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As filed with the Securities and Exchange Commission on July 5, 2012 |
Securities Act File No. 333-123257 |
Investment Company Act File No. 811-10325 |
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Washington, D.C. 20549 |
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FORM N-1A |
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Registration Statement Under the Securities Act of 1933 |
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Pre-Effective Amendment No. |
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Post Effective Amendment No. 765 |
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and/or |
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Registration Statement Under the Investment Company Act of 1940 |
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Amendment No. 769 |
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MARKET VECTORS ETF TRUST |
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(Exact Name of Registrant as Specified in its Charter) |
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335 Madison Avenue, 19 th Floor |
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New York, New York 10017 |
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(Address of Principal Executive Offices) |
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(212) 293-2000 |
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Registrants Telephone Number |
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Joseph J. McBrien, Esq. |
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Senior Vice President and General Counsel |
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Van Eck Associates Corporation |
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335 Madison Avenue, 19 th Floor |
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New York, New York 10017 |
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(Name and Address of Agent for Service) |
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Copy to: |
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Stuart M. Strauss, Esq. |
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Dechert LLP |
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1095 Avenue of the Americas |
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New York, New York 10036 |
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Approximate Date of Proposed Public Offering:
As soon as practicable after the
effective date of this
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IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX) |
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Immediately upon filing pursuant to paragraph (b) |
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On [date] pursuant to paragraph (b) |
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60 days after filing pursuant to paragraph (a)(1) |
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On [date] pursuant to paragraph (a)(1) |
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75 days after filing pursuant to paragraph (a)(2) |
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On [date] pursuant to paragraph (a)(2) of rule 485 |
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July 5, 2012 |
Principal U.S. Listing Exchange for the Fund: NYSE Arca, Inc.
The U.S. Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
Table of Contents
1
1
Additional Information About the Funds Investment Strategies and Risks
5
9
9
10
10
11
13
Wells Fargo
®
Hybrid and Preferred Securities ex Financials Index
14
15
16
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17
MARKET VECTORS PREFERRED SECURITIES EX FINANCIALS ETF
INVESTMENT OBJECTIVE
Market Vectors Preferred Securities ex Financials ETF (the Fund) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Wells Fargo
®
Hybrid and Preferred Securities ex Financials Index (the Index).
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund (Shares).
Shareholder Fees
(fees paid directly from your investment)
None
Annual Fund Operating Expenses
Management Fee
0.40
%
Other Expenses
(a)
0.12
%
Total Annual Fund Operating Expenses
(b)
0.52
%
Fee Waivers and Expense Reimbursement
(b)
0.12
%
Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement
(a)
0.40
%
(a)
Other Expenses are based on estimated amounts for the current fiscal year.
(b)
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 interest expense, offering costs, trading expenses, taxes and extraordinary expenses) from exceeding 0.40% of the Funds average daily net assets per year until at least September 1, 2013. During such time, the
expense limitation is expected to continue until the Funds Board of Trustees acts to discontinue all or a portion of such expense limitation.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund.
The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your Shares at the end of those periods. The example also assumes that your investment has a 5% annual return and that the Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
YEAR
EXPENSES
1
$
41
3
$
155
PORTFOLIO TURNOVER
The Fund will pay transaction costs, such as commissions, when it purchases and sells securities (or turns over its portfolio). A higher portfolio turnover will cause the Fund to incur additional 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, may affect the Funds performance. Because the Fund is newly organized, no portfolio turnover figures are available.
PRINCIPAL INVESTMENT STRATEGIES
1
(expenses that you pay each year as a percentage of the value of your investment)
The Fund normally invests at least 80% of its total assets in securities that comprise the Funds benchmark index. The Index is comprised of convertible or exchangeable and non-convertible preferred securities listed on U.S. exchanges, including securities that, in Wells Fargo & Companys (the Index Provider) judgment, are functionally equivalent to preferred securities
including, but not limited to, convertible securities, depositary preferred securities and perpetual subordinated debt, excluding securities with a financial industry sector classification (collectively, Preferred Securities). Preferred Securities generally pay fixed or variable rate distributions to preferred shareholders and such shareholders have preference
over common shareholders in the payment of distributions and in the event of a liquidation of the issuers assets, but are junior to most other forms of debt, including senior and subordinated debt. Functionally equivalent securities to Preferred Securities are securities that are issued and trade in similar manner to traditional perpetual preferred securities.
Such securities generally have a lower par amount, may allow the issuer to defer interest or dividend payments and are equal to preferred shareholders or the lowest level of subordinated debt in terms of
The Fund, using a passive or indexing investment approach, attempts to approximate the investment performance of the Index by investing in a portfolio of securities that generally replicates the Index. The Adviser expects that, over time, the correlation between the Funds performance before fees and expenses and that of the Index will be 95% or
better. A figure of 100% would indicate perfect correlation.
The Fund may concentrate its investments in a particular industry or group of industries to the extent that the Index concentrates in an industry or group of industries. As of the date of this Prospectus, the Index is concentrated in the real estate industry and utilities sector and the consumer discretionary sector represents a significant portion of the
Index.
The Index is sponsored by Wells Fargo & Company, which is not affiliated with or sponsored by the Fund or the Adviser. The Index Provider determines the composition of the Index and relative weightings of the securities in the Index, and publishes information regarding the market value of the Index.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Investors in the Fund should be willing to accept a high degree of volatility in the price of the Funds Shares and the possibility of significant losses. An investment in the Fund involves a substantial degree of risk. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Therefore, you should consider carefully the following risks before investing in the Fund.
Convertible Securities Risk. Convertible securities are subject to risks associated with both fixed income securities and common stocks. To the extent that the value of a convertible securitys investment is greater than its conversion value, its price will be likely to increase when interest rates fall and decrease when interest rates rise, as with a fixed
income security. If the conversion value exceeds the investment value, the price of the convertible security will tend to fluctuate directly with the price of the underlying equity security.
Credit Risk. Preferred Securities are subject to certain risks associated with fixed income securities. Preferred Securities are subject to credit risk. Credit risk refers to the possibility that the issuer of a security will be unable and/or unwilling to make timely distributions of dividends. Preferred Securities are subject to varying degrees of credit risk which
may be reflected in credit ratings. There is a possibility that the credit rating of a Preferred Security may be downgraded after purchase, which may adversely affect the value of the security.
Interest Rate Risk. Preferred Securities are also subject to interest rate risk. Interest rate risk refers to fluctuations in the value of a Preferred Security resulting from changes in the general level of interest rates. When the general level of interest rates goes up, the prices of Preferred Securities may go down. When the general level of interest rates goes
down, the prices of Preferred Securities may go up.
Risk of Subordinated Obligations. Payments under some Preferred Securities may be structurally subordinated to all existing and future liabilities and obligations of subsidiaries and associated companies of an issuer of Preferred Securities. Claims of creditors of such subsidiaries and associated companies will have priority as to the assets of such
subsidiaries and associated companies over the issuer and the Fund, who seek to enforce Preferred Securities. Certain Preferred Securities do not contain any restrictions on the ability of the subsidiaries of the issuers to incur additional unsecured indebtedness.
Call Risk. The Fund may invest in callable Preferred Securities, and the issuers of such securities may call or repay these securities with higher coupon or interest rates before the securitys maturity date. If interest rates are falling, the Fund may have to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Funds
income.
Risk of Investing in REITs. REITs are exposed to the risks specific to the real estate market as well as the risks that relate specifically to the way in which REITs are organized and operated. REITs may be subject to credit risk, interest rate risk, leverage risk and prepayment risk. REITs are subject to special U.S. federal tax requirements. A REITs failure
to comply with these
2
claims to the issuers assets in the event of liquidation. Preferred Securities issued by real estate investment trusts (REITs) are not considered to be securities with a financial industry sector classification as determined by the Bloomberg Professional
®
service, and therefore may be included in the Index. Preferred Securities may be subject to
redemption or call provisions and may include those issued by small- and medium-capitalization companies. The Funds 80% investment policy is non-fundamental and requires 60 days prior written notice to shareholders before it can be changed.
Preferred Securities Risk. Preferred Securities are essentially contractual obligations that entail rights to distributions declared by the issuers board of directors but may permit the issuer to defer or suspend distributions for a certain period of time. If the Fund owns a Preferred Security whose issuer has deferred or suspended distributions, the Fund may
be required to account for the distribution that has been deferred or suspended for tax purposes, even though it may not have received this income. Further, Preferred Securities may lose substantial value if distributions are deferred, suspended or not declared. Preferred Securities may also permit the issuer to convert Preferred Securities into the issuers
common stock. Preferred Securities that are convertible to common stock may decline in value if the common stock into which Preferred Securities may be converted declines in value. Preferred Securities are subject to greater credit risk than traditional fixed income securities because the rights of holders of Preferred Securities are subordinated to the
rights of the bond and debtholders of an issuer.
requirements may negatively affect its performance. REITs may be dependent upon management skills and may have limited financial resources.
Risks of Investing in the Utilities Sector. The utilities sector includes companies that produce or distribute electricity, gas or water. Because as currently constituted the Index is concentrated in the utilities sector, the Fund will invest in companies in such sector. As such, the Fund will be sensitive to changes in, and its performance may depend on, the
overall condition of the utilities sector. Companies in the utilities sector may be adversely affected by changes in exchange rates, domestic and international competition, and governmental limitation on rates charged to customers.
Risk of Investing in the Consumer Discretionary Sector. The consumer discretionary sector includes automotive, household durable goods and apparel manufacturers and companies that provide retail, lodging, leisure or food and beverage services. Because the Index includes securities of issuers in the consumer discretionary sector, the Fund will invest
in companies in such sector. As such, the Fund may be sensitive to changes in, and its performance may depend on, the overall condition of the consumer discretionary sector. Companies engaged in the consumer discretionary sector are subject to fluctuations in supply and demand. These companies may also be adversely affected by changes in
consumer spending as a result of world events, political and economic conditions, commodity price volatility, changes in exchange rates, imposition of import controls, increased competition, depletion of resources and labor relations.
Market Risk. The prices of the securities in the Fund are subject to the risk associated with investing in the securities market, including general economic conditions and sudden and unpredictable drops in value. An investment in the Fund may lose money.
Risk of Investing in Small- and Medium-Capitalization Companies. Small- and medium-capitalization companies may be more volatile and more likely than large-capitalization companies to have narrower product lines, fewer financial resources, less management depth and experience and less competitive strength. Returns on investments in securities of
these companies could trail the returns on investments in securities of larger companies.
Index Tracking Risk. The Funds return may not match the return of the Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the Index and incurs costs associated with buying and selling securities, especially when rebalancing the Funds securities holdings to reflect changes in the composition
of the Index. Because the Fund bears the costs and risks associated with buying and selling securities while such costs and risks are not factored into the return of the Index, the Funds return may deviate significantly from the return of the Index. In addition, the Fund may not be able to invest in certain securities included in the Index, or invest in
them in the exact proportions in which they are represented in the Index, due to legal restrictions or limitations imposed by the governments of certain countries or a lack of liquidity on stock exchanges in which such securities trade. The Fund is expected to value certain of its investments based on fair value prices. To the extent the Fund calculates its
net asset value (NAV) based on fair value prices and the value of the Index is based on securities closing prices on local foreign markets (
i.e.,
the value of the Index is not based on fair value prices), the Funds ability to track the Index may be adversely affected.
Replication Management Risk. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in security prices. However, because the Fund is not
actively managed, unless a specific security is removed from the Index, the Fund generally would not sell a security because the securitys issuer was in financial trouble. Therefore, the Funds performance could be lower than other types of mutual funds that may actively shift their portfolio assets to take advantage of market opportunities or to lessen
the impact of a market decline or a decline in the value of one or more issuers.
Non-Diversified Risk. The Fund is classified as a non-diversified investment company under the Investment Company Act of 1940, as amended (1940 Act). Therefore, the Fund may invest a relatively high percentage of its assets in a smaller number of issuers or may invest a larger proportion of its assets in a single issuer. As a result, the gains and
losses on a single investment may have a greater impact on the Funds NAV and may make the Fund more volatile than more diversified funds.
Concentration Risk. The Funds assets may be concentrated in a particular sector or sectors or industry or group of industries to the extent the Index concentrates in a particular sector or sectors or industry or group of industries. Based on the current composition of the Index, it is expected that the Funds assets will be concentrated in the real estate
industry and utilities sector
3
Risk of Investing in the Real Estate Industry. Companies in the real estate industry include companies that invest in real estate, such as REITs and real estate management and development companies. Because as currently constituted the Index is concentrated in the real estate industry, the Fund will invest in companies in such industry. As such, the
Fund will be sensitive to changes in, and its performance may depend on, the overall condition of the real estate industry. Adverse economic, business or political developments affecting real estate could have an effect on the value of the Funds investments.
Risk of Investing in Foreign Issuers. Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities. These additional risks include greater market volatility, taxation by foreign governments, decreased market liquidity and political instability.
PERFORMANCE
The Fund has not yet commenced operations and therefore does not have a performance history. Once available, the Funds performance information will be accessible on the Funds website at vaneck.com/etf.
PORTFOLIO MANAGEMENT
Investment Adviser. Van Eck Associates Corporation.
Portfolio Managers. The following individuals are primarily responsible for the day-to-day management of the Funds portfolio:
Name
Title with Adviser
Date Began Managing the Fund
Hao-Hung (Peter) Liao
Portfolio Manager
Since inception
George Cao
Portfolio Manager
Since inception
PURCHASE AND SALE OF FUND SHARES
The Fund issues and redeems Shares at NAV only in a large specified number of Shares each called a Creation Unit, or multiples thereof. A Creation Unit consists of 50,000 Shares.
Individual Shares of the Fund may only be purchased and sold in secondary market transactions through brokers. Shares of the Fund are expected to be approved for listing, subject to notice of issuance, on NYSE Arca, Inc. (NYSE Arca) and because Shares will trade at market prices rather than NAV, Shares of the Fund may trade at a price greater
than or less than NAV.
TAX INFORMATION
The Funds distributions are taxable and will generally be taxed as ordinary income or capital gains.
4
and that the Fund will be subject to the risk that economic, political or other conditions that have a negative effect on that industry or sector will negatively impact the Fund to a greater extent than if the Funds assets were invested in a wider variety of sectors or industries.
ADDITIONAL INFORMATION ABOUT THE FUNDS INVESTMENT STRATEGIES AND RISKS
PRINCIPAL INVESTMENT STRATEGIES
The Adviser anticipates that, generally, the Fund will hold all of the securities that comprise the Index in proportion to their weightings in the Index. However, under various circumstances, it may not be possible or practicable to purchase all of those securities in those weightings. In these circumstances, the Fund may purchase a sample of securities in
the Index. There also may be instances in which the Adviser may choose to underweight or overweight a security in the Index, purchase securities not in the Index that the Adviser believes are appropriate to substitute for certain securities in the Index or utilize various combinations of other available investment techniques in seeking to replicate as
closely as possible, before fees and expenses, the price and yield performance of the Index. The Fund may sell securities that are represented in the Index in anticipation of their removal from the Index or purchase securities not represented in the Index in anticipation of their addition to the Index.
ADDITIONAL INVESTMENT STRATEGIES
The Fund may invest in securities not included in the Index, money market instruments, including repurchase agreements or other funds which invest exclusively in money market instruments, convertible securities, structured notes (notes on which the amount of principal repayment and interest payments are based on the movement of one or more
specified factors, such as the movement of a particular stock or stock index) and certain derivatives. Depositary receipts not included in the Index may be used by the Fund in seeking performance that corresponds to the Index and in managing cash flows, and may count towards the Funds 80% policy. The Fund will not invest in money market
instruments as part of a temporary defensive strategy to protect against potential securities market declines. The Fund may also invest, to the extent permitted by the 1940 Act, in other affiliated and unaffiliated funds, such as open-end or closed-end management investment companies, including other exchange-traded funds.
An authorized participant (
i.e
., a person eligible to place orders with the Distributor (defined below) to create or redeem Creation Units of the Fund) that is not a qualified institutional buyer, as such term is defined under Rule 144A of the Securities Act of 1933, as amended (Securities Act), will not be able to receive, as part of a redemption,
restricted securities eligible for resale under Rule 144A.
BORROWING MONEY
The Fund may borrow money from a bank up to a limit of one-third of the market value of its assets. To the extent that the Fund borrows money, it will be leveraged; at such times, the Fund will appreciate or depreciate in value more rapidly than the Index.
FUNDAMENTAL AND NON-FUNDAMENTAL POLICIES
The Funds investment objective and each of its other investment policies are non-fundamental policies that may be changed by the Board of Trustees without shareholder approval, except as noted in this Prospectus or the Statement of Additional Information (SAI) under the section entitled Investment Policies and RestrictionsInvestment Restrictions.
LENDING PORTFOLIO SECURITIES
The Fund may lend its portfolio securities to brokers, dealers and other financial institutions desiring to borrow securities to complete transactions and for other purposes. In connection with such loans, the Fund receives liquid collateral equal to at least 102% of the value of the portfolio securities being loaned. This collateral is marked-to-market on a
daily basis. Although the Fund will receive collateral in connection with all loans of its securities holdings, the Fund would be exposed to a risk of loss should a borrower fail to return the borrowed securities (
e.g.
, the Fund would have to buy replacement securities and the loaned securities may have appreciated beyond the value of the collateral held by
the Fund) or become insolvent. The Fund may pay fees to the party arranging the loan of securities. In addition, the Fund will bear the risk of loss of any cash collateral that it invests.
RISKS OF INVESTING IN THE FUND
The following section provides additional information regarding the principal risks identified under Principal Risks of Investing in the Fund in the Funds Summary Information section followed by additional risk information.
Investors in the Fund should be willing to accept a high degree of volatility in the price of the Funds Shares and the possibility of significant losses. An investment in the Fund involves a substantial degree of risk. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Therefore, you should consider carefully the following risks before investing in the Fund.
Preferred Securities Risk. Preferred Securities are essentially contractual obligations that entail rights to distributions declared by the issuers board of directors but may permit the issuer to defer or suspend distributions for a certain period of time. Preferred Securities, which generally pay fixed or adjustable rate dividends or interest to investors, have
preference over common stock in the payment of dividends or interest and the liquidation of a companys assets, which means that a company typically must pay dividends or interest on its Preferred Securities before paying any dividends on its common stock. On the other hand, preferred
5
ADDITIONAL INFORMATION ABOUT THE FUNDS INVESTMENT STRATEGIES AND RISKS (continued)
securities are junior to the companys debt, including both senior and subordinated debt. Because of their subordinated position in the capital structure of an issuer, the ability to defer dividend or interest payments for extended periods of time without triggering an event of default for the issuer, and certain other features, Preferred Securities are often
treated as equity-like instruments by both issuers and investors, as their quality and value are heavily dependent on the profitability and cash flows of the issuer rather than on any legal claims to specific assets.
If the Fund owns a Preferred Security whose issuer has deferred or suspended distributions, the Fund may be required to account for the distribution that has been deferred or suspended for tax purposes, even though it may not have received this income. Further, Preferred Securities may lose substantial value if distributions are deferred, suspended or
not declared. Preferred Securities may also permit the issuer to convert Preferred Securities into the issuers common stock. Preferred Securities that are convertible into common stock may decline in value if the common stock to which Preferred Securities may be converted declines in value. Preferred Securities may be less liquid than such securities
as common stocks and do not convey the same rights as common stock to the holder of Preferred Securities, such as voting rights (except in certain situations relating to distributions of preferred dividends). Preferred Securities are subject to greater credit risk than traditional fixed income securities because the rights of holders of Preferred Securities
are subordinated to the rights of the bond and debtholders of an issuer. If an issuer of Preferred Securities encounters financial difficulties, the issuers board of directors may not declare a distribution and the value of Preferred Securities may decline as a result. The board of directors of an issuer of Preferred Securities may not declare distributions even
if such payments have come due.
Convertible Securities Risk. Convertible securities are subject to risks associated with both fixed income securities and common stocks. To the extent that the value of a convertible securitys investment is greater than its conversion value, its price will be likely to increase when interest rates fall and decrease when interest rates rise, as with a fixed
income security. If the conversion value exceeds the investment value, the price of the convertible security will tend to fluctuate directly with the price of the underlying equity security.
Credit Risk. Preferred Securities are subject to certain risks associated with fixed income securities. Preferred Securities are subject to credit risk. Credit risk refers to the possibility that the issuer of a security will be unable and/or unwilling to make timely distributions of dividends. Preferred Securities are subject to varying degrees of credit risk which
may be reflected in credit ratings. There is a possibility that the credit rating of a Preferred Security may be downgraded after purchase, which may adversely affect the value of the security.
Interest Rate Risk. Preferred Securities are also subject to interest rate risk. Interest rate risk refers to fluctuations in the value of a Preferred Security resulting from changes in the general level of interest rates. When the general level of interest rates goes up, the prices of Preferred Securities may go down. When the general level of interest rates goes
down, the prices of Preferred Securities may go up.
Risk of Subordinated Obligations. Payments under some Preferred Securities may be structurally subordinated to all existing and future liabilities and obligations of subsidiaries and associated companies of an issuer of Preferred Securities. Claims of creditors of such subsidiaries and associated companies will have priority as to the assets of such
subsidiaries and associated companies over the issuer and the Fund, who seek to enforce Preferred Securities. Certain Preferred Securities do not contain any restrictions on the ability of the subsidiaries and affiliated companies of the issuers to incur additional unsecured indebtedness.
Call Risk. The Fund may invest in callable Preferred Securities, and such issuers may call or repay these securities with higher distribution rates before the securitys maturity date. If interest rates are falling, the Fund may have to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the Funds income.
Risk of Investing in REITs. REITs are exposed to the risks specific to the real estate market as well as the risks that relate specifically to the way in which REITs are organized and operated. REITs may be subject to credit risk. To the extent that a REIT invests in mortgage-backed securities offered by private issuers, such as commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers, the REIT may be subject to additional risks. REITs may be subject to significant interest rate risk.
REITs typically use leverage and many are highly leveraged, which exposes them to leverage risk. Leverage risk refers to the risk that leverage created from borrowing may impair a REITs liquidity, cause it to liquidate positions at an unfavorable time and increase the volatility of the values of securities issued by the REIT. The use of leverage may not be
advantageous to a REIT. The success of using leverage is dependent on whether the investments made using the proceeds of leverage exceed the cost of using leverage. To the extent that a REIT incurs significant leverage, it may incur substantial losses if its borrowing costs increase. Borrowing costs may increase for any of the following reasons: short-
term interest rates increase; the market value of a REITs assets decrease; interest rate volatility increases; or the availability of financing in the market decreases. During periods of adverse market conditions the use of leverage may cause a REIT to lose more money that would have been the case if leverage was not used.
6
REITs may be subject to prepayment risk, which is the risk that borrowers may prepay their loans at faster than expected rates. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise. These faster than expected payments may adversely affect a REITs profitability because the REIT may be forced to replace
investments that have been redeemed or repaid early with other investments having a lower yield. Additionally, rising interest rates rise may cause the duration of a REITs investments to be longer than anticipated and increase such investments interest rate sensitivity.
REITs are subject to special U.S. federal tax requirements. A REITs failure to comply with these requirements may negatively affect its performance. REITs may be dependent upon management skills of a few key individuals and may have limited financial resources. REITs are generally not diversified and may be subject to heavy cash flow dependency,
default by borrowers and self-liquidation. In addition, transactions between REITs and their affiliates may be subject to conflicts of interest which may adversely affect a REITs shareholders.
Risk of Investing in the Real Estate Industry. Companies in the real estate industry include companies that invest in real estate, such as REITs and real estate management and development companies. Because as currently constituted the Index is concentrated in the real estate industry, the Fund will invest in companies in such industry. As such, the
Fund will be sensitive to changes in, and its performance may depend on, the overall condition of the real estate industry. Companies that invest in real estate are subject to the risks of owning real estate directly as well as to risks that relate specifically to the way that such companies operate, including management risk (such companies are
dependent upon the management skills of a few key individuals and may have limited financial resources). Adverse economic, business or political developments affecting real estate could have an effect on the value of the Funds investments. Investing in real estate is subject to such risks as decreases in real estate values, overbuilding, increased
competition and other risks related to local or general economic conditions, increases in operating costs and property taxes, changes in zoning laws, casualty or condemnation losses, possible environmental liabilities, regulatory limitations on rent, possible lack of availability of mortgage financing, fluctuations in rental income and extended vacancies of
properties.
Risk of Investing in the Utilities Sector. The utilities sector includes companies that produce or distribute electricity, gas or water. Because as currently constituted the Index is concentrated in the utilities sector, the Fund will invest in companies in such sector. As such, the Fund will be sensitive to changes in, and its performance may depend on, the
overall condition of the utilities sector. Issuers in the utilities sector are subject to a variety of factors that may adversely affect their business or operations, including high interest costs in connection with capital construction and improvement programs; difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and
unsettled capital markets; governmental regulation of rates charged to customers; costs associated with compliance with and changes in environmental and other regulations; effects of economic slowdowns and surplus capacity; increased competition from other providers of utility services; inexperience with and potential losses resulting from a developing
deregulatory environment; costs associated with the reduced availability of certain types of fuel, occasionally reduced availability and high costs of natural gas for resale, and the effects of energy conservation policies; effects of a national energy policy and lengthy delays and greatly increased costs and other problems associated with the design,
construction, licensing, regulation and operation of nuclear facilities for electric generation, including, among other considerations, the problems associated with the use of radioactive materials and the disposal of radioactive wastes; technological innovations that may render existing plants, equipment or products obsolete; difficulty in obtaining regulatory
approval of new technologies; lack of compatibility of telecommunications equipment; and potential impact of terrorist activities on the utilities industry and its customers and the impact of natural or man-made disasters. Issuers in the utilities sector also may be subject to regulation by various governmental authorities and may be affected by the
imposition of special tariffs and changes in tax laws, regulatory policies and accounting standards.
Risk of Investing in the Consumer Discretionary Sector. The consumer discretionary sector includes automotive, household durable goods and apparel manufacturers and companies that provide retail, lodging, leisure or food and beverage services. Because the Index includes securities of issuers in the consumer discretionary sector, the Fund will invest
in companies in such sector. As such, the Fund may be sensitive to changes in, and its performance may depend on, the overall condition of the consumer discretionary sector. Companies engaged in the consumer discretionary sector are subject to fluctuations in supply and demand. These companies may also be adversely affected by changes in
consumer spending as a result of world events, political and economic conditions, commodity price volatility, changes in exchange rates, imposition of import controls, increased competition, depletion of resources and labor relations.
Market Risk. The prices of the securities in the Fund are subject to the risk associated with investing in the securities market, including general economic conditions and sudden and unpredictable drops in value. An investment in the Fund may lose money. Overall securities values could decline generally or underperform other investments.
Risk of Investing in Foreign Issuers. The Fund may invest in foreign securities. Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities. These additional risks include greater market volatility, taxation by foreign governments, decreased market liquidity and political instability. Increased
interconnectivity of world
7
ADDITIONAL INFORMATION ABOUT THE FUNDS INVESTMENT STRATEGIES AND RISKS (continued)
economies and financial markets increases the possibility that adverse developments and conditions in one country or region will affect the stability of economies and financial markets in other countries or regions. Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than
are U.S. issuers, and therefore, not all material information may be available or reliable.
Risk of Investing in Small- and Medium-Capitalization Companies. The Fund may invest in small- and medium-capitalization companies and, therefore, will be subject to certain risks associated with small- and medium-capitalization companies. These companies are often subject to less analyst coverage and may be in early and less predictable periods of
their corporate existences, with little or no record of profitability. In addition, these companies often have greater price volatility, lower trading volume and less liquidity than larger, more established companies. These companies tend to have smaller revenues, narrower product lines, less management depth and experience, smaller shares of their product
or service markets, fewer financial resources and less competitive strength than large-capitalization companies. Returns on investments in securities of small- and medium-capitalization companies could trail the returns on investments in securities of larger companies.
Index Tracking Risk. The Funds return may not match the return of the Index for a number of reasons. For example, the Fund incurs a number of operating expenses not applicable to the Index and incurs costs associated with buying and selling securities, especially when rebalancing the Funds securities holdings to reflect changes in the composition
of the Index. The Funds return may also deviate significantly from the return of the Index because the Fund bears the costs and risks associated with buying and selling securities while such costs and risks are not factored into the return of the Index. The Fund may not be fully invested at times as a result of reserves of cash held by the Fund to pay
expenses. In addition, the Fund may not be able to invest in certain securities included in the Index, or invest in them in the exact proportions they represent of the Index, due to a lack of liquidity on stock exchanges in which such securities trade. Moreover, the Fund may be delayed in purchasing or selling securities included in the Index. The Fund is
expected to fair value certain of the foreign securities it holds except those securities primarily traded on exchanges that close at the same time the Fund calculates its NAV. See Shareholder InformationDetermination of NAV. To the extent the Fund calculates its NAV based on fair value prices and the value of the Index is based on securities closing
prices on local foreign markets (
i.e.
, the value of the Index is not based on fair value prices), the Funds ability to track the Index may be adversely affected. The need to comply with the tax diversification and other requirements of the Internal Revenue Code of 1986, as amended (Internal Revenue Code) may also impact the Funds ability to replicate
the performance of the Index. In addition, if the Fund utilizes depositary receipts not included in the Index and other derivative instruments, its return may not correlate as well with the Index as would be the case if the Fund had purchased all the securities in the Index directly.
Replication Management Risk. Unlike many investment companies, the Fund is not actively managed. Therefore, unless a specific security is removed from the Index, the Fund generally would not sell a security because the securitys issuer is in financial trouble. If a specific security is removed from the Funds Index, the Fund may be forced to sell
such security at an inopportune time or for prices other than at current market values. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in
security prices. The Funds Index may not contain the appropriate or a diversified mix of securities for any particular economic cycle. The timing of changes in the Fund from one type of security to another in seeking to replicate the Index could have a negative effect on the Fund. Unlike with an actively managed fund, the Adviser does not use
techniques or defensive strategies designed to lessen the effects of market volatility or to reduce the impact of periods of market decline. This means that, based on market and economic conditions, the Funds performance could be lower than other types of mutual funds that may actively shift their portfolio assets to take advantage of market
opportunities or to lessen the impact of a market decline.
Non-Diversified Risk. The Fund is a separate investment portfolio of Market Vectors ETF Trust (the Trust), which is an open-end investment company registered under the 1940 Act. The Fund is classified as a non-diversified investment company under the 1940 Act. As a result, the Fund is subject to the risk that it will be more volatile than a
diversified fund because the Fund may invest its assets in a smaller number of issuers or may invest a larger proportion of its assets in a single issuer. As a result, the gains and losses on a single investment may have a greater impact on the Funds NAV and may make the Fund more volatile than more diversified funds.
Concentration Risk. The Funds assets may be concentrated in a particular sector or sectors or industry or group of industries to the extent that the Index concentrates in a particular sector or sectors or industry or group of industries. The securities of companies in the same sector or industry may decline in value due to developments adversely
affecting such sector or industry. By concentrating its assets in a particular sector or sectors or industry or group of industries, the Fund is subject to the risk that economic, political or other conditions that have a negative effect on that sector or industry will negatively impact the Fund to a greater extent than if the Funds assets were invested in a
wider variety of sectors or industries. Based on the current composition of the Index, it is expected that the Funds assets will be concentrated in the real estate industry and utilities sector
8
and that the Fund will be subject to the risk that economic, political or other conditions that have a negative effect on that industry or sector will negatively impact the Fund to a greater extent than if the Funds assets were invested in a wider variety of sectors or industries.
ADDITIONAL RISKS
Risk of Investing in Derivatives. Derivatives are financial instruments whose values are based on the value of one or more indicators, such as a security, asset, currency, interest rate or index. The Funds use of derivatives involves risks different from, and possibly greater than, the risks associated with investing directly in securities and other more
traditional investments. Moreover, although the value of a derivative is based on an underlying indicator, a derivative does not carry the same rights as would be the case if the Fund invested directly in the underlying securities.
Derivatives are subject to a number of risks, such as potential changes in value in response to market developments or as a result of the counterpartys credit quality and the risk that a derivative transaction may not have the effect the Adviser anticipated. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in
the value of a derivative may not correlate perfectly with the underlying indicator. Derivative transactions can create investment leverage, may be highly volatile, and the Fund could lose more than the amount it invests. The use of derivatives may increase the amount and affect the timing and character of taxes payable by shareholders of the Fund.
Many derivative transactions are entered into over-the-counter (not on an exchange or contract market); as a result, the value of such a derivative transaction will depend on the ability and the willingness of the Funds counterparty to perform its obligations under the transaction. If a counterparty were to default on its obligations, the Funds contractual
remedies against such counterparty may be subject to bankruptcy and insolvency laws, which could affect the Funds rights as a creditor (
e.g
., the Fund may not receive the net amount of payments that it is contractually entitled to receive). A liquid secondary market may not always exist for the Funds derivative positions at any time.
Leverage Risk. To the extent that the Fund borrows money or utilizes certain derivatives, it may be leveraged. Leveraging generally exaggerates the effect on NAV of any increase or decrease in the market value of the Funds portfolio securities.
Absence of Prior Active Market. The Fund is a newly organized series of an investment company and thus has no operating history. While the Funds Shares are expected to be listed on NYSE Arca, there can be no assurance that an active trading market for the Shares will develop or be maintained. Van Eck Securities Corporation, the distributor of the
Shares (the Distributor), does not maintain a secondary market in the Shares.
Trading Issues. Trading in Shares on NYSE Arca may be halted due to market conditions or for reasons that, in the view of NYSE Arca, make trading in Shares inadvisable. In addition, trading in Shares on NYSE Arca is subject to trading halts caused by extraordinary market volatility pursuant to NYSE Arcas circuit breaker rules. There can be no
assurance that the requirements of NYSE Arca necessary to maintain the listing of the Fund will continue to be met or will remain unchanged.
Fluctuation of NAV. The NAV of the Shares will fluctuate with changes in the market value of the Funds securities holdings. The market prices of Shares will fluctuate in accordance with changes in NAV and supply and demand on NYSE Arca. The Adviser cannot predict whether Shares will trade below, at or above their NAV. Price differences may be
due, in large part, to the fact that supply and demand forces at work in the secondary trading market for Shares will be closely related to, but not identical to, the same forces influencing the prices of the securities of the Funds Index trading individually or in the aggregate at any point in time. In addition, disruptions to creations and redemptions or the
existence of extreme market volatility may result in trading prices that differ significantly from NAV. If a shareholder purchases Shares at a time when the market price is at a premium to the NAV or sells Shares at a time when the market price is at a discount to the NAV, the shareholder may sustain losses.
TAX ADVANTAGED PRODUCT STRUCTURE
Unlike many conventional mutual funds which are only bought and sold at closing NAVs, the Shares of the Fund have been designed to be tradable in a secondary market on an intra-day basis and to be created and redeemed principally in-kind in Creation Units at each days market close. These in-kind arrangements are designed to mitigate adverse
effects on the Funds portfolio that could arise from frequent cash purchase and redemption transactions that affect the NAV of the Fund. Moreover, in contrast to conventional mutual funds, where frequent redemptions can have an adverse tax impact on taxable shareholders because of the need to sell portfolio securities which, in turn, may generate
taxable gain, the in-kind redemption mechanism of the Fund, to the extent used, generally is not expected to lead to a tax event for shareholders.
A description of the Funds policies and procedures with respect to the disclosure of the Funds portfolio securities is available in the Funds SAI.
9
ADDITIONAL INFORMATION ABOUT THE FUNDS INVESTMENT STRATEGIES AND RISKS (continued)
Board of Trustees. The Board of Trustees of the Trust has responsibility for the general oversight of the management of the Fund, including general supervision of the Adviser and other service providers, but is not involved in the day-to-day management of the Trust. A list of the Trustees and the Trust officers, and their present positions and principal
occupations, is provided in the Funds SAI.
Investment Adviser. Under the terms of an Investment Management Agreement between the Trust and Van Eck Associates Corporation with respect to the Fund (the Investment Management Agreement), Van Eck Associates Corporation serves as the adviser to the Fund and, subject to the supervision of the Board of Trustees, will be responsible for
the day-to-day investment management of the Fund. As of February 29, 2012, the Adviser managed approximately $37.1 billion in assets. The Adviser 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. The Advisers
principal business address is 335 Madison Avenue, 19th Floor, New York, New York 10017.
A discussion regarding the Board of Trustees approval of the Investment Management Agreement will be available in the Trusts semi-annual report for the fiscal period ending October 31, 2012.
For the services provided to the Fund under the Investment Management Agreement, the Fund will pay the Adviser monthly fees based on a percentage of the Funds average daily net assets at the annual rate of 0.40%. From time to time, the Adviser may waive all or a portion of its fee. Until at least September 1, 2013, 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 interest expense, offering costs, trading expenses, taxes and extraordinary expenses) from exceeding 0.40% of its average daily net assets per year. Offering costs excluded from the expense cap are: (a) legal fees pertaining to the Funds
Shares offered for sale; (b) SEC and state registration fees; and (c) initial fees paid for Shares of the Fund to be listed on an exchange.
The Fund is responsible for all of its expenses, including the investment advisory fees, costs of transfer agency, custody, legal, audit and other services, interest, taxes, any distribution fees or expenses, offering fees or expenses and extraordinary expenses.
Administrator, Custodian and Transfer Agent. Van Eck Associates Corporation is the administrator for the Fund (the Administrator), and The Bank of New York Mellon is the custodian of the Funds assets and provides transfer agency and fund accounting services to the Fund. The Administrator is responsible for certain clerical, recordkeeping and/or
bookkeeping services which are provided pursuant to the Investment Management Agreement.
Distributor. Van Eck Securities Corporation is the distributor of the Shares. The Distributor will not distribute Shares in less than Creation Units, and does not maintain a secondary market in the Shares. The Shares are expected to be traded in the secondary market.
The portfolio managers who currently share joint responsibility for the day-to-day management of the Funds portfolio are Hao-Hung (Peter) Liao and George Cao. Mr. Liao has been employed by the Adviser since the summer of 2004 as an Analyst. Mr. Liao also serves as a portfolio manager for certain other investment companies advised by the Adviser.
Mr. Cao has been employed by the Adviser since December 2007 as a Senior Analyst. Prior to joining the Adviser, he served as Controller of Operations Administrations Division and Corporate Safety (September 2006December 2007) for United Airlines. Because the Fund is new, Messrs. Liao and Cao will be serving as the portfolio managers of the Fund
since its inception. See the Funds SAI for additional information about the portfolio managers compensation, other accounts managed by the portfolio managers and their respective ownership of Shares of the Fund.
10
DETERMINATION OF NAV
The NAV per Share for the Fund is computed by dividing the value of the net assets of the Fund (
i.e.
, the value of its total assets less total liabilities) by the total number of Shares outstanding. Expenses and fees, including the management fee, are accrued daily and taken into account for purposes of determining NAV. The NAV of the Fund is
determined each business day as of the close of trading (ordinarily 4:00 p.m. Eastern time) on the New York Stock Exchange.
The values of the Funds portfolio securities are based on the securities closing prices on their local principal markets, where available. In the absence of a last reported sales price, or if no sales were reported, and for other assets for which market quotes are not readily available, values may be based on quotes obtained from a quotation reporting
system, established market makers or by an outside independent pricing service. Prices obtained by an outside independent pricing service use information provided by market makers or estimates of market values obtained from yield data related to investments or securities with similar characteristics and may use a computerized grid matrix of securities
and its evaluations in determining what it believes is the fair value of the portfolio securities. If a market quotation for a security is not readily available or the Adviser believes it does not otherwise accurately reflect the market value of the security at the time the Fund calculates its NAV, the security will be fair valued by the Adviser in accordance with
the Trusts valuation policies and procedures approved by the Board of Trustees. The Fund may also use fair value pricing in a variety of circumstances, including but not limited to, situations where the value of a security in the Funds portfolio has been materially affected by events occurring after the close of the market on which the security is
principally traded (such as a corporate action or other news that may materially affect the price of a security) or trading in a security has been suspended or halted. In addition, the Fund currently expects that it will fair value certain of the foreign equity securities held by the Fund each day the Fund calculates its NAV, except those securities principally
traded on exchanges that close at the same time the Fund calculates its NAV. Accordingly, the Funds NAV is expected to reflect certain portfolio securities fair values rather than their market prices at the time the exchanges on which they principally trade close. Fair value pricing involves subjective judgments and it is possible that a fair value
determination for a security is materially different than the value that could be realized upon the sale of the security. In addition, fair value pricing could result in a difference between the prices used to calculate the Funds NAV and the prices used by the Index. This may adversely affect the Funds ability to track the Index. With respect to securities
that are traded in foreign markets, the value of the Funds portfolio securities may change on days when you will not be able to purchase or sell your Shares.
BUYING AND SELLING EXCHANGE-TRADED SHARES
The Shares of the Fund are expected to be approved for listing on NYSE Arca, subject to notice of issuance. If you buy or sell Shares in the secondary market, you will incur customary brokerage commissions and charges and may pay some or all of the spread between the bid and the offered price in the secondary market on each leg of a round trip
(purchase and sale) transaction. In times of severe market disruption or low trading volume in the Funds Shares, this spread can increase significantly. It is anticipated that the Shares will trade in the secondary market at prices that may differ to varying degrees from the NAV of the Shares. During periods of disruptions to creations and redemptions or
the existence of extreme market volatility, the market prices of Shares are more likely to differ significantly from the Shares NAV.
The Depository Trust Company (DTC) serves as securities depository for the Shares. (The Shares may be held only in book-entry form; stock certificates will not be issued.) DTC, or its nominee, is the record or registered owner of all outstanding Shares. Beneficial ownership of Shares will be shown on the records of DTC or its participants (described
below). Beneficial owners of Shares are not entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, to exercise any rights of a holder of Shares, each beneficial owner must rely on the procedures of: (i)
DTC; (ii) DTC Participants,
i.e.
, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC; and (iii) Indirect Participants,
i.e.
, brokers, dealers, banks and trust companies that clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly, through which such beneficial owner holds its interests. The Trust understands that under existing industry practice, in the event the Trust requests any action of holders of Shares, or a beneficial owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC
would authorize the DTC Participants to take such action and that the DTC Participants would authorize the Indirect Participants and beneficial owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of beneficial owners owning through them. As described above, the Trust recognizes DTC or its
nominee as the owner of all Shares for all purposes. For more information, see the section entitled Book Entry Only System in the Funds SAI.
The NYSE Arca is open for trading Monday through Friday and is closed on weekends and the following holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Because non-U.S. exchanges may be open on days when the Fund does not price
its Shares, the value of the securities in the Funds portfolio may change on days when shareholders will not be able to purchase or sell the Funds Shares.
11
SHAREHOLDER INFORMATION (continued)
Market Timing and
Related Matters. The Fund imposes no restrictions on the frequency of purchases
and redemptions. The Board of Trustees considered the nature of the Fund
(
i.e
., a fund whose shares are expected to trade intra-day), that
the Adviser monitors the trading activity of authorized participants for
patterns of abusive trading, that the Fund reserves the right to reject orders
that may be disruptive to the management of or otherwise not in the Funds
best interests and that the Fund fair values certain of its securities. Given
this structure, the Board of Trustees determined that it is not necessary
to impose restrictions on the frequency of purchases and redemptions for
the Fund at the present time.
DISTRIBUTIONS
Net
Investment Income and Capital Gains. As a shareholder of the Fund, you are
entitled to your share of the Funds distributions of net investment
income and net realized capital gains on its investments. The Fund pays out
substantially all of its net earnings to its shareholders as distributions.
The
Fund typically earns income dividends from stocks and interest from debt
securities. These amounts, net of expenses, are typically passed along to
Fund shareholders as dividends from net investment income. The Fund realizes
capital gains or losses whenever it sells securities. Net capital gains are
distributed to shareholders as capital gain distributions.
Net
investment income, if any, is typically distributed to shareholders at least
monthly while net capital gains, if any, are typically distributed to shareholders
at least annually. Dividends may be declared and paid more frequently to
improve index tracking or to comply with the distribution requirements of
the Internal Revenue Code. In addition, the Fund may determine to distribute
at least annually amounts representing the full dividend yield net of expenses
on the underlying investment securities, as if the Fund owned the underlying
investment securities for the entire dividend period, in which case some
portion of each distribution may result in a return of capital, which, for
tax purposes, is treated as a return of your investment in Shares. You will
be notified regarding the portion of the distribution which represents a
return of capital.
Distributions
in cash may be reinvested automatically in additional Shares of the Fund
only if the broker through which you purchased Shares makes such option available.
TAX
INFORMATION
As
with any investment, you should consider how your Fund investment will be
taxed. The tax information in this Prospectus is provided as general information.
You should consult your own tax professional about the tax consequences of
an investment in the Fund, including the possible application of foreign,
state and local taxes. Unless your investment in the Fund is through a tax-exempt
entity or tax-deferred retirement account, such as a 401(k) plan, you need
to be aware of the possible tax consequences when: (i) the Fund makes distributions,
(ii) you sell Shares in the secondary market or (iii) you create or redeem
Creation Units.
Taxes
on Distributions. As noted above, the Fund expects to distribute net investment
income, if any, at least monthly, and any net realized long-term or short-term
capital gains, if any, at least annually. The Fund may also pay a special
distribution at any time to comply with U.S. federal tax requirements.
In
general, your distributions are subject to U.S. federal income tax when they
are paid, whether you take them in cash or reinvest them in the Fund. Distributions
of net investment income are generally taxable as ordinary income. Whether
distributions of capital gains represent long-term or short-term capital
gains is determined by how long the Fund owned the investments that generated
them, rather than how long you have owned your Shares. Distributions of net
short-term capital gains in excess of net longterm capital losses,
if any, are generally taxable as ordinary income. Distributions of net long-term
capital gains in excess of net short-term capital losses, if any, that are
properly reported as capital gain dividends are generally taxable as long-term
capital gains. Long-term capital gains of non-corporate shareholders are
generally taxable at a maximum rate of 15%. Absent further legislation, the
maximum tax rate on long-term capital gains of non-corporate shareholders
will generally return to 20% for taxable years beginning after December 31,
2012.
For
taxable years beginning before January 1, 2013, the Fund may receive dividends,
the distribution of which the Fund may report as qualified dividends. In
the event that the Fund receives such a dividend and reports the distribution
of such dividend as a qualified dividend, the dividend may be taxed at the
maximum capital gains rate, provided holding period and other requirements
are met at both the shareholder and the Fund level. It is not expected that
a significant portion of the Funds distribution will be eligible for
treatment as qualified dividends or, in the case of corporate shareholders,
eligible for the dividends paid deduction.
Distributions
in excess of the Funds current and accumulated earnings and profits
are treated as a tax-free return of your investment to the extent of your
basis in the Shares, and generally as capital gain thereafter. A return of
capital, which for tax purposes is treated as a return of your investment,
reduces your basis in Shares, thus reducing any loss or increasing any gain
on a subsequent taxable disposition of Shares. A distribution will reduce
the Funds NAV per Share and may be taxable to you as ordinary income
or capital gain even though, from an economic standpoint, the distribution
may constitute a return of capital.
12
Dividends, interest and gains from non-U.S. investments of the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may, in some cases, reduce or eliminate such taxes.
If more than 50% of the Funds total assets at the end of its taxable year consist of foreign securities, the Fund may elect to pass through to its investors certain foreign income taxes paid by the Fund, with the result that each investor will (i) include in gross income, as an additional dividend, even though not actually received, the investors pro rata
share of the Funds foreign income taxes, and (ii) either deduct (in calculating U.S. taxable income) or credit (in calculating U.S. federal income), subject to certain limitations, the investors pro rata share of the Funds foreign income taxes.
If you are not a citizen or resident alien of the United States, the Funds ordinary income dividends (which include distributions of net short-term capital gains) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies or unless such income is effectively connected with a U.S. trade or business. Nonresident shareholders
are urged to consult their own tax advisers concerning the applicability of the U.S. withholding tax and the possible applicability of the U.S. estate tax.
The Fund may be required to withhold a percentage of your distributions and proceeds if you have not provided a taxpayer identification number or social security number or otherwise established a basis for exemption from backup withholding. The backup withholding rate for individuals is currently 28%, and is scheduled to increase to 31% after 2012.
This is not an additional tax and may be refunded, or credited against your U.S. federal income tax liability, provided certain required information is furnished to the Internal Revenue Service.
Taxes on the Sale or Cash Redemption of Exchange Listed Shares. Currently, any capital gain or loss realized upon a sale of Shares is generally treated as long term capital gain or loss if the Shares have been held for more than one year and as a short term capital gain or loss if held for one year or less. However, any capital loss on a sale of Shares
held for six months or less is treated as long-term capital loss to the extent that capital gain dividends were paid with respect to such Shares. The ability to deduct capital losses may be limited. To the extent that a shareholders Shares are redeemed for cash, this is normally treated as a sale for tax purposes.
Taxes on Creations and Redemptions of Creation Units. A person who exchanges securities for Creation Units generally will recognize a gain or loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time of exchange and the sum of the exchangers aggregate basis in the securities surrendered and
the amount of any cash paid for such Creation Units. A person who exchanges Creation Units for securities will generally recognize a gain or loss equal to the difference between the exchangers basis in the Creation Units and the sum of the aggregate market value of the securities received. The Internal Revenue Service, however, may assert that a loss
realized upon an exchange of primarily securities for Creation Units cannot be deducted currently under the rules governing wash sales, or on the basis that there has been no significant change in economic position. Persons exchanging securities for Creation Units or redeeming Creation Units should consult their own tax adviser with respect to
whether wash sale rules apply and when a loss might be deductible and the tax treatment of any creation or redemption transaction.
Under current U.S. federal income tax laws, any capital gain or loss realized upon a redemption (or creation) of Creation Units is generally treated as long-term capital gain or loss if the Shares (or securities surrendered) have been held for more than one year and as a short-term capital gain or loss if the Shares (or securities surrendered) have been
held for one year or less.
If you create or redeem Creation Units, you will be sent a confirmation statement showing how many Shares you created or sold and at what price.
The foregoing discussion summarizes some of the consequences under current U.S. federal income tax law of an investment in the Fund. It is not a substitute for personal tax advice. Consult your own tax advisor about the potential tax consequences of an investment in the Fund under all applicable tax laws.
The Index is published by Wells Fargo & Company. The Index Provider does not sponsor, endorse, or promote the Fund and bears no liability with respect to the Fund or any security.
13
WELLS FARGO
®
HYBRID AND PREFERRED SECURITIES EX FINANCIALS INDEX
The Index is designed to track the performance of convertible or exchangeable and non-convertible preferred securities listed on U.S. exchanges. The Index is comprised of preferred securities listed on U.S. exchanges, including securities that, in the Index Providers judgment, are functionally equivalent to preferred securities including, but not limited to,
convertible securities, depositary preferred securities and perpetual subordinated debt, excluding securities with a financial industry sector classification per the Bloomberg Professional
®
service (collectively, Preferred Securities). Functionally equivalent securities to Preferred Securities are securities that are issued and trade in similar manner to traditional
perpetual preferred securities. Preferred Securities may be subject to redemption or call provisions and may include those issued by small- and medium-capitalization companies. Preferred Securities issued by real estate investment trusts (REITs) are not considered to be securities with a financial industry sector classification, and therefore may be
included in the Index.
Preferred Securities (or, in the case of convertible or exchangeable Preferred Securities, the securities into which they are convertible or exchangeable) must be listed on the NYSE, the NYSE Arca or NASDAQ. Preferred Securities must maintain a minimum par value of $250 million or minimum of 10 million shares outstanding. For purposes of selecting
securities, the Index Providers Index Review Committee (IRC) does not distinguish between affiliated and non-affiliated holders. Accordingly, securities would be deemed to be outstanding even if they are held entirely by affiliates of the issuer. Preferred Securities may have fixed or floating dividends or coupons, although dividends or coupons may be
subject to deferral. Preferred Securities must be denominated in U.S. dollars. Issuers may be either U.S.-based or foreign-based. Preferred Securities must be publicly registered or exempt from registration under Section 3(a)(2) of the Securities Act. Unregistered, privately placed securities are not eligible for inclusion unless they are exchangeable for
registered shares, assuming eligibility criteria are otherwise met. Preferred Securities do not include auction rate preferred securities, securities subject to sinking fund provisions, shares in closed-end funds, municipal securities, or repackaged securities linked to a security, a basket of securities or an index.
Preferred Securities are reviewed and qualified for Index inclusion and removal by the IRC in accordance with the Index rules and methodology. The IRC is responsible for oversight and review for rebalancing changes to the Index. The IRC is also responsible for ensuring that the Index complies with the Index rules and methodology.
The Index is reconstituted and rebalanced monthly as of the close of business on the final NYSE Arca trading day of each month (the Monthly Rebalance Date). Preferred Securities that have become ineligible since the previous rebalancing generally will be removed only at the next Monthly Rebalance Date except in the case of certain corporate
actions or if the Preferred Security is delisted.
Adjustments to constituent Preferred Securities will be provided to the NYSE Arca no later than five business days prior to a Monthly Rebalancing Date. NYSE Arca will make this information publicly available on its website, via broadcast email and/or press release.
14
LICENSE AGREEMENT AND DISCLAIMERS
The Adviser has entered into a licensing agreement with the Index Provider to use the Index. The Fund is entitled to use the Index pursuant to a sub-licensing arrangement with the Adviser.
The Fund is not issued, sponsored, endorsed or advised by Wells Fargo & Company, Wells Fargo Securities, LLC or their subsidiaries and affiliates (collectively, Wells Fargo). Wells Fargo makes no representation or warranty, express or implied, to the Funds investors or any member of the public regarding the advisability of investing in securities generally
or in the Fund particularly or the ability of any data supplied by Wells Fargo or the Index to track financial instruments comprising the Index or any trading market. Wells Fargos only relationship to the Adviser is the licensing of certain trademarks and trade names of Wells Fargo and of the data supplied by Wells Fargo that is determined, composed and
calculated by Wells Fargo or a third party index calculator, without regard to the Fund or its shareholders. Wells Fargo has no obligation to take the needs of the Fund or the Funds shareholders into consideration when determining, composing or calculating the data. Wells Fargo has no obligation or liability in connection with the administration,
marketing or trading of the Fund.
WELLS FARGO DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF ANY INDEX DATA OR OTHER INFORMATION OR DATA SUPPLIED BY IT OR ANY DATA INCLUDED THEREIN. WELLS FARGO MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ADVISER AND THE FUND, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE INDEX AND OTHER DATA SUPPLIED BY WELLS FARGO OR ANY DATA INCLUDED THEREIN. WELLS FARGO MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
INDEX OR OTHER DATA SUPPLIED BY WELLS FARGO OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL WELLS FARGO HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES.
NYSE ARCA IS NOT AFFILIATED WITH THE ADVISER OR WELLS FARGO AND DOES NOT APPROVE, ENDORSE, REVIEW OR RECOMMEND WELLS FARGO, VAN ECK OR THE FUND.
The Fund is based on the Wells Fargo
®
Hybrid and Preferred Securities ex Financials Index and the values of such Wells Fargo
®
Hybrid and Preferred Securities ex Financials Index are derived from sources deemed reliable, but NYSE Arca and its suppliers do not guarantee the correctness or completeness of the Wells Fargo
®
Hybrid and Preferred Securities
ex Financials Index, its values or other information furnished in connection with the Wells Fargo
®
Hybrid and Preferred Securities ex Financials Index. NYSE ARCA MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY ANY PERSON OR ENTITY FROM THE USE OF THE INDEX, TRADING BASED ON THE INDEX, OR ANY
DATA INCLUDED THEREIN IN CONNECTION WITH THE TRADING OF THE ADVISERS PRODUCTS, OR FOR ANY OTHER USE. WELLS FARGO AND NYSE ARCA MAKE NO WARRANTIES, EXPRESS OR IMPLIED, AND HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT
TO THE INDEX OR ANY DATA INCLUDED THEREIN.
15
The Fund has not yet commenced operations as of the date of this Prospectus and therefore does not have a financial history.
The Fund has not yet commenced operations and, therefore, does not have information about the differences between the Funds daily market price on NYSE Arca and its NAV. Information regarding how often the Shares of the Fund traded on NYSE Arca at a price above (
i.e
., at a premium) or below (
i.e
., at a discount) the NAV of the Fund during the
past four calendar quarters, as applicable, can be found at www.vaneck.com/etf.
16
CONTINUOUS OFFERING
The method by which Creation Units are created and traded may raise certain issues under applicable securities laws. Because new Creation Units are issued and sold by the Trust on an ongoing basis, a distribution, as such term is used in the Securities Act, may occur at any point. Broker dealers and other persons are cautioned that some activities
on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act.
For example, a broker dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an order with the Distributor, breaks them down into constituent Shares, and sells such Shares directly to customers, or if it chooses to couple the creation of a supply of new Shares with an active selling effort involving
solicitation of secondary market demand for Shares. A determination of whether one is an underwriter for purposes of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker dealer or its client in the particular case, and the examples mentioned above should not be considered a complete
description of all the activities that could lead to a categorization as an underwriter.
Broker dealers who are not underwriters but are participating in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares that are part of an unsold allotment within the meaning of Section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by
Section 4(3) of the Securities Act. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. As a result, broker dealer firms should note that dealers who are not underwriters but are participating in a distribution (as contrasted with
ordinary secondary market transactions) and thus dealing with the Shares that are part of an overallotment within the meaning of Section 4(3)(A) of the Securities Act would be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act. Firms that incur a prospectus delivery obligation with respect to
Shares are reminded that, under Rule 153 of the Securities Act, a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to an exchange member in connection with a sale on NYSE Arca is satisfied by the fact that the prospectus is available at NYSE Arca upon request. The prospectus delivery mechanism provided in Rule 153 is
only available with respect to transactions on an exchange.
OTHER INFORMATION
The Trust was organized as a Delaware statutory trust on March 15, 2001. Its Declaration of Trust currently permits the Trust to issue an unlimited number of Shares of beneficial interest. If shareholders are required to vote on any matters, each Share outstanding would be entitled to one vote. Annual meetings of shareholders will not be held except as
required by the 1940 Act and other applicable law. See the Funds SAI for more information concerning the Trusts form of organization. Section 12(d)(1) of the 1940 Act restricts investments by investment companies in the securities of other investment companies, including Shares of the Fund. Registered investment companies are permitted to invest
in the Fund beyond the limits set forth in Section 12(d)(1) subject to certain terms and conditions set forth in an SEC exemptive order issued to the Trust, including that such investment companies enter into an agreement with the Fund.
Dechert LLP serves as counsel to the Trust, including the Fund. Ernst & Young LLP serves as the Trusts independent registered public accounting firm and will audit the Funds financial statements annually.
17
ADDITIONAL INFORMATION
This Prospectus does not contain all the information included in the Registration Statement filed with the SEC with respect to the Funds Shares. Information about the Fund can be reviewed and copied at the SECs Public Reference Room and information on the operation of the Public Reference Room may be obtained by calling the SEC at
1.202.551.8090. The Funds Registration Statement, including this Prospectus, the Funds SAI and the exhibits may be examined at the offices of the SEC (100 F Street, NE, Washington, DC 20549) or on the EDGAR database at the SECs website (http://www.sec.gov), and copies may be obtained, after paying a duplicating fee, by electronic request at
the following email address: publicinfo@sec.gov, or by writing the SECs Public Reference Section, Washington, DC 20549-1520. These documents and other information concerning the Trust also may be inspected at the offices of NYSE Arca (20 Broad Street, New York, New York 10005).
The SAI for the Fund, which has been filed with the SEC, provides more information about the Fund. The SAI for the Fund is incorporated herein by reference and is legally part of this Prospectus. Additional information about the Funds investments will be available in the Funds annual and semi-annual reports to shareholders. In the Funds annual report,
when available, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds performance during its last fiscal year. The SAI and the Funds annual and semi-annual reports may be obtained without charge by writing to the Fund at Van Eck Securities Corporation, the Funds distributor, at 335 Madison
Avenue, New York, New York 10017 or by calling the distributor at the following number: Investor Information: 1.888.MKT.VCTR (658-8287).
Shareholder inquiries may be directed to the Fund in writing to 335 Madison Avenue, 19th Floor, New York, New York 10017 or by calling 1.888.MKT.VCTR (658-8287).
The Funds SAI will be available at vaneck.com/etf.
(Investment Company Act file no. 811-10325)
18
Call Van Eck at 888.MKT.VCTR to request, free of charge, the annual or semi-annual reports, when available, the SAI, or other information about the Fund or to make shareholder inquiries. You may also obtain the SAI or the Funds annual or semi-annual reports, when available, by visiting the Van Eck website at vaneck.com/etf.
Information about the Fund (including the SAI) can also be reviewed and copied at the 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.
Reports and other information about the Fund are available on the EDGAR Database on the SECs internet site at http://www.sec.gov. In addition, copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing the SECs Public Reference Section,
Washington, DC 20549-0102.
Transfer Agent: The Bank of New York Mellon
STATEMENT
OF ADDITIONAL INFORMATION
Fund
Principal U.S.
Ticker
Market
Vectors Preferred Securities ex Financials ETF
NYSE Arca,
Inc.
PFXF
A copy of
the Prospectus may be obtained without charge by writing to the Trust or the
Distributor. The Trusts 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
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- ii -
G
ENERAL
DESCRIPTION OF THE TRUST
The Trust
reserves the right to permit or require a cash option for creations and
redemptions of Shares (subject to applicable legal requirements). In each
instance of such cash creations or redemptions, the Trust may impose
transaction fees based on transaction expenses related to the particular
exchange that will be higher than the transaction fees associated with in-kind
purchases or redemptions.
I
NVESTMENT
POLICIES AND RESTRICTIONS
The Fund
may invest in repurchase agreements with commercial banks, brokers or dealers
to generate income from its excess cash balances and to invest securities
lending cash collateral. A repurchase agreement is an agreement under which the
Fund acquires a money market instrument (generally a security issued by the
U.S. Government or an agency thereof, a bankers acceptance or a certificate of
deposit) from a seller, subject to resale to the seller at an agreed upon price
and date (normally, the next business day). A repurchase agreement may be
considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by
the Fund and is unrelated to the interest rate on the underlying instrument.
In these
repurchase agreement transactions, the securities acquired by the Fund
(including accrued interest earned thereon) must have a total value at least
equal to the value of the repurchase agreement and are held by the Trusts
custodian bank until repurchased. In addition, the Trusts Board of Trustees
(Board or Trustees) has established guidelines and standards for review of
the creditworthiness of any bank, broker or dealer counterparty to a repurchase
agreement with the Fund. No more than an aggregate of 15% of the Funds net
assets will be invested in repurchase agreements having maturities longer than
seven days.
The use of
repurchase agreements involves certain risks. For example, if the other party
to the agreement defaults on its obligation to repurchase the underlying
security at a time when the value of the security has declined, the Fund may
incur a loss upon disposition of the security. If the other party to the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a court may determine that the underlying
security is collateral not within the control of the Fund and, therefore, the
Fund may incur delays in disposing of the security and/or may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement.
F
utures Contracts
and Options
An
option is a contract that provides the holder the right to buy or sell shares
at a fixed price, within a specified period of time. A call option gives the
option holder the right to buy the underlying security from the option writer
at the option exercise price at any time prior to the expiration of the option.
A put option gives the option holder the right to sell the underlying security
to the option writer at the option exercise price at any time prior to the
expiration of the option.
Although
futures contracts (other than cash settled futures contracts including most
stock index futures contracts) by their terms call for actual delivery or
acceptance of the underlying instrument or commodity, in most cases the
contracts are closed out before the maturity date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position (buying
- 2 -
a contract which has previously been sold or selling a contract
previously purchased) in an identical contract to terminate the position.
Brokerage commissions are incurred when a futures contract position is opened
or closed.
Futures
traders are required to make a good faith margin deposit in cash or government
securities with a broker or custodian to initiate and maintain open positions
in futures contracts. A margin deposit is intended to assure completion of the
contract (delivery or acceptance of the underlying instrument or commodity or
payment of the cash settlement amount) if it is not terminated prior to the
specified delivery date. Brokers may establish deposit requirements which are
higher than the exchange minimums. Futures contracts are customarily purchased
and sold on margin deposits which may range upward from less than 5% of the
value of the contract being traded.
After a
futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional variation margin will be required.
Conversely,
a change in the contract value may reduce the required margin, resulting in a
repayment of excess margin to the contract holder. Variation margin payments
are made to and from the futures broker for as long as the contract remains
open. The Fund expects to earn interest income on its margin deposits.
Positions
in futures contracts and options may be closed out only on an exchange that
provides a secondary market therefor. However, there can be no assurance that a
liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close a futures or
options position. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily margin requirements at a time when it
may be disadvantageous to do so. In addition, the Fund may be required to make
delivery of the instruments underlying futures contracts it has sold.
The Fund
will seek to minimize the risk that it will be unable to close out a futures or
options contract by only entering into futures and options for which there
appears to be a liquid secondary market.
The risk of
loss in trading futures contracts or uncovered call options in some strategies
(
e.g.
,
selling uncovered stock index futures contracts) is potentially unlimited. The
Fund does not plan to use futures and options contracts in this way. The risk
of a futures position may still be large as traditionally measured due to the
low margin deposits required. In many cases, a relatively small price movement
in a futures contract may result in immediate and substantial loss or gain to
the investor relative to the size of a required margin deposit.
- 3 -
Certain
financial futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous days settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of future positions and subjecting
some futures traders to substantial losses.
Swap agreements
are contracts between parties in which one party agrees to make payments to the
other party based on the change in market value or level of a specified index
or asset. In return, the other party agrees to make payments to the first party
based on the return of a different specified index or asset. Although swap
agreements entail the risk that a party will default on its payment obligations
thereunder, the Fund seeks to reduce this risk by entering into agreements that
involve payments no less frequently than quarterly. The net amount of the
excess, if any, of the Funds obligations over its entitlements with respect to
each swap is accrued on a daily basis and an amount of cash or highly liquid
securities having an aggregate value at least equal to the accrued excess is
maintained in an account at the Trusts custodian bank.
W
arrants and
Subscription Rights
Warrants
are equity securities in the form of options issued by a corporation which give
the holder the right to purchase stock, usually at a price that is higher than
the market price at the time the warrant is issued. A purchaser takes the risk
that the warrant may expire worthless because the market price of the common
stock fails to rise above the price set by the warrant.
A currency
forward transaction is a contract to buy or sell a specified quantity of
currency at a specified date in the future at a specified price 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. Currency forward contracts
may be used to increase or reduce exposure to currency price movements.
- 4 -
The use of
currency forward transactions involves certain risks. For example, if the
counterparty under the contract defaults on its obligation to make payments due
from it as a result of its bankruptcy or otherwise, the Fund may lose such
payments altogether or collect only a portion thereof, which collection could
involve costs or delays.
A
convertible security is a bond, debenture, note, preferred stock, right,
warrant or other security that may be converted into or exchanged for a
prescribed amount of common stock or other security of the same or a different
issuer or into cash within a particular period of time at a specified price or
formula. A convertible security generally entitles the holder to receive interest
paid or accrued on debt securities or the dividend paid on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
Before conversion, convertible securities generally have characteristics
similar to both debt and equity securities. The value of convertible securities
tends to decline as interest rates rise and, because of the conversion feature,
tends to vary with fluctuations in the market value of the underlying
securities. Convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stock of the same or similar
issuers. Convertible securities generally rank senior to common stock in a
corporations capital structure but are usually subordinated to comparable nonconvertible
securities. Convertible securities generally do not participate directly in any
dividend increases or decreases of the underlying securities although the
market prices of convertible securities may be affected by any dividend changes
or other changes in the underlying securities.
A
structured note is a derivative security for which the amount of principal
repayment and/or interest payments is based on the movement of one or more
factors. These factors include, but are not limited to, currency exchange
rates, interest rates (such as the prime lending rate or LIBOR), referenced
bonds and stock indices. Some of these factors may or may not correlate to the
total rate of return on one or more underlying instruments referenced in such
notes. Investments in structured notes involve risks including interest rate
risk, credit risk and market risk. Depending on the factor(s) used and the use
of multipliers or deflators, changes in interest rates and movement of such
factor(s) may cause significant price fluctuations. Structured notes may be
less liquid than other types of securities and more volatile than the reference
factor underlying the note.
Participation
notes (P-Notes) are issued by banks or broker-dealers and are designed to
offer a return linked to the performance of a particular underlying equity
security or market. P-Notes can have the characteristics or take the form of
various instruments, including, but not limited to, certificates or warrants.
The holder of a P-Note that is linked to a particular underlying security is
entitled to receive any dividends paid in connection with the underlying
security. However, the holder of a P-Note generally does not receive voting
rights as it would if it directly owned the underlying security. P-Notes
constitute direct, general and unsecured contractual obligations of the banks
or broker-dealers that issue them, which therefore subject the Fund to
counterparty risk, as discussed below. Investments in P-Notes involve certain
risks in addition to those associated with a direct investment in the
underlying foreign securities or foreign securities markets whose return they
seek to replicate. For instance, there can be no assurance that the trading
price of a P-Note will equal the value of the underlying foreign security or
foreign securities market that it seeks to replicate. As the purchaser of a
P-Note, the Fund is relying on the creditworthiness of the counterparty issuing
the P-Note and has no rights under a P-Note against the issuer of the
underlying security. Therefore, if such counterparty were to become insolvent,
the Fund would lose its investment. The risk that the Fund may lose its
investments due to the insolvency of a
- 5 -
single counterparty may be amplified to the extent the Fund purchases
P-Notes issued by one issuer or a small number of issuers. P-Notes also include
transaction costs in addition to those applicable to a direct investment in
securities. In addition, the Funds use of P-Notes may cause the Funds
performance to deviate from the performance of the portion of the Index to
which the Fund is gaining exposure through the use of P-Notes.
Due to
liquidity and transfer restrictions, the secondary markets on which P-Notes are
traded may be less liquid than the markets for other securities, which may lead
to the absence of readily available market quotations for securities in the
Funds portfolio and may cause the value of the P-Notes to decline. The ability
of the Fund to value its securities becomes more difficult and the Advisers
judgment in the application of fair value procedures may play a greater role in
the valuation of the Funds securities due to reduced availability of reliable
objective pricing data. Consequently, while such determinations will be made in
good faith, it may nevertheless be more difficult for the Fund to accurately
assign a daily value to such securities.
The Fund
may take advantage of opportunities in the area of options, futures contracts,
options on futures contracts, options on the Fund, warrants, swaps and any
other investments which are not presently contemplated for use or which are not
currently available, but which may be developed, to the extent such investments
are considered suitable for the Fund by the Adviser.
The Trust
has adopted the following investment restrictions as fundamental policies with
respect to the Fund. These restrictions cannot be changed without the approval
of the holders of a majority of the Funds outstanding voting securities. For
purposes of the 1940 Act, a majority of the outstanding voting securities of
the Fund means the vote, at an annual or a special meeting of the security
holders of the Trust, of the lesser of (1) 67% or more of the voting
securities of the Fund present at such meeting, if the holders of more than 50%
of the outstanding voting securities of the Fund are present or represented by
proxy, or (2) more than 50% of the outstanding voting securities of the
Fund. Under these restrictions:
1.
The Fund may not make loans, except that the Fund may (i) lend
portfolio securities, (ii) enter into repurchase agreements,
(iii) purchase all or a portion of an issue of debt securities, bank loan
or participation interests, bank certificates of deposit, bankers
acceptances, debentures or other securities, whether or not the purchase is
made upon the original issuance of the securities and (iv) participate
in an interfund lending program with other registered investment companies;
2.
The Fund may not borrow money, except as permitted under the 1940
Act, and as interpreted or modified by regulation from time to time;
3.
The Fund may not issue senior securities, except as permitted under
the 1940 Act, and as interpreted or modified by regulation from time to time;
4.
The Fund may not purchase or sell real estate, except that the Fund
may (i) invest in securities of issuers that invest in real estate or
interests therein; (ii) invest in mortgage-related securities and other
securities that are secured by real estate or interests therein; and (iii)
hold and sell real estate acquired by the Fund as a result of the ownership
of securities;
- 6 -
5.
The Fund may not engage in the business of underwriting securities
issued by others, except to the extent that the Fund may be considered an
underwriter within the meaning of the Securities Act of 1933, as amended (the
Securities Act), in the disposition of restricted securities or in
connection with its investments in other investment companies;
6.
The Fund may not purchase or sell commodities, unless acquired as a
result of owning securities or other instruments, but it may purchase, sell
or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments and may invest in securities or other instruments backed by
commodities; and
7.
The Fund may not purchase any security if, as a result of that
purchase, 25% or more of its total assets would be invested in securities of
issuers having their principal business activities in the same industry,
except that the Fund may invest 25% or more of the value of its total assets
in securities of issuers in any one industry or group of industries if the
index that the Fund replicates concentrates in an industry or group of
industries. This limit does not apply to securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
In addition
to the investment restrictions adopted as fundamental policies as set forth
above, the Fund observes the following restrictions, which may be changed by
the Board without a shareholder vote. The Fund will not:
1.
Invest in securities which are illiquid securities, including
repurchase agreements maturing in more than seven days and options traded
over-the-counter, if the result is that more than 15% of the Funds net
assets would be invested in such securities.
2.
Make short sales of securities.
3.
Purchase any security on margin, except for such short-term loans as
are necessary for clearance of securities transactions. The deposit or
payment by the Fund or initial or variation margin in connection with futures
contracts or related options thereon is not considered the purchase of a
security on margin.
4.
Participate in a joint or joint-and-several basis in any trading
account in securities, although transactions for the Fund and any other
account under common or affiliated management may be combined or allocated
between the Fund and such account.
5.
Purchase securities of open-end or closed-end investment companies
except in compliance with the 1940 Act, although the Fund may not acquire any
securities of registered open-end investment companies or registered unit
investment trusts in reliance on Sections 12(d)(1)(F) or 12(d)(1)(G) of the
1940 Act.
If a
percentage limitation is adhered to at the time of investment or contract, a
later increase or decrease in percentage resulting from any change in value or
total or net assets will not result in a violation of such restriction, except
that the percentage limitations with respect to the borrowing of money and
illiquid securities will be continuously complied with.
- 7 -
contracts, stock options, stock index options, options on the Shares,
and stock index swaps and swaptions, each with a view towards providing the
Fund with exposure to the securities in the Index. These investments may be
made to invest uncommitted cash balances or, in limited circumstances, to
assist in meeting shareholder redemptions of Creation Units. The Fund will not
invest in money market instruments as part of a temporary defensive strategy to
protect against potential stock market declines.
- 8 -
S
PECIAL
CONSIDERATIONS AND RISKS
A
discussion of the risks associated with an investment in the Fund is contained
in the Prospectus under the headings Summary InformationPrincipal Risks
of Investing in the Fund and Additional Information About the Funds
Investment Strategies and RisksRisks of Investing in the Fund. The discussion
below supplements, and should be read in conjunction with, such sections of the
Prospectus.
Investment
in the Fund should be made with an understanding that the value of the Funds
portfolio securities may fluctuate in accordance with changes in the financial
condition of the issuers of the portfolio securities, the value of securities
generally and other factors.
An
investment in the Fund should also be made with an understanding of the risks
inherent in an investment in equity securities, including the risk that the
financial condition of issuers may become impaired or that the general
condition of the stock market may deteriorate (either of which may cause a
decrease in the value of the portfolio securities and thus in the value of
Shares). Common stocks are susceptible to general stock market fluctuations and
to volatile increases and decreases in value as market confidence in and perceptions
of their issuers change. These investor perceptions are based on various and
unpredictable factors, including expectations regarding government, economic,
monetary and fiscal policies, inflation and interest rates, economic expansion
or contraction, and global or regional political, economic and banking crises.
Holders of
common stocks incur more risk than holders of preferred stocks and debt
obligations because common stockholders, as owners of the issuer, have
generally inferior rights to receive payments from the issuer in comparison
with the rights of creditors of, or holders of debt obligations or preferred
stocks issued by, the issuer. Further, unlike debt securities which typically
have a stated principal amount payable at maturity (whose value, however, will
be subject to market fluctuations prior thereto), or preferred stocks which
typically have a liquidation preference and which may have stated optional or
mandatory redemption provisions, common stocks have neither a fixed principal
amount nor a maturity. Common stock values are subject to market fluctuations
as long as the common stock remains outstanding.
In the
event that the securities in the Index are not listed on a national securities
exchange, the principal trading market for some may be in the over-the-counter
market. The existence of a liquid trading market for certain securities may
depend on whether dealers will make a market in such securities. There can be
no assurance that a market will be made or maintained or that any such market
will be or remain liquid. The price at which securities may be sold and the
value of the Funds Shares will be adversely affected if trading markets for
the Funds portfolio securities are limited or absent or if bid/ask spreads are
wide.
The Fund is
not actively managed by traditional methods, and therefore the adverse
financial condition of any one issuer will not result in the elimination of its
securities from the securities held by the Fund unless the securities of such
issuer are removed from the Index.
An
investment in the Fund should also be made with an understanding that the Fund
will not be able to replicate exactly the performance of the Index because the
total return generated by the securities will be reduced by transaction costs
incurred in adjusting the actual balance of the securities and other Fund
expenses, whereas such transaction costs and expenses are not included in the
calculation of the Index. It is also possible that for periods of time, the
Fund may not fully replicate the performance of the Index due to the temporary
unavailability of certain Index securities in the secondary market or due to
- 9 -
other extraordinary circumstances. Such events are unlikely to continue
for an extended period of time because the Fund is required to correct such
imbalances by means of adjusting the composition of the securities. It is also
possible that the composition of the Fund may not exactly replicate the
composition of the Index if the Fund has to adjust its portfolio holdings in
order to continue to qualify as a regulated investment company under the U.S.
Internal Revenue Code of 1986, as amended (the Internal Revenue Code).
Shares are
subject to the risks of an investment in a portfolio of equity securities in an
economic sector or industry in which the Index is highly concentrated. In
addition, because it is the policy of the Fund to generally invest in the
securities that comprise the Index, the portfolio of securities held by the Fund
(Fund Securities) also will be concentrated in that economic sector or
industry.
- 10 -
A
discussion of exchange listing and trading matters associated with an
investment in the Fund is contained in the Prospectus under the headings Summary InformationPrincipal Risks
of Investing in the Fund, Additional Information About the Funds Investment
Strategies and RisksRisks of Investing in the Fund, Shareholder
InformationDetermination of NAV and Shareholder InformationBuying and
Selling Exchange-Traded Shares. The discussion below supplements, and should
be read in conjunction with, such sections of the Prospectus.
The Shares
of the Fund are expected to be approved for listing on NYSE Arca, subject to
notice of issuance, and will trade in the secondary market at prices that may
differ to some degree from their NAV. The Exchange may but is not required to
remove the Shares of the Fund from listing if: (1) following the initial
twelve-month period beginning upon the commencement of trading of the Fund,
there are fewer than 50 beneficial holders of the Shares for 30 or more
consecutive trading days, (2) the value of the Index or portfolio of
securities on which the Fund is based is no longer calculated or available or
(3) such other event shall occur or condition exists that, in the opinion of
the Exchange, makes further dealings on the Exchange inadvisable. In addition,
the Exchange will remove the Shares from listing and trading upon termination
of the Trust. There can be no assurance that the requirements of the Exchange
necessary to maintain the listing of Shares of the Fund will continue to be
met.
As in the
case of other securities traded on the Exchange, brokers commissions on
transactions will be based on negotiated commission rates at customary levels.
In order to
provide investors with a basis to gauge whether the market price of the Shares
on the Exchange is approximately consistent with the current value of the
assets of the Fund on a per Share basis, an updated Indicative Per Share
Portfolio Value is disseminated intra-day through the facilities of the
Consolidated Tape Associations Network B. Indicative Per Share Portfolio
Values are disseminated every 15 seconds during regular Exchange trading hours
based on the most recently reported prices of Fund Securities. As the
respective international local markets close, the Indicative Per Share
Portfolio Value will continue to be updated for foreign exchange rates for the
remainder of the U.S. trading day at the prescribed 15 second interval. The
Fund is not involved in or responsible for the calculation or dissemination of
the Indicative Per Share Portfolio Value and makes no warranty as to the
accuracy of the Indicative Per Share Portfolio Value.
- 11 -
T
rustees and
Officers of the Trust
The Board
of the Trust consists of four Trustees, three of whom are not interested
persons (as defined in the 1940 Act), of the Trust (the Independent
Trustees). Mr. David H. Chow, an Independent Trustee, serves as Chairman of
the Board. The Board is responsible for overseeing the management and
operations of the Trust, including general supervision of the duties performed
by the Adviser and other service providers to the Trust. The Adviser is
responsible for the day-to-day administration and business affairs of the
Trust.
The Board
believes that each Trustees experience, qualifications, attributes or skills
on an individual basis and in combination with those of the other Trustees
lead to the conclusion that the Board possesses the requisite skills and
attributes to carry out its oversight responsibilities with respect to the
Trust. The Board believes that the Trustees ability to review, critically
evaluate, question and discuss information provided to them, to interact
effectively with the Adviser, other service providers, counsel and
independent auditors, and to exercise effective business judgment in the
performance of their duties, support this conclusion. The Board also has
considered the following experience, qualifications, attributes and/or
skills, among others, of its members in reaching its conclusion: such
persons character and integrity; length of service as a board member of the
Trust; such persons willingness to serve and willingness and ability to
commit the time necessary to perform the duties of a Trustee; and as to each
Trustee other than Mr. van Eck, his status as not being an interested
person (as defined in the 1940 Act) of the Trust. In addition, the following
specific experience, qualifications, attributes and/or skills apply as to
each Trustee: Mr. Chow, significant business and financial experience,
particularly in the investment management industry, experience with trading
and markets through his involvement with the Pacific Stock Exchange, and
service as a chief executive officer, board member, partner or executive
officer of various businesses and non-profit organizations; Mr. Short,
business and financial experience, particularly in the investment management
industry, and service as a president, board member or executive officer of
various businesses; Mr. Stamberger, business and financial experience and
service as the president and chief executive officer of SmartBrief Inc., a
media company; and Mr. van Eck, business and financial experience,
particularly in the investment management industry, and service as a
president, executive officer and/or board member of various businesses,
including the Adviser, Van Eck Securities Corporation, and Van Eck Absolute
Return Advisers Corporation. References to the experience, qualifications,
attributes and skills of Trustees are pursuant to requirements of the
Securities and Exchange Commission (the SEC), do 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.
The
Trustees of the Trust, their addresses, positions with the Trust, ages, term of
office and length of time served, principal occupations during the past five
years, the number of portfolios in the Fund Complex overseen by each Trustee
and other directorships, if any, held by the Trustees, are set forth below.
- 12 -
Name, Address
1
Position(s)
Term of
Principal
Number of
Other
David H. Chow,
Chairman
Since 2008
Founder and CEO, DanCourt Management LLC (strategy consulting
firm), March 1999 to present.
60
Director, Audit Committee Chairman and Compensation Committee
member, Forward Management, LLC, May 2008 to present; Trustee, Berea College
of Kentucky and Vice-Chairman of the Investment Committee; Secretary and
Board Member of the Stamford CFA Society.
R. Alastair Short,
Trustee
Since 2006
President, Apex Capital Corporation (personal investment
vehicle), January 1988 to present; Vice Chairman, W.P. Stewart & Co.,
Inc. (asset management firm), September 2007 to September 2008; and Managing
Director, The GlenRock Group, LLC (private equity investment firm), May 2004
to September 2007.
70
Chairman and Independent Director, EULAV Asset Management,
January 2011 to present; Independent Director, Tremont offshore funds, June
2009 to present; Director, Kenyon Review.
Richard D.
Trustee
Since 2006
President and CEO, SmartBrief, Inc. (media company).
70
None.
1
The
address for each Trustee and officer is 335 Madison Avenue, 19th Floor, New
York, New York 10017.
2
Each
Trustee serves until resignation, death, retirement or removal. Officers are
elected yearly by the Trustees.
3
The
Fund Complex consists of the Van Eck Funds, Van Eck VIP Trust and the Trust.
*
Member
of the Audit Committee.
Member
of the Nominating and Corporate Governance Committee.
- 13 -
Name, Address
1
Position(s)
Term of
Principal
Number of
Other
Jan F. van Eck,
Trustee,
President and Chief Executive Officer
Trustee (Since 2006);
President and Chief Executive Officer (Since 2009)
Director, President and
Owner of the Adviser, Van Eck Associates Corporation; Director and President,
Van Eck Securities Corporation (VESC); Director and President, Van Eck
Absolute Return Advisers Corp. (VEARA).
60
Director, National
Committee on US-China Relations.
1
The
address for each Trustee and officer is 335 Madison Avenue, 19th Floor, New
York, New York 10017.
2
Each
Trustee serves until resignation, death, retirement or removal. Officers are
elected yearly by the Trustees.
3
The
Fund Complex consists of the Van Eck Funds, Van Eck VIP Trust and the Trust.
4
Interested
person of the Trust within the meaning of the 1940 Act. Mr. van Eck is an
officer of the Adviser.
The Officers of the Trust, their addresses, positions with the Trust,
ages and principal occupations during the past five years are set forth below.
Officers Name,
Position(s) Held
Term of
Principal Occupation(s)
Russell G. Brennan, 47
Assistant Vice President and Assistant Treasurer
Since 2008
Assistant Vice President and Assistant Treasurer of the Adviser
(since 2008); Manager (Portfolio Administration) of the Adviser, September
2005 to October 2008; Officer of other investment companies advised by the
Adviser.
Charles T. Cameron, 52
Vice President
Since 2006
Director of Trading (since 1995) and Portfolio Manager (since
1997) for the Adviser; Officer of other investment companies advised by the
Adviser.
John J. Crimmins, 54
Vice President, Treasurer, Chief Financial Officer and Principal
Accounting Officer
Vice President, Chief Financial Officer and Principal Accounting
Officer (Since 2012); Treasurer (Since 2009
Vice President of Portfolio Administration of the Adviser, June
2009 to present; Vice President of VESC and VEARA, June 2009 to present;
Chief Financial, Operating and Compliance Officer, Kern Capital Management
LLC, September 1997 to February 2009; Officer of other investment companies
advised by the Adviser.
- 14 -
Officers Name,
Position(s) Held
Term of
Principal Occupation(s)
Eduardo Escario, 36
Vice President
Since 2012
Regional Director, Business Development/Sales for Southern
Europe and South America of the Adviser (since July 2008); Regional Director
(Spain, Portugal, South America and Africa) of Dow Jones Indexes and STOXX
Ltd. (May 2001 July 2008).
Lars Hamich, 43
Vice President
Since 2012
Managing Director and Chief Executive Officer of Van Eck Global
(Europe) GmbH (since 2009); Chief Executive Officer of Market Vectors Index
Solutions GmbH (MVIS) (since June 2011); Managing Director of STOXX Limited
(until 2008).
Wu-Kwan Kit,
31
Assistant
Vice President and Assistant Secretary
Since 2011
Assistant
Vice President, Associate General Counsel and Assistant Secretary of the
Adviser, VESC and VEARA (since 2011); Associate, Schulte Roth & Zabel
(September 2007 2011); University of Pennsylvania Law School (August 2004
May 2007).
Susan C. Lashley, 57
Vice President
Since 2006
Vice President of the Adviser and VESC; Officer of other investment
companies advised by the Adviser.
Thomas K. Lynch, 55
Chief Compliance Officer
Since 2007
Chief Compliance Officer of the Adviser and VEARA (since
December 2006) and of VESC (since August 2008); Vice President of the
Adviser, VEARA and VESC; Treasurer (April 2005 December 2006); Officer of
other investment companies advised by the Adviser.
Laura I. Martínez, 32
Assistant Vice President and Assistant Secretary
Since 2008
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.
Joseph J. McBrien, 64
Senior Vice President, Secretary and Chief Legal Officer
Since 2006
Senior Vice President, General Counsel and 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.
Jonathan R. Simon, 37
Vice President and Assistant Secretary
Since 2006
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.
Bruce J. Smith, 57
Senior Vice President
Since 2006
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.
1
The address for each
Officer is 335 Madison Avenue, 19th Floor, New York, New York 10017.
2
Officers are
elected yearly by the Trustees.
- 15 -
The Board
has an Audit Committee, consisting of three Trustees who are Independent
Trustees. Messrs. Chow, Short and Stamberger currently serve as members of the
Audit Committee and each has been designated as an audit committee financial
expert as defined under Item 407 of Regulation S-K of the Securities Exchange
Act of 1934, as amended (the Exchange Act). Mr. Short is the Chairman of the
Audit Committee. The Audit Committee has the responsibility, among other
things, to: (i) oversee the accounting and financial reporting processes of the
Trust and its internal control over financial reporting; (ii) oversee the
quality and integrity of the Trusts financial statements and the independent
audit thereof; (iii) oversee or, as appropriate, assist the Boards oversight
of the Trusts compliance with legal and regulatory requirements that relate to
the Trusts accounting and financial reporting, internal control over financial
reporting and independent audit; (iv) approve prior to appointment the engagement
of the Trusts independent registered public accounting firm and, in connection
therewith, to review and evaluate the qualifications, independence and
performance of the Trusts independent registered public accounting firm; and
(v) act as a liaison between the Trusts independent registered public
accounting firm and the full Board.
The Board
also has a Nominating and Corporate Governance Committee consisting of three
Independent Trustees. Messrs. Chow, Short and Stamberger currently serve as
members of the Nominating and Corporate Governance Committee. Mr. Stamberger is
the Chairman of the Nominating and Corporate Governance Committee. The
Nominating and Corporate Governance Committee has the responsibility, among
other things, to: (i) evaluate, as necessary, the composition of the Board, its
committees and sub-committees and make such recommendations to the Board as
deemed appropriate by the Committee; (ii) review and define Independent Trustee
qualifications; (iii) review the qualifications of individuals serving as
Trustees on the Board and its committees; (iv) evaluate, recommend and nominate
qualified individuals for election or appointment as members of the Board and
recommend the appointment of members and chairs of each Board committee and
subcommittee; and (v) review and assess, from time to time, the performance of
the committees and subcommittees of the Board and report the results to the
Board.
The Board
has determined that its leadership structure is appropriate given the business
and nature of the Trust. In connection with its determination, the Board
considered that the Chairman of the Board is an Independent Trustee. The
Chairman of the Board can play an important role in setting the agenda of the
Board and also serves as a key point person for dealings between management and
the other Independent Trustees. The Independent Trustees believe that the
Chairmans independence facilitates meaningful dialogue between the Adviser and
the Independent Trustees. The Board also considered that the Chairman of each
Board committee is an Independent Trustee, which yields similar benefits with
respect to the functions and activities of the various Board committees. The
Independent Trustees also 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. The Board reviews
its structure on an annual basis.
As an
integral part of its responsibility for oversight of the Trust in the interests
of shareholders, the Board, as a general matter, oversees risk management of
the Trusts investment programs and business affairs. 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 risk management activities for the Trust. 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 (such as
investment-related risks) to achieve the Trusts goals, and that the processes,
procedures and controls employed to address certain risks may be limited in
their effectiveness. Moreover, reports received by the Trustees that may relate
to risk management matters are typically summaries of the relevant information.
- 16 -
The Board
exercises oversight of the risk management process primarily through the Audit
Committee, and through oversight by the Board itself. The Trust faces a number
of risks, such as investment-related and compliance risks. The Advisers
personnel seek to identify and address risks, i.e., events or circumstances
that could have material adverse effects on the business, operations,
shareholder services, investment performance or reputation of the Trust. Under
the overall supervision of the Board or the applicable Committee of the Board,
the Trust, the Adviser, and the affiliates of the Adviser employ a variety of
processes, procedures and controls to identify such possible events or
circumstances, to lessen the probability of their occurrence and/or to mitigate
the effects of such events or circumstances if they do occur. Different
processes, procedures and controls are employed with respect to different types
of risks. Various personnel, including the Trusts Chief Compliance Officer, as
well as various personnel of the Adviser and other service providers such as
the Trusts independent accountants, may report to the Audit Committee and/or
to the Board with respect to various aspects of risk management, as well as
events and circumstances that have arisen and responses thereto.
The
officers and Trustees of the Trust, in the aggregate, own less than 1% of the
Shares of the Fund.
As to each
Independent Trustee and his 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.
The Trust
pays each Independent Trustee an annual retainer of $40,000, a per meeting fee
of $15,000 for scheduled quarterly meetings of the Board and each special
meeting of the Board and a per meeting fee of $7,500 for telephonic meetings.
The Trust pays the Chairman of the Board an annual retainer of $42,875, the
Chairman of the Audit Committee an annual retainer of $18,375 and the Chairman
of the Governance Committee an annual retainer of $12,250. The Trust also
reimburses each Trustee for travel and other out-of-pocket expenses incurred in
attending such meetings. No pension or retirement benefits are accrued as part
of Trustee compensation
The table
below shows the estimated compensation that is contemplated to be paid to the
Trustees by the Trust for the calendar year ending December 31, 2012. Annual
Trustee fees may be reviewed periodically and changed by the Trusts Board.
Name of Trustee
Aggregate
Deferred
Pension or
Estimated
Annual
Total
David H. Chow
$
0
$
172,875
N/A
N/A
$
172,875
R. Alastair Short
$
155,875
$
0
N/A
N/A
$
255,875
Richard D. Stamberger
$
71,125
$
71,125
N/A
N/A
$
252,250
Jan F. van Eck
(3)
$
0
$
0
N/A
N/A
$
0
(1)
The Fund Complex consists
of Van Eck Funds, Van Eck VIP Trust and the Trust.
(2)
Because the funds of the
Fund Complex have different fiscal year ends, the amounts shown are presented
on a calendar year basis.
(3)
Interested person under
the 1940 Act.
- 17 -
P
ORTFOLIO
HOLDINGS DISCLOSURE
The Funds
portfolio holdings are publicly disseminated each day the Fund is open for
business through financial reporting and news services, including publicly
accessible Internet web sites. In addition, a basket composition file, which
includes the security names and share quantities to deliver in exchange for
Creation Units, together with estimates and actual cash components, is publicly
disseminated daily prior to the opening of the Exchange via the National
Securities Clearing Corporation (the NSCC), a clearing agency that is
registered with the SEC. The basket represents one Creation Unit of the Fund.
The Trust, Adviser, Custodian and Distributor will not disseminate non-public
information concerning the Trust.
The Trust
is required to disclose, after its first and third fiscal quarters, the
complete schedule of the Funds portfolio holdings with the SEC on Form N-Q.
Form N-Q for the Fund will be available on the SECs website at
http://www.sec.gov
.
The Funds Form N-Q may also be reviewed and copied at the SECs Public
Reference Room in Washington, D.C. and information on the operation of the
Public Reference Room may be obtained by calling 202.551.8090. The Funds Form
N-Q will be available through the Funds website, at
www.vaneck.com
or
by writing to 335 Madison Avenue, 19th Floor, New York, New York 10017.
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.
Generally,
all Personnel must obtain approval prior to conducting any transaction in
securities. Independent Trustees, however, are not required to obtain prior
approval of personal securities transactions. Personnel may purchase securities
in an initial public offering or private placement,
provided
that he or she
obtains preclearance of the purchase and makes certain representations.
P
ROXY VOTING
POLICIES AND PROCEDURES
The Funds
proxy voting record will be available upon request and on the SECs website at
http://www.sec.gov
.
Proxies for the Funds portfolio securities are voted in accordance with the
Advisers proxy voting policies and procedures, which are set forth in Appendix
A to this SAI.
The Trust
is required to disclose annually the Funds 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 will be available
through the Funds website, at www.vaneck.com, or by writing to 335 Madison Avenue, 19th Floor, New York, New York 10017. The Funds Form N-PX will also be
available on the SECs website at
www.sec.gov
.
- 18 -
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled Management of the Fund.
Van Eck
Associates Corporation acts as investment adviser to the Trust and, subject to
the general 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 manages other mutual funds and separate accounts.
The Adviser
serves as investment adviser to the Fund pursuant to an investment management
agreement between the Trust and the Adviser (the Investment Management
Agreement). Under the Investment Management 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 Funds assets. The Adviser
is responsible for placing purchase and sale orders and providing continuous
supervision of the investment portfolio of the Fund.
Pursuant to
the Investment Management Agreement, the Trust has agreed to indemnify the
Adviser for certain liabilities, including certain liabilities arising under
the federal securities laws, unless such loss or liability results from willful
misfeasance, bad faith or gross negligence in the performance of its duties or
the reckless disregard of its obligations and duties.
Term
.
The Investment Management Agreement is subject to annual approval by (1) the
Board or (2) a vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of 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 Investment
Management Agreement is terminable without penalty, on 60 days notice, by the
Board or by a vote of the holders of a majority (as defined in the 1940 Act) of
the Funds outstanding voting securities. The Investment Management Agreement
is also terminable upon 60 days notice by the Adviser and will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
Van Eck
Associates Corporation also serves as administrator for the Trust pursuant to
the Investment Management Agreement. Under the Investment Management Agreement,
the Adviser is obligated on a continuous basis to provide such administrative
services as the Board of the Trust reasonably deems necessary for the proper
administration of the Trust and the Fund. The Adviser will generally assist in
all aspects of the Trusts and the Funds operations; supply and maintain
office
- 19 -
facilities, statistical and research data, data processing services,
clerical, bookkeeping and record keeping services (including without limitation
the maintenance of such books and records as are required under the 1940 Act
and the rules thereunder, except as maintained by other agents), internal
auditing, executive and administrative services, and stationery and office
supplies; prepare reports to shareholders or investors; prepare and file tax
returns; supply financial information and supporting data for reports to and
filings with the SEC and various state Blue Sky authorities; supply supporting
documentation for meetings of the Board; provide monitoring reports and assistance
regarding compliance with the Declaration of Trust, by-laws, investment
objectives and policies and with federal and state securities laws; arrange for
appropriate insurance coverage; calculate NAVs, net income and realized capital
gains or losses; and negotiate arrangements with, and supervise and coordinate
the activities of, agents and others to supply services.
The Bank of
New York Mellon (The Bank of New York), located at 101 Barclay Street, New
York, New York 10286, serves as custodian for the Fund pursuant to a Custodian
Agreement. As Custodian, The Bank of New York holds the Funds assets. The Bank
of New York serves as the Funds transfer agent pursuant to a Transfer Agency
Agreement. The Bank of New York may be reimbursed by the Fund for its
out-of-pocket expenses. In addition, The Bank of New York provides various
accounting services to the Fund pursuant to a fund accounting agreement.
Van Eck
Securities Corporation (the Distributor) is the principal underwriter and
distributor of Shares. Its principal address is 335 Madison Avenue, New York,
New York 10017 and investor information can be obtained by calling
1-888-MKT-VCTR. The Distributor has entered into an agreement with the Trust
which will continue from its effective date unless terminated by either party
upon 60 days prior written notice to the other party by the Trust and the
Adviser, or by the Distributor, or until termination of the Trust or the Fund
offering its Shares, and which is renewable annually thereafter (the
Distribution Agreement), pursuant to which it distributes Shares. Shares will
be continuously offered for sale by the Trust through the Distributor only in
Creation Units, as described below under Creation and Redemption of Creation
UnitsProcedures for Creation of Creation Units. Shares in less than Creation
Units are not distributed by the Distributor. The Distributor will deliver a
prospectus to persons purchasing Shares in Creation Units and will maintain
records of both orders placed with it and confirmations of acceptance furnished
by it. The Distributor is a broker-dealer registered under the Exchange Act and
a member of the Financial Industry Regulatory Authority (FINRA). The
Distributor has no role in determining the investment policies of the Trust or
which securities are to be purchased or sold by the Trust.
The
Distributor may also enter into sales and investor services agreements with
broker-dealers or other persons that are Participating Parties and DTC
Participants (as defined below) to provide distribution assistance, including
broker-dealer and shareholder support and educational and promotional services
but must pay such broker-dealers or other persons, out of its own assets.
The
Distribution Agreement provides that it may be terminated at any time, without
the payment of any penalty: (i) by vote of a majority of the Independent
Trustees or (ii) by vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Fund, on at least 60 days written notice
to the Distributor. The Distribution Agreement is also terminable upon 60 days
notice by the Distributor and will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
- 20 -
O
ther Accounts
Managed by the Portfolio Managers
Other
Accounts Managed
Accounts
with respect to which the
Name of
Category
of
Number
of
Total
Assets
Number
of
Total
Assets in
Hao-Hung
Registered
investment companies
34
$22.065
0
0
Other
pooled investment vehicles
0
0
0
0
Other
accounts
0
0
0
0
George
Cao
Registered
investment companies
34
$22.065
0
0
Other
pooled investment vehicles
0
0
0
0
Other
accounts
0
0
0
0
P
ortfolio Manager
Compensation
P
ortfolio Manager
Share Ownership
- 21 -
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 seek best execution on
trades effected. Since the investment objective of the Fund is investment
performance that corresponds to that of the Index, the Adviser does not intend
to select brokers and dealers for the purpose of receiving research services in
addition to a favorable price and prompt execution either from that broker or
an unaffiliated third party.
The Adviser
assumes general supervision over placing orders on behalf of the Trust for the
purchase or sale of portfolio securities. If purchases or sales of portfolio
securities of the Trust and one or more other investment companies or clients
supervised by the Adviser are considered at or about the same time,
transactions in such securities are allocated among the several investment
companies and clients in a manner deemed equitable to all by the Adviser. In
some cases, this procedure could have a detrimental effect on the price or
volume of the security so far as the Trust is concerned. However, in other
cases, it is possible that the ability to participate in volume transactions
and to negotiate lower brokerage commissions will be beneficial to the Trust.
The primary consideration is best execution.
Portfolio
turnover may vary from year to year, as well as within a year. High turnover
rates are likely to result in comparatively greater brokerage expenses and
taxable distributions. 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.
- 22 -
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled Shareholder InformationBuying and Selling
Exchange-Traded Shares.
The
Depository Trust Company (DTC) acts as securities depositary for the Shares.
Shares of the Fund are represented by securities registered in the name of DTC
or its nominee and deposited with, or on behalf of, DTC. Certificates will not
be issued for Shares.
Beneficial
ownership of Shares is limited to DTC Participants, Indirect Participants and
persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in Shares (owners of such beneficial
interests are referred to herein as Beneficial Owners) is shown on, and the
transfer of ownership is effected only through, records maintained by DTC (with
respect to DTC Participants) and on the records of DTC Participants (with
respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of Shares.
Conveyance
of all notices, statements and other communications to Beneficial Owners is
effected as follows. Pursuant to the Depositary Agreement between the Trust and
DTC, DTC is required to make available to the Trust upon request and for a fee
to be charged to the Trust a listing of the Shares holdings of each DTC
Participant. The Trust shall inquire of each such DTC Participant as to the
number of Beneficial Owners holding Shares, directly or indirectly, through
such DTC Participant. The Trust shall provide each such DTC Participant with
copies of such notice, statement or other communication, in such form, number
and at such place as such DTC Participant may reasonably request, in order that
such notice, statement or communication may be transmitted by such DTC
Participant, directly or indirectly, to such Beneficial Owners. In addition,
the Trust shall pay to each such DTC Participant a fair and reasonable amount
as reimbursement for the expenses attendant to such transmittal, all subject to
applicable statutory and regulatory requirements.
Share
distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants accounts with
payments in amounts proportionate to their respective beneficial interests in
Shares as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts
of customers in bearer form or registered in a street name, and will be the
responsibility of such DTC Participants.
The Trust
has no responsibility or liability for any aspects of the records relating to
or notices to Beneficial Owners, or payments made on account of beneficial
ownership interests in such Shares, or for
- 23 -
maintaining, supervising or reviewing any records relating to such
beneficial ownership interests or for any other aspect of the relationship
between DTC and the DTC Participants or the relationship between such DTC
Participants and the Indirect Participants and Beneficial Owners owning through
such DTC Participants.
DTC may
determine to discontinue providing its service with respect to the Shares at
any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action either to find a replacement for DTC
to perform its functions at a comparable cost or, if such a replacement is
unavailable, to issue and deliver printed certificates representing ownership
of Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the Exchange.
- 24 -
C
REATION AND
REDEMPTION OF CREATION UNITS
A
Business Day with respect to the Fund is any day on which the NYSE is open
for business. As of the date of the Prospectus, the NYSE observes the following
holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day
(Washingtons Birthday), Good Friday, Memorial Day (observed), Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The
consideration for a purchase of Creation Units generally consists of the
in-kind deposit of a designated portfolio of equity securities (the Deposit
Securities) that comprise the Index and an amount of cash computed as
described below (the Cash Component) or, as permitted or required by the
Fund, of cash. The Cash Component together with the Deposit Securities, as
applicable, are referred to as the Fund Deposit, which represents the minimum
initial and subsequent investment amount for Shares. The Cash Component
represents the difference between the NAV of a Creation Unit and the market
value of Deposit Securities and may include a Dividend Equivalent Payment. The
Dividend Equivalent Payment enables the Fund to make a complete distribution
of dividends on the next dividend payment date, and is an amount equal, on a
per Creation Unit basis, to the dividends on all the securities held by the
Fund (Fund Securities) with ex dividend dates within the accumulation period
for such distribution (the Accumulation Period), net of expenses and liabilities
for such period, as if all of the Fund Securities had been held by the Trust
for the entire Accumulation Period. The Accumulation Period begins on the ex
dividend date for the Fund and ends on the next ex dividend date.
The
Administrator, through the NSCC, makes available on each Business Day,
immediately prior to the opening of business on the Exchange (currently 9:30
a.m. Eastern time), the list of the names and the required number of shares of
each Deposit Security to be included in the current Fund Deposit (based on
information at the end of the previous Business Day) as well as the Cash
Component for the Fund. Such Fund Deposit is applicable, subject to any
adjustments as described below, in order to effect creations of Creation Units
of the Fund until such time as the next-announced Fund Deposit composition is
made available.
The
identity and number of shares of the Deposit Securities required for the Fund
Deposit for the Fund changes as rebalancing adjustments and corporate action
events are reflected from time to time by the Adviser with a view to the
investment objective of the Fund. The composition of the Deposit Securities may
also change in response to adjustments to the weighting or composition of the
securities constituting the Index. In addition, the Trust reserves the right to
accept a basket of securities or cash that differs from Deposit Securities or
to permit or require the substitution of an amount of cash (
i.e.
,
a cash in lieu amount) to be added to the Cash Component to replace any
Deposit Security which may, among other reasons, not be available in sufficient
quantity for delivery, not be permitted to be re-registered in the name of the
Trust as a result of an in-kind creation order pursuant to local law or market
convention or which may not be eligible for transfer through the Clearing
Process (described below), or which may not be eligible for trading by a
Participating Party (defined below). In light of the foregoing, in order to
seek
- 25 -
to replicate the in-kind
creation order process, the Trust expects to purchase the Deposit Securities
represented by the cash in lieu amount in the secondary market (Market
Purchases). In such cases where the Trust makes Market Purchases because a
Deposit Security may not be permitted to be re-registered in the name of the
Trust as a result of an in-kind creation order pursuant to local law or market
convention, or for other reasons, the Authorized Participant will reimburse the
Trust for, among other things, any difference between the market value at which
the securities were purchased by the Trust and the cash in lieu amount (which
amount, at the Advisers discretion, may be capped), applicable registration
fees and taxes. Brokerage commissions incurred in connection with the Trusts
acquisition of Deposit Securities will be at the expense of the Fund and will
affect the value of all Shares of the Fund; but the Adviser may adjust the
transaction fee to the extent the composition of the Deposit Securities changes
or cash in lieu is added to the Cash Component to protect ongoing shareholders.
The adjustments described above will reflect changes, known to the Adviser on
the date of announcement to be in effect by the time of delivery of the Fund
Deposit, in the composition of the Index or resulting from stock splits and
other corporate actions.
In
addition to the list of names and numbers of securities constituting the
current Deposit Securities of the Fund Deposit, the Administrator, through the
NSCC, also makes available (i) on each Business Day, the Dividend Equivalent
Payment, if any, and the estimated Cash Component effective through and
including the previous Business Day, per outstanding Shares of the Fund, and
(ii) on a continuous basis throughout the day, the Indicative Per Share
Portfolio Value.
P
rocedures for Creation of Creation Units
All
orders to create Creation Units must be placed in multiples of 50,000 Shares
(i.e., a Creation Unit). All orders to create Creation Units, whether through
the Clearing Process or outside the Clearing Process, must be received by the
Distributor no later than the closing time of the regular trading session on
NYSE Arca (Closing Time) (ordinarily 4:00 p.m. Eastern time) on the date such
order is placed in order for creation of Creation Units to be effected based on
the NAV of the Fund as determined on such date. A Custom Order may be placed
by an Authorized Participant in the event that the Trust permits or requires
the substitution of an amount of cash to be added to the Cash Component to
replace any Deposit Security which may not be available in sufficient quantity
for delivery or which may not be eligible for trading by such Authorized
Participant or the investor for which it is acting, or other relevant reason.
The Business Day on which a creation order (or order to redeem as discussed
below) is placed is herein referred to as the Transmittal Date. Orders must
be transmitted by telephone or other transmission method acceptable to the
Distributor pursuant to procedures set forth in the Participant Agreement, as
described below (see Placement of Creation Orders Using Clearing Process).
Severe economic or market disruptions or changes, or telephone or other
communication failure, may impede the ability to reach the Distributor, a
Participating Party or a DTC Participant.
- 26 -
Orders
to create Creation Units of the Fund shall be placed with a Participating Party
or DTC Participant, as applicable, in the form required by such Participating
Party or DTC Participant. Investors should be aware that their particular
broker may not have executed a Participant Agreement, and that, therefore,
orders to create Creation Units of the Fund may have to be placed by the
investors broker through a Participating Party or a DTC Participant who has
executed a Participant Agreement. At any given time there may be only a limited
number of broker dealers that have executed a Participant Agreement. Those
placing orders to create Creation Units of the Fund through the Clearing
Process should afford sufficient time to permit proper submission of the order
to the Distributor prior to the Closing Time on the Transmittal Date.
Orders
for creation that are effected outside the Clearing Process are likely to
require transmittal by the DTC Participant earlier on the Transmittal Date than
orders effected using the Clearing Process. Those persons placing orders
outside the Clearing Process should ascertain the deadlines applicable to DTC
and the Federal Reserve Bank wire system by contacting the operations
department of the broker or depository institution effectuating such transfer
of Deposit Securities and Cash Component.
P
lacement of Creation Orders Using Clearing Process
The
Participant Agreement authorizes the Distributor to transmit to NSCC on behalf
of the Participating Party such trade instructions as are necessary to effect
the Participating Partys creation order. Pursuant to such trade instructions
from the Distributor to NSCC, the Participating Party agrees to transfer the
requisite Deposit Securities (or contracts to purchase such Deposit Securities
that are expected to be delivered in a regular way manner by the third (3rd)
Business Day) and the Cash Component to the Trust, together with such
additional information as may be required by the Distributor. An order to
create Creation Units of the Fund through the Clearing Process is deemed
received by the Distributor on the Transmittal Date if (i) such order is
received by the Distributor not later than the Closing Time on such Transmittal
Date and (ii) all other procedures set forth in the Participant Agreement
are properly followed.
P
lacement of Creation Orders Outside Clearing Process
- 27 -
to the number of Deposit
Securities to be delivered, and the validity, form and eligibility (including
time of receipt) for the deposit of any tendered securities, will be determined
by the Trust, whose determination shall be final and binding. The cash equal to
the Cash Component must be transferred directly to the Distributor through the
Federal Reserve wire system in a timely manner so as to be received by the
Distributor no later than 2:00 p.m. Eastern time, on the next Business Day
immediately following the Transmittal Date. An order to create Creation Units
of the Fund outside the Clearing Process is deemed received by the Distributor
on the Transmittal Date if (i) such order is received by the Distributor
not later than the Closing Time on such Transmittal Date; and (ii) all
other procedures set forth in the Participant Agreement are properly followed.
However, if the Distributor does not receive both the requisite Deposit
Securities and the Cash Component in a timely fashion on the next Business Day
immediately following the Transmittal Date, such order will be cancelled. Upon
written notice to the Distributor, such cancelled order may be resubmitted the
following Business Day using the Fund Deposit as newly constituted to reflect
the current NAV of the Fund. The delivery of Creation Units so created will
occur no later than the third (3rd) Business Day following the day on which the
creation order is deemed received by the Distributor.
Additional
transaction fees may be imposed with respect to transactions effected outside
the Clearing Process (through a DTC participant) and in circumstances in which
any cash can be used in lieu of Deposit Securities to create Creation Units.
(See Creation Transaction Fee section below.)
A
cceptance of Creation Orders
All
questions as to the number of shares of each security in the Deposit Securities
and the validity, form, eligibility and acceptance for deposit of any
securities to be delivered shall be determined by the Trust, and the Trusts
determination shall be final and binding.
- 28 -
times the basic creation
transaction fee will be imposed. In the case of cash creations or where the
Trust permits or requires a creator to substitute cash in lieu of depositing a
portion of the Deposit Securities, the creator may be assessed an additional
variable charge to compensate the Fund for the costs associated with purchasing
the applicable securities. (See Fund Deposit section above.) As a result, in
order to seek to replicate the in-kind creation order process, the Trust
expects to purchase, in the secondary market or otherwise gain exposure to, the
portfolio securities that could have been delivered as a result of an in-kind
creation order pursuant to local law or market convention, or for other reasons
(Market Purchases). In such cases where the Trust makes Market Purchases, the
Authorized Participant will reimburse the Trust for, among other things, any
difference between the market value at which the securities and/or financial
instruments were purchased by the Trust and the cash in lieu amount (which
amount, at the Advisers discretion, may be capped), applicable registration
fees, brokerage commissions and certain taxes. The Adviser may adjust the
transaction fee to the extent the composition of the creation securities
changes or cash in lieu is added to the Cash Component to protect ongoing
shareholders. Creators of Creation Units are responsible for the costs of
transferring the securities constituting the Deposit Securities to the account
of the Trust.
Shares
may be redeemed only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by the Distributor, only on a
Business Day and only through a Participating Party or DTC Participant who has
executed a Participant Agreement.
The Trust will not redeem Shares in amounts less than
Creation Units
. Beneficial Owners also may sell Shares in the
secondary market, but must accumulate enough Shares to constitute a Creation
Unit in order to have such Shares redeemed by the Trust. There can be no
assurance, however, that there will be sufficient liquidity in the public
trading market at any time to permit assembly of a Creation Unit. Investors
should expect to incur brokerage and other costs in connection with assembling
a sufficient number of Shares to constitute a redeemable Creation Unit. See the
section entitled Summary InformationPrincipal Risks of Investing in the Fund
and Additional Information About the Funds Investment Strategies and
RisksRisks of Investing in the Fund in the Prospectus.
The
Administrator, through NSCC, makes available immediately prior to the opening
of business on the Exchange (currently 9:30 a.m. Eastern time) on each day that
the Exchange is open for business, the Fund Securities that will be applicable
(subject to possible amendment or correction) to redemption requests received
in proper form (as defined below) on that day. Unless cash redemptions are
permitted or required for the Fund, the redemption proceeds for a Creation Unit
generally consist of Fund Securities as announced by the Administrator on the
Business Day of the request for redemption, plus cash in an amount equal to the
difference between the NAV of the Shares being redeemed, as next determined
after a receipt of a request in proper form, and the value of the Fund
Securities, less the redemption transaction fee and variable fees described
below. Should the Fund Securities have a value greater than the NAV of the
Shares being redeemed, a compensating cash payment to the Trust equal to the
differential plus the applicable redemption transaction fee will be required to
be arranged for by or on behalf of the redeeming shareholder. The Fund reserves
the right to honor a redemption request by delivering a basket of securities or
cash that differs from the Fund Securities.
- 29 -
for the costs associated with
selling the applicable securities. As a result, in order to seek to replicate
the in-kind redemption order process, the Trust expects to sell, in the
secondary market, the portfolio securities or settle any financial instruments
that may not be permitted to be re-registered in the name of the Participating
Party as a result of an in-kind redemption order pursuant to local law or
market convention, or for other reasons (Market Sales). In such cases where
the Trust makes Market Sales, the Authorized Participant will reimburse the
Trust for, among other things, any difference between the market value at which
the securities and/or financial instruments were sold or settled by the Trust
and the cash in lieu amount (which amount, at the Advisers discretion, may be
capped), applicable registration fees, brokerage commissions and certain taxes
(Transaction Costs). The Adviser may adjust the transaction fee to the extent
the composition of the redemption securities changes or cash in lieu is added
to the Cash Component to protect ongoing shareholders. In no event will fees
charged by the Fund in connection with a redemption exceed 2% of the value of
each Creation Unit. Investors who use the services of a broker or other such
intermediary may be charged a fee for such services. To the extent the Fund
cannot recoup the amount of Transaction Costs incurred in connection with a
redemption from the redeeming shareholder because of the 2% cap or otherwise,
those Transaction Costs will be borne by the Funds remaining shareholders and
negatively affect the Funds performance.
P
lacement of Redemption Orders Using Clearing Process
P
lacement of Redemption Orders Outside Clearing Process
After
the Administrator has deemed an order for redemption outside the Clearing
Process received, the Administrator will initiate procedures to transfer the
requisite Fund Securities (or contracts to purchase such Fund Securities) which
are expected to be delivered within three Business Days and the cash redemption
payment to the redeeming Beneficial Owner by the third Business Day following
the Transmittal Date on which such redemption order is deemed received by the
Administrator. An
- 30 -
additional variable redemption
transaction fee of up to four times the basic transaction fee is applicable to
redemptions outside the Clearing Process.
Deliveries
of redemption proceeds generally will be made within three business days. The
right of redemption may be suspended or the date of payment postponed
(1) for any period during which the NYSE is closed (other than customary
weekend and holiday closings); (2) for any period during which trading on
the NYSE is suspended or restricted; (3) for any period during which an
emergency exists as a result of which disposal of the Shares of the Fund or
determination of its NAV is not reasonably practicable; or (4) in such
other circumstance as is permitted by the SEC.
- 31 -
D
ETERMINATION OF
NET ASSET VALUE
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled Shareholder InformationDetermination of
NAV.
The
NAV per Share for the Fund is computed by dividing the value of the net assets
of the Fund (
i.e.
, the value of its total assets less total liabilities)
by the total number of Shares outstanding. Expenses and fees, including the
management fee, are accrued daily and taken into account for purposes of
determining NAV. The NAV of the Fund is determined each business day as of the
close of trading (ordinarily 4:00 p.m., Eastern time) on the NYSE.
The
values of the Funds portfolio securities are based on the securities closing
prices on their local principal markets, where available. In the absence of a
last reported sales price, or if no sales were reported, and for other assets
for which market quotes are not readily available, values may be based on
quotes obtained from a quotation reporting system, established market makers or
by an outside independent pricing service. Prices obtained by an outside
independent pricing service use information provided by market makers or
estimates of market values obtained from yield data related to investments or
securities with similar characteristics and may use a computerized grid matrix
of securities and its evaluations in determining what it believes is the fair
value of the portfolio securities. If a market quotation for a security is not
readily available or the Adviser believes it does not otherwise accurately
reflect the market value of the security at the time the Fund calculates its
NAV, the security will be fair valued by the Adviser in accordance with the
Trusts valuation policies and procedures approved by the Board of Trustees.
The Fund may also use fair value pricing in a variety of circumstances,
including but not limited to, situations where the value of a security in the
Funds portfolio has been materially affected by events occurring after the
close of the market on which the security is principally traded (such as a
corporate action or other news that may materially affect the price of a
security) or trading in a security has been suspended or halted. In addition,
the Fund currently expects that it will fair value certain of the foreign
equity securities held by the Fund each day the Fund calculates its NAV, except
those securities principally traded on exchanges that close at the same time
the Fund calculates its NAV. Accordingly, the Funds NAV is expected to reflect
certain portfolio securities fair values rather than their market prices at
the time the exchanges on which they principally trade close. Fair value
pricing involves subjective judgments and it is possible that a fair value
determination for a security is materially different than the value that could
be realized upon the sale of the security. In addition, fair value pricing
could result in a difference between the prices used to calculate the Funds
NAV and the prices used by the Index. This may adversely affect the Funds
ability to track the Index. With respect to securities traded in foreign
markets, the value of the Funds portfolio securities may change on days when
you will not be able to purchase or sell your Shares.
- 32 -
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled Shareholder InformationDistributions.
Dividends
from net investment income, if any, are declared and paid at least monthly by
the Fund. Distributions of net realized capital gains, if any, generally are
declared and paid once a year, but the Trust may make distributions on a more
frequent basis for the Fund to improve its Index tracking or to comply with the
distribution requirements of the Internal Revenue Code, in all events in a
manner consistent with the provisions of the 1940 Act. It is currently expected that the Fund will distribute virtually all of its net income (interest less expenses) monthly while capital gains distributions will generally occur annually in December. In addition, the Trust
may distribute at least annually amounts representing the full dividend yield
on the underlying portfolio securities of the Fund, net of expenses of the Fund,
as if the Fund owned such underlying portfolio securities for the entire
dividend period in which case some portion of each distribution may result in
a return of capital for tax purposes for certain shareholders.
Dividends
and other distributions on Shares are distributed, as described below, on a pro
rata basis to Beneficial Owners of such Shares. Dividend payments are made
through DTC Participants and Indirect Participants to Beneficial Owners then of
record with proceeds received from the Trust. The Trust makes additional
distributions to the minimum extent necessary (i) to distribute the entire
annual taxable income of the Trust, plus any net capital gains and (ii) to
avoid imposition of the excise tax imposed by Section 4982 of the Internal
Revenue Code. Management of the Trust reserves the right to declare special
dividends if, in its reasonable discretion, such action is necessary or
advisable to preserve the status of the Fund as a regulated investment company
(RIC) or to avoid imposition of income or excise taxes on undistributed
income.
D
IVIDEND
REINVESTMENT SERVICE
No
reinvestment service is provided by the Trust. Broker-dealers may make
available the DTC book-entry Dividend Reinvestment Service for use by
Beneficial Owners of the Fund through DTC Participants for reinvestment of
their dividend distributions. If this service is used, dividend distributions
of both income and realized gains will be automatically reinvested in
additional whole Shares of the Fund. Beneficial Owners should contact their
broker to determine the availability and costs of the service and the details
of participation therein. Brokers may require Beneficial Owners to adhere to
specific procedures and timetables.
C
ONTROL PERSONS
AND PRINCIPAL SHAREHOLDERS
As
of the date of this SAI, no entity beneficially owned any voting securities of
the Fund.
- 33 -
The
Fund intends to qualify for and to elect treatment as a RIC under Subchapter M
of the Internal Revenue Code. As a RIC, the Fund will not be
subject to U.S. federal income tax on the portion of its taxable investment
income and capital gains that it distributes to its shareholders. To qualify for treatment as a RIC, a company
must annually distribute at least 90% of its net investment company taxable
income (which includes dividends, interest and net short-term capital gains)
and meet several other requirements relating to the nature of its income and
the diversification of its assets, among others. If the Fund fails to
qualify for any taxable year as a RIC, all of its taxable income will be
subject to tax at regular corporate income tax rates without any deduction for
distributions to shareholders, and such distributions generally will be taxable
to shareholders as ordinary dividends to the extent of the Funds current and
accumulated earnings and profits.
As
a result of U.S. federal income tax requirements, the Trust on behalf of the
Fund, has the right to reject an order for a creation of Shares if the creator
(or group of creators) would, upon obtaining the Shares so ordered, own 80% or
more of the outstanding Shares of the Fund and if, pursuant to Section 351
of the Internal Revenue Code, the Fund would have a basis in the Deposit
Securities different from the market value of such securities on the date of
deposit. The Trust also has the right to require information necessary to
determine beneficial share ownership for purposes of the 80% determination. See
Creation and Redemption of Creation UnitsProcedures for Creation of Creation
Units.
Dividends
and interest received by the Fund from a non-U.S. investment may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. If more than 50% of the Funds total assets at the end of its taxable
year consist of foreign stock or securities, the Fund may elect to pass
through to its investors certain foreign income taxes paid by the Fund, with
the result that each investor will (i) include in gross income, as an
additional dividend, even though not actually received, the investors pro rata
share of the Funds foreign income taxes, and (ii) either deduct (in
calculating U.S. taxable income) or credit (in calculating U.S. federal
income), subject to certain limitations, the investors pro rata share of the
Funds foreign income taxes.
The
Fund will report to shareholders annually the amounts of dividends received
from ordinary income, the amount of distributions received from capital gains
and the portion of dividends, if any, which may qualify for the dividends
received deduction. For taxable years beginning before January 1, 2013, certain
ordinary dividends paid to non-corporate shareholders may qualify for taxation
at a lower tax rate applicable to long-term capital gains provided holding
period and other requirements are met at both the shareholder and Fund levels.
In
general, a sale of Shares results in capital gain or loss, and for individual
shareholders, is taxable at a federal rate dependent upon the length of time
the Shares were held. A redemption of a shareholders Fund Shares is normally
treated as a sale for tax purposes. Fund Shares held for a period of
- 34 -
one
year or less at the time of such sale or redemption will, for tax purposes,
generally result in short-term capital gains or losses, and those held for more
than one year will generally result in long-term capital gains or losses. Under
current law, the maximum tax rate on long-term capital gains available to
non-corporate shareholders generally is 15%. Without future congressional
action, the maximum tax rate on long-term capital gains will return to 20% for
taxable years beginning on or after January 1, 2013.
Special
tax rules may change the normal treatment of gains and losses recognized by the
Fund if the Fund makes certain investments such as investments in structured
notes, swaps, options, futures transactions, and non-U.S. corporations
classified as passive foreign investment companies. Those special tax rules
can, among other things, affect the treatment of capital gain or loss as
long-term or short-term and may result in ordinary income or loss rather than
capital gain or loss and may accelerate when the Fund has to take these items
into account for U.S. federal income tax purposes.
A
loss realized on a sale or exchange of Shares of the Fund may be disallowed if
other Fund Shares or substantially identical shares are acquired (whether
through the automatic reinvestment of dividends or otherwise) within a
sixty-one (61) day period beginning thirty (30) days before and
ending thirty (30) days after the date that the Shares are disposed of. In
such a case, the basis of the Shares acquired will be adjusted to reflect the
disallowed loss. Any loss upon the sale or exchange of Shares held for six
(6) months or less will be treated as long-term capital loss to the extent
of any capital gain dividends received by the shareholders. Distribution of
ordinary income and capital gains may also be subject to foreign, state and
local taxes.
The
Fund may make investments in which it recognizes income or gain prior to
receiving cash with respect to such investment. For example, under certain tax
rules, the Fund may be required to accrue a portion of any discount at which
certain securities are purchased as income each year even though the Fund
receives no payments in cash on the security during the year. To the extent
that the Fund makes such investments, it generally would be required to pay out
such income or gain as a distribution in each year to avoid taxation at the
Fund level.
Distributions
reinvested in additional Fund Shares through the means of the service (see
Dividend Reinvestment Service) will nevertheless be taxable dividends to
Beneficial Owners acquiring such additional Shares to the same extent as if
such dividends had been received in cash.
- 35 -
Some
shareholders may be subject to a withholding tax on distributions of ordinary
income, capital gains and any cash received on redemption of Creation Units
(backup withholding). The backup withholding rate for individuals is
currently 28% and is currently scheduled to increase to 31% in 2013. Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Funds
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld will be allowed as a
credit against shareholders U.S. federal income tax liabilities, and may
entitle them to a refund,
provided
that the required information is timely furnished to the Internal Revenue
Service.
The
foregoing discussion is a summary only and is not intended as a substitute for
careful tax planning. Purchasers of Shares of the Trust should consult their
own tax advisers as to the tax consequences of investing in such Shares,
including under state, local and other tax laws. Finally, the foregoing
discussion is based on applicable provisions of the Internal Revenue Code,
regulations, judicial authority and administrative interpretations in effect on
the date hereof. Changes in applicable authority could materially affect the
conclusions discussed above, and such changes often occur.
Under
promulgated Treasury regulations, if a shareholder recognizes a loss on
disposition of the Funds Shares of $2 million or more in any one taxable year
(or $4 million or more over a period of six taxable years) for an individual
shareholder or $10 million or more in any taxable year (or $20 million or more
over a period of six taxable years) for a corporate shareholder, the
shareholder must file with the IRS a disclosure statement on Form 8886. Direct
shareholders of portfolio securities are in many cases excepted from this
reporting requirement, but under current guidance, shareholders of a RIC that
engaged in a reportable transaction are not excepted. Future guidance may
extend the current exception from this reporting requirement to shareholders of
most or all RICs. In addition, significant penalties may be imposed for the
failure to comply with the reporting requirements. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayers treatment of the loss is proper. Shareholders should
consult their tax advisors to determine the applicability of these regulations
in light of their individual circumstances.
C
APITAL STOCK AND
SHAREHOLDER REPORTS
Each
Share issued by the Trust has a pro rata interest in the assets of the Fund.
Shares have no pre-emptive, exchange, subscription or conversion rights and are
freely transferable. Each Share is entitled to participate equally in dividends
and distributions declared by the Board with respect to the Fund, and in the
net distributable assets of the Fund on liquidation.
- 36 -
Each
Share has one vote with respect to matters upon which a shareholder vote is
required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder and each fractional Share has a proportional fractional
vote. Shares of all funds vote together as a single class except that if the
matter being voted on affects only a particular fund it will be voted on only
by that fund, and if a matter affects a particular fund differently from other
funds, that fund will vote separately on such matter. Under Delaware law, the
Trust is not required to hold an annual meeting of shareholders unless required
to do so under the 1940 Act. The policy of the Trust is not to hold an annual
meeting of shareholders unless required to do so under the 1940 Act. All Shares
of the Trust have noncumulative voting rights for the election of Trustees.
Under Delaware law, Trustees of the Trust may be removed by vote of the
shareholders.
Under
Delaware law, shareholders of a statutory trust may have similar limitations on
liability as shareholders of a corporation.
The
Trust will issue through DTC Participants to its shareholders semi-annual
reports containing unaudited financial statements and annual reports containing
financial statements audited by an independent auditor approved by the Trusts
Trustees and by the shareholders when meetings are held and such other
information as may be required by applicable laws, rules and regulations.
Beneficial Owners also receive annually notification as to the tax status of
the Trusts distributions.
Shareholder
inquiries may be made by writing to the Trust, c/o Van Eck Associates
Corporation, 335 Madison Avenue, 19th Floor, New York, New York 10017.
C
OUNSEL AND
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Dechert
LLP, 1095 Avenue of the Americas, New York, New York 10036, is counsel to the
Trust and has passed upon the validity of the Funds Shares.
- 37 -
L
ICENSE AGREEMENT
AND DISCLAIMERS
The
Fund is not issued, sponsored, endorsed or advised by Wells Fargo &
Company, Wells Fargo Securities, LLC or their subsidiaries and affiliates
(collectively, Wells Fargo). Wells Fargo makes no representation or warranty,
express or implied, to the Funds investors or any member of the public
regarding the advisability of investing in securities generally or in the Fund
particularly or the ability of any data supplied by Wells Fargo or the Index to
track financial instruments comprising the Index or any trading market. Wells
Fargos only relationship to the Adviser is the licensing of certain trademarks
and trade names of Wells Fargo and of the data supplied by Wells Fargo that is
determined, composed and calculated by Wells Fargo or a third party index
calculator, without regard to the Fund or its shareholders. Wells Fargo has no
obligation to take the needs of the Fund or the Funds shareholders into
consideration when determining, composing or calculating the data. Wells Fargo
has no obligation or liability in connection with the administration, marketing
or trading of the Fund.
WELLS
FARGO DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF ANY INDEX DATA
OR OTHER INFORMATION OR DATA SUPPLIED BY IT OR ANY DATA INCLUDED THEREIN. WELLS
FARGO MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY
THE ADVISER AND THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
INDEX AND OTHER DATA SUPPLIED BY WELLS FARGO OR ANY DATA INCLUDED THEREIN.
WELLS FARGO MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE INDEX OR OTHER DATA SUPPLIED BY WELLS FARGO OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL WELLS FARGO
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES.
NYSE
ARCA IS NOT AFFILIATED WITH THE ADVISER OR WELLS FARGO AND DOES NOT APPROVE,
ENDORSE, REVIEW OR RECOMMEND WELLS FARGO, VAN ECK OR THE FUND.
- 38 -
A
PPENDIX A
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:
1.
Strict adherence to the
Glass Lewis guidelines, or
2.
The potential conflict will
be disclosed to the client:
a.
with a request that the
client vote the proxy,
b.
with a recommendation that
the client engage another party to determine how the proxy should be voted or
c.
if the foregoing are not
acceptable to the client, disclosure of how Van Eck intends to vote and a
written consent to that vote by the client.
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
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 Advisers products and services solicits proxies; a broker-dealer or
insurance company that controls 5% or more of the Advisers assets solicits
proxies; the Adviser serves as an investment adviser to the pension or other
investment account of
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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:
1.
Notification of Availability
of Information
a.
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.
2.
Availability of Proxy Voting
Information
a.
At the clients request or
if the information is not available on the Advisers website, a hard copy of
the accounts proxy votes will be mailed to each client.
Recordkeeping
Requirements
1.
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:
a.
proxy
statements received;
b.
identifying
number for the portfolio security;
c.
shareholder
meeting date;
d.
brief
identification of the matter voted on;
e.
whether
the vote was cast on the matter;
f.
how
the vote was cast (e.g., for or against proposal, or abstain; for or withhold
regarding election of directors);
g.
records
of written client requests for information on how the Adviser voted proxies
on behalf of the client;
h.
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.
2.
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.
3.
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
clients best interest.
4.
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 Advisers proxy voting
responsibilities and its fiduciary duty with respect to its clients. The
Adviser will review any material amendments to the Guidelines.
While
it is the Advisers 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.
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PROXY PAPER GUIDELINES
2012 PROXY SEASON
A N O V E R V I E W O F
T H E G L A S S L E W I S A P P R O A C H T O
P R O X Y A D V I C E
U
N I T E D
S
T A T E S
C
ONTENTS
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and 20-50% Beneficial Owners
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Additional Scrutiny for Companies
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V.
Compensation, Environmental, Social and Governance Shareholder Initiatives
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Copyright 2011 Glass, Lewis
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Co., llc
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.
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
directors 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.
We look at each director nominee to examine the directors relationships
with the company, the companys executives, and other directors. We do this to
evaluate whether personal, familial, or financial relationships (not including
director compensation) may impact the directors decisions. We believe that
such relationships make it difficult for a director to put shareholders
interests above the directors or the related partys 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.
Thus, we put directors into three categories based on an examination of
the type of relationship they have with the company:
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.
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.
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.
Copyright 2011 Glass, Lewis
&
Co., llc
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 companys voting stock as an
affiliate.
4
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.
Definition
of
Material
: A
material relationship is one in which the dollar value exceeds:
$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
$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 directors
firm; or
1% of
either companys 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).
Definition
of
Familial
: Familial
relationships include a persons spouse, parents, children, siblings,
grandparents, uncles, aunts, cousins, nieces, nephews, in-laws, and anyone
(other than domestic employees) who shares such persons 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.
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.
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
2 If a company classifies one of
its non-employee directors as non-independent, Glass Lewis will classify that
director as an affiliate.
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.
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 investment firm has
disproportionate board representation or (ii) the director serves on the
audit committee.
5 We will generally take into
consideration the size and nature of such charitable entities in relation to
the companys size and industry along with any other relevant factors such as
the directors 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.
Copyright 2011 Glass, Lewis
&
Co., llc
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
directors own best interests. Therefore, we will recommend voting against
such a director.
Voting Recommendations on the Basis of
Board Independence
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.
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
chairmans presence.
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.
Committee Independence
We believe that only independent directors should serve on a
companys audit, compensation, nominating, and governance committees.
7
We typically 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.
Independent Chairman
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.
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.
A CEO should set the strategic course for the company, with the
boards approval, and the board should enable the CEO to carry out the CEOs
vision for accomplishing the boards objectives.
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.
7 We will recommend voting against
an audit committee member who owns 20% or more of the companys 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 companys stock on the compensation, nominating, and governance
committees.
Copyright 2011 Glass, Lewis
&
Co., llc
Failure to achieve the boards objectives should lead the board to
replace that CEO with someone in whom the board has confidence.
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.
Further, it is the boards 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.
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 directionone 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
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.
The most crucial test of a boards 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.
Voting Recommendations on the Basis of
Performance
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:
1.
A director who fails to attend a minimum of 75% of board and
applicable committee meetings, calculated in the aggregate.
10
2.
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 directors fault (we
look at these late filing situations on a case-by-case basis).
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).
9 Spencer Stuart Board Index,
2011, p. 6.
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 or
other extenuating circumstances.
Copyright 2011 Glass, Lewis
&
Co., llc
3.
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.
4.
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).
5.
All directors who served on the board if, for the last three years,
the companys performance has been in the bottom quartile of the sector and
the directors have not taken reasonable steps to address the poor
performance.
Audit Committees and Performance
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.
11
When assessing an audit committees 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:
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 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.
Standards For Assessing The Audit Committee
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
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
11 Audit Committee Effectiveness
- What Works Best. PricewaterhouseCoopers. The Institute of Internal
Auditors Research Foundation. 2005.
12 Commission on Public Trust and
Private Enterprise. The Conference Board. 2003.
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is
lacking, we are more likely to vote against committee members when a problem
such as a restatement occurs and such expertise is lacking.
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.
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
1.
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.
2.
The
audit committee chair, if the audit committee does not have a financial
expert or the committees financial expert does not have a demonstrable
financial background sufficient to understand the financial issues unique to
public companies.
3.
The
audit committee chair, if the audit committee did not meet at least four
times during the year.
4.
The
audit committee chair, if the committee has less than three members.
5.
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 members attendance at all board and committee
meetings.
14
6.
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.
7.
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).
8.
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).
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.
14 Glass Lewis may exempt certain
audit committee members from the above threshold if, upon further analysis of
relevant factors such as the directors experience, the size, industry-mix
and location of the companies involved and the directors 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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9.
All
members of an audit committee that reappointed an auditor that we no longer
consider to be independent for reasons unrelated to fee proportions.
10.
All
members of an audit committee when audit fees are excessively low, especially
when compared with other companies in the same industry.
11.
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.
12.
All
members of an audit committee where the auditor has resigned and reported
that a section 10A
16
letter has been issued.
13.
All
members of an audit committee at a time when material accounting fraud
occurred at the company.
17
14.
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:
The
restatement involves fraud or manipulation by insiders;
The
restatement is accompanied by an SEC inquiry or investigation;
The
restatement involves revenue recognition;
The
restatement results in a greater than 5% adjustment to costs of goods sold,
operating expense, or operating cash flows; or
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.
15.
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 five quarters.
16.
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).
17.
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.
18.
All members of the audit
committee when there is a disagreement with the auditor and the auditor
resigns or is dismissed.
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.
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.
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 declinesfacing 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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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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When assessing the performance
of compensation committees, we will recommend voting against for the
following:
19
1.
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
2.
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.
3.
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
4.
All
members of the compensation committee (during the relevant time period) if
the company entered into excessive employment agreements and/or severance
agreements.
5.
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.
6.
All
members of the compensation committee if excessive employee perquisites and
benefits were allowed.
7.
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).
8.
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.
9.
All
members of the compensation committee when vesting of in-the-money options is
accelerated or when fully vested options are granted.
10.
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.
11.
All
members of the compensation committee when option exercise prices were
spring-loaded or otherwise timed around the release of material information.
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 committee chair.
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.
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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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
committee.
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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1.
All
members of the governance committee
24
during
whose tenure the 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.
2.
The
governance committee chair,
26
when
the chairman is not independent and an independent lead or presiding director
has not been appointed.
27
3.
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.
4.
The
governance committee chair, when the committee fails to meet at all during
the year.
5.
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).
6.
The
governance committee chair, when during the past year the board 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.
Regarding
the nominating committee, we will recommend voting against the following:
29
1.
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.
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.
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.
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.
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. 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 shareholders legal remedy regarding appropriate choice
of venue and related relief offered under that states laws and rulings.
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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2.
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).
3.
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
4.
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
5.
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
Board-level Risk Management Oversight
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 firms 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.
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
organizations 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 boards
role in the oversight of risk.
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 companys 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
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.
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.
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.
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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company maintains a significant level of financial risk exposure but
fails to disclose any explicit form of board-level risk oversight (committee
or 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.
We find that a directors 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.
Voting Recommendations on the Basis of Director Experience
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
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.
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.
Conflicts of
Interest
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:
1.
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.
2.
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
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 companys board structure and method of
disclosure. At some companies, the entire board is charged with risk
management.
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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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.
37 Spencer
Stuart Board Index, 2011, p. 8.
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.
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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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
Controlled companies present an exception to
our independence recommendations. The boards 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.
Independence
Exceptions
The
independence exceptions that we make for controlled companies are as follows:
1.
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.
2.
The compensation committee and nominating and governance committees
do not need to consist solely of independent directors.
a.
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 companys shareholder base makes such committees weak and
irrelevant.
b.
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 companys 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.
3.
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 boards duties, controlled companies serve a unique
shareholder population whose voting power ensures the protection of its interests.
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 youve got a 20 or 30 person corporate board, its one way of
assuring that nothing is ever going to happen that the CEO doesnt want to
happen.
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Size of the Board of Directors
We have no board size requirements for controlled companies.
Audit Committee Independence
We believe that audit committees should consist solely of independent
directors. Regardless of a companys controlled status, the interests of all
shareholders must be protected by ensuring the integrity and accuracy of the
companys financial statements. Allowing affiliated directors to oversee the
preparation of financial reports could create an insurmountable conflict of
interest.
U
nofficially Controlled Companies and 20-50% Beneficial Owners
Where an individual or entity owns more than
50% of a companys 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 companys 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 entitys percentage of ownership.
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 companys IPO is sufficient time for most companies to
comply with all relevant regulatory re-quirements 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.
However, two specific cases warrant strong
shareholder action against the board of a company that completed an IPO within
the past year:
1.
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 pills 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
pills adoption. Such instances are indicative of boards that may subvert
shareholders best interests following their IPO.
2.
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
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where a
board adopts such a provision for inclusion in a companys charter or bylaws before
the companys 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.
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 funds, or investment companies, are structured differently from
regular public companies (i.e., operating companies). Typically, members of a
funds adviser are on the board and management takes on a different role from
that of regular public companies. 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:
1.
Size of the board of directors
: The
board should be made up of between five and twenty directors.
2.
The CFO
on the board:
Neither the CFO of the fund nor the CFO of the funds
registered investment adviser should serve on the board.
3.
Independence
of the audit committee:
The audit committee should consist solely of
independent directors.
4.
Audit
committee financial expert:
At least one member of the audit committee should
be designated as the audit committee financial expert.
The
following differences from regular public companies apply at mutual funds:
1.
Independence
of the board:
We believe that three-fourths of an investment companys 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.
2.
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.
3.
Non-independent
chairman:
The SEC has proposed that the chairman of the fund board be
independent. We agree that the roles of a mutual funds chairman and CEO
should be separate.
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Although
we believe this would be best at all companies, we recommend voting against
the chairman of an investment companys 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 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)
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 firms 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 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
companys value and the increasing shareholder opposition to such a structure,
Glass Lewis supports the declassification of boards and the annual election of
directors.
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).
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).
Copyright 2011 Glass, Lewis
&
Co., llc
M
ANDATORY 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.
In our view, a directors 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 boards
approach to corporate governance and the boards stewardship of company
performance rather than imposing inflexible rules that dont 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.
R
EQUIRING 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 boards clear choice or that he
or she would be elected. Therefore, Glass Lewis generally will vote against
such proposals.
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.
M
AJORITY 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
Copyright 2011 Glass, Lewis
&
Co., llc
on a company-specific basis.
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.
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.
A
dvantages 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 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
directors 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.
47
Spencer Stuart Board Index, 2011, p. 14
Copyright 2011 Glass, Lewis
&
Co., llc
The auditors 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 companys books to ensure that the information
provided to shareholders is complete, accurate, fair, and that it is a
reasonable representation of a companys financial position. The only way
shareholders can make rational investment decisions is if the market is
equipped with accurate information about a companys 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:
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 skepticism when facing situations that may compromise
their independence.
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 auditors interests and the publics interests. Almost without
exception, shareholders should be able to annually review an auditors
performance and to annually ratify a boards 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 en-sure 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.
V
OTING
R
ECOMMENDATIONS ON
A
UDITOR
R
ATIFICATION
We generally support managements choice of auditor except when we
believe the auditors 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:
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.
Copyright 2011 Glass, Lewis
&
Co., llc
1.
When
audit fees plus audit-related fees total less than the tax fees and/or other
non-audit fees.
2.
Recent
material restatements of annual financial statements, including those
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
3.
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.
4.
When
audit fees are excessively low, especially when compared with other companies
in the same industry.
5.
When the
company has aggressive accounting policies.
6.
When the
company has poor disclosure or lack of transparency in its financial
statements.
7.
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.
8.
We also
look for other relationships or concerns with the auditor that might suggest
a conflict between the auditors interests and shareholder interests.
A pension accounting question often raised in proxy proposals is what
effect, if any, projected returns on employee pension assets should have on a
companys 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 companys 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 companys 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.
Copyright 2011 Glass, Lewis
&
Co., llc
Glass Lewis carefully reviews the compensation awarded to senior
executives, as we believe that this is an important area in which the boards
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.
A
DVISORY 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).
This practice of allowing shareholders a non-binding vote on a companys
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 companys 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 companys 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 companys long-term
shareholder value.
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.
Copyright 2011 Glass, Lewis
&
Co., llc
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 companys 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:
The
overall design and structure of the Companys executive compensation program
including performance metrics;
The
quality and content of the Companys disclosure;
The
quantum paid to executives; and
The link
between compensation and performance as indicated by the Companys current
and past pay-for-performance grades
We also review any significant changes or modifications, and rationale
for such changes, made to the Companys compensation structure or award
amounts, including base salaries.
S
AY-ON-
P
AY
V
OTING
R
ECOMMENDATIONS
In cases
where we find deficiencies in a companys compensation programs 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:
Inappropriate
peer group and/or benchmarking issues
Inadequate
or no rationale for changes to peer groups
Egregious
or excessive bonuses, equity awards or severance payments, including golden
handshakes and golden parachutes
Guaranteed
bonuses
Targeting
overall levels of compensation at higher than median without adequate
justification
Bonus or
long-term plan targets set at less than mean or negative performance levels
Performance
targets not sufficiently challenging, and/or providing for high potential
payouts
Performance
targets lowered, without justification
Discretionary
bonuses paid when short- or long-term incentive plan targets were not met
Executive
pay high relative to peers not justified by outstanding company performance
The
terms of the long-term incentive plans are inappropriate (please see
Long-Term Incentives below)
Copyright 2011 Glass, Lewis
&
Co., llc
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
DDITIONAL
S
CRUTINY FOR
C
OMPANIES WITH
S
IGNIFICANT
O
PPOSITION 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 years 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.
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
Companys 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.
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.
Glass Lewis recognizes the value of equity-based incentive programs.
When used appropriately, they can provide a vehicle for linking an executives
pay to company performance, thereby aligning their
Copyright 2011 Glass, Lewis
&
Co., llc
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:
No
re-testing or lowering of performance conditions
Performance
metrics that cannot be easily manipulated by management
Two or
more performance metrics
At least
one relative performance metric that compares the companys performance to a
relevant peer group or index
Performance
periods of at least three years
Stretching
metrics that incentivize executives to strive for outstanding performance
Individual
limits expressed as a percentage of base salary
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 companys business.
Glass Lewis believes that measuring a companys performance with
multiple metrics serves to provide a more complete picture of the companys
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.
We also believe shareholders should evaluate the relative success of a
companys 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 companys
pay-for-performance grade, see below for more information, and specifically the
proportion of total compensation that is stock-based.
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.
Copyright 2011 Glass, Lewis
&
Co., llc
R
ECOUPMENT
(C
LAWBACK
) P
ROVISIONS
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.
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.
V
OTE ON
G
OLDEN
P
ARACHUTE
A
RRANGEMENTS
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).
E
QUITY-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, repricing history, express or implied rights to reprice, and the
presence of evergreen provisions.
Copyright 2011 Glass, Lewis
&
Co., llc
Our analysis is primarily quantitative and focused on the plans cost as
compared with the businesss 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 companys 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 programs expected annual expense with
the businesss operating metrics to help determine whether the plan is
excessive in light of company performance. We also compare the option plans
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:
1.
Companies
should seek more shares only when needed.
2.
Requested
share amounts should be small enough that companies seek shareholder approval
every three to four years (or more frequently).
3.
If a
plan is relatively expensive, it should not grant options solely to senior
executives and board members.
4.
Annual
net share count and voting power dilution should be limited.
5.
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.
6.
The
expected annual cost of the plan should be proportional to the businesss
value.
7.
The
intrinsic value that option grantees received in the past should be
reasonable compared with the businesss financial results.
8.
Plans
should deliver value on a per-employee basis when compared with programs at
peer companies.
9.
Plans
should not permit re-pricing of stock options.
10.
Plans
should not contain excessively liberal administrative or payment terms.
11.
Selected
performance metrics should be challenging and appropriate, and should be
subject to relative performance measurements.
12.
Stock
grants should be subject to minimum vesting and/or holding periods sufficient
to ensure sustainable performance and promote retention.
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.
Copyright 2011 Glass, Lewis
&
Co., llc
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 options 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 stocks 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:
1.
Officers
and board members cannot participate in the program;
2.
The
stock decline mirrors the market or industry price decline in terms of timing
and approximates the decline in magnitude;
3.
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
4.
Management
and the board make a cogent case for needing to motivate and retain existing
employees, such as being in a competitive employment market.
O
PTION
B
ACKDATING
, S
PRING
-L
OADING, AND
B
ULLET
-D
ODGING
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 options 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 stocks 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
Copyright 2011 Glass, Lewis
&
Co., llc
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 companys 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 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 companys 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.
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 companys 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 companys peers.
The companys 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 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.
51 Lucian
Bebchuk, Yaniv Grinstein and Urs Peyer. LUCKY CEOs. November, 2006.
Copyright 2011 Glass, Lewis
&
Co., llc
D
IRECTOR
C
OMPENSATION
P
LANS
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.
Copyright 2011 Glass, Lewis
&
Co., llc
P
OISON
P
ILLS
(S
HAREHOLDER
R
IGHTS
P
LANS
)
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 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 companys 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 plans
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:
1.
The form
of offer is not required to be an all-cash transaction;
2.
The
offer is not required to remain open for more than 90 business days;
3.
The
offeror is permitted to amend the offer, reduce the offer, or otherwise
change the terms;
4.
There is
no fairness opinion requirement; and
5.
There is
a low to no premium requirement.
Where these requirements are met, we typically feel comfortable that
shareholders will have the opportunity to voice their opinion on any legitimate
offer.
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 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%.
Copyright 2011 Glass, Lewis
&
Co., llc
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, 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 corporations
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 companys outstanding stock, but the
trigger can vary.
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.
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
Copyright 2011 Glass, Lewis
&
Co., llc
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:
1.
Is the board sufficiently independent?
2.
Does the Company have anti-takeover protections such as a poison pill
or classified board in place?
3.
Has the board been previously unresponsive to shareholders (such as
failing to implement a shareholder proposal that received majority
shareholder support)?
4.
Do shareholders have the right to call special meetings of
shareholders?
5.
Are there other material governance issues at the Company?
6.
Has the Companys performance matched or exceeded its peers in the
past one and three years?
7.
How has the Company ranked in Glass Lewis pay-for-performance
analysis during the last three years?
8.
Does the company have an independent chairman?
9.
We note, however, that we will only support shareholder proposals to
change a companys place of incorporation in exceptional circumstances.
Glass Lewis believes that charter or bylaw
provisions limiting a shareholders 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).
Glass Lewis believes that adequate capital
stock is important to a companys operation. When analyzing a request for
additional shares, we typically review four common reasons why a company might
need
Copyright 2011 Glass, Lewis
&
Co., llc
additional capital stock:
1.
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 companys most common trading price over the 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.
2.
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.
3.
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.
4.
Financing for Operations
- We review the companys cash
position and its ability to secure financing through borrowing or other
means. We look at the companys history of capitalization and whether the
company has had to use stock in the recent past as a means of raising
capital.
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.
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.
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.
Copyright 2011 Glass, Lewis
&
Co., llc
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 companys 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 companys 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 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.
S
UPE
RMAJORITY
V
OTE
R
EQUIREMENTS
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
Copyright 2011 Glass, Lewis
&
Co., llc
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.
T
RANSACTION 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.
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.
M
UTUAL FUNDS: INVESTMENT POLICIES AND
ADVISORY AGREEMENTS
Glass Lewis believes that decisions about a
funds structure and/or a funds 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:
The terms of any amended advisory or sub-advisory agreement;
Any changes in the fee structure paid to the investment advisor; and
Any material changes to the funds investment objective or strategy.
We generally support amendments to a
funds 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 funds 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 funds investment
objective or strategy, we believe shareholders are best served when a funds
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 funds 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.
Copyright 2011 Glass, Lewis
&
Co., llc
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 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.
Glass Lewis carefully reviews executive
compensation since we believe that this is an important area in which the
boards 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 companys 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 boards 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.
D
ISCL
OSURE OF
I
NDIVIDUAL
C
OMPENSATION
Glass Lewis believes that disclosure of
information regarding compensation is critical to allowing shareholders to
evaluate the extent to which a companys 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
Copyright 2011 Glass, Lewis
&
Co., llc
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
companys history of aligning executive compensation and the creation of
shareholder value.
L
IN
KING
P
AY WITH
P
ERFORMANCE
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 executives compensation should be
specific to the company and its performance, as well as tied to the executives
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.
R
ETIREM
ENT
B
ENEFITS &
S
EVERANCE
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 boards compensation committee, which
can be held accountable for its decisions through the election of its director
members.
However, when proposals are crafted to only
require approval if the benefit exceeds 2.99 times the amount of the
executives base salary plus bonus, Glass Lewis typically supports such
requests. Above this threshold, based on the executives 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.
B
ONUS
R
ECOUP
MENTS
(C
LAWBACKS
)
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.
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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
boards 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 it is reasonable that a mandatory recoupment policy should
only affect senior executives and those directly responsible for the companys
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.
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.
R
ETEN
TION OF
S
HARES UNTIL
R
ETIREMENT
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 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.
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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.
L
inking Executive Pay to Environmental and Social Criteria
We recognize that a companys involvement in environmentally sensitive
and labor-intensive industries influences the degree to which a firms 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 firms 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 firms 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.
D
eclassification 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.
R
ight 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
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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:
Company
size
Shareholder
base in both percentage of ownership and type of shareholder (e.g., hedge
fund, activist investor, mutual fund, pension fund, etc.)
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
Company
performance and steps taken to improve bad performance (e.g., new executives/
directors, spin-offs, etc.)
Existence
of anti-takeover protections or other entrenchment devices
Opportunities
for shareholder action (e.g., ability to act by written consent)
Existing
ability for shareholders to call a special meeting
R
ight 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:
Company
size
Shareholder
base in both percentage of ownership and type of shareholder (e.g., hedge
fund, activist investor, mutual fund, pension fund, etc.)
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
Company
performance and steps taken to improve bad performance (e.g., new executives/
directors, spin offs, etc.)
Existence
of anti-takeover protections or other entrenchment devices
Opportunities
for shareholder action (e.g., ability and threshold to call a special
meeting)
Existing
ability for shareholders to act by written consent
Glass Lewis believes the selection and screening process for identifying
suitably qualified candidates
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for a companys 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 boards 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 boards lack of diversity lead to a decline in shareholder value.
R
eimbursement 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.
M
ajority 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.
C
umulative 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 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
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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.
S
upermajority 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.
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.
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.
Governments 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 agencys 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 companys
securities continuously for at least three years, the right to nominate up to
25% of a boards directors and have such nominees included on a companys
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 rules 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 SECs
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
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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:
Company
size;
The
shareholder proponent and their reasoning for putting forth the proposal at
the target company;
The
percentage ownership requested and holding period requirement;
Shareholder
base in both percentage of ownership and type of shareholder (e.g., hedge
fund, activist investor, mutual fund, pension fund, etc.);
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;
Company
performance and steps taken to improve bad performance (e.g., new executives/
directors, spin-offs, etc.);
Existence
of anti-takeover protections or other entrenchment devices; and
Opportunities
for shareholder action (e.g., ability to act by written consent or right to
call a special meeting).
There are significant financial, legal and reputational risks to companies
resulting from poor environmental practices or negligent oversight thereof. We
believe part of the boards role is to ensure that management conducts a
complete risk analysis of company operations, including those that have
environmental implications. Directors should monitor managements 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
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spills, contamination, hazardous leakages,
explosions, or 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.
C
limate Change and Green House Gas
Emission Disclosure
Glass Lewis will consider recommending a vote
in favor of a reasonably crafted proposal to disclose a companys 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.
S
ustainability and other
Environmentally-Related Reports
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:
The financial risk to the company from the firms environmental
practices and/or regulation;
The relevant companys current level of disclosure;
The level of sustainability information disclosed by the firms
peers;
The industry in which the firm operates;
The level and type of sustainability concerns/controversies at the
relevant firm, if any;
The time frame within which the relevant report is to be produced;
and
The level of flexibility granted to the board in the implementation
of the proposal.
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
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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.
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 Canadas 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.
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.
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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 financial risk. Where there is
clear evidence of employment practices resulting in negative economic exposure,
Glass Lewis may support shareholder proposals addressing such risks.
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:
1.
Increasing
the representation of individuals from underrepresented religious groups in
the workforce including managerial, supervisory, administrative, clerical and
technical jobs;
2.
Adequate
security for the protection of minority employees both at the workplace and
while traveling to and from work;
3.
The
banning of provocative religious or political emblems from the workplace;
4.
All job
openings should be publicly advertised and special recruitment efforts should
be made to attract applicants from underrepresented religious groups;
5.
Layoff,
recall, and termination procedures should not, in practice, favor particular
religious groupings;
6.
The
abolition of job reservations, apprenticeship restrictions, and differential
employment criteria, which discriminate on the basis of religion or ethnic
origin;
7.
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;
8.
The
establishment of procedures to assess, identify and actively recruit minority
employees with potential for further advancement; and
9.
The
appointment of senior management staff member to oversee the companys
affirmative action efforts and setting up of timetables to carry out
affirmative action principles.
10.
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 companys 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 firms specific record of
labor concerns in Northern Ireland.
Glass Lewis believes explicit policies set out by companies boards of
directors on human rights provides
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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.
M
ilitary 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.
F
oreign 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 firms actions outside its home jurisdiction.
H
ealth 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 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:
Health
care coverage should be universal;
Health
care coverage should be continuous;
Health
care coverage should be affordable to individuals and families;
The
health insurance strategy should be affordable and sustainable for society;
and
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.
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 boards 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
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typically do not support the implementation of national health care
reform principles at the company level.
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.
R
eporting 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 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:
Is the
Companys disclosure comprehensive and readily accessible?
How does
the Companys political expenditure policy and disclosure compare to its
peers?
What is
the Companys current level of oversight?
Glass Lewis will consider supporting a proposal seeking increased
disclosure of corporate political expenditure and contributions if the firms
current disclosure is insufficient, or if the firms 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.
Copyright 2011 Glass, Lewis
&
Co., llc
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 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 boards policies and the degradation of shareholder value.
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.
Copyright 2011 Glass, Lewis
&
Co., llc
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PROXY PAPER GUIDELINES
2012 PROXY SEASON
A N O V E R V I E W O F
T H E G L A S S L E W I S A P P R O A C H T O
I N T E R N A T I O N A L P R O X Y A D V I C E
I
N T E R N A T I O N A L
Contents
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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.
Copyright 2012 Glass, Lewis
&
Co., LLC
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.
When
companies disclose sufficient relevant information, we look at each individual
on the board and examine his or her relationships with the company, the
companys 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 boards 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 companys 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:
A director who attends less than 75% of the board and applicable committee
meetings.
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.
We
also feel that the following conflicts of interest may hinder a directors
performance and will therefore recommend voting against a:
CFO who presently sits on the
board.
Copyright 2012 Glass, Lewis
&
Co., LLC
Director who presently sits on an excessive number of boards.
Director, or a director whose immediate family member, provides material
professional services to the company at any time during the past five years.
Director, or a director whose immediate family member, engages in airplane,
real estate or other similar deals, including perquisite type grants from the
company.
Director with an interlocking directorship.
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.
We
believe that independent directors should serve on a companys audit,
compensation, nominating and governance committees. We will support boards with
such a structure and encourage change where this is not the case.
R
EVIEW 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 companys
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.
Glass
Lewis favors the repeal of staggered boards in favor of the annual election of
directors. 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.
Copyright 2012 Glass, Lewis
&
Co., LLC
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, auditors 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.
I
NCOME 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 companys dividend payout
ratio is exceptionally low or excessively high relative to its peers and the
company has not provided a satisfactory explanation.
A
PPOINTMENT 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 managements 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:
When audit fees added to audit-related fees total less than one-half of total
fees.
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).
When the company has aggressive accounting policies.
When the company has poor disclosure or lack of transparency in financial
statements.
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.
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 statement disclosure or auditing scope or procedures.
Copyright 2012 Glass, Lewis
&
Co., LLC
C
OMPENSATION 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:
Gross disconnect between pay and performance;
Performance goals and metrics are inappropriate or insufficiently
challenging;
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;
Excessive discretion afforded to or exercised by management or the
compensation committee to deviate from defined performance metrics and goals
in making awards;
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;
Guaranteed bonuses are established;
There is no clawback policy; or
Egregious or excessive bonuses, equity awards or severance payments.
Glass
Lewis recognizes the value of equity-based incentive programs. When used
appropriately, they can provide a vehicle for linking an employees pay to a
companys performance, thereby aligning their interests with those of
shareholders. Tying a portion of an employees 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 Companys peers.
Performance-Based Equity
Compensation
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
Copyright 2012 Glass, Lewis
&
Co., LLC
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).
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.
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.
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.
R
etirement Benefits for Directors
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.
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 boards
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 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 executives pay is capped at a low level rather than flexibly tied to the
performance of the company.
Copyright 2012 Glass, Lewis
&
Co., LLC
A
MENDMENTS TO THE ARTICLES OF ASSOCIATION
We will evaluate proposed amendments to a companys 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.
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 companys 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 plans 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.
I
NCREASE IN AUTHORIZED SHARES
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.
Copyright 2012 Glass, Lewis
&
Co., llc
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.
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).
Copyright 2012 Glass, Lewis
&
Co., llc
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 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 companys accounts and reports
and/or; (iii) directors (in egregious cases).
Copyright 2012 Glass, Lewis
&
Co., llc
This document sets
forth the proxy voting policy and guidelines of Glass, Lewis
&
Co., LLC.
The policies included herein have been developed based on Glass Lewis
experience with proxy voting and corporate governance issues and are not
tailored to any specific person. Moreover, these guidelines are not intended to
be exhaustive and do not include all potential voting issues. The information
included herein is reviewed periodically and updated or revised as necessary.
Glass Lewis is not responsible for any actions taken or not taken on the basis
of this information. This document may not be reproduced or distributed in any
manner without the written permission of Glass Lewis.
Copyright © 2011
Glass, Lewis
&
Co., LLC. All Rights Reserved.
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Please direct general inquiries to info@glasslewis.com
PART C: OTHER INFORMATION
Item 28.
Exhibits
:
(a)
Amended and Restated
Declaration of Trust.
(b)
Amended and Restated Bylaws of the Trust.>>>>>
(c)
Not applicable.
(d)(1)
Form of Investment
Management Agreement between the Trust and Van Eck Associates Corporation
(with respect to Market VectorsGold Miners ETF).*
(d)(2)
Form of Investment
Management Agreement between the Trust and Van Eck Associates Corporation
(with respect to all portfolios except for Market VectorsGold Miners
ETF).***
(d)(3)
Form of Investment
Management Agreement between the Trust and Van Eck Associates Corporation
(with respect to certain municipal portfolios). ###
(e)(1)
Form of Distribution
Agreement between the Trust and Van Eck Securities Corporation.**
(e)(2)
Form of Participant
Agreement.*
(f)
Not applicable.
(g)
Form of Custodian
Agreement between the Trust and The Bank of New York.*
(h)(1)
Form of Fund Accounting
Agreement between the Trust and The Bank of New York.*
(h)(2)
Form of Transfer Agency
Services Agreement between the Trust and The Bank of New York.*
(h)(3)
Form of Sub-License
Agreement between the Trust and the Van Eck Associates Corp.*
(i)(1)
Opinion and consent of
Clifford Chance US LLP (with respect to Market VectorsEnvironmental Services
ETF, Market VectorsGold Miners ETF and Market VectorsSteel ETF).***
(i)(2)
Opinion of Clifford Chance
US LLP (with respect to Market VectorsGlobal Alternative Energy ETF and
Market VectorsRussia ETF).****
(i)(3)
Opinion of Clifford Chance
US LLP (with respect to Market VectorsGlobal Agribusiness ETF and Market
VectorsGlobal Nuclear Energy ETF).*****
(i)(4)
Opinion of Clifford Chance
US LLP (with respect to Market VectorsLehman Brothers Intermediate Municipal
ETF, Market VectorsLehman Brothers Long Municipal ETF, Market VectorsLehman
Brothers 1-5 Year Municipal ETF, Market VectorsLehman Brothers
Non-Investment Grade Municipal ETF, Market VectorsLehman Brothers California
Municipal ETF and Market VectorsLehman Brothers New York Municipal
ETF).******
(i)(5)
Opinion of Clifford Chance
US LLP (with respect to Market VectorsCoal ETF and Market VectorsGaming
ETF).
(i)(6)
Opinion of Clifford Chance
US LLP (with respect to Market VectorsLehman Brothers AMT-Free Massachusetts
Municipal Index ETF, Market VectorsLehman Brothers AMT-Free New Jersey
Municipal Index ETF, Market VectorsLehman Brothers AMT-Free Ohio Municipal
Index ETF and Market VectorsLehman Brothers AMT-Free Pennsylvania Municipal
Index ETF).
(i)(7)
Opinion of Clifford Chance
US LLP (with respect to Market VectorsHard Assets ETF and Market
VectorsSolar Energy ETF).
(i)(8)
Opinion and consent of
Clifford Chance US LLP with respect to Market VectorsAfrica Index ETF,
Market VectorsEmerging Eurasia Index ETF, Market VectorsGlobal Frontier
Index ETF and Market VectorsGulf States Index ETF).
(i)(9)
Consent of Clifford Chance
US LLP (with respect to Market VectorsLehman Brothers High-Yield Municipal
Index ETF).
(i)(10)
Opinion and consent of
Clifford Chance US LLP (with respect to Market Vectors Indonesia Index ETF).
(i)(11)
Opinion and consent of
Clifford Chance US LLP (with respect to Market Vectors Vietnam ETF).
(i)(12)
Opinion and consent of
Clifford Chance US LLP (with respect to Market Vectors Pre-Refunded Municipal
Index ETF).
(i)(13)
Opinion and consent of
Dechert LLP (with respect to Market Vectors Egypt Index ETF).^^^^
(i)(14)
Opinion and consent of
Dechert LLP (with respect to Market Vectors Kuwait Index ETF).^^^^
(i)(15)
Opinion and consent of
Dechert LLP (with respect to Market Vectors Latin America Small-Cap Index
ETF). ^^^^^
(i)(16)
Opinion and consent of
Dechert LLP (with respect to Market Vectors China ETF).^
(i)(17)
Opinion and consent of
Clifford Chance US LLP (with respect to Market Vectors Brazil Small-Cap
ETF).
(i)(18)
Opinion and consent of
Dechert LLP (with respect to Market Vectors Junior Gold Miners ETF).^^
(i)(19)
Opinion and consent of
Dechert LLP (with respect to Market Vectors Poland ETF).^^^
(i)(20)
Opinion and consent of
Dechert LLP (with respect to Market Vectors India Small-Cap Index ETF).#
(i)(21)
Opinion and consent of Dechert
LLP (with respect to Market Vectors Emerging Markets Local Currency Bond
ETF).##
(i)(22)
Opinion and consent of
Dechert LLP (with respect to Market Vectors GDP International Equity ETF
and Market Vectors GDP Emerging Markets Equity ETF). §§§
(i)(23)
Opinion and consent of
Dechert LLP (with respect to Market Vectors Investment Grade Floating Rate
Bond ETF). ##
(i)(24)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors MLP ETF). >>>>
(i)(25)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Rare Earth/Strategic Metals ETF).
####
(i)(26)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors LatAm Aggregate Bond ETF). §
(i)(27)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors High Yield Floating Rate ETF). >>>>
(i)(28)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Fixed Income II ETF). >>>>
(i)(29)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Colombia ETF). #####
(i)(30)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors CM Commodity Index ETF).
>>>>
(i)(31)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Russia Small-Cap ETF). ######
(i)(32)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Germany Small-Cap ETF). ######
(i)(33)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Germany Mid-Cap ETF).
>>>>
(i)(34)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors CEF Municipal Income ETF). §§
(i)(35)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors GDP Emerging Markets Small-Cap
Equity ETF). >>>>
(i)(36)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Japanese Bond ETF).
>>>>
(i)(37)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors European Currency High Yield Bond
ETF). <
(i)(38)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors European Sovereign Bond ETF).
>>>>
(i)(39)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Business Development
Company/Specialty Finance ETF). >>>
(i)(40)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Asia ex-Japan Aggregate Bond
ETF). >>>>
(i)(41)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Mortgage REIT Income ETF). §§§
(i)(42)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors International High Yield Bond
ETF). <<<<<
(i)(43)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Business Development Company
ETF). >>>>
(i)(44)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Mongolia ETF). >>>>
(i)(45)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Nigeria ETF). >>>>
(i)(46)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Greater China Corporate Bond
ETF). >>>>
(i)(47)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Greater China High Yield Bond
ETF). >>>>
(i)(48)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Renminbi Bond ETF). §§§§§
(i)(49)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Biotech ETF, Market Vectors Bank
and Brokerage ETF, Market Vectors Oil Services ETF, Market Vectors
Pharmaceutical ETF, Market Vectors Retail ETF and Market Vectors
Semiconductor ETF). <<
(i)(50)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Indonesia Small-Cap ETF).
<<<<
(i)(51)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Yuan Bond ETF). >>>>
(i)(52)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Unconventional Oil & Gas
ETF). <<<
(i)(53)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Nigeria-Focused West Africa
ETF). >>>
(i)(54)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Morningstar Wide Moat Research
ETF). >>
(i)(55)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Emerging Markets High Yield
Bond ETF). >>>>
(i)(56)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Global High Yield Bond ETF).
>>>>
(i)(57)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Global High Yield US$ Bond ETF).
>>>>
(i)(58)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Global Fallen Angel Bond ETF).
>>>>
(i)(59)
Opinion and Consent of Dechert LLP (with respect to Market Vectors Fallen Angel High Yield Bond ETF). >
(i)(60)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors International US$ High Yield Bond
ETF). >>>>
(i)(61)
Opinion and Consent of
Dechert LLP (with respect to Market Vectors Global Chemicals ETF).
>>>>
(i)(62)
Opinion and Consent of Dechert LLP (with respect to Market Vectors Preferred Securities ex Financials ETF). >>>>>
(i)(63)
Opinion and Consent of Dechert LLP (with respect to Market Vectors Saudi Arabia ETF). >>>>
(i)(64)
Opinion and Consent of Dechert LLP (with respect to Market Vectors Saudi Arabia Small-Cap ETF). >>>>
(j)
Not applicable.
(k)
Not applicable.
(l)
Not applicable.
(m)
Not applicable.
(n)
Not applicable.
(o)
Not applicable.
(p)(1)
Code of Ethics.
*
Incorporated by reference
to the Registrants Registration Statement filed on April 28, 2006.
**
Incorporated by reference
to the Registrants Registration Statement filed on May 11, 2006.
***
Incorporated by reference
to the Registrants Registration Statement filed on October 6, 2006.
****
Incorporated by reference
to the Registrants Registration Statement filed on April 9, 2007.
*****
Incorporated by reference
to the Registrants Registration Statement filed on July 30, 2007.
******
Incorporated by reference
to the Registrants Registration Statement filed on November 2, 2007.
Incorporated by reference
to the Registrants Registration Statement filed on December 31, 2007.
Incorporated by reference
to the Registrants Registration Statement filed on February 15, 2008.
Incorporated by reference
to the Registrants Registration Statement filed on April 21, 2008.
Incorporated by reference
to the Registrants Registration Statement filed on July 8, 2008.
Incorporated by reference
to the Registrants Registration Statement filed on August 8, 2008.
Incorporated by reference
to the Registrants Registration Statement filed on November 25, 2008.
Incorporated by reference
to the Registrants Registration Statement filed on December 23, 2008.
Incorporated by reference
to the Registrants Registration Statement filed on January 28, 2009.
Incorporated by reference
to the Registrants Registration Statement filed on February 6, 2009.
Incorporated by reference
to the Registrants Registration Statement filed on April 21, 2009.
Incorporated by reference
to the Registrants Registration Statement filed on May 8, 2009.
^
Incorporated by reference
to the Registrants Registration Statement filed on September 4, 2009.
^^
Incorporated by reference
to the Registrants Registration Statement filed on November 9, 2009.
^^^
Incorporated by reference to
the Registrants Registration Statement filed on November 20, 2009.
^^^^
Incorporated by reference
to the Registrants Registration Statement filed on February 16, 2010.
^^^^^
Incorporated by reference
to the Registrants Registration Statement filed on March 29, 2010.
#
Incorporated by reference
to the Registrants Registration Statement filed on April 5, 2010.
##
Incorporated by reference
to the Registrants Registration Statement filed on June 28, 2010.
###
Incorporated by reference
to the Registrants Registration Statement filed on August 27, 2010.
####
Incorporated by reference
to the Registrants Registration Statement filed on October 20, 2010.
#####
Incorporated by reference
to the Registrants Registration Statement filed on March 4, 2011.
######
Incorporated by reference
to the Registrants Registration Statement filed on April 1, 2011.
§
Incorporated by reference
to the Registrants Registration Statement filed on May 10, 2011.
§§
Incorporated by reference
to the Registrants Registration Statement filed on July 7, 2011.
§§§
Incorporated by reference
to the Registrants Registration Statement filed on August 15, 2011.
§§§§
Incorporated by reference
to the Registrants Registration Statement filed on August 24, 2011.
§§§§§
Incorporated by reference
to the Registrants Registration Statement filed on October 11, 2011.
<
Incorporated by reference to the Registrants Registration Statement filed on October 26, 2011.
<<
Incorporated by reference to the Registrants Registration Statement filed on October 31, 2011.
<<<
Incorporated by reference to the Registrants Registration Statement filed on February 8, 2012.
<<<<
Incorporated by reference to the Registrants Registration Statement filed on March 14, 2012.
<<<<<
Incorporated by reference to the Registrants Registration Statement filed on March 29, 2012.
>
Incorporated by reference to the Registrants Registration Statement filed on April 3, 2012.
>>
Incorporated by reference to the Registrants Registration Statement filed on April 13, 2012.
>>>
Incorporated by reference to the Registrants Registration Statement filed on May 17, 2012.
>>>>
To be filed by amendment.
>>>>>
Filed herewith.
Item 29.
Persons Controlled by or Under Common Control with
Registrant
None.
Item 30.
Indemnification
Pursuant
to Section 10.2 of the Amended and Restated Declaration of Trust, all persons
that are or have been a Trustee or officer of the Trust (collectively, the
Covered Persons) shall be indemnified by the Trust to the fullest extent
permitted by law against liability and against all expenses reasonably incurred
or paid by him in connection with any claim, action, suit, or proceeding in
which he or she becomes involved as a party or otherwise by virtue of his being
or having been a Trustee or officer and against amounts paid or incurred by him
in the settlement thereof. No indemnification will be provided to a Covered
Person who shall have been adjudicated by a court or body before which the
proceeding was brought to be liable to the Trust or its shareholders by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office or not to have acted in good
faith in the reasonable belief that his action was in the best interest of the
Trust; or in the event of a
settlement, unless there has been a determination
that such Trustee or officer did not engage in willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct
of his office.
Article
XII of the Trusts Bylaws, to the maximum extent permitted by Delaware law in
effect from time to time, the Trust shall indemnify and, without requiring a
preliminary determination of the ultimate entitlement to indemnification, shall
pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any individual who is a present or former trustee or officer
of the Trust and who is made a party to the proceeding by reason of his or her
service in that capacity or (b) any individual who, while a director of the
Trust and at the request of the Trust, serves or has served as a trustee,
officer, partner or trustee of another corporation, real estate investment
trust, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his or her
service in that capacity. The Trust may, with the approval of its Board of
Trustees, provide such indemnification and advance for expenses to a person who
served a predecessor of the Trust in any of the capacities described in (a) or
(b) above and to any employee or agent of the Trust or a predecessor of the
Trust;
provided
that no provision of Article XII shall be effective to protect or purport to
protect any trustee or officer of the Trust against liability to the Trust or
its stockholders to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
The
Trust has agreed to indemnify and hold harmless the Trustees against any and
all expenses actually and reasonably incurred by the Trustee in any proceeding
arising out of or in connection with the Trustees service to the Trust, to the
fullest extent permitted by the Amended and Restated Agreement and Declaration
of Trust and Bylaws of the Fund and Title 12, Part V, Chapter 38 of the
Delaware Code, and applicable law.
Item 31.
Business and Other Connections of Investment Manager
See
Management in the Statement of Additional Information. Information as to the
directors and officers of the Adviser is included in its Form ADV filed with
the SEC and is incorporated herein by reference thereto.
Item 32.
Principal Underwriters
(a)
Van
Eck Securities Corporation is the Trusts principal underwriter. Van Eck
Securities Corporation also acts as a principal underwriter, depositor, or
investment manager for the following other investment companies: each series
of Van Eck Funds and Van Eck VIP Trust.
(b)
The
following is a list of the officers, directors and partners of Van
Eck Securities Corporation:
Name and Principal
Positions
and Offices
Positions
and Offices with
Jan F. van Eck
Director and President
President, Chief Executive Officer and Trustee
Joseph J. McBrien
Director, Senior Vice President, General Counsel and Secretary
Senior Vice President, Secretary and Chief Legal Officer
Name and Principal
Positions
and Offices
Positions
and Offices with
Bruce J. Smith
Director, Senior Vice President, Chief Financial Officer, Treasurer and Controller
Senior Vice President
Susan Marino
Senior Vice President
N/A
Harvey Hirsch
Senior Vice President
N/A
John J. Crimmins
Vice President
Vice President, Treasurer, Chief Financial Officer and Principal Accounting Officer
Michele Medina
Vice President Corporate Accounting
N/A
Susan C. Lashley
Vice President
Vice President
Jonathan R. Simon
Vice President, Associate General Counsel and Assistant Secretary
Vice President and Assistant Secretary
Thomas K. Lynch
Vice President and Chief Compliance Officer
Chief Compliance Officer
John Wolfe
Vice President and Chief Administrative Officer
N/A
Laura I. Martinez
Assistant Vice President and Assistant Secretary
Assistant Vice President and Assistant Secretary
Wu-Kwan Kit
Assistant Vice President and Assistant Secretary
Assistant Vice President and Assistant Secretary
Glenn Smith
Vice President
N/A
Name and Principal
Positions
and Offices
Positions
and Offices with
Allison Lovett
Vice President
N/A
Patrick Lulley
Vice President
N/A
Bryan S. Paisley
Assistant Vice President
N/A
Item 33.
Location of Accounts and Records
All
accounts, books and other documents required to be maintained by Section 31(a)
of the 1940 Act and the Rules thereunder will be maintained at the offices of
The Bank of New York Mellon, 101 Barclay Street, New York, New York 10286.
Item 34.
Management Services
Not
applicable.
Item 35.
Undertakings
Not
applicable.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant certifies that it meets all of the requirements
for effectiveness pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of New York and
State of New York on the 5th day of July 2012.
MARKET VECTORS ETF TRUST
By:
/s/ Jan F. van Eck
Name: Jan F. van Eck
Title: President and Chief
Executive Officer
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed below by the following person in the capacities and on the date
indicated.
/s/ David H. Chow
*
Trustee
July 5, 2012
David H. Chow
/s/ R. Alastair Short
*
Trustee
July 5, 2012
R. Alastair Short
/s/ Richard D. Stamberger
*
Trustee
July 5, 2012
Richard D. Stamberger
/s/
Jan F. van Eck
President, Chief Executive
Officer and Trustee
July 5, 2012
Jan F. van Eck
/s/ John J. Crimmins
*
Treasurer, Chief Financial
Officer and Principal
July 5, 2012
Accounting Officer
John J. Crimmins
*By:
/s/ Jonathan
R. Simon
Jonathan R. Simon
Attorney in Fact
EXHIBIT INDEX
(b)
Amended and
Restated Bylaws of the Trust
(i)(62)
Opinion and
Consent of Dechert LLP (with respect to Market Vectors Preferred Securities
ex Financials ETF).
For more detailed information about the Fund, see the SAI dated July 5, 2012, which is incorporated by reference into this Prospectus. Additional information about the Funds investments will be available in the Funds annual and semi-annual reports to shareholders. In the Funds annual report, when available, you will find a discussion of the market
conditions and investment strategies that significantly affected the Funds performance during its last fiscal year.
SEC Registration Number: 333-123257
1940 Act Registration Number: 811-10325
PFXFPRO
This
Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the Prospectus dated July 5, 2012 (the Prospectus)
for the Market Vectors ETF Trust (the Trust), relating to the series of the Trust listed below,
as it may be revised from time to time.
Listing Exchange
The
Fund will offer and issue Shares at their net asset value (NAV) only in
aggregations of a specified number of Shares (each, a Creation Unit).
Similarly, Shares are redeemable by the Fund only in Creation Units. Creation
Units of the Fund are issued and redeemed generally in exchange for specified
securities held by the Fund generally included in the Index (defined herein) and
a specified cash payment. The Shares of the Fund are expected to be approved
for listing, subject to notice of issuance, on NYSE Arca, Inc. (NYSE Arca or
the Exchange), and will trade in the secondary market at market prices that
may differ from the Shares NAV. A Creation Unit consists of 50,000 Shares.
and Age
Held with
the Trust
Office
2
and
Length of
Time Served
Occupation(s) During
Past Five Years
Portfolios in
Fund
Complex
3
Overseen
Directorships
Held By
Trustee During
Past Five Years
54*
Trustee
Since 2006
58*
Stamberger, 53*
and Age
Held with
the Trust
Office
2
and
Length of
Time Served
Occupation(s) During
Past Five Years
Portfolios in
Fund
Complex
3
Overseen
Directorships
Held By
Trustee During
Past Five Years
48
4
Address
1
and Age
with the Trust
Office
2
and
Length of
Time Served
During The Past Five Years
Address
1
and Age
with the Trust
Office
2
and
Length of
Time Served
During The Past Five Years
Compensation
From the Trust
Compensation
From the Trust
Retirement
Benefits Accrued
as Part of the
Trusts Expenses
(2)
Benefits Upon
Retirement
Compensation
From the Trust
and the Fund
Complex
(1)
Paid to
Trustee
(2)
(As of December 31, 2011)
advisory fee is based on the
performance of the account
Portfolio
Manager
Account
Accounts in
Category
in Accounts in
Category
Accounts in
Category
Accounts in
Category
(Peter) Liao
billion
billion
VAN ECK GLOBAL PROXY VOTING POLICIES
i
ii
iii
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
Headquarters
Glass, Lewis & Co., LLC
One Sansome Street
Suite 3300
San Francisco, CA 94104
Tel: +1 415-678-4110
Tel: +1 888-800-7001
Fax: +1 415-357-0200
Glass, Lewis & Co., LLC
48 Wall Street
15th Floor
New York, N.Y. 10005
Tel: +1 212-797-3777
Fax: +1 212-980-4716
CGI Glass Lewis
Suite 8.01, Level 8
261 George Street
Sydney NSW 2000
Australia
Tel: +61 2 9299 9266
Fax: +61 2 9299 1866
Glass, Lewis & Co., Europe Ltd.
6th Floor, Riverpoint
Bishops Quay
Limerick, Ireland
Tel: +353 61 404700
Fax: +353 61 404711
2
3
4
5
6
7
8
9
10
Headquarters
Glass, Lewis & Co., LLC
One Sansome Street
Suite 3300
San Francisco, CA 94104
Tel: +1 415-678-4110
Tel: +1 888-800-7001
Fax: +1 415-357-0200
Glass, Lewis & Co., LLC
48 Wall Street
15th Floor
New york, N.y. 10005
Tel: +1 212-797-3777
Fax: +1 212-980-4716
CGI Glass Lewis Pty Limited
Suite 8.01, Level 8,
261 George St
Sydney NSW 2000
Australia
Tel: +61 2 9299 9266
Fax: +61 2 9299 1866
Glass Lewis International, Ltd.
Via Pazzalino 25
6962 Lugano Viganello
Switzerland
Phone: +41 76 346 0673
Fax: +41 91 260 6182
Glass Lewis Europe, Ltd.
6th Floor, Riverpoint
Bishops Quay
Limerick, Ireland
Phone: +353 61 404700
Fax: +353 61 404711
Business Address
with Underwriter
Trust
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
Business Address
with Underwriter
Trust
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
Business Address
with Underwriter
Trust
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
335 Madison Avenue
New York, NY 10017
Exhibit (b)
MARKET VECTORS ETF TRUST
AMENDED AND RESTATED BYLAWS
These Bylaws may contain any provision not inconsistent with applicable Investment Company Act Rules and Regulations, Delaware Law, other applicable law or the Agreement and Declaration of Trust, relating to the governance of the Market Vectors ETF Trust. Each stockholder, by virtue of having become a Stockholder, shall be bound by these Bylaws.
ARTICLE I
OFFICES
Section 1.1. Principal Office . The principal office of MARKET VECTORS ETF TRUST (the Trust) in the State of Delaware shall be located at such place as the Board of Trustees may designate.
Section 1.2. Additional Offices . The Trust may have additional offices, including a principal executive office, at such places within or outside the State of Delaware as the Board of Trustees may from time to time determine or the business of the Trust may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1. Place . All meetings of stockholders shall be held at the principal executive office of the Trust or at such other place as shall be set by the Board of Trustees and stated in the notice of the meeting.
Section 2.2. Annual Meeting . Subject to the following sentence, an annual meeting of the stockholders for the election of trustees of the Trust (the Trustees) and the transaction of any business within the powers of the Trust shall be held on a date and at the time set by the Board of Trustees during the month of April in each year. The Trust shall not be required to hold an annual meeting of stockholders in any year in which the election of Trustees is not required to be acted upon under the Investment Company Act of 1940, as amended (the 1940 Act).
Section 2.3. Special Meetings . The chairman of the board, president, chief executive officer or Board of Trustees may call a special meeting of the stockholders. A special meeting of stockholders shall also be called by the secretary of the Trust upon the written request of the stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. The secretary shall inform the requesting stockholders of the reasonably estimated cost of preparing and mailing the notice of meeting (including the Trusts proxy materials). The secretary shall not be required to call a special meeting upon stockholder request and such meeting shall not be held unless the secretary receives payment of such reasonably estimated cost prior to the mailing of any notice of the meeting.
Section 2.4. Notice . Not less than ten nor more than 60 days before each meeting of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, either by mail, by presenting it to such
stockholder personally, by leaving it at the stockholders residence or usual place of business or by any other means permitted by Delaware law. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at the stockholders address as it appears on the records of the Trust, with postage thereon prepaid. If no address of a shareholder appears on the Trusts books or has been provided in writing by a stockholder, notice shall be deemed to have been duly given without a mailing or substantial equivalent thereof, if such notice shall be available to the shareholder at the offices of the Trust. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice.
Section 2.5. Organization and Conduct . Every meeting of stockholders shall be conducted by an individual appointed by the Board of Trustees to be chairman of the meeting or, in the absence of such appointment, by the chairman of the board or, in the case of a vacancy in the office or absence of the chairman of the board, by one of the following officers present at the meeting: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or, in the absence of such officers, a chairman chosen by the stockholders by the vote of a majority of the votes cast by stockholders present in person or by proxy. The secretary, or, in the secretarys absence, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the Board of Trustees or, in the absence of such appointment, a person appointed by the chairman of the meeting shall act as secretary. In the event that the secretary presides at a meeting of the stockholders, an assistant secretary shall record the minutes of the meeting. The order of business and all other matters of procedure at any meeting of stockholders shall be determined by the chairman of the meeting. The chairman of the meeting may prescribe such rules, regulations and procedures and take such action as, in the discretion of such chairman, are appropriate for the proper conduct of the meeting, including, without limitation, (a) restricting admission to the time set for the commencement of the meeting; (b) limiting attendance at the meeting to stockholders of record of the Trust, their duly authorized proxies or other such persons as the chairman of the meeting may determine; (c) limiting participation at the meeting on any matter to stockholders of record of the Trust entitled to vote on such matter, their duly authorized proxies or other such persons as the chairman of the meeting may determine; (d) limiting the time allotted to questions or comments by participants; (e) maintaining order and security at the meeting; (f) removing any stockholder or any other person who refuses to comply with meeting procedures, rules or guidelines as set forth by the chairman of the meeting; and (g) recessing or adjourning the meeting to a later date and time and place announced at the meeting. Unless otherwise determined by the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.
Section 2.6. Quorum . At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast one-third of all the votes entitled to be cast at such meeting shall constitute a quorum; but this section shall not affect any requirement under any statute or the charter of the Trust for the vote necessary for the adoption of any specific measure under Delaware law. Any meeting may be adjourned from time to time by the chairman, the trustees (or their designees) or a majority of the votes properly cast upon the question of adjourning a meeting, whether or not a quorum is present, and the meeting may be held as adjourned without further notice.
The stockholders present either in person or by proxy, at a meeting which has been duly called and convened, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. One share shall constitute one vote for purposes of voting.
Section 2.7. Voting . A plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a director. Each share may be voted for as many individuals as there are Trustees to be elected and for whose election the share is entitled to be
2
voted. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the charter of the Trust. Unless otherwise provided in the charter, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. One share shall constitute one vote for purposes of voting.
Section 2.8. Proxies . A stockholder may cast the votes entitled to be cast by the shares of stock owned of record by the stockholder in person or by proxy executed by the stockholder or by the stockholders duly authorized agent in any manner permitted by law. Such proxy or evidence of authorization of such proxy shall be filed with the secretary of the Trust before or at the meeting, every proxy must be authorized in a manner permitted by Section 212 of the Delaware General Corporate Law. No proxy shall be valid more than eleven months after its date unless otherwise provided in the proxy.
Section 2.9. Voting of Stock by Certain Holders . Stock of the Trust registered in the name of a Trust, partnership, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or agreement of the partners of a partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any director or other fiduciary may vote stock registered in his or her name as such fiduciary, either in person or by proxy.
Shares of stock of the Trust directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time.
The Board of Trustees may adopt by resolution a procedure by which a stockholder may certify in writing to the Trust that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to 3 be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Trust; and any other provisions with respect to the procedure which the Board of Trustees considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified stock in place of the stockholder who makes the certification.
Section 2.10. Inspectors . The Board of Trustees, in advance of any meeting, shall, appoint one or more individual inspectors or one or more entities that designate individuals as inspectors to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the Board of Trustees in advance of the meeting or at the meeting by the chairman of the meeting. The inspectors, if any, shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, and determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. Each such report
3
shall be in writing and signed by him or her or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof.
Section 2.11. Voting by Ballot . Voting on any question or in any election may be viva voce unless the presiding officer shall order or any stockholder shall demand that voting be by ballot or if authorized by governing body, any requirement of written ballot shall be satisfied by a ballot submitted by electronic transmission, provided that any such electronic transmission must either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by the member or proxy holder.
Section 2.12. Meeting by Conference Telephone . To the extent permitted by the Board of Trustees or the chairman of the Board of Trustees of the meeting, stockholders may participate in a meeting by means of conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at the meeting.
ARTICLE III
TRUSTEES
Section 3.1. General Powers . The business and affairs of the Trust shall be managed under the direction of its Board of Trustees.
Section 3.2. Number, Tenure and Qualifications . At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Trustees may establish, increase or decrease the number of Trustees, provided that the number thereof shall never be less than the minimum number required by Delaware Law, nor more than 20, and further provided that the tenure of office of a director shall not be affected by any decrease in the number of Trustees. Trustees shall be elected by ballot at the annual meeting of stockholders of the Trust or by written consent; provided, however , that if no annual meeting of the stockholders is required to be held pursuant to Section 2 of Article II of these Bylaws, Trustees shall be elected in accordance with Section 211(c) of the Delaware General Corporate Law.
Section 3.3. Annual and Regular Meetings . An annual meeting of the Board of Trustees shall be held immediately after and at the same place as the annual meeting of stockholders, no notice other than this Bylaw being necessary. In the event such meeting is not so held, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Trustees. Regular meetings of the Board of Trustees shall be held from time to time at such places and times as provided by the Board of Trustees by resolution, without notice other than such resolution.
Section 3.4. Special Meetings . Special meetings of the Board of Trustees may be called by or at the request of the chairman of the board or by a majority of the Trustees then in office. The person or persons authorized to call special meetings of the Board of Trustees may fix any place as the place for holding any special meeting of the Board of Trustees called by them. The Board of Trustees may provide, by resolution, the time and place for the holding of special meetings of the Board of Trustees without notice other than such resolution.
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Section 3.5. Notice . Notice of any special meeting of the Board of Trustees shall be delivered personally or by telephone, electronic mail, facsimile transmission, United States mail or courier to each director at his or her business or residence address. Notice by personal delivery, telephone, electronic mail or facsimile transmission shall be given at least 24 hours prior to the meeting. Notice by United States mail shall be given at least three days prior to the meeting. Notice by courier shall be given at least two days prior to the meeting. Telephone notice shall be deemed to be given when the director or his or her agent is personally given such notice in a telephone call to which the director or his or her agent is a party. Electronic mail notice shall be deemed to be given upon transmission of the message to the electronic mail address given to the Trust by the director. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Trust by the director and receipt of a completed answer-back indicating receipt. Notice by United States mail shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Notice by courier shall be deemed to be given when deposited with or delivered to a courier properly addressed. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Trustees need be stated in the notice, unless specifically required by statute or these Bylaws.
Section 3.6. Quorum . A majority of the Trustees shall constitute a quorum for transaction of business at any meeting of the Board of Trustees, provided that, if less than a majority of such Trustees are present at said meeting, a majority of the Trustees present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to the charter of the Trust or these Bylaws, the vote of a majority of a particular group of Trustees is required for action, a quorum must also include a majority of such group.
Section 3.7. Voting . The action of the majority of the Trustees present at a meeting at which a quorum is present shall be the action of the Board of Trustees, unless the concurrence of a greater proportion is required for such action by applicable statute or the charter.
Section 3.8. Organization . At each meeting of the Board of Trustees, the chairman of the board or, in the absence of the chairman, the vice chairman of the board, if any, shall act as Chairman. In the absence of both the chairman and vice chairman of the board, the chief executive officer or in the absence of the chief executive officer, the treasurer or in the absence of the treasurer, a director chosen by a majority of the Trustees present, shall act as Chairman. The secretary or, in his or her absence, an assistant secretary of the Trust, or in the absence of the secretary and all assistant secretaries, a person appointed by the Chairman, shall act as Secretary of the meeting.
Section 3.9. Telephone Meetings . Subject to the provisions of the Investment Company Act of 1940, Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.
Section 3.10. Written Consent by Trustees . Subject to the provisions of the Investment Company Act of 1940, any action required or permitted to be taken at any meeting of the Board of Trustees may be taken without a meeting, if a consent in writing, or by electronic transmission to such action is signed by a majority of the directors and such written consent or electronic transmission is filed with the minutes of proceedings of the Board of Trustees in the same form as the minutes are maintained.
Section 3.11. Vacancies . If for any reason any or all the Trustees cease to be Trustees, such event shall not terminate the Trust or affect these Bylaws or the powers of the remaining Trustees hereunder. Any vacancy on the Board of Trustees for any cause other than an increase in the number of Trustees shall be filled by a majority of the remaining Trustees, even if such majority is less than a
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quorum. Any vacancy in the number of Trustees created by an increase in the number of Trustees may be filled by a majority vote of the entire Board of Trustees. Any individual so elected as director shall serve until the next annual meeting of stockholders and until his or her successor is elected and qualifies unless earlier resignation or removal.
Section 3.12. Compensation . Trustees shall not receive any stated salary for their services as Trustees but, by resolution of the Board of Trustees, may receive compensation per year and/or per meeting and/or per visit to real property or other facilities owned or leased by the Trust and for any service or activity they performed or engaged in as Trustees. Trustees may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Trustees or of any committee thereof and for their expenses, if any, in connection with each property visit and any other service or activity they performed or engaged in as Trustees; but nothing herein contained shall be construed to preclude any Trustees from serving the Trust in any other capacity and receiving compensation therefor.
Section 3.13. Loss of Deposits . No director shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or stock have been deposited.
Section 3.14. Surety Bonds . Unless required by law, no director shall be obligated to give any bond or surety or other security for the performance of any of his or her duties.
Section 3.15. Reliance . Each director, officer, employee and agent of the Trust shall, in the performance of his or her duties with respect to the Trust, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel or upon reports made to the Trust by any of its officers or employees or by the adviser, accountants, appraisers or other experts or consultants selected by the Board of Trustees or officers of the Trust, regardless of whether such counsel or expert may also be a director.
Section 3.16. Certain Rights of Trustees, Officers, Employees and Agents . The Trustees shall have no responsibility to devote their full time to the affairs of the Trust. Any director or officer, employee or agent of the Trust, in his or her personal capacity or in a capacity as an affiliate, employee, or agent of any other person, or otherwise, may have business interests and engage in business activities similar to or in addition to or in competition with those of or relating to the Trust.
ARTICLE IV
COMMITTEES
Section 4.1. Number, Tenure and Qualifications . The Board of Trustees may appoint from among its members an Executive Committee, an Audit Committee and other committees, composed of one or more Trustees, to serve at the pleasure of the Board of Trustees.
Section 4.2. Powers . The Board of Trustees may delegate to committees appointed under Section 1 of this Article any of the powers of the Board of Trustees, except as prohibited in Section 141(c)(2) of the Delaware General Corporate Law or otherwise by law.
Section 4.3. Meetings . Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Trustees. A majority of the members of the committee shall constitute a quorum for the transaction of business at any meeting of the committee. The act of a majority of the committee members present at a meeting shall be the act of such committee. The Board of Trustees may designate a chairman of any committee, and such chairman or, in the absence of a chairman, any two
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members of any committee (if there are at least two members of the Committee) may fix the time and place of its meeting unless the Board shall otherwise provide. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another director to act in the place of such absent member. Each committee shall keep minutes of its proceedings.
Section 4.4. Telephone Meetings . Members of a committee of the Board of Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.
Section 4.5. Written Consent by Committees . Any action required or permitted to be taken at any meeting of a committee of the Board of Trustees may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee.
Section 4.6. Vacancies . Subject to the provisions hereof, the Board of Trustees shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member or to dissolve any such committee. Subject to the power of the Board of Trustees, the members of the committee shall have the power to unanimously fill any vacancies on the committee for purposes of a specific meeting in accordance with Section 141(c)(2) of the Delaware General Corporate Law.
ARTICLE V
OFFICERS
Section 5.1. General Provisions . The officers of the Trust shall include a president, a secretary and a treasurer and may include a chairman of the board, a vice chairman of the board, a chief executive officer, one or more vice presidents ofyarious offices, a chief operating officer, a chief financial officer, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Trustees may from time to time elect such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Trust shall be elected annually by the Board of Trustees, except that the chief executive officer or president may from time to time appoint one or more vice presidents, assistant secretaries, assistant treasurers or other officers. Each officer shall hold office until his or her successor is elected and qualifies or until death, resignation or removal in the manner hereinafter provided. Any two or more offices except president and vice president may be held by the same person. Election of an officer or agent shall not of itself create contract rights between the Trust and such officer or agent.
Section 5.2. Removal and Resignation . Any officer or agent of the Trust may be removed, with or without cause, by the Board of Trustees if in its judgment the best interests of the Trust would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Trust may resign at any time by giving written notice of his or her resignation to the Board of Trustees, the chairman of the board, the president or the secretary. Any resignation shall take effect immediately upon its receipt or at such later time specified in the notice of resignation. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Trust.
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Section 5.3. Vacancies . A vacancy in any office may be filled by the Board of Trustees for the balance of the term.
Section 5.4. Chief Executive Officer . The Board of Trustees may designate a chief executive officer. In the absence of such designation, the chairman of the board shall be the chief executive officer of the Trust. The chief executive officer shall have general responsibility for implementation of the policies of the Trust, as determined by the Board of Trustees, and for the management of the business and affairs of the Trust.
Section 5.5. Chief Operating Officer . The Board of Trustees may designate a chief operating officer. The chief operating officer shall have the responsibilities and duties as set forth by the Board of Trustees or the chief executive officer.
Section 5.6. Chief Financial Officer . The Board of Trustees may designate a chief financial officer. The chief financial officer shall have the responsibilities and duties as set forth by the Board of Trustees or the chief executive officer.
Section 5.7. Chairman of the Board . The Board of Trustees shall designate a chairman of the board. The chairman of the Board of Trustees shall be independent of the Trusts management. The chairman of the board shall preside over the meetings of the Board of Trustees and of the stockholders at which he or she shall be present. The chairman of the board shall perform such other duties as may be assigned to him or her by the Board of Trustees.
Section 5.8. President . In the absence of a designation of a chief operating officer by the Board of Trustees, the president shall be the chief operating officer. He or she may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Trustees or by these Bylaws to some other officer or agent of the Trust or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Trustees from time to time.
Section 5.9. Vice Presidents . In the absence of the president or in the event of a vacancy in such office, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to such vice president by the president or by the Board of Trustees. The Board of Trustees may designate one or more vice presidents as executive vice president or as vice president for particular areas of responsibility.
Section 5.10. Secretary . The secretary shall (a) keep the minutes of the proceedings of the stockholders, the Board of Trustees and committees of the Board of Trustees in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Trust; (d) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder; (e) have general charge of the stock transfer books of the Trust; and (f) in general perform such other duties as from time to time may be assigned to him by the chief executive officer, the president or by the Board of Trustees.
Section 5.11. Treasurer . The treasurer shall have the custody of the funds and securities of the Trust and shall keep full and accurate accounts of receipts and disbursements in books belonging to the
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Trust and shall deposit all moneys and other valuable effects in the name and to the credit of the Trust in such depositories as may be designated by the Board of Trustees. In the absence of a designation of a chief financial officer by the Board of Trustees, the treasurer shall be the chief financial officer of the Trust.
The treasurer shall disburse the funds of the Trust as may be ordered by the Board of Trustees, taking proper vouchers for such disbursements, and shall render to the president and Board of Trustees, at the regular meetings of the Board of Trustees or whenever it may so require, an account of all his or her transactions as treasurer and of the financial condition of the Trust.
If required by the Board of Trustees, the treasurer shall give the Trust a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Trustees for the faithful performance of the duties of his or her office and for the restoration to the Trust, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, moneys and other property of whatever kind in his or her possession or under his or her control belonging to the Trust.
Section 5.12. Assistant Secretaries and Assistant Treasurers . The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the president or the Board of Trustees. The assistant treasurers shall, if required by the Board of Trustees, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Board of Trustees.
Section 5.13. Salaries . The salaries and other compensation of the officers shall be fixed from time to time by the Board of Trustees and no officer shall be prevented from receiving such salary or other compensation by reason of the fact that he or she is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 6.1. Contracts . The Board of Trustees may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Trust and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document shall be valid and binding upon the Trust when authorized or ratified by action of the Board of Trustees and executed by an authorized person.
Section 6.2. Checks and Drafts . All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Trust shall be signed by such officer or agent of the Trust in such manner as shall from time to time be determined by the Board of Trustees.
Section 6.3. Deposits . All funds of the Trust not otherwise employed shall be deposited from time to time to the credit of the Trust in such banks, trust companies or other depositories as the Board of Trustees may designate.
ARTICLE VII
STOCK
Section 7.1. Certificates; Required Information . In the event that the Trust issues shares of stock represented by certificates, such certificates shall be signed by the officers of the Trust in the manner permitted by Delaware Law and contain the statements and information required by Delaware
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Law. In the event that the Trust issues shares of stock without certificates, the Trust shall provide to holders of such shares a written statement of the information required by Delaware Law to be included on stock certificates.
Section 7.2. Transfers When Certificates Issued . Upon surrender to the Trust or the transfer agent of the Trust of a stock certificate duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Trust shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.
The Trust shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware.
Notwithstanding the foregoing, transfers of shares of any class of stock will be subject in all respects to the charter of the Trust and all of the terms and conditions contained therein.
Section 7.3. Replacement Certificate . The president of the Trust, the secretary, the treasurer or any officer designated by the Board of Trustees may direct a new certificate to be issued in place of any certificate previously issued by the Trust alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, an officer designated by the Board of Trustees may, in his or her discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owners legal representative to advertise the same in such manner as he or she shall require and/or to give bond, with sufficient surety, to the Trust to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate.
Section 7.4. Closing of Transfer Books or Fixing of Record Date . The Board of Trustees may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of stockholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of stockholders of record is to be held or taken.
In lieu of fixing a record date, the Board of Trustees may provide that the stock transfer books shall be closed for a stated period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten days before the date of such meeting.
If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (a) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the Trustees, declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except when
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(i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than 120 days after the record date fixed for the original meeting, in either of which case a new record date shall be determined as set forth herein.
Section 7.5. Stock Ledger . The Trust shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate share ledger containing the name and address of each stockholder and the number of shares of each class held by such stockholder.
Section 7.6. Fractional Stock; Issuance of Units . The Board of Trustees may issue fractional stock or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the charter or these Bylaws, the Board of Trustees may issue units consisting of different securities of the Trust. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Trust, except that the Board of Trustees may provide that for a specified period securities of the Trust issued in such unit may be transferred on the books of the Trust only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Trustees shall have the power, from time to time, to fix the fiscal year of the Trust by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 9.1. Authorization . Dividends and other distributions upon the stock of the Trust may be authorized by the Board of Trustees, subject to the provisions of law and the charter of the Trust. Dividends and other distributions may be paid in cash, property or stock of the Trust, subject to the provisions of law and the charter.
Section 9.2. Contingencies . Before payment of any dividends or other distributions, there may be set aside out of any assets of the Trust available for dividends or other distributions such sum or sums as the Board of Trustees may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends or other distributions, for repairing or maintaining any property of the Trust or for such other purpose as the Board of Trustees shall determine to be in the best interest of the Trust, and the Board of Trustees may modify or abolish any such reserve.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the charter of the Trust, the Board of Trustees may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Trust as it shall deem appropriate in its sole discretion.
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ARTICLE XI
SEAL
Section 11.1. Seal . The Board of Trustees may authorize the adoption of a seal by the Trust. The seal shall contain the name of the Trust and the year of its incorporation and the words Incorporated Delaware. The Board of Trustees may authorize one or more duplicate seals and provide for the custody thereof.
Section 11.2. Affixing Seal . Whenever the Trust is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word (SEAL) adjacent to the signature of the person authorized to execute the document on behalf of the Trust.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
Subject to Section 17 of the 1940 Act and to the maximum extent permitted by Delaware law in effect from time to time, the Trust shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former director or officer of the Trust and who is made a party to the proceeding by reason of his or her service in that capacity or (b) any individual who, while a director of the Trust and at the request of the Trust, serves or has served as a director, officer, partner or trustee of another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his or her service in that capacity. The Trust may, with the approval of its Board of Trustees, provide such indemnification and advance for expenses to a person who served a predecessor of the Trust in any of the capacities described in (a) or (b) above and to any employee or agent of the Trust or a predecessor of the Trust. No provision of this Article XII shall be effective to protect or purport to protect any director or officer of the Trust against liability to the Trust or its stockholders to which he or she would otherwise be subject by reason of willfulness misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Bylaws or charter of the Trust inconsistent with this Article, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the charter of the Trust or these Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
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ARTICLE XIV
AMENDMENT OF BYLAWS
The Board of Trustees shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws.
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Exhibit (i) (62)
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July 5, 2012
Market Vectors ETF Trust
335 Madison Avenue, 19
th
Floor
New York, New York 10017
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Re: |
Opinion of Counsel regarding Post-Effective
Amendment No. 765 to the Registration
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(File Nos. 333-123257; 811-10325) |
Dear Ladies and Gentlemen:
We have acted as counsel to Market Vectors ETF Trust (the Fund), in connection with the above-referenced Registration Statement (as amended, the Registration Statement), which relates to the shares of beneficial interest of the Market Vectors Preferred Securities ex Financials ETF, no par value (collectively, the Shares). This opinion is being delivered to you in connection with the Funds filing of Post-Effective Amendment No. 765 to the Registration Statement (the Amendment) to be filed with the Securities and Exchange Commission pursuant to Rule 485(b) of the Securities Act of 1933, as amended (the 1933 Act), and Amendment No. 769 pursuant to the Investment Company Act of 1940, as amended, in connection with the effectiveness of the Market Vectors Preferred Securities ex Financials ETF. With your permission, all assumptions and statements of reliance herein have been made without any independent investigation or verification on our part except to the extent otherwise expressly stated, and we express no opinion with respect to the subject matter or accuracy of such assumptions or items relied upon. We have reviewed the Funds Declaration of Trust, as amended, and such other documents and matters as we have deemed necessary to enable us to render this opinion.
Based upon, and subject to, the foregoing, we are of the opinion that the Shares proposed to be sold pursuant to the Amendment, when effective, will have been duly authorized and, when sold in accordance with the terms of the Amendment and the requirements of applicable federal and state law and delivered by the Fund against receipt of the net asset value of the Shares, will have been legally issued, fully paid and non-assessable by the Fund (except for the potential liability of
Market Vectors ETF Trust
July 5, 2012
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shareholders described in the Funds current Statement of Additional Information under the caption Capital Stock and Shareholder Reports).
We are attorneys licensed to practice only in the State of New York. The foregoing opinion is limited to the Federal laws of the United States and the Delaware Statutory Trust Act, and we are expressing no opinion as to the effect of the laws of any other jurisdiction.
We have consented to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the headings General Information in the Prospectus and Counsel and Independent Registered Public Accounting Firm in the Statement of Additional Information, each forming a part of the Registration Statement. In giving this consent, we do not concede that we are in the category of persons whose consent is required under Section 7 of the 1933 Act.
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Very truly yours, |
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/s/ Dechert LLP |
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