is critical, we prefer that, for significant transactions,
management come to shareholders to justify their use of additional shares
rather than providing a blank check in the form of large pools of unallocated
shares available for any purpose.
In general, we will support proposals to increase authorized shares up
to 100% of the number of shares currently authorized unless, after the increase
the company would be left with less than 30% of its authorized shares
outstanding.
Issuance of Shares
Issuing additional shares can dilute existing holders in some
circumstances. Further, the availability of additional shares, where the board
has discretion to implement a poison pill, can often serve as a deterrent to
interested suitors. Accordingly, where we find that the company has not
disclosed a detailed plan for use of the proposed shares, or where the number
of shares requested are excessive, we typically recommend against the issuance.
In the case of a private placement, we will also consider whether the company
is offering a discount to its share price.
In general, we will support proposals to issue shares (with pre-emption
rights) when the requested increase is the lesser of (i) the unissued ordinary
share capital; or (ii) a sum equal to one-third of the issued ordinary share
capital. This authority should not exceed five years. In some countries, if the
proposal contains a figure greater than one-third, the company should explain
the nature of the additional amounts.
We will also generally support proposals to suspend pre-emption rights
for a maximum of 5-20% of the issued ordinary share capital of the company,
depending on the country in which the company is located. This authority should
not exceed five years, or less for some countries.
Repurchase of Shares
We will recommend voting in favor of a proposal to repurchase shares
when the plan includes the following provisions: (i) a maximum number of shares
which may be purchased (typically not more than 15% of the issued share
capital); and (ii) a maximum price which may be paid for each share (as a
percentage of the market price).
V. ENVIRONMENTAL AND
SOCIAL RISK
We believe companies should actively evaluate risks to long-term
shareholder value stemming from exposure to environmental and social risks and
should incorporate this information into their overall business risk
profile. In addition, we believe companies should consider their exposure
to changes in environmental or social regulation with respect to their
operations as well as related legal and reputational risks. Companies should
disclose to shareholders both the nature
A-84
and magnitude of such risks as well as steps they have taken or will
take to mitigate those risks.
When we identify situations where shareholder value is at risk, we may
recommend voting in favor of a reasonable and well-targeted shareholder
proposal if we believe supporting the proposal will promote disclosure of
and/or mitigate significant risk exposure. In limited cases where a company has
failed to adequately mitigate risks stemming from environmental or social
practices, we will recommend shareholders vote against: (i) ratification of
board and/or management acts; (ii) approving a company’s accounts and reports
and/or; (iii) directors (in egregious cases).
A-85
A
PPENDIX B:
RATINGS
STANDARD & POOR’S ISSUE CREDIT RATING
DEFINITIONS
A Standard
& Poor’s issue credit rating is a current opinion of the creditworthiness
of an obligor with respect to a specific financial obligation, a specific class
of financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The opinion evaluates the obligor’s
capacity and willingness to meet its financial commitments as they come due,
and may assess terms, such as collateral security and subordination, which
could affect ultimate payment in the event of default. The issue credit rating
is not a recommendation to purchase, sell, or hold a financial obligation,
inasmuch as it does not comment as to market price or suitability for a particular
investor.
Issue credit
ratings are based on current information furnished by the obligors or obtained
by Standard & Poor’s from other sources it considers reliable. Standard
& Poor’s does not perform an audit in connection with any credit rating and
may, on occasion, rely on unaudited financial information. Credit ratings may
be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit
ratings can be either long term or short term. Short-term ratings are generally
assigned to those obligations considered short-term in the relevant market. In
the U.S., for example, that means obligations with an original maturity of no
more than 365 days—including commercial paper. Short-term ratings are also used
to indicate the creditworthiness of an obligor with respect to put features on
long-term obligations. The result is a dual rating, in which the short-term
rating addresses the put feature, in addition to the usual long-term rating.
Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
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Likelihood of payment—capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of the
obligation;
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Nature of and provisions of the obligation;
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Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors’ rights.
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Issue
ratings are an assessment of default risk, but may incorporate an assessment of
relative seniority or ultimate recovery in the event of default. Junior
obligations are typically rated lower than senior obligations, to reflect the
lower priority in bankruptcy, as noted above. (Such differentiation may apply
when an entity has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations.)
AAA
An obligation rated ‘AAA’ has the highest rating assigned by Standard
& Poor’s. The obligor’s capacity to meet its financial commitment on the
obligation is extremely strong.
AA
An
obligation rated ‘AA’ differs from the highest-rated obligations only to a
small degree. The obligor’s capacity to meet its financial commitment on the
obligation is very strong.
B-1
A
An obligation rated ‘A’ is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is still strong.
BBB
An obligation rated ‘BBB’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC, and C
Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having
significant speculative characteristics. ‘BB’ indicates the least degree of
speculation and ‘C’ the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB
An
obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor’s
inadequate capacity to meet its financial commitment on the obligation.
B
An
obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated
‘BB’, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor’s capacity or willingness to meet its
financial commitment on the obligation.
CCC
An
obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC
An
obligation rated ‘CC’ is currently highly vulnerable to nonpayment.
C
A ‘C’
rating is assigned to obligations that are currently highly vulnerable to
nonpayment, obligations that have payment arrearages allowed by the terms of
the documents, or obligations of an issuer that is the subject of a bankruptcy
petition or similar action which have not experienced a payment default. Among
others, the ‘C’ rating may be assigned to subordinated debt, preferred stock or
other obligations on which cash payments have been suspended in accordance with
the instrument’s terms or when preferred stock is the subject of a distressed
exchange offer, whereby some or all of the issue is either repurchased for an
amount of cash or replaced by other instruments having a total value that is
less than par.
B-2
D
An
obligation rated ‘D’ is in payment default. The ‘D’ rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor’s believes
that such payments will be made during such grace period. The ‘D’ rating also
will be used upon the filing of a bankruptcy petition or the taking of similar
action if payments on an obligation are jeopardized. An obligation’s rating is
lowered to ‘D’ upon completion of a distressed exchange offer, whereby some or
all of the issue is either repurchased for an amount of cash or replaced by
other instruments having a total value that is less than par.
Plus (+) or minus (-)
The
ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
NR
This
indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor’s does not
rate a particular obligation as a matter of policy.
SHORT-TERM ISSUE CREDIT RATINGS
A-1
A
short-term obligation rated ‘A-1’ is rated in the highest category by Standard
& Poor’s. The obligor’s capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor’s capacity to meet its
financial commitment on these obligations is extremely strong.
A-2
A
short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is satisfactory.
A-3
A
short-term obligation rated ‘A-3’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B
A
short-term obligation rated ‘B’ is regarded as having significant speculative
characteristics. Ratings of ‘B-1’, ‘B-2’, and ‘B-3’ may be assigned to indicate
finer distinctions within the ‘B’ category. The obligor currently has the
capacity to meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor’s inadequate
capacity to meet its financial commitment on the obligation.
B-1.
A
short-term obligation rated ‘B-1’ is regarded as having significant speculative
characteristics, but the obligor has a relatively stronger capacity to meet its
financial commitments over the short-term compared to other speculative-grade
obligors.
B-3
B-2.
A
short-term obligation rated ‘B-2’ is regarded as having significant speculative
characteristics, and the obligor has an average speculative-grade capacity to
meet its financial commitments over the short-term compared to other
speculative-grade obligors.
B-3.
A
short-term obligation rated ‘B-3’ is regarded as having significant speculative
characteristics, and the obligor has a relatively weaker capacity to meet its
financial commitments over the short-term compared to other speculative-grade
obligors.
C
A
short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D
A
short-term obligation rated ‘D’ is in payment default. The ‘D’ rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor’s believes
that such payments will be made during such grace period. The ‘D’ rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
DUAL RATINGS
Standard
& Poor’s assigns “dual” ratings to all debt issues that have a put option
or demand feature as part of their structure. The first rating addresses the
likelihood of repayment of principal and interest as due, and the second rating
addresses only the demand feature. The long-term rating symbols are used for
bonds to denote the long-term maturity and the short-term rating symbols for
the put option (for example, ‘AAA/A-1+’). With U.S. municipal short-term demand
debt, note rating symbols are used with the short-term issue credit rating
symbols (for example, ‘SP-1+/A-1+’).
MOODY’S CREDIT RATING DEFINITIONS
Aaa
Bonds and
preferred stock which are rated Aaa are judged to be of the highest quality,
with minimal credit risk.
Aa
Bonds and
preferred stock which are rated Aa are judged to be of high quality and are
subject to very low credit risk.
A
Bonds and
preferred stock which are rated A are considered upper-medium grade and are
subject to low credit risk.
Baa
Bonds and
preferred stock which are rated Baa are subject to moderate credit risk. They
are considered medium-grade and as such may possess certain speculative
characteristics.
B-4
Ba
Bonds and
preferred stock which are rated Ba are judged to have speculative elements and
are subject to substantial credit risk.
B
Bonds and
preferred stock which are rated B are considered speculative and are subject to
high credit risk.
Caa
Bonds and
preferred stock which are rated Caa are of poor standing and are subject to
very high credit risk.
Ca
Bonds and
preferred stock which are rated Ca are highly speculative and are likely in, or
very near, default, with some prospect of recovery of principal and interest.
C
Bonds and preferred
stock which are rated C are the lowest rated class of bonds/preferred stock and
are typically in default, with little prospect for recovery of principal or
interest.
B-5
VAN ECK
FUNDS
PART C
OTHER INFORMATION
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(a)
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(1) Amended and Restated Master
Trust Agreement.(1)
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(2) Amendment No. 1 to Amended
and Restated Master Trust Agreement.(1)
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(3) Amendment No. 2 to Amended
and Restated Master Trust Agreement.(1)
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(4) Amendment No. 3 to Amended
and Restated Master Trust Agreement.(1)
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(5) Amendment No. 4 to Amended
and Restated Master Trust Agreement.(1)
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(6) Amendment No. 5 to Amended
and Restated Master Trust Agreement.(1)
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(7) Amendment No. 6 to Amended
and Restated Master Trust Agreement.(1)
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(8) Amendment No. 7 to Amended
and Restated Master Trust Agreement.(1)
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(9) Amendment No. 8 to Amended
and Restated Master Trust Agreement.(1)
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(10) Amendment No. 9 to Amended
and Restated Master Trust Agreement.(1)
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(11) Amendment No. 10 to Amended
and Restated Master Trust Agreement.(3)
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(12) Amendment No. 11 to Amended
and Restated Master Trust Agreement.(3)
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(13) Amendment No. 12 to Amended
and Restated Master Trust Agreement.(3)
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(14) Amendment No. 13 to Amended
and Restated Master Trust Agreement.(2)
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(15) Amendment No. 15 to Amended
and Restated Master Trust Agreement.(3)
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(16) Amendment No. 16 to Amended
and Restated Master Trust Agreement.(3)
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(17) Amendment No. 17 to Amended
and Restated Master Trust Agreement.(3)
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|
(18) Amendment No. 18 to Amended
and Restated Master Trust Agreement.(3)
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|
(19) Amendment No. 19 to Amended
and Restated Master Trust Agreement.(3)
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|
(20) Amendment No. 20 to Amended
and Restated Master Trust Agreement.(5)
|
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|
(21) Amendment No. 21 to Amended
and Restated Master Trust Agreement.(5)
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|
(22) Amendment No. 22 to Amended
and Restated Master Trust Agreement.(10)
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|
(23) Amendment No. 23 to Amended
and Restated Master Trust Agreement.(10)
|
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|
(24) Amendment No. 24 to Amended
and Restated Master Trust Agreement.(12)
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|
(25) Amendment No. 25 to Amended
and Restated Master Trust Agreement.(12)
|
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|
(26) Amendment No. 26 to Amended
and Restated Master Trust Agreement.(13)
|
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|
(27) Amendment No. 27 to Amended
and Restated Master Trust Agreement.(15)
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(b)
|
Amended and Restated By-Laws of
Registrant.(15)
|
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|
(c)
|
Rights of security holders are
contained in Articles IV, V and VI of the Registrant’s Amended and Restated
Master Trust Agreement, as amended, and Article 9 of the Registrant’s Amended
and Restated By-Laws, both of which are incorporated by reference above.
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(d)
|
(1)
|
Advisory Agreement.(1)
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(2)
|
Advisory Agreement with respect
to Global Hard Assets Fund.(1)
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(3)
|
Advisory Agreement with respect
to Emerging Markets Fund (formerly known as Global Balanced Fund).(4)
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|
(4)
|
(i)
|
Investment Advisory Agreement
with respect to Multi-Manager Alternatives Fund, CM Commodity Index Fund,
Long/Flat Commodity Index Fund and Unconstrained Emerging Markets Bond
Fund.(13)
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|
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(ii)
|
Exhibit A, updated as of March
14, 2012, to the Investment Advisory Agreement, filed herewith.
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(5)
|
(i)
|
Form of Sub-Investment Advisory
Agreement with respect to Multi-Manager Alternatives Fund.(10)
|
|
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|
(ii)
|
Schedule of Parties to
Sub-Investment Advisory Agreements with respect to Multi-Manager Alternatives
Fund, filed herewith.
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(e)
|
(1)
|
Distribution Agreement.(1)
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|
(2)
|
Letter Agreement adding Class C
shares of International Investors Gold Fund to Distribution Agreement.(1)
|
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|
(3)
|
Letter Agreement adding Class A
and Class C shares of Global Hard Assets Fund to Distribution Agreement.(1)
|
|
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|
(4)
|
Letter Agreement adding Class A
shares of Emerging Markets Fund (formerly known as Global Balanced Fund) to
Distribution Agreement.(4)
|
|
|
|
|
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|
(5)
|
Letter Agreement adding Class A
shares and Class I shares of Multi-Manager Alternatives Fund to Distribution
Agreement.(10)
|
|
|
|
|
|
|
|
(6)
|
Letter Agreement adding CM
Commodity Index Fund and Long/Flat Commodity Index Fund to Distribution
Agreement.(13)
|
|
|
|
|
|
|
|
(7)
|
Letter Agreement adding Class C
shares of Multi-Manager Alternatives Fund and adding Unconstrained Emerging
Markets Bond Fund to Distribution Agreement.(15)
|
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|
(f)
|
(1)
|
Simplified Employee Plan.(1)
|
2
|
|
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|
(2)
|
Amended Retirement Plan for
Self-Employed Individuals, Partnerships and Corporations Using Shares of
International Investors Incorporated or the Van Eck Funds.(1)
|
|
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|
(g)
|
Custodian Agreement.(2)
|
|
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|
|
|
|
(h)
|
(1)
|
Accounting and Administrative
Services Agreement.(1)
|
|
|
|
|
|
|
|
(2)
|
Letter Agreement adding
International Investors Gold Fund to Accounting and Administrative Services
Agreement.(1)
|
|
|
|
|
|
|
|
(3)
|
Forms of Procedural Agreement,
Customer Agreement and Safekeeping Agreement with Merrill Lynch Futures Inc.
and Morgan Stanley.(1)
|
|
|
|
|
|
|
|
(4)
|
Letter Agreement adding Emerging
Markets Fund (formerly known as Global Balanced Fund) to Accounting and
Administrative Services Agreement.(4)
|
|
|
|
|
|
|
|
(5)
|
Data Access Service
Agreement.(4)
|
|
|
|
|
|
|
|
(6)
|
Transfer Agency Agreement.(4)
|
|
|
|
|
|
|
|
(7)
|
Form of Trustee Indemnification
Agreement.(6)
|
|
|
|
|
|
|
|
(8)
|
Form of Participation Agreement
with Unaffiliated Fund Complexes.(10)
|
|
|
|
|
|
|
(i)
|
(1)
|
Opinion and Consent of Counsel.
(1)
|
|
|
|
|
|
|
|
(2)
|
Opinion and
Consent of Counsel with respect to the addition of Class I of Emerging
Markets Fund, Global Hard Assets Fund and International Investors Gold
Fund.(5)
|
|
|
|
|
|
|
|
(3)
|
Opinion and Consent of Counsel
with respect to the addition of
Class A and Class I
of Multi-Manager Alternatives Fund.(10)
|
|
|
|
|
|
|
|
(4)
|
Opinion and Consent of Counsel
with respect to the addition of
Class Y of Emerging Markets Fund, Global Hard Assets Fund, International
Investors Gold Fund and Multi-Manager Alternatives Fund.(12)
|
|
|
|
|
|
|
|
(5)
|
Opinion and Consent of Counsel
with respect to CM Commodity Index
Fund and Long/Flat Commodity Index Fund.(13)
|
|
|
|
|
|
|
|
(6)
|
Opinion and Consent of Counsel
with respect to the addition of
Class C
of Multi-Manager Alternatives Fund.(15)
|
|
|
|
|
|
|
|
(7)
|
Opinion and Consent of Counsel
with respect to
Unconstrained
Emerging Markets Bond Fund, filed herewith.
|
|
|
|
|
|
|
(j)
|
(1)
|
Consent of Goodwin Procter
LLP.(15)
|
|
|
|
|
|
|
|
(2)
|
Powers of Attorney.(7)
|
|
|
|
|
|
|
|
(3)
|
Jan F. van Eck Power of
Attorney.(13)
|
|
|
|
|
|
|
(k)
|
Not applicable.
|
|
|
|
|
|
|
(l)
|
Not applicable.
|
3
|
|
|
|
|
|
(m)
|
(1)
|
Form of Amended and Restated
Plan of Distribution pursuant to Rule 12b-1
.(13)
|
|
|
|
|
|
|
(m)
|
(2)
|
Amended Exhibit A
to Amended and Restated Plan of Distribution pursuant to Rule 12b-1.(15)
|
|
|
|
|
|
|
(n)
|
Multiple Class Plan pursuant to
Rule 18f-3.(12)
|
|
|
|
|
|
|
(o)
|
Reserved.
|
|
|
|
|
|
|
(p)
|
(1)
|
Code of Ethics of the
Registrant, its Investment Adviser and its Principal Underwriter.(10)
|
|
|
|
|
|
|
|
(2)
|
Code of Ethics of Martingale Asset
Management, L.P.(8)
|
|
|
|
|
|
|
|
(3)
|
Code of Ethics of PanAgora Asset
Management, Inc.(9)
|
|
|
|
|
|
|
|
(4)
|
Code of Ethics of Dix Hills
Partners, LLC.(10)
|
|
|
|
|
|
|
|
(5)
|
Code of Ethics of Primary Funds,
LLC.(12)
|
|
|
|
|
|
|
|
(6)
|
Code of Ethics of Medley Credit
Strategies, LLC.(14)
|
|
|
|
|
|
|
|
(7)
|
Code of Ethics of Acorn
Derivatives Management Corp.(15)
|
|
|
|
|
|
|
|
(8)
|
Code of Ethics of Coe Capital
Management, LLC.(15)
|
|
|
|
|
|
|
|
(9)
|
Code of Ethics of Millrace Asset
Group, Inc.(15)
|
|
|
|
|
|
|
|
(10)
|
Code of Ethics of Tiburon
Capital Management, LLC.(15)
|
|
|
|
|
|
|
|
(11)
|
Code of Ethics of KeyPoint
Capital Management, LLC, filed herewith.
|
|
|
|
|
|
|
|
(12)
|
Code of Ethics of SW Asset
Management, LLC, filed herewith.
|
|
|
|
|
(1)
|
Incorporated
by reference to Post-Effective Amendment No. 51 to Registrant’s Registration
Statement, File Nos. 002-97596 and 811-04297, filed on March 1, 1999.
|
|
|
|
|
(2)
|
Incorporated
by reference to Post-Effective Amendment No. 55 to Registrant’s Registration
Statement, File Nos. 002-97596 and 811-04297, filed on March 19, 2001.
|
|
|
|
|
(3)
|
Incorporated
by reference to Post-Effective Amendment No. 62 to Registrant’s Registration
Statement, File Nos. 02-97596 and 811-04297, filed on April 30, 2004.
|
|
|
|
|
(4)
|
Incorporated
by reference to Post-Effective Amendment No. 63 to Registrant’s Registration
Statement, File Nos. 02-97596 and 811-04297, filed February 25, 2005.
|
|
|
|
|
(5)
|
Incorporated
by reference to Post-Effective Amendment No. 66 to Registrant’s Registration
Statement, File Nos. 02-97596 and 811-04297, filed May 1, 2006.
|
|
|
|
|
(6)
|
Incorporated
by reference to Post-Effective Amendment No. 67 to Registrant’s Registration
Statement, File Nos. 02-97596 and 811-04297, filed April 30, 2007.
|
|
|
|
|
(7)
|
Incorporated
by reference to Post-Effective Amendment No. 68 to Registrant’s Registration
Statement, File Nos. 02-97596 and 811-04297, filed April 24, 2008.
|
4
|
|
|
|
(8)
|
Incorporated
by reference to Post-Effective Amendment No. 26 to the Registration Statement
of Van Eck VIP Trust (formerly, Van Eck Worldwide Insurance Trust), File Nos.
033-13019 and 811-05083, filed on April 30, 2004.
|
|
|
|
|
(9)
|
Incorporated
by reference to Post-Effective Amendment No. 35 to the Registration Statement
of Van Eck VIP Trust (formerly, Van Eck Worldwide Insurance Trust), File Nos.
033-13019 and 811-05083, filed February 15, 2008.
|
|
|
|
|
(10)
|
Incorporated
by reference to Post-Effective Amendment No. 78 to Registrant’s Registration
Statement, File Nos. 02-97596 and 811-04297, filed April 3, 2009.
|
|
|
|
|
(11)
|
Incorporated
by reference to Post-Effective Amendment No. 79 to Registrant’s Registration
Statement, File Nos. 02-97596 and 811-04297, filed April 22, 2009.
|
|
|
|
|
(12)
|
Incorporated
by reference to Post-Effective Amendment No. 82 to Registrant’s Registration
Statement, File Nos. 02-97596 and 811-04297, filed April 30, 2010.
|
|
|
|
|
(13)
|
Incorporated
by reference to Post-Effective Amendment No. 100 to Registrant’s Registration
Statement, File Nos. 02-97596 and 811-04297, filed November 22, 2010.
|
|
|
|
|
(14)
|
Incorporated
by reference to Post-Effective Amendment No. 101 to Registrant’s Registration
Statement, File Nos. 02-97596 and 811-04297, filed April 14, 2011.
|
|
|
|
|
(15)
|
Incorporated
by reference to Post-Effective Amendment No. 106 to Registrant’s Registration
Statement, File Nos. 02-97596 and 811-04297, filed April 27, 2012.
|
|
|
|
|
ITEM 29.
|
PERSONS CONTROLLED BY OR UNDER
COMMON CONTROL WITH THE FUND.
|
|
|
|
|
Not Applicable.
|
|
|
|
|
ITEM 30.
|
INDEMNIFICATION.
|
Reference
is made to Article VI of the Amended and Restated Master Trust Agreement of the
Registrant, as amended, Section 8 of the Advisory Agreement, Section 5 of the
Distribution Agreement, Section 27 of the Custodian Agreement, and Section 6 of
the Data Access Agreement.
The
general effect of this Indemnification will be to indemnify the officers,
trustees, employees and agents of the Registrant from costs and expenses
arising from any action, suit or proceeding to which they may be made a party
by reason of their being or having been a trustee, officer, employee or agent
of the Registrant, except where such action is determined to have arisen out of
the willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the trustee’s, officer’s, employee’s or
agent’s office.
Reference
is also made to the individual Trustee Indemnification Agreements entered into
with each of the Trustees of the Registrant. The Indemnification Agreements do
not supersede or replace the indemnification under the Amended and Restated
Master Trust Agreement of the Registrant, as amended. The Indemnification Agreements
supplement the protections under the Amended and Restated Master Trust
Agreement, by clarifying the scope of certain terms of the Amended and Restated
Master Trust Agreement and providing a variety of procedural benefits,
including with respect to protection from modification of the indemnification,
term and survival of Registrant’s obligations, and procedural enhancements with
respect to, among other things, advancement of expenses, determination of
entitlement, indemnification for expenses incurred by a Trustee as a witness
and selection of counsel.
Insofar
as indemnification for liability arising under the Securities Act of 1933, as
amended (“1933 Act”), may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the
5
foregoing
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission (“SEC”) such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
|
|
|
|
ITEM 31.
|
BUSINESS AND OTHER CONNECTIONS
OF THE INVESTMENT ADVISER.
|
Van
Eck Associates Corporation is a registered investment adviser and provides
investment advisory services to the Registrant. The description of Van Eck
Associates Corporation under the caption “Management of the Funds” in the
Registrant’s Prospectuses and under the caption “Investment Advisory Services”
in the Registrant’s Statements of Additional Information, constituting Parts A
and B, respectively, of this Registration Statement are incorporated herein by
reference. Information as to any business, profession, vocation or employment
of a substantial nature engaged in by investment adviser and its officers,
directors or partners within the past two fiscal years is set forth under the
caption “Trustees and Officers” in the Registrant’s Statements of Additional
Information and in its Form ADV filed with the SEC (File No. 801-21340), both
of which are incorporated herein by reference.
Each
of Acorn Derivatives Management Corp. (SEC File No. 801-43760), Coe Capital
Management, LLC (SEC File No. 801-56483), Dix Hills Partners, LLC (SEC File No.
801-62551), KeyPoint Capital Management, LLC (SEC File No. 801-74985),
Martingale Asset Management, L.P. (SEC File No. 801-30067), Medley Credit
Strategies, LLC (SEC File No. 801-71839), Millrace Asset Group, Inc. (SEC File
No. 801-70920), PanAgora Asset Management, Inc. (SEC File No. 801-35497),
Primary Funds, LLC (SEC File No. 801-69279), SW Asset Management, LLC (SEC File
No. 801-71945) and Tiburon Capital Management, LLC (SEC File No. 801-71202) serves
as a sub-adviser to Multi-Manager Alternatives Fund. The descriptions of each
sub-adviser under the caption “Management of the Fund” in the Registrant’s
Prospectus and under the caption “Investment Advisory Services” in the
Registrant’s Statement of Additional Information, constituting Parts A and B,
respectively, of this Registration Statement are incorporated herein by
reference. Information on the directors and officers of each sub-adviser set
forth in its Form ADV filed with the SEC is incorporated herein by reference.
|
|
|
|
ITEM 32.
|
PRINCIPAL UNDERWRITERS
|
|
|
|
|
(a)
|
Van Eck Securities Corporation,
principal underwriter for the Registrant, also distributes shares of Van Eck
VIP Trust and Market Vectors ETF Trust.
|
|
|
|
|
(b)
|
The following table presents
certain information with respect to each director and officer of Van Eck
Securities Corporation for the fiscal year ended December 31, 2011. The
principal business address for each director and officer of Van Eck
Securities Corporation is 335 Madison Avenue, 19th Floor, New York, New York
10017.
|
|
|
|
|
|
|
|
|
|
|
NAME
|
|
|
POSITIONS AND OFFICES WITH
UNDERWRITER
|
|
|
POSITIONS AND OFFICES
WITH REGISTRANT
|
|
|
John J. Crimmins
|
|
|
Vice President
|
|
|
Vice President, Treasurer, Chief
Financial Officer and Principal Accounting Officer
|
|
|
Harvey Hirsch
|
|
|
Senior Vice President
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Wu-Kwan Kit
|
|
|
Assistant Vice President and
Assistant Secretary
|
|
|
Assistant Vice President and
Assistant Secretary
|
|
6
|
|
|
|
|
|
|
|
|
|
NAME
|
|
|
POSITIONS AND OFFICES WITH
UNDERWRITER
|
|
|
POSITIONS AND OFFICES
WITH REGISTRANT
|
|
|
Susan C. Lashley
|
|
|
Vice President
|
|
|
Vice President
|
|
|
|
|
|
|
|
|
|
|
|
Allison Lovett
|
|
|
Vice President
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Patrick Lulley
|
|
|
Vice President
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Thomas K. Lynch
|
|
|
Vice President and Chief
Compliance Officer
|
|
|
Vice President and Chief
Compliance Officer
|
|
|
Susan Marino
|
|
|
Senior Vice President
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Laura Martinez
|
|
|
Assistant Vice President and
Assistant Secretary
|
|
|
Assistant Vice President and
Assistant Secretary
|
|
|
Joseph J. McBrien
|
|
|
Director, Senior Vice President,
General Counsel and Secretary
|
|
|
Senior Vice President, Secretary
and Chief Legal Officer
|
|
|
Michele Medina
|
|
|
Vice President Corporate
Accounting
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Bryan S. Paisley
|
|
|
Assistant Vice President
|
|
|
N/A
|
|
|
Jonathan R. Simon
|
|
|
Vice President, Associate
General Counsel and Assistant Secretary
|
|
|
Vice President and Assistant
Secretary
|
|
|
Bruce J. Smith
|
|
|
Director, Senior Vice President,
Chief Financial Officer, Treasurer and Controller
|
|
|
Senior Vice President
|
|
|
Glenn Smith
|
|
|
Vice President
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Jan F. van Eck
|
|
|
Director and President
|
|
|
Chief Executive Officer and
President
|
|
|
John Wolfe
|
|
|
Vice President and Chief
Administrative Officer
|
|
|
N/A
|
|
|
|
|
|
|
(c)
|
Not Applicable
|
|
|
|
|
|
ITEM 33.
|
LOCATION OF ACCOUNTS AND
RECORDS.
|
The
location of accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the Investment Company Act of 1940, as amended
(“1940 Act”), and the Rules promulgated thereunder is set forth below.
Accounts,
books and documents maintained pursuant to 17 CFR 270 31a-1(b)(1),
31a-1(b)(2)(i), 31a-1(b)(2)(ii), 31a-1(b)(2)(iii), 31a-1(b)(4), 31a-1(b)(5),
31a-1(b)(6), 31a-1(b)(7), 31a-1(b)(8), 31a-1(b)(9), 31a-1(b)(10), 31a-1(b)(11),
31a-1(b)(12), 31a-1(d), 31a-1(f), 31a-2(a)(1) and 31a-2(e) are located at Van
Eck Associates Corporation, 335 Madison Avenue, 19th Floor, New York, New York
10017.
Accounts,
books and documents relating to the sub-adviser are located at Acorn
Derivatives Management Corp., 1266 E. Main Street, 7th Floor, Stamford,
Connecticut 06902.
Accounts,
books and documents relating to the sub-adviser are located at Coe Capital
Management, LLC, 9 Parkway North, Suite 325 Deerfield, IL 60015.
7
Accounts,
books and documents relating to the sub-adviser are located at Dix Hills
Partners, LLC, 50 Jericho Quadrangle, Suite 117, Jericho, New York 11753.
Accounts,
books and documents relating to the sub-adviser are located at KeyPoint Capital
Management, LLC, 3100 Monticello Avenue, Suite 400, Dallas, Texas 75205.
Accounts,
books and documents relating to the sub-adviser are located at Medley Credit
Strategies, LLC, 375 Park Avenue, Suite 3304, New York, NY 10152.
Accounts,
books and documents relating to the sub-adviser are located at Millrace Asset
Group, Inc., 1205 Westlakes Drive, Suite 375. Berwyn, PA 19312.
Account,
books and documents relating to the sub-adviser are located at PanAgora Asset
Management, Inc., 470 Atlantic Avenue, 8th Floor, Boston, Massachusetts 02110.
Accounts,
books and documents relating to the sub-adviser are located at Primary Funds,
LLC, 1000 A St., Suite 408, San Rafael, CA 94901.
Accounts,
books and documents relating to the sub-adviser are located at SW Asset
Management, LLC, 23 Corporate Plaza Drive, Suite 130, Newport Beach, CA 92660.
Accounts,
books and documents relating to the sub-adviser are located at Tiburon Capital
Management, LLC, 527 Madison Avenue, 6th Floor, New York, New York 10022.
Accounts,
books and documents maintained pursuant to 17 CFR 270 31a-2(c) are located at
Van Eck Securities Corporation, 335 Madison Avenue, 19th Floor, New York, New
York 10017.
Accounts,
books and documents relating to the custodian are located at State Street Bank
and Trust Company, One Lincoln Street, Boston, Massachusetts 02111.
Accounts,
books and documents maintained pursuant to 17 CFR 270 31a-1(b)(2)(iv) and
31a-2(a)(1) are located at DST Systems, Inc., 21 West Tenth Street, Kansas
City, MO 64105.
Accounts,
books and documents maintained pursuant to 17 CFR 270 31a-1(b)(3), 31a-1(c),
31a-1(e), 31a-2(b), 31a-2(d) and 31a-3 are not applicable to the Registrant.
All other records are maintained at the offices of the Registrant at 335
Madison Avenue, 19th Floor, New York, New York 10017.
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ITEM 34.
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MANAGEMENT SERVICES.
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None
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ITEM 35.
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UNDERTAKINGS.
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Not applicable.
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8
SIGNATURES
Pursuant
to the requirements of the 1933 Act and the 1940 Act, the Registrant certifies
that it meets all of the requirements for effectiveness of this registration
statement under Rule 485(b) under the 1933 Act and has duly caused this
post-effective amendment to the registration statement to be signed on its
behalf by the undersigned, duly authorized, in the City of New York and State
of New York on the 27
th
day of June, 2012.
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VAN ECK FUNDS
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By:
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/s/ Jan F. van Eck
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Name:
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Jan F. van Eck
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Title:
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Chief Executive Officer and
President
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Pursuant
to the requirements of the 1933 Act, this post-effective amendment no. 112 to
the registration statement has been signed below by the following persons in
the capacities and on the date(s) indicated.
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/s/ Jan F. van Eck
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Chief Executive Officer and
President
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June 27, 2012
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Jan F. van Eck
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/s/ John J. Crimmins
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Vice President, Treasurer, Chief
Financial Officer and Principal Accounting Officer
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June 27, 2012
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John J. Crimmins
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/s/ Jane DiRenzo Pigott*
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Trustee
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June 27, 2012
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Jane DiRenzo Pigott*
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/s/ Jon Lukomnik*
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Trustee
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June 27, 2012
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Jon Lukomnik*
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/s/ Wayne H. Shaner*
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Trustee
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June 27, 2012
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Wayne H. Shaner*
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/s/ R. Alastair Short*
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Trustee
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June 27, 2012
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R. Alastair Short*
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/s/ Richard D. Stamberger*
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Trustee
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June 27, 2012
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Richard D. Stamberger*
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/s/ Robert L. Stelzl*
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Trustee
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June 27, 2012
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Robert L. Stelzl*
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* BY:
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/s/ JOSEPH J. MCBRIEN
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Joseph J. McBrien
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Attorney-in-Fact
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June 27, 2012
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EXHIBITS
INDEX
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(d)(4)(ii)
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Exhibit A, updated as of March
14, 2012, to the Investment Advisory Agreement
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(d)(5)(ii)
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Schedule of Parties to
Sub-Investment Advisory Agreements with respect to Multi-Manager Alternatives
Fund
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(i)(7)
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Opinion and Consent of Counsel
with respect to
Unconstrained
Emerging Markets Bond Fund
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(p)(11)
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Code of Ethics of KeyPoint
Capital Management, LLC
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(p)(12)
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Code of Ethics of
SW Asset Management, LLC
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10
