AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 2015

 

File No. 333-198170

File No. 811-22986

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-1A

 

  REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ý
     
  PRE-EFFECTIVE AMENDMENT NO. 2 ý  
     
  POST-EFFECTIVE AMENDMENT NO. __ o  
     
  and/or  
     
  REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 ý
     

 

AMENDMENT NO. 2 ý

 

ETFS TRUST

(Exact Name of Registrant as Specified in Charter)

 

48 Wall Street

New York, New York 10005

(Address of Principal Executive Offices, Zip Code)

 

212-918-4955

(Registrant’s Telephone Number, including Area Code)

 

The Corporation Trust Company

1209 Orange Street

Wilmington, Delaware 19801

(Name and Address of Agent for Service)

 

Copies to:

 

Benoit Autier

ETF Securities Advisors LLC

48 Wall Street

New York, New York 10005

W. John McGuire

Morgan, Lewis and Bockius LLP

2020 K Street NW

Washington, DC 20006

 

  It is proposed that this filing will become effective (check appropriate box):
     
  o immediately upon filing pursuant to paragraph (b) of rule 485
  o on (date) pursuant to paragraph (b)(1)(v) of rule 485
  o 60 days after filing pursuant to paragraph (a)(1) of rule 485
  o on (date) pursuant to paragraph (a)(1) of rule 485
  o 75 days after filing pursuant to paragraph (a)(2) of rule 485
  o on (date) pursuant to paragraph (a)(2) of rule 485
  ý As soon as practicable after the effective date of this registration statement.

 

 
 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

 

PROSPECTUS

 

January 8, 2015

 

 

ETFS Trust

 

ETFS Zacks Earnings Large-Cap U.S. Index Fund (ZLRG)

 

ETFS Zacks Earnings Small-Cap U.S. Index Fund (ZSML)

 

ETFS Diversified-Factor U.S. Large Cap Index Fund (SBUS)

 

ETFS Diversified-Factor Developed Europe Index Fund (SBEU)

 

 

Principal U.S. Listing Exchange: NYSE Arca

 

THE U.S. SECURITIES AND EXCHANGE COMMISSION (“SEC”) HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

ETFS Trust

 

Table of Contents

 

Summary
   
 
ETFS Zacks Earnings Large-Cap U.S. Index Fund 1
ETFS Zacks Earnings Small-Cap U.S. Index Fund 4
   
ETFS Diversified-Factor U.S. Large Cap Index Fund 7
ETFS Diversified-Factor Developed Europe Index Fund 10
   
Additional Information About the Funds 13
   
Additional Principal Risk Information About the Funds 13
   
Additional Non-Principal Risk Information 15
   
Portfolio Holdings Information 16
   
Management 17
   
Additional Information on Buying and Selling Fund Shares 18
   
Dividends and Distribution 19
   
Book Entry 19
   
Delivery of Shareholder Documents – Householding 19
   
Frequent Purchases and Redemption of Fund Shares 19
   
Investments by Registered Investment Companies 19
   
Additional Tax Information 19
   
Distribution 21
   
Premium/Discount and NAV Information 21
   
Additional Notices 21
   
Financial Highlights 22
 
i

ETFS Zacks Earnings Large-Cap U.S. Index Fund

 

Investment Objective

The Fund seeks to track the price and yield performance, before fees and expenses, of the Zacks Earnings Large-Cap U.S. Index.

 

Fees and Expenses of the Fund

 

The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund. The fees are expressed as a percentage of the Fund’s average net assets. Investors purchasing and selling shares may be subject to costs (including brokerage commissions) charged by their broker, which are not reflected in the table and example below.

 

   
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
 
   
Management Fees 0.65%
Distribution and Service (12b-1) Fees* 0.00%
Other Expenses** 0.01%
Total Annual Fund Operating Expenses 0.66%
   

 

* The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up to 0.25% of average daily net assets may be made, however, the Board has determined that no such payments will be made through the next twelve (12) months of operation.
** Other Expenses are based on estimated amounts for the current fiscal year.

 

Example

The following 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 include brokerage commissions that you may pay to buy and sell shares of the Fund in the secondary market.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same each year. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

1 Year   3 Years
$67   $211

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the Example, affect the Fund’s performance. Because the Fund is newly-organized, portfolio turnover information is not yet available.

 

Principal Investment Strategies

 

Under normal circumstances, at least 80% of the Fund’s total assets (exclusive of collateral held from securities lending) will be invested in the component securities of the Zacks Earnings Large-Cap U.S. Index (the “Index”). The Fund may invest the remainder of its assets in cash and cash equivalents, such as repurchase agreements or money market instruments, or other instruments that Index Management Solutions, LLC, the sub-adviser for the Fund (the “Sub-Adviser”), believes will help the Fund track the Index.

 

The Index is generally comprised of approximately 140 U.S. listed common stocks selected based on a proprietary methodology developed by Zacks Investment Research, Inc. (“Zacks” or the “Index Provider”). The Index Provider selects stocks from a universe composed of the largest 1,000 listed stocks in the U.S. with a price of at least $3 per share and an average daily price volume of at least $10 million (based either on most recent month or on median monthly price volume over the past 13 months). The Index’s stock selection process relies upon two proprietary investment factors – Zacks Rank factor and Zacks Quality factor. The Zacks Rank factor focuses on sell-side analysts’ revised earnings estimates to extract stock price movement-related information. The Zacks Quality factor focuses on earnings quality information and favors companies with higher cash earnings and lower accruals.

1

There are 16 sectors in the Underlying Index. Each sector is equally weighted (i.e., 6.25% or 1/16), unless there is a sector in which no qualifying stocks are identified. The stocks within each sector are also equally weighted. The target number of stocks in a sector is approximately equal to 1/10th of the number of stocks composing that sector in the investible universe. For instance, if there are 80 stocks in the healthcare sector in the index universe, there will be approximately 8 healthcare stocks in the underlying index, each stock having a weight of approximately 0.80% (i.e., 6.25% / 8). In addition no single stock constituent can have a weight of more than 10% and the sum of the stocks that have an individual weight in excess of 5% cannot exceed 45% of the final portfolio. The Index will be reconstituted and rebalanced quarterly.

 

The Index’s stock selection process relies upon two proprietary investment factors – Zacks Rank factor and Zacks Quality factor. The Zacks Rank factor focuses on Earnings Estimate revision information. Various profitability measures (including earnings) of many individual public companies are covered by financial analysts who work for brokerage houses – these analysts are often called sell-side analysts. Zacks tries to extract stock price movement-related information by paying close attention to how those estimates are revised by the sell-side analysts over time.

 

The Zacks Quality factor focuses on earnings quality information. A company’s earnings is composed of cash earnings and accrued earnings. Whereas the cash component is subject to little manipulation by the company’s management team, some subjectivity is allowed for the accrued portion according to the U.S. Generally Accepted Accounting Principles (“GAAP”). The Zacks Quality factor is an adaptation of the concept that, in general, companies with lower accruals are less likely to manipulate their earnings and tend to perform better over time.

 

The Fund employs a “replication strategy” approach to try to achieve its investment objective. “Replication strategy” is a passive indexing strategy that involves investing in all the securities of the Underlying Index in approximately the same proportion as the Underlying Index. However, the Fund may utilize a representative sampling strategy with respect to the Underlying Index when a replication strategy may be detrimental to shareholders, such as when there are practical difficulties or substantial costs involved in compiling a portfolio of all the equity securities in the Underlying Index. In general, if the Fund is performing as designed, the return of the Index will dictate the return for the Fund. The Fund pursues its investment objective regardless of the market conditions and does not take defensive positions. The Fund seeks to be fully invested at all times and will concentrate its investment (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. Currently, the Index and the Fund are not concentrated.

 

The Index Provider is not affiliated with the Fund, the Adviser or the Sub-Adviser. The Index Provider determines the composition of the Index, relative weightings of the securities in the Index and publishes information regarding the market value of the Index.

 

The Adviser expects that, over time, the correlation between the Fund’s performance and that of the Index, before fees and expenses, will exceed 95%. A correlation of 100% would represent a perfect correlation. If the Fund uses a replication strategy, it can be expected to have greater correlation to the Underlying Index than if it uses a representative replication strategy.

 

Summary of Principal Risks

You can lose money on your investment in the Fund. For more information about the risks of investing in the Fund, see the sections in this Prospectus titled “Additional Principal Risk Information” and “Additional Non-Principal Risk Information.” The Fund is subject to the risks described below. Some or all of these risks may adversely affect the Fund’s net asset value per share (“NAV”), trading price, yield, total return and/or its ability to meet its objective.

 

Early Close/Trading Halt Risk: An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Equity Securities Risk: Investments in publicly issued equity securities, including common stocks, in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value (“NAV”) of the Fund to fluctuate.
Large-Cap Risk: The Fund invests primarily in large-capitalization companies. As a result, the Fund’s performance may be adversely affected if securities of large-capitalization companies underperform securities of smaller-capitalization companies or the market as a whole. The securities of large-capitalization companies may be relatively mature compared to smaller capitalization companies and, therefore, generally experience slower growth during times of economic expansion.
Market Risk: The prices of the securities in which the Fund invests may decline for a number of reasons, including in response to economic developments and perceptions about the creditworthiness of individual issuers.
Passive Investment Risk: The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit. The Fund does not attempt to outperform its Index or take defensive positions in declining markets. As a result, the Fund’s performance may be adversely affected by a general decline in the market segments relating to its Index.
Shares of the Fund May Trade at Prices Other than NAV: Although it is expected that the market price of the Shares of the Fund will approximate the Fund’s NAV when purchased and sold in the secondary market, there may be times when the market price of the Shares is more than the NAV intra-day (premium) or less than the NAV intra-day (discount). This risk is heightened in times of market volatility or periods of steep market declines.
Tracking Error Risk: The performance of the Fund may diverge from that of the Index.

 

Fund Performance

 

The Fund is new and therefore does not have a performance history.

2

Management

 

Investment Adviser and Sub-Adviser

 

ETF Securities Advisors LLC serves as the investment adviser to the Fund. Index Management Solutions, LLC serves as the sub-adviser to the Fund.

 

Portfolio Managers

Mike Gompers, CEO, has been the portfolio manager of the Fund since its inception.

 

Justin Lowry, Portfolio Manager, has been the portfolio manager of the Fund since its inception.

 

Sean Reichert, Portfolio Manager, has been the portfolio manager of the Fund since its inception.

 

Buying and Selling Fund Shares

 

The Fund is an exchange traded fund or “ETF.” This means that shares of the Fund are listed on a national securities exchange, such as the NYSE Arca, and trade at market prices. Most investors will buy and sell shares of the Fund through brokers. Because Fund shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (premium) or less than NAV (discount). The Fund issues and redeems shares at NAV only in large blocks of shares (“Creation Units”), which only certain institutions or large investors (typically market makers or other broker-dealers) may purchase or redeem. Currently, Creation Units generally consist of 50,000 shares, though this may change from time to time. Creation Units are not expected to consist of less than 25,000 shares. The Fund generally issues and redeems Creation Units in exchange for a portfolio of securities closely approximating the holdings of the Fund and/or a designated amount of U.S. cash.

 

Payments to Broker-Dealers and Other Financial Intermediaries

If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay Intermediaries for certain activities related to the Fund, including participation in activities that are designed to make Intermediaries more knowledgeable about exchange traded products, including the Fund, or for other activities, such as marketing, educational training or other initiatives related to the sale or promotion of Fund shares. These payments may create a conflict of interest by influencing the Intermediary and your salesperson to recommend the Fund over another investment. Any such arrangements do not result in increased Fund expenses. Ask your salesperson or visit the Intermediary’s website for more information.

 

Tax Information

The Fund intends to make distributions that may be taxed as ordinary income, qualified dividend income, or capital gains.

3

ETFS Zacks Earnings Small-Cap U.S. Index Fund

 

Investment Objective

The Fund seeks to track the price and yield performance, before fees and expenses, of the Zacks Earnings Small-Cap U.S. Index.

 

Fees and Expenses of the Fund

 

The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund. The fees are expressed as a percentage of the Fund’s average net assets. Investors purchasing and selling shares may be subject to costs (including brokerage commissions) charged by their broker, which are not reflected in the table and example below.

 

   
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
 
   
Management Fees 0.65%
Distribution and Service (12b-1) Fees* 0.00%
Other Expenses** 0.01%
Total Annual Fund Operating Expenses 0.66%
   

 

* The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up to 0.25% of average daily net assets may be made, however, the Board has determined that no such payments will be made through the next twelve (12) months of operation.
** Other Expenses are based on estimated amounts for the current fiscal year.

 

Example

The following 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 include brokerage commissions that you may pay to buy and sell shares of the Fund in the secondary market.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same each year. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

1 Year   3 Years
$67   $211

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the Example, affect the Fund’s performance. Because the Fund is newly-organized, portfolio turnover information is not yet available.

 

Principal Investment Strategies

 

Under normal circumstances, at least 80% of the Fund’s total assets (exclusive of collateral held from securities lending) will be invested in the component securities of the Zacks Earnings Small-Cap U.S. Index (the “Index”). The Fund may invest the remainder of its assets in cash and cash equivalents, such as repurchase agreements or money market instruments, or other instruments that Index Management Solutions, LLC, the sub-adviser to the Fund (the “Sub-Adviser”), believes will help the Fund track the Index.

 

The Index is generally comprised of approximately 180 U.S. listed common stocks selected based on a proprietary methodology developed by Zacks Investment Research, Inc. (“Zacks” or the “Index Provider”). The Index Provider selects stocks from a universe composed of common shares of U.S. issuers with a market capitalization ranking by the Index Provider ranging from 1001 to 3000, with a price of at least $3 per share and an average daily price volume of at least $10 million (based either on most recent month or on median monthly price volume over the past 13 months). The Index’s stock selection process relies upon two proprietary investment factors – Zacks Rank factor and Zacks Quality factor. The Zacks Rank factor focuses on sell-side analysts’ revised earnings estimates to extract stock price movement-related information. The Zacks Quality factor focuses on earnings quality information and favors companies with higher cash earnings and lower accruals.

4

There are 16 sectors in the Underlying Index. Each sector is equally weighted (i.e., 6.25% or 1/16), unless there is a sector in which no qualifying stocks are identified. The stocks within each sector are also equally weighted. The target number of stocks in a sector is approximately equal to 1/10th of the number of stocks composing that sector in the investible universe. For instance, if there are 80 stocks in the healthcare sector in the index universe, there will be approximately 8 healthcare stocks in the underlying index, each stock having a weight of approximately 0.80% (i.e., 6.25% / 8). In addition no single stock constituent can have a weight of more than 10% and the sum of the stocks that have an individual weight in excess of 5% cannot exceed 45% of the final portfolio. The Index will be reconstituted and rebalanced quarterly.

 

The Index’s stock selection process relies upon two proprietary investment factors – Zacks Rank factor and Zacks Quality factor. The Zacks Rank factor focuses on Earnings Estimate revision information. Various profitability measures (including earnings) of many individual public companies are covered by financial analysts who work for brokerage houses – these analysts are often called sell-side analysts. Zacks tries to extract stock price movement-related information by paying close attention to how those estimates are revised by the sell-side analysts over time.

 

The Zacks Quality factor focuses on earnings quality information. A company’s earnings is composed of cash earnings and accrued earnings. Whereas the cash component is subject to little manipulation by the company’s management team, some subjectivity is allowed for the accrued portion according to the U.S. Generally Accepted Accounting Principles (“GAAP”). The Zacks Quality factor is an adaptation of the concept that, in general, companies with lower accruals are less likely to manipulate their earnings and tend to perform better over time.

 

The Fund employs a “replication strategy” approach to try to achieve its investment objective. “Replication strategy” is a passive indexing strategy that involves investing in all the securities of the Underlying Index in approximately the same proportion as the Underlying Index. However, the Fund may utilize a representative sampling strategy with respect to the Underlying Index when a replication strategy may be detrimental to shareholders, such as when there are practical difficulties or substantial costs involved in compiling a portfolio of all the equity securities in the Underlying Index. In general, if the Fund is performing as designed, the return of the Index will dictate the return for the Fund. The Fund pursues its investment objective regardless of the market conditions and does not take defensive positions. The Fund seeks to be fully invested at all times and will concentrate its investment (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. Currently, the Index and the Fund are not concentrated.

 

The Index Provider is not affiliated with the Fund, the Adviser or the Sub-Adviser. The Index Provider determines the composition of the Index, relative weightings of the securities in the Index and publishes information regarding the market value of the Index.

 

The Adviser expects that, over time, the correlation between the Fund’s performance and that of the Index, before fees and expenses, will exceed 95%. A correlation of 100% would represent a perfect correlation. If the Fund uses a replication strategy, it can be expected to have greater correlation to the Underlying Index than if it uses a representative replication strategy.

 

Summary of Principal Risks

You can lose money on your investment in the Fund. For more information about the risks of investing in the Fund, see the sections in this Prospectus, titled “Additional Principal Risk Information” and “Additional Non-Principal Risk Information.” The Fund is subject to the risks described below. Some or all of these risks may adversely affect the Fund’s net asset value per share (“NAV”), trading price, yield, total return and/or its ability to meet its objective.

 

Early Close/Trading Halt Risk: An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Equity Securities Risk: Investments in publicly issued equity securities, including common stocks, in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value (“NAV”) of the Fund to fluctuate.
Small-Cap Risk: The Fund may invest in the securities of small capitalization companies. As a result, the Fund’s performance may be adversely affected if securities of small capitalization companies underperform securities of other capitalization ranges or the market as a whole. Securities of smaller companies are often more vulnerable to market volatility than securities of larger companies.
Market Risk: The prices of the securities in which the Fund invests may decline for a number of reasons, including in response to economic developments and perceptions about the creditworthiness of individual issuers.
Passive Investment Risk: The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit. The Fund does not attempt to outperform its Index or take defensive positions in declining markets. As a result, the Fund’s performance may be adversely affected by a general decline in the market segments relating to its Index.
5
Shares of the Fund May Trade at Prices Other than NAV: Although it is expected that the market price of the Shares of the Fund will approximate the Fund’s NAV when purchased and sold in the secondary market, there may be times when the market price of the Shares is more than the NAV intra-day (premium) or less than the NAV intra-day (discount). This risk is heightened in times of market volatility or periods of steep market declines.
Tracking Error Risk: The performance of the Fund may diverge from that of the Index.

 

Fund Performance

 

The Fund is new and therefore does not have a performance history.

 

Management

 

Investment Adviser and Sub-Adviser

 

ETF Securities Advisors LLC serves as the investment adviser to the Fund. Index Management Solutions, LLC serves as the sub-adviser to the Fund.

 

Portfolio Managers

Mike Gompers, CEO, has been the portfolio manager of the Fund since its inception.

 

Justin Lowry, Portfolio Manager, has been the portfolio manager of the Fund since its inception.

 

Sean Reichert, Portfolio Manager, has been the portfolio manager of the Fund since its inception.

 

Buying and Selling Fund Shares

 

The Fund is an “ETF” or exchange traded fund. This means that shares of the Fund are listed on a national securities exchange, such as the NYSE, and trade at market prices. Most investors will buy and sell shares of the Fund through brokers. Because Fund shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (premium) or less than NAV (discount). The Fund issues and redeems shares at NAV only in large blocks of shares (“Creation Units”), which only certain institutions or large investors (typically market makers or other broker-dealers) may purchase or redeem. Currently, Creation Units generally consist of 50,000 shares, though this may change from time to time. Creation Units are not expected to consist of less than 25,000 shares. The Fund generally issues and redeems Creation Units in exchange for a portfolio of securities closely approximating the holdings of the Fund and/or a designated amount of U.S. cash.

 

Payments to Broker-Dealers and Other Financial Intermediaries

If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay Intermediaries for certain activities related to the Fund, including participation in activities that are designed to make Intermediaries more knowledgeable about exchange traded products, including the Fund, or for other activities, such as marketing, educational training or other initiatives related to the sale or promotion of Fund shares. These payments may create a conflict of interest by influencing the Intermediary and your salesperson to recommend the Fund over another investment. Any such arrangements do not result in increased Fund expenses. Ask your salesperson or visit the Intermediary’s website for more information.

 

Tax Information

The Fund intends to make distributions that may be taxed as ordinary income, qualified dividend income, or capital gains.

6

ETFS Diversified-Factor U.S. Large Cap Index Fund

 

Investment Objective

 

The Fund seeks to track the price and yield performance, before fees and expenses, of the Scientific Beta United States Multi-Beta Multi-Strategy Equal Weight Index (the “Index”).

 

Fees and Expenses of the Fund

 

The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund. The fees are expressed as a percentage of the Fund’s average net assets. Investors purchasing and selling shares may be subject to costs (including brokerage commissions) charged by their broker, which are not reflected in the table and example below.

 

   
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
 
   
Management Fees 0.39%
Distribution and Service (12b-1) Fees* 0.00%
Other Expenses** 0.01%
Total Annual Fund Operating Expenses 0.40%
   

 

* The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up to 0.25% of average daily net assets may be made; however, the Board has determined that no such payments will be made through the next twelve (12) months of operation.
** Other Expenses are based on estimated amounts for the current fiscal year.

 

Example

The following 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 include brokerage commissions that you may pay to buy and sell shares of the Fund in the secondary market.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same each year. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

1 Year   3 Years
$41   $128

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the Example, affect the Fund’s performance. Because the Fund is newly-organized, portfolio turnover information is not yet available.

 

Principal Investment Strategies

 

Under normal circumstances, at least 80% of the Fund’s total assets (exclusive of collateral held from securities lending) will be invested in the component securities of the Index. The Fund may invest the remainder of its assets in cash and cash equivalents, such as repurchase agreements or money market instruments, or other instruments that Index Management Solutions, LLC, the sub-adviser to the Fund (the “Sub-Adviser”), believes will help the Fund track the Index.

 

The Index is generally comprised of approximately 500 or less U.S. listed common stocks selected based on a proprietary methodology developed by EDHEC Risk Institute Asia Ltd. (“EDHEC” or the “Index Provider”). The Index Provider selects and weights stocks, according to its Index methodology, from a pre-screening universe generally composed of the 500 largest and most liquid stocks traded principally on a stock exchange in and incorporated or domiciled (i.e., maintain a principal place of business) in the United States. The Index is composed of four sub-indices, each of which represents a specific beta exposure (or factor tilt): (i) high valuation, (ii) high momentum, (iii) low volatility, and (iv) size. Each sub-index is comprised of the top 50% of companies from the pre-screening universe that best represent that sub-index’s specific beta exposure, except that the “size” sub-index is comprised of the

7

bottom 50% of companies in the pre-screening universe according to free-float market capitalization. Each sub-index then applies a combination of five equally weighted diversification-based weighting strategies: Maximum Deconcentration, Maximum Decorrelation, Efficient Minimum Volatility, Efficient Maximum Sharpe Ratio, and Diversified Risk Weighted. Each Diversified Factor Index is designed to maximize diversification within each sub-index and limit the risks inherent with applying only one of the five diversification strategies. Each sub-index is given an equal importance or weight in the Index. The Index is reconstituted and rebalanced quarterly.

 

The Fund employs a “replication strategy” approach to try to achieve its investment objective. “Replication strategy” is a passive indexing strategy that involves investing in all the securities of the Underlying Index in approximately the same proportion as the Underlying Index. However, the Fund may utilize a representative sampling strategy with respect to the Underlying Index when a replication strategy may be detrimental to shareholders, such as when there are practical difficulties or substantial costs involved in compiling a portfolio of all the equity securities in the Underlying Index. In general, if the Fund is performing as designed, the return of the Index will dictate the return for the Fund. The Fund pursues its investment objective regardless of the market conditions and does not take defensive positions. The Fund seeks to be fully invested at all times and will concentrate its investment (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. Currently, the Index and the Fund are not concentrated.

 

The Index Provider is not affiliated with the Fund, the Adviser or the Sub-Adviser. The Index Provider determines the composition of the Index, relative weightings of the securities in the Index and publishes information regarding the market value of the Index.

 

The Adviser expects that, over time, the correlation between the Fund’s performance and that of the Index, before fees and expenses, will exceed 95%. A correlation of 100% would represent a perfect correlation. If the Fund uses a replication strategy, it can be expected to have greater correlation to the Index than if it uses a representative replication strategy.

 

Summary of Principal Risks

You can lose money on your investment in the Fund. For more information about the risks of investing in the Fund, see the sections in this Prospectus, titled “Additional Principal Risk Information” and “Additional Non-Principal Risk Information.” The Fund is subject to the risks described below. Some or all of these risks may adversely affect the Fund’s net asset value per share (“NAV”), trading price, yield, total return and/or its ability to meet its objective.

 

Early Close/Trading Halt Risk: An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Equity Securities Risk: Investments in publicly issued equity securities, including common stocks, in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value (“NAV”) of the Fund to fluctuate.
Large-Cap Risk: The Fund invests primarily in large-capitalization companies. As a result, the Fund’s performance may be adversely affected if securities of large-capitalization companies underperform securities of smaller-capitalization
8
  companies or the market as a whole. The securities of large-capitalization companies may be relatively mature compared to smaller capitalization companies and, therefore, generally experience slower growth during times of economic expansion.
Market Risk: The prices of the securities in which the Fund invests may decline for a number of reasons, including in response to economic developments and perceptions about the creditworthiness of individual issuers.
Passive Investment Risk: The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit. The Fund does not attempt to outperform its Index or take defensive positions in declining markets. As a result, the Fund’s performance may be adversely affected by a general decline in the market segments relating to its Index.
Shares of the Fund May Trade at Prices Other than NAV: Although it is expected that the market price of the Shares of the Fund will approximate the Fund’s NAV when purchased and sold in the secondary market, there may be times when the market price of the Shares is more than the NAV intra-day (premium) or less than the NAV intra-day (discount). This risk is heightened in times of market volatility or periods of steep market declines.
Tracking Error Risk: The performance of the Fund may diverge from that of the Index.

 

Fund Performance

 

The Fund is new and therefore does not have a performance history.

 

Management

 

Investment Adviser and Sub-Adviser

 

ETF Securities Advisors LLC serves as the investment adviser to the Fund. Index Management Solutions, LLC serves as the sub-adviser to the Fund.

 

Portfolio Managers

Mike Gompers, CEO, has been the portfolio manager of the Fund since its inception.

 

Justin Lowry, Portfolio Manager, has been the portfolio manager of the Fund since its inception.

 

Sean Reichert, Portfolio Manager, has been the portfolio manager of the Fund since its inception.

 

Buying and Selling Fund Shares

 

The Fund is an exchange traded fund or “ETF.” This means that shares of the Fund are listed on a national securities exchange, such as the NYSE Arca, and trade at market prices. Most investors will buy and sell shares of the Fund through brokers. Because Fund shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (premium) or less than NAV (discount). The Fund issues and redeems shares at NAV only in large blocks of shares (“Creation Units”), which only certain institutions or large investors (typically market makers or other broker-dealers) may purchase or redeem. Currently, Creation Units generally consist of 50,000 shares, though this may change from time to time. Creation Units are not expected to consist of less than 25,000 shares. The Fund generally issues and redeems Creation Units in exchange for a portfolio of securities closely approximating the holdings of the Fund and/or a designated amount of U.S. cash.

 

Payments to Broker-Dealers and Other Financial Intermediaries

If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay Intermediaries for certain activities related to the Fund, including participation in activities that are designed to make Intermediaries more knowledgeable about exchange traded products, including the Fund, or for other activities, such as marketing, educational training or other initiatives related to the sale or promotion of Fund shares. These payments may create a conflict of interest by influencing the Intermediary and your salesperson to recommend the Fund over another investment. Any such arrangements do not result in increased Fund expenses. Ask your salesperson or visit the Intermediary’s website for more information.

 

Tax Information

The Fund intends to make distributions that may be taxed as ordinary income, qualified dividend income, or capital gains.

9

ETFS Diversified-Factor Developed Europe Index Fund

 

Investment Objective

 

The Fund seeks to track the price and yield performance, before fees and expenses, of the Scientific Beta Developed Europe Multi-Beta Multi-Strategy Equal Weight Index (the “Index”).

 

Fees and Expenses of the Fund

 

The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund. The fees are expressed as a percentage of the Fund’s average net assets. Investors purchasing and selling shares may be subject to costs (including brokerage commissions) charged by their broker, which are not reflected in the table and example below.

 

   
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
 
   
Management Fees 0.39%
Distribution and Service (12b-1) Fees* 0.00%
Other Expenses** 0.01%
Total Annual Fund Operating Expenses 0.40%
   

 

* The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up to 0.25% of average daily net assets may be made; however, the Board has determined that no such payments will be made through the next twelve (12) months of operation.
** Other Expenses are based on estimated amounts for the current fiscal year.

 

Example

The following 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 include brokerage commissions that you may pay to buy and sell shares of the Fund in the secondary market.

 

The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same each year. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

1 Year   3 Years
$41   $128

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the Example, affect the Fund’s performance. Because the Fund is newly-organized, portfolio turnover information is not yet available.

 

Principal Investment Strategies

 

Under normal circumstances, at least 80% of the Fund’s total assets (exclusive of collateral held from securities lending) will be invested in the component securities of the Index. The Fund may invest the remainder of its assets in cash and cash equivalents, such as repurchase agreements or money market instruments, or other instruments that Index Management Solutions, LLC, the sub-adviser to the Fund (the “Sub-Adviser”), believes will help the Fund track the Index.

 

The Index is generally comprised of approximately 700 or less European-listed common stocks selected based on a proprietary methodology developed by EDHEC Risk Institute Asia Ltd. (“EDHEC” or the “Index Provider”). The Index Provider selects and weights stocks, according to its Index methodology, from a pre-screening universe generally composed of the 700 largest and most liquid stocks that are ordinarily traded principally on a stock exchange in one of the following 16 developed European countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Index is composed of four sub-indices, each of which represents a specific beta exposure (or factor tilt): (i) high valuation, (ii) high momentum, (iii) low volatility, and (iv) size. Each sub-index is comprised of the top 50% of

10

companies from the pre-screening universe that best represent that sub-index’s specific beta exposure, except that the “size” sub-index is comprised of the bottom 50% of companies in the pre-screening universe according to free-float market capitalization. Each sub-index then applies a combination of five equally weighted diversification-based weighting strategies: Maximum Deconcentration, Maximum Decorrelation, Efficient Minimum Volatility, Efficient Maximum Sharpe Ratio, and Diversified Risk Weighted. Each Diversified Factor Index is designed to maximize diversification within each sub-index and limit the risks inherent with applying only one of the five diversification strategies. Each sub-index is given an equal importance or weight in the Index. The Index is reconstituted and rebalanced quarterly.

 

The Fund employs a “replication strategy” approach to try to achieve its investment objective. “Replication strategy” is a passive indexing strategy that involves investing in all the securities of the Underlying Index in approximately the same proportion as the Underlying Index. However, the Fund may utilize a representative sampling strategy with respect to the Underlying Index when a replication strategy may be detrimental to shareholders, such as when there are practical difficulties or substantial costs involved in compiling a portfolio of all the equity securities in the Underlying Index. In general, if the Fund is performing as designed, the return of the Index will dictate the return for the Fund. The Fund pursues its investment objective regardless of the market conditions and does not take defensive positions. The Fund seeks to be fully invested at all times and will concentrate its investment (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. Currently, the Index and the Fund are not concentrated.

 

The Index Provider is not affiliated with the Fund, the Adviser or the Sub-Adviser. The Index Provider determines the composition of the Index, relative weightings of the securities in the Index and publishes information regarding the market value of the Index.

 

The Adviser expects that, over time, the correlation between the Fund’s performance and that of the Index, before fees and expenses, will exceed 95%. A correlation of 100% would represent a perfect correlation. If the Fund uses a replication strategy, it can be expected to have greater correlation to the Index than if it uses a representative replication strategy.

 

Summary of Principal Risks

You can lose money on your investment in the Fund. For more information about the risks of investing in the Fund, see the sections in this Prospectus, titled “Additional Principal Risk Information” and “Additional Non-Principal Risk Information.” The Fund is subject to the risks described below. Some or all of these risks may adversely affect the Fund’s net asset value per share (“NAV”), trading price, yield, total return and/or its ability to meet its objective.

 

Currency Exchange Rate Risk: The Fund invests a relatively large percentage of its assets in investments denominated in non-U.S. currencies or in securities that provide exposure to such currencies. Changes in currency exchange rates and the relative value of non-U.S. currencies will affect the value of the Fund’s investment and the value of your Fund shares. Currency exchange rates can be very volatile and can change quickly and unpredictably. As a result, the value of an investment in the Fund may change quickly and without warning and you may lose money.
Early Close/Trading Halt Risk: An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Equity Securities Risk: Investments in publicly issued equity securities, including common stocks, in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the net asset value (“NAV”) of the Fund to fluctuate.
Foreign Securities Risk: Investments in non-U.S. securities involve certain risks that may not be present with investments in U.S. securities. For example, investments in non-U.S. securities may be subject to risk of loss due to foreign currency fluctuations or to political or economic instability. Investments in non-U.S. securities also may be subject to withholding or other taxes and may be subject to additional trading, settlement, custodial, and operational risks. These and other factors can make investments in the Fund more volatile and potentially less liquid than other types of investments and may be heightened in connection with investments in developing or emerging market countries and may be heightened in connection with investments in developing or emerging markets countries.
11
Geographic Concentration in Europe: Because the Fund invests primarily in the securities of companies in Europe, the Fund’s performance is expected to be closely tied to social, political, and economic conditions within Europe and to be more volatile than the performance of more geographically diversified funds. Most developed countries in Western Europe are members of the European Union (EU), and many are also members of the European Monetary Union (EMU), which requires compliance with restrictions on inflation rates, deficits, and debt levels. Unemployment in certain European nations is historically high and several countries face significant debt problems. These conditions can significantly affect every country in Europe.
Large-Cap Risk: The Fund invests primarily in large-capitalization companies. As a result, the Fund’s performance may be adversely affected if securities of large-capitalization companies underperform securities of smaller-capitalization companies or the market as a whole. The securities of large-capitalization companies may be relatively mature compared to smaller capitalization companies and, therefore, generally experience slower growth during times of economic expansion.
Market Risk: The prices of the securities in which the Fund invests may decline for a number of reasons, including in response to economic developments and perceptions about the creditworthiness of individual issuers.
Passive Investment Risk: The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit. The Fund does not attempt to outperform its Index or take defensive positions in declining markets. As a result, the Fund’s performance may be adversely affected by a general decline in the market segments relating to its Index.
Shares of the Fund May Trade at Prices Other than NAV: Although it is expected that the market price of the Shares of the Fund will approximate the Fund’s NAV when purchased and sold in the secondary market, there may be times when the market price of the Shares is more than the NAV intra-day (premium) or less than the NAV intra-day (discount). This risk is heightened in times of market volatility or periods of steep market declines.
Tracking Error Risk: The performance of the Fund may diverge from that of the Index.

 

Fund Performance

 

The Fund is new and therefore does not have a performance history.

 

Management

 

Investment Adviser and Sub-Adviser

 

ETF Securities Advisors LLC serves as the investment adviser to the Fund. Index Management Solutions, LLC serves as the sub-adviser to the Fund.

 

Portfolio Managers

Mike Gompers, CEO, has been the portfolio manager of the Fund since its inception.

 

Justin Lowry, Portfolio Manager, has been the portfolio manager of the Fund since its inception.

 

Sean Reichert, Portfolio Manager, has been the portfolio manager of the Fund since its inception.

 

Buying and Selling Fund Shares

 

The Fund is an exchange traded fund or “ETF.” This means that shares of the Fund are listed on a national securities exchange, such as the NYSE Arca, and trade at market prices. Most investors will buy and sell shares of the Fund through brokers. Because Fund shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (premium) or less than NAV (discount). The Fund issues and redeems shares at NAV only in large blocks of shares (“Creation Units”), which only certain institutions or large investors (typically market makers or other broker-dealers) may purchase or redeem. Currently, Creation Units generally consist of 50,000 shares, though this may change from time to time. Creation Units are not expected to consist of less than 25,000 shares. The Fund generally issues and redeems Creation Units in exchange for a portfolio of securities closely approximating the holdings of the Fund and/or a designated amount of U.S. cash.

 

Payments to Broker-Dealers and Other Financial Intermediaries

If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay Intermediaries for certain activities related to the Fund, including participation in activities that are designed to make Intermediaries more knowledgeable about exchange traded products, including the Fund, or for other activities, such as marketing, educational training or other initiatives related to the sale or promotion of Fund shares. These payments may create a conflict of interest by influencing the Intermediary and your salesperson to recommend the Fund over another investment. Any such arrangements do not result in increased Fund expenses. Ask your salesperson or visit the Intermediary’s website for more information.

 

Tax Information

The Fund intends to make distributions that may be taxed as ordinary income, qualified dividend income, or capital gains.

12

Additional Information About the Funds

 

Additional Investment Objective Information. Each Fund seeks to track the price and yield performance, before fees and expenses, of its underlying Index. Each Index consists of securities in the market suggested by its name that meet specific criteria developed by its Index Provider. Since each Fund’s investment objective has been adopted as a non-fundamental investment policy, a Fund’s investment objective may be changed without a vote of shareholders upon 60 days’ prior written notice to shareholders.

 

Additional Information About Each Fund’s Strategy.

 

General. The Funds normally will invest at least 80% of its net assets, plus the amount of any borrowing for investment purposes, in the types of securities suggested by its name. Each Fund anticipates, under normal circumstances, investing substantially all of its assets in component securities of its Index. However, each Fund is permitted to invest up to 20% of its total assets in securities not included in its underlying Index, but which the Fund believes will help it track its Index. For example, a Fund may invest in securities that are not components of its Index to reflect various corporate actions and other changes to the Index (such as reconstitutions, additions and deletions).

 

Zacks Earnings Indexes. There are 16 sectors in each Zacks Earnings Index. Each sector is equally weighted (i.e., 6.25% or 1/16), unless there is a sector in which no qualifying stocks are identified. The stocks within each sector are also equally weighted. The target number of stocks in a sector is approximately equal to 1/10th of the number of stocks composing that sector in the investible universe. For instance, if there are 80 stocks in the healthcare sector in the index universe, there will be approximately 8 healthcare stocks in the underlying index, each stock having a weight of approximately 0.80% (i.e., 6.25% / 8). In addition no single stock constituent can have a weight of more than 10% and the sum of the stocks that have an individual weight in excess of 5% cannot exceed 45% of the final portfolio.

 

Zacks defines a U.S. company as a public company that is organized in the United States (U.S.) – that is, the country in which a company is organized is the primary determinant in classifying the nationality of public companies. A U.S. company may have its shares listed on a major exchange in the U.S., or they may be traded over-the-counter.

 

 

Diversified Factor Indexes. For each Diversified Factor Index, country allocation is ordinarily determined by a company’s primary listing, but, under certain circumstances identified in the Index methodology, other factors such as a company’s country of incorporation or domicile (i.e., principal place of business) may be considered. Market capitalization of a stock is determined on a free float factor basis, which excludes restricted shares owned by: (i) employees or directors and (ii) a strategic partner controlling 5% of more of the company’s capital. Shares owned by non-strategic partners (such as investment managers, insurance companies and banks) are not considered as restricted. In addition, the liquidity of a stock is assessed through a composite liquidity score, which takes into account (i) the trading ratio (how often does a particular stock trade) and (ii) the average traded daily dollar volume. If a stock trades on multiple exchanges, the index methodology only considers trading on the primary listing exchange.

 

Reconstitution and Rebalance. Each Fund’s underlying Index will be reconstituted and rebalanced quarterly.

 

Index/Trademark Licenses/Disclaimers . Zacks Investment Research, Inc. and EDHEC Risk Institute Asia Ltd., each including their subsidiaries and business divisions, respectively, (together, the “Index Providers”) shall have no liability for any errors, omissions, or interruptions related to a Fund or its underlying Index.

 

The Index Providers are not affiliated with the Trust, the Adviser, the Sub-Adviser, the Funds’ administrator, custodian, transfer agent, distributor, or any of their respective affiliates.

 

Additional Principal Risk Information About the Funds

This section provides additional information regarding the “Principal Risks” described in each Fund Summary.

 

Currency Exchange Rate Risk. The ETFS Diversified-Factor Developed Europe Index Fund invests primarily in foreign securities. Changes in currency exchange rates and the relative value of non-U.S. currencies will affect the value of the Fund’s investments and the value of your Fund shares. Because the Fund’s NAV is determined on the basis of U.S. dollars, the U.S. dollar value of your investment in the Fund may go down if the value of the local currency of the non-U.S. markets in which the Fund invests depreciates against the U.S. dollar. This is true even if the local currency value of securities in the Fund’s holdings goes up. Conversely, the dollar value of your investment in the Fund may go up if the value of the local currency appreciates against the U.S. dollar.

 

The value of the U.S. dollar measured against other currencies is influenced by a variety of factors. These factors include: national debt levels and trade deficits, changes in balances of payments and trade, domestic and foreign interest and inflation rates, global or regional political, economic or financial events, monetary policies of governments, actual or potential government intervention, and

13

global energy prices. Political instability, the possibility of government intervention and restrictive or opaque business and investment policies may also reduce the value of a country’s currency. Government monetary policies and the buying or selling of currency by a country’s government may also influence exchange rates. Currency exchange rates can be very volatile and can change quickly and unpredictably. As a result, the value of an investment in a Fund may change quickly and without warning, and you may lose money.

 

Early Close/Trading Halt Risk. An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in a Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, a Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.

 

Equity Securities Risk. Each Fund invests in equity securities, which are subject to changes in value that may be attributable to market perception of a particular issuer or the general stock market fluctuations that affect all issues. Investments in equity securities may be more volatile than investments in other asset classes. Common stocks are generally exposed to greater risk than other types of securities, such as preferred stock and debt obligations, because common stockholders generally have inferior rights to receive payment from issuers. 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.

 

Foreign Securities Risk. The ETFS Diversified-Factor Developed Europe Index Fund invests primarily in foreign securities. Investments in non-U.S. securities involve certain risks that may not be present with investments in U.S. securities. For example, investments in non-U.S. securities may be subject to risk of loss due to foreign currency fluctuations or to political or economic instability. There may be less information publicly available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may be subject to different accounting, auditing, financial reporting and investor protection standards than U.S. issuers. Investments in non-U.S. securities may be subject to withholding or other taxes and may be subject to additional trading, settlement, custodial, and operational risks. With respect to certain countries, there is the possibility of government intervention and expropriation or nationalization of assets. Because legal systems differ, there is also the possibility that it will be difficult to obtain or enforce legal judgments in certain countries. Since foreign exchanges may be open on days when a Fund does not price its shares, the value of the securities in a Fund’s portfolio may change on days when shareholders will not be able to purchase or sell a Fund’s shares. Conversely, Fund shares may trade on days when foreign exchanges are closed. Each of these factors can make investments in the Fund more volatile and potentially less liquid than other types of investments and may be heightened in connection with investments in developing or emerging market countries. Foreign securities also include American Depositary Receipts (“ADRs”) which are U.S. dollar-denominated receipts representing shares of foreign-based corporations. ADRs are issued by U.S. banks or trust companies and entitle the holder to all dividends and capital gains that are paid out on the underlying foreign shares. Global Depositary Receipts (“GDRs”), which are similar to ADRs, but are shares to foreign-based corporations generally issued by international banks in one or more markets around the world. Investments in ADRs and GDRs may be less liquid and more volatile than underlying shares in their primary trading markets.

 

Geographic Investment Risk. The ETFS Diversified-Factor Developed Europe Index Fund invests primarily in European securities. To the extent that the Fund’s Index invests a significant portion of its assets in the securities of companies of a single country or region, it is more likely to be impacted by events or conditions affecting that country or region. For example, political and economic conditions and changes in regulatory, tax, or economic policy in a country could significantly affect the market in that country and in surrounding or related countries and have a negative impact on the Fund’s performance. Currency developments or restrictions, political and social instability, and changing economic conditions have resulted in significant market volatility.

 

Investments in Europe. Most developed countries in Western Europe are members of the European Union (EU), and many are also members of the European Monetary Union (EMU), which requires compliance with restrictions on inflation rates, deficits, and debt levels. Unemployment in certain European nations is historically high and several countries face significant debt problems. These conditions can significantly affect every country in Europe. The euro is the official currency of the European Union (EU). Funds that invest in Europe may have significant exposure to the euro and events affecting the euro. Recent market events affecting several of the EU member countries have adversely affected the sovereign debt issued by those countries, and ultimately may lead to a decline in the value of the euro. A significant decline in the value of the euro may produce unpredictable effects on trade and commerce generally and could lead to increased volatility in financial markets worldwide.

 

Market Risk. Each Fund is subject to market risks that can affect the value of its Shares, sometimes rapidly and unpredictably. These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market. A Fund will typically lose value when its benchmark Index declines.

14

Market Capitalization Risk.

 

Large-Capitalization Investing

The securities of large-capitalization companies may be relatively mature compared to smaller companies and therefore subject to slower growth during times of economic expansion. Large-capitalization companies may also be unable to respond quickly to new competitive challenges, such as changes in technology and consumer tastes.

 

Small-Capitalization Investing

The securities of small-capitalization companies may be more vulnerable to adverse issuer, market, political, or economic developments than securities of a mid- or large-capitalization companies. The securities of small-capitalization companies generally trade in lower volumes and are subject to greater and more unpredictable price changes than large capitalization stocks or the stock market as a whole. Some small capitalization companies have limited product lines, markets, financial resources, and management personnel and tend to concentrate on fewer geographical markets relative to mid- and large-capitalization companies.

 

Passive Investment Risk. The Funds are not actively managed and may be affected by a general decline in market segments related to their benchmark Indexes. Each Fund invests in securities included in, or representative of securities included in, its benchmark Index, regardless of their investment merits. The Funds do not take defensive positions under any market conditions, including conditions that are adverse to the performance of a Fund.

 

Shares of the Fund May Trade at Prices Other than NAV. As with all ETFs, Fund shares may be bought and sold in the secondary market at market prices. Although it is expected that the market price of the Shares of the Fund will approximate the Fund’s NAV when purchased and sold in the secondary market, there may be times when the market price of the Shares is more than the NAV intra-day (premium) or less than the NAV intra-day (discount). This risk is heightened in times of market volatility or periods of steep market declines. The market price of Fund shares during the trading day, like the price of any exchange-traded security, includes a “bid/ask” spread charged by the exchange specialist, market makers or other participants that trade the Fund shares. In times of severe market disruption, the bid/ask spread can increase significantly. At those times, Fund shares are most likely to be traded at a discount to NAV, and the discount is likely to be greatest when the price of Fund shares is falling fastest, which may be the time that you most want to sell your Fund shares. The Adviser believes that, under normal market conditions, large market price discounts or premiums to NAV will not be sustained because of arbitrage opportunities.

 

Tracking Error Risk. Imperfect correlation between a Fund’s portfolio of securities and those in its benchmark Index, rounding of prices, changes to the Index and regulatory requirements may cause tracking error, which is the divergence of a Fund’s performance from that of its benchmark Index. This risk may be heightened during times of increased market volatility or unusual market conditions. Tracking error also may result because a Fund incurs certain fees and expenses related to creating and maintaining a portfolio of securities, while its benchmark Index does not. Although each Fund generally uses a replication strategy, if a Fund employs a representative sampling strategy, a Fund may experience tracking error to a greater extent than a fund that seeks to replicate an index.

 

Additional Non-Principal Risk Information

 

Trading. Although the Funds’ shares are listed for trading on the NYSE Arca, Inc. (the “Listing Exchange”) and may be listed or traded on U.S. and non-U.S. stock exchanges other than the Listing Exchange, there can be no assurance that an active trading market for such shares will develop or be maintained. Trading in shares may be halted due to market conditions or for reasons that, in the view of the Listing Exchange, make trading in shares inadvisable. In addition, trading in shares on the Listing Exchange is subject to trading halts caused by extraordinary market volatility pursuant to Listing Exchange “circuit breaker” rules. There can be no assurance that the requirements of the Listing Exchange necessary to maintain the listing of a Fund will continue to be met or will remain unchanged or that Fund shares will trade with any volume, or at all, on any stock exchange.

 

Costs of Buying or Selling Shares. Investors buying or selling a Fund’s shares in the secondary market will pay brokerage commissions or other charges imposed by brokers, as determined by that broker. Brokerage commissions are often a fixed amount and may be a significant proportional cost for investors seeking to buy or sell relatively small amounts of Fund shares. In addition, secondary market investors will also incur the cost of the difference between the price that an investor is willing to buy shares (the “bid” price) and the price at which an investor is willing to sell shares (the “ask” price). This difference in bid and ask prices is often referred to as the “spread” or “bid/ask spread.” The bid/ask spread varies over time for shares based on trading volume and market liquidity, and is generally lower if the Fund’s shares have more trading volume and market liquidity and higher if the Fund’s shares have little trading volume and market liquidity. Further, increased market volatility may cause increased bid/ask spreads. Due to the costs of buying or selling Fund shares, including bid/ask spreads, frequent trading of Fund shares may significantly reduce investment results and an investment in shares may not be advisable for investors who anticipate regularly making small investments.

15

Portfolio Holdings Information

 

Information about each Fund’s daily portfolio holdings is available at www.etfsecurities.com. In addition, each Fund discloses its complete portfolio holdings as of the end of its fiscal year (December 31) and its second fiscal quarter (June 30) in its reports to shareholders. Each Fund files its complete portfolio holdings as of the end of its first and third fiscal quarters (March 31 and September 30, respectively) with the SEC on Form N-Q no later than 60 days after the relevant fiscal period. You can find the SEC filings on the SEC’s website, www.sec.gov. A summarized description of the Funds’ policies and procedures with respect to the disclosure of each Fund’s portfolio holdings is available in the Statement of Additional Information (“SAI”) for the Trust.

16

Management

 

Investment Adviser

 

As investment adviser, ETF Securities Advisors LLC (the “Adviser”) is responsible for the management and administration of the Trust and the Funds. The Adviser is a registered investment adviser with offices located at 48 Wall Street, New York, NY 10005. The Adviser in a directly-owned subsidiary of ETF Securities Limited. As of January 5, 2015, ETF Securities Limited and its affiliates had assets under management totaling approximately $17.05 billion. The Adviser provides an investment program for each Fund. The Adviser also provides proactive oversight of the Sub-Adviser, daily monitoring of the Sub-Adviser’s buying and selling of securities for each Fund, and regular review of the Sub-Adviser’s performance. The Adviser also arranges for transfer agency, custody, fund administration, and all other non-distribution related services necessary for the Funds to operate. For its services, the Adviser expects to receive fees from the Funds, based on a percentage of each Fund’s average daily net assets, as shown in the following table:

 

Name of Fund Advisory Fee Rate
ETFS Zacks Earnings Large-Cap U.S. Index Fund 0.65 %
ETFS Zacks Earnings Small-Cap U.S. Index Fund 0.65 %
ETFS Diversified-Factor U.S. Large Cap Index Fund 0.39 %
ETFS Diversified-Factor Developed Europe Index Fund 0.39 %

 

Under the Investment Advisory Agreement for the Funds, the Adviser has agreed to pay all expenses of the Funds, subject to certain exceptions. For a detailed description of the Investment Advisory Agreement for the Fund, please see the “Management of the Trust” section of the SAI.

 

The basis for the Board of Trustees’ approval of the Funds’ Investment Advisory Agreement will be available in the Trust’s next report to shareholders for the period ending June 30, 2015.

 

Sub-Adviser

 

Index Management Solutions, LLC (the “Sub-Adviser”), located at 2005 Market Street, One Commerce Square, Suite 2020, Philadelphia Pennsylvania 19103, is a wholly-owned subsidiary of VTL Associates, LLC. The Sub-Adviser provides advisory services to various other exchange-traded funds as well as separate accounts. The Sub-Adviser is responsible for trading portfolio securities on behalf of each Fund, including selecting broker-dealers to execute purchase and sale transactions as instructed by the Adviser or in connection with any rebalancing or reconstitution of the Index, subject to the supervision of the Adviser and the Board. Under a sub-advisory agreement, the Adviser pays the Sub-Adviser a fee calculated daily and paid monthly, at an annual rate of the average daily net assets of each Fund as follows:

 

Fund Assets Under Management Fee
Under $100 million 0.05%
$100 million up to $299,999,999 0.04%
$300 million and above 0.03%

 

 

The basis for the Board of Trustees’ approval of the Funds’ Investment Sub-Advisory Agreement will be available in the Trust’s next report to shareholders for the period ending June 30, 2015.

 

ETF Securities Advisors LLC, as the investment adviser for the Funds, may hire one or more sub-advisers to oversee the day-to-day activities of the Funds. The sub-advisers are subject to oversight by ETF Securities Advisors LLC. ETF Securities Advisors LLC and the Trust are seeking an exemptive order from the SEC that will permit ETF Securities Advisors LLC, with the approval of the Independent Trustees of the Trust, to retain unaffiliated investment sub-advisers for the Funds without submitting the sub-advisory agreement to a vote of the Funds’ shareholders. The Trust will notify shareholders in the event of any change in the identity of such sub-adviser or sub-advisers. ETF Securities Advisors LLC has ultimate responsibility for the investment performance of the Funds due to its responsibility to oversee each sub-adviser and recommend their hiring, termination and replacement. If the exemptive relief is obtained, ETF Securities Advisors LLC will not be required to disclose fees paid to sub-advisers.

 

Portfolio Managers

 

Mike Gompers, Justin V. Lowry and Sean Reichert and are primarily responsible for the day-to-day management of the Funds.

 

Mr. Gompers is the Chief Executive Officer for IMS. He is responsible for all the firm’s business operations which includes, direct and indirect responsibility for programs, financial oversight, and all internal/external operations of the organization. He also serves as an additional portfolio manager. Mr. Gompers works closely with all outside vendors associated with the ETF and Indexing strategies.

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Before joining IMS, Mr. Gompers was an accountant with Gompers & Associates, PLLC in Wheeling, West Virginia. Mr. Gompers earned his B.S. Degree in Accounting from St. Joseph’s University and also his MBA in Accounting from St. Joseph’s University.

 

Mr. Lowry is a portfolio manager with Index Management Solutions, LLC and has been with the firm since its founding in 2009. He has six years of experience in the investment management industry, and currently manages and trades products with nearly $2.5 billion in total fund assets. Mr. Lowry has also worked to create and develop customized indexes that have been developed into exchange traded products. Mr. Lowry graduated with a B.S. in Business Management from St. Joseph’s University.

 

Mr. Reichert is a portfolio manager with Index Management Solutions, LLC and has been with the firm since 2009. He currently manages products with nearly $2.5 billion in total fund assets and facilitates the trading, as well as the cash and tax management for such accounts. Prior to joining IMS, Mr. Reichert worked as an investment consultant for VTL Associates, the parent company of IMS, where he focused on creating asset allocation models for institutional investors. He also worked in the Public Finance department at Janney Montgomery Scott, a regional investment bank. Mr. Reichert graduated with a B.S. in Economics with a concentration in Finance from The Wharton School of The University of Pennsylvania. He is currently a Level II CFA candidate.

 

The SAI provides additional information about the Portfolio Managers’ compensation, other accounts managed by the Portfolio Managers, and the Portfolio Managers’ ownership of Fund shares.

 

Additional Information on Buying and Selling Fund Shares

Most investors will buy and sell shares of the Funds in secondary market transactions through brokers. Shares of the Fund are expected to be listed for trading on the Listing Exchange and elsewhere during the trading day and can be bought and sold throughout the trading day like other shares of publicly traded securities. When buying or selling shares through a broker, most investors will incur customary brokerage commissions and charges. Shares of the Funds trade under the trading symbols listed on the cover of this Prospectus. Only authorized participants (“Authorized Participants” or “APs”) may acquire shares directly from a Fund, and only APs may tender their shares for redemption directly to the Fund, at NAV in Creation Units. Once created, shares trade in the secondary market in amounts less than a Creation Unit.

 

Share Trading Prices

Transactions in Fund shares will be priced at NAV only if you purchase or redeem shares directly from a Fund in Creation Units. As with other types of securities, the trading prices of shares in the secondary market can be affected by market forces such as supply and demand, economic conditions and other factors. The price you pay or receive when you buy or sell your shares in the secondary market may be more or less than the NAV of such shares.

 

The approximate intra-day value of shares of a Fund, also referred to as the “indicative optimized portfolio value” (IOPV), is disseminated every 15 seconds throughout the trading day by the national securities exchange on which such Fund is listed or by market data vendors or other information providers. The IOPV should not be viewed as a “real time” update of the NAV, because the IOPV may not be calculated in the same manner as the NAV, which is computed once per day, generally at the end of the day. The approximate value generally is determined by using amortized cost for securities with remaining maturities of 60 days or less, current market quotations, and/or price quotations obtained from broker-dealers that may trade in the portfolio securities held by a Fund. The Funds are not involved in, or responsible for, the calculation or dissemination of the IOPV and makes no warranty as to its accuracy.

 

Determination of Net Asset Value

The NAV of each Fund’s shares is calculated each day the national securities exchanges are open for trading as of the close of regular trading on the Listing Exchange, generally 4:00 p.m. New York time (the “NAV Calculation Time”). NAV per share is calculated by dividing a Fund’s net assets by the number of Fund shares outstanding.

 

In calculating its NAV, each Fund generally values its assets on the basis of market quotations, last sale prices, or estimates of value furnished by a pricing service or brokers who make markets in such instruments. Debt obligations with maturities of 60 days or less are valued at amortized cost, which approximates fair value.

 

Investments in futures are valued at market value, which is generally determined using the last reported official closing price or last trading price on the exchange or market on which the futures contract is primarily traded at the time of valuation. Generally, trading in futures, U.S. government securities (such as U.S. Treasury securities), money market instruments and certain fixed-income securities is substantially completed each day at various times prior to the NAV Calculation Time. The values of such securities used in computing the NAV of the Fund are determined as of such times.

 

Fair value pricing is used by a Fund when reliable market valuations are not readily available or are not deemed to reflect current market values. For these purposes, a price based on amortized cost is considered a market valuation. Securities that may be valued using “fair value” pricing may include, but are not limited to, securities for which there are no current market quotations or whose issuer is in default or bankruptcy, securities subject to corporate actions (such as mergers or reorganizations), securities subject to non-U.S. investment limits or currency controls, and securities affected by “significant events.” An example of a significant event is an event occurring after the close of the market in which a security trades but before the Fund’s next NAV calculation time that may

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materially affect the value of a Fund’s investment ( e.g. , government action, natural disaster, or significant market fluctuation). When fair-value pricing is employed, the prices of securities used by a Fund to calculate its NAV may differ from quoted or published prices for the same securities.

 

Transactions in each Fund’s shares will be priced at NAV only if you purchase or redeem shares directly from the Fund in Creation Units. Shares of the Funds are purchased or sold on a national securities exchange at market prices, which may be higher or lower than NAV.

 

Dividends and Distributions

The Funds intend to pay out dividends, if any, on a quarterly basis. Nonetheless, a Fund may not make a dividend payment every quarter. The Funds intend to distribute their net realized capital gains, if any, annually. A Fund occasionally may be required to make supplemental distributions at some other time during the year. Distributions in cash may be reinvested automatically in additional whole shares only if the broker through whom you purchased shares makes such option available. Your broker is responsible for distributing the income and capital gain distributions to you.

 

Book Entry

Shares of the Funds are held in book-entry form, which means that no stock certificates are issued. The Depository Trust Company (“DTC”) or its nominee is the record owner of all outstanding shares of the Funds.

 

Investors owning shares of a Fund are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all shares of the Fund. Participants include DTC, securities brokers and dealers, banks, trust companies, clearing corporations, and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of shares, you are not entitled to receive physical delivery of stock certificates or to have shares registered in your name, and you are not considered a registered owner of shares. Therefore, to exercise any right as an owner of shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any securities that you hold in book entry or “street name” form. Your broker will provide you with account statements, confirmations of your purchases and sales, and tax information.

 

Delivery of Shareholder Documents – Householding

Householding is an option available to certain investors of the Fund. Householding is a method of delivery, based on the preference of the individual investor, in which a single copy of certain shareholder documents can be delivered to investors who share the same address, even if their accounts are registered under different names. Householding for the Fund is available through certain broker-dealers. If you are interested in enrolling in householding and receiving a single copy of prospectuses and other shareholder documents, please contact your broker-dealer. If you are currently enrolled in householding and wish to change your householding status, please contact your broker-dealer.

 

Frequent Purchases and Redemptions of Fund Shares

The Funds impose no restrictions on the frequency of purchases and redemptions of shares. In determining not to approve a written, established policy, the Board evaluated the risks of market timing activities by Fund shareholders. Purchases and redemptions by APs, who are the only parties that may purchase or redeem shares directly with a Fund, are an essential part of the ETF process and help keep share trading prices in line with NAV. As such, the Funds accommodate frequent purchases and redemptions by APs. However, the Board has also determined that frequent purchases and redemptions for cash may increase tracking error and portfolio transaction costs and may lead to the realization of capital gains. Frequent in-kind creations and redemptions generally do not give rise to these concerns. To minimize these potential consequences of frequent purchases and redemptions, the Funds employ fair value pricing and imposes transaction fees on purchases and redemptions of Creation Units to cover the custodial and other costs incurred by a Fund in effecting trades. In addition, the Funds and the Adviser reserve the right to reject any purchase order at any time.

 

Investments by Registered Investment Companies

Section 12(d)(1) of the 1940 Act restricts investments by registered investment companies in the securities of other investment companies, including shares of the Fund. Registered investment companies are permitted to invest in the Funds beyond the limits set forth in section 12(d)(1), subject to certain terms and conditions set forth in an SEC exemptive order issued to the ETFS Trust, including that such investment companies enter into an agreement with that Fund. The Fund’s SAI provides additional information about Section 12(d)(1) limits under the “Investment Company Securities” sub-section of the “Specific Investment Strategies” section.

 

Additional Tax Information

The following discussion is a summary of some important U.S. federal income tax considerations generally applicable to investments in the Funds. Your investment in a Fund may have other tax implications. Please consult your tax advisor about the tax consequences of an investment in Fund shares, including the possible application of foreign, state, and local tax laws. Each Fund intends to qualify each year for treatment as a regulated investment company. If it meets certain minimum distribution requirements, a regulated investment company is not subject to tax at the fund level on income and gains from investments that are timely distributed to shareholders. However, a Fund’s failure to qualify as a regulated investment company or to meet minimum distribution requirements

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would result (if certain relief provisions were not available) in fund-level taxation and consequently a reduction in income available for distribution to shareholders.

 

Unless you are a tax-exempt entity or your investment in shares is made through a tax-deferred retirement account, such as an individual retirement account, you need to be aware of the possible tax consequences when:

A Fund in which you invest makes distributions,
You sell Fund shares, and
You purchase or redeem Creation Units (institutional investors only).

 

Taxes on Distributions

For federal income tax purposes, distributions of investment income are generally taxable as ordinary income or qualified dividend income. Taxes on distributions of capital gains (if any) are determined by how long a Fund owned the assets that generated them, rather than how long a shareholder has owned his or her Fund shares. Sales of assets held by a Fund for more than one year generally result in long-term capital gains and losses, and sales of assets held by a Fund for one year or less generally result in short-term capital gains and losses. Distributions of a Fund’s net capital gain (the excess of net long-term capital gains over net short-term capital losses) that are properly reported by the Fund as capital gain dividends (“Capital Gain Dividends”) will be taxable as long-term capital gains. For noncorporate shareholders, long-term capital gains are generally subject to tax at reduced rates. Distributions of short-term capital gain will generally be taxable as ordinary income. Distributions reported by the Fund as “qualified dividend income” are generally taxed to noncorporate shareholders at rates applicable to long-term capital gains, provided holding period and other requirements are met. “Qualified dividend income” generally is income derived from dividends paid by U.S. corporations or certain foreign corporations that are either incorporated in a U.S. possession or eligible for tax benefits under certain U.S. income tax treaties. In addition, dividends that a Fund receives in respect of stock of certain foreign corporations may be qualified dividend income if that stock is readily tradable on an established U.S. securities market. A portion of the dividends received from a Fund may qualify for the dividends-received deduction for corporate shareholders.

 

In general, your distributions are subject to federal income tax for the year in which they are paid. Certain distributions paid in January, however, may be treated as paid on December 31 of the prior year. Distributions are generally taxable even if they are paid from income or gains earned by a Fund before your investment (and thus were included in the Fund’s net asset value when you purchased your shares).

 

Dividends and distributions from the Funds and capital gain on the sale of Fund shares are generally taken into account in determining a shareholder’s “net investment income” for purposes of the Medicare contribution tax applicable to certain individuals, estates and trusts.

 

A Fund may include a payment of cash in addition to, or in place of, the delivery of a basket of securities upon the redemption of Creation Units. A Fund may sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. This may cause a Fund to recognize investment income and/or capital gains or losses that it might not have recognized if it had completely satisfied the redemption in-kind. As a result, a Fund may be less tax efficient if it includes such a cash payment in the proceeds paid upon the redemption of Creation Units.

 

Distributions (other than Capital Gain Dividends) paid to individual shareholders that are neither citizens nor residents of the U.S. or to foreign entities will generally be subject to a U.S. withholding tax at the rate of 30%, unless a lower treaty rate applies.

 

The Funds (or financial intermediaries, such as brokers, through which shareholders own Fund shares) generally are required to withhold and remit to the U.S. Treasury a percentage of the taxable distributions and sale or redemption proceeds paid to any shareholder who fails to properly furnish a correct taxpayer identification number, who has under-reported dividend or interest income, or who fails to certify that he, she or it is not subject to such withholding.

 

Taxes When You Sell Fund Shares

Any capital gain or loss realized upon a sale of Fund shares is generally treated as a long-term gain or loss if the shares have been held for more than one year. Any capital gain or loss realized upon a sale of Fund shares held for one year or less is generally treated as a short-term gain or loss, except that any capital loss on a sale of shares held for six months or less is treated as a long-term capital loss to the extent of Capital Gain Dividends paid with respect to such shares. The ability to deduct capital losses may be limited depending on your circumstances.

 

Taxes on Creation and Redemption of Creation Units

An Authorized Participant having the U.S. dollar as its functional currency for U.S. federal tax purposes that exchanges securities for Creation Units generally will recognize a gain or a loss equal to the difference between (i) the sum of the market value of the Creation Units at the time of the exchange and any amount of cash received by the Authorized Participant in the exchange and (ii) the sum of the exchanger’s aggregate basis in the securities surrendered and any amount of cash paid for such Creation Units. A person who

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redeems Creation Units will generally recognize a gain or loss equal to the difference between the exchanger’s basis in the Creation Units and the sum of the aggregate U.S. dollar market value of the securities plus the amount of any cash received for such Creation Units. The Internal Revenue Service, however, may assert that a loss that is realized by an Authorized Participant upon an exchange of securities for Creation Units cannot be currently deducted under the rules governing “wash sales,” or on the basis that there has been no significant change in economic position.

 

Gain or loss recognized by an Authorized Participant upon an issuance of Creation Units in exchange for securities, or upon a redemption of Creation Units, may be capital or ordinary gain or loss depending on the circumstances. Any capital gain or loss realized upon an issuance of Creation Units in exchange for securities will generally be treated as long-term capital gain or loss if the securities exchanged have been held for more than one year. Any capital gain or loss realized upon the redemption of Creation Units will generally be treated as long-term capital gain or loss if the Fund shares comprising the Creation Units have been held for more than one year. Otherwise, such capital gains or losses are treated as short-term capital gains or losses.

 

Distribution

 

ALPS Distributors, Inc. (the “Distributor”) serves as the distributor of Creation Unit Aggregations for the Funds on an agency basis. The Distributor does not maintain a secondary market in shares of the Funds. The Distributor’s principal address is 1290 Broadway, Suite 1100, Denver, Colorado 80203. The Distributor has no role in determining the policies of any Fund or the securities that are purchased or sold by any Fund.

 

The Board has adopted a Distribution and Service (12b-1) Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Rule 12b-1 Plan, each Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse the Distributor for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. The Distributor may also use this amount to compensate securities dealers or other entities that are Authorized Participants for providing distribution and/or investor services assistance, including broker-dealer and shareholder support and educational and promotional services.

 

No 12b-1 fees are currently paid by any Fund, and no such payments will be made through the next twelve (12) months of operation. However, in the event 12b-1 fees are charged in the future, because the fees are paid out of a Fund’s assets, over time these fees will increase the cost of your investment and may cost you more than certain other types of sales charges.

 

Premium/Discount and NAV Information

 

Information regarding each Fund’s NAV and how often shares of the Funds traded on the Listing Exchange at a price above ( i.e. , at a premium) or below ( i.e. , at a discount) the net asset value of the Fund during the past calendar year and most recent calendar quarter will be posted to www.etfsecurities.com when it becomes available.

 

Additional Notices

Shares of the Trust are not sponsored, endorsed, or promoted by any Listing Exchange. The Listing Exchange makes no representation or warranty, express or implied, to the owners of the shares of the Funds. The Listing Exchange is not responsible for, nor has it participated in, the determination of the timing of, prices of, or quantities of the shares of a Fund to be issued, nor in the determination or calculation of the equation by which the shares are redeemable. The Listing Exchange has no obligation or liability to owners of the shares of a Fund in connection with the administration, marketing, or trading of the shares of the Fund. Without limiting any of the foregoing, in no event shall the Listing Exchange have any liability for any lost profits or indirect, punitive, special, or consequential damages even if notified of the possibility thereof.

 

ETF Securities, the Adviser, the Index Provider and the Funds make no representation or warranty, express or implied, to the owners of shares of a Fund or any member of the public regarding the advisability of investing in securities generally or in a Fund particularly. The Index Provider is a licensor of certain trademarks, service marks and trade names of the Fund.

 

ZACKS INVESTMENT RESEARCH, INC. (“INDEX PROVIDER”) SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS RELATED TO THE FUNDS OR UNDERLYING INDEXES. THE INDEX PROVIDER MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ADVISER, DISTRIBUTOR OR OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF THE UNDERLYING INDEXES OR ANY DATA INCLUDED THEREIN. THE INDEX PROVIDER MAKES NO WARRANTY, EXPRESS OR IMPLIED, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, WITH RESPECT TO THE FUNDS OR TO THE UNDERLYING INDEXES OR TO ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE INDEX PROVIDER HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) IN CONNECTION WITH THE FUND OR THE UNDERLYING INDEXES, EVEN IF THE INDEX PROVIDER IS NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

 

The Scientific Beta United States Multi-Beta Multi-Strategy Equal Weight Index (“ Index ”) referenced herein is the property of EDHEC Risk Institute Asia Ltd (“ERIA”) and have been licensed for use in connection with ETFS Diversified-Factor U.S. Large Cap Index Fund within the framework of ERI Scientific Beta activity. Each party acknowledges and agrees that ETFS Diversified-Factor U.S. Large Cap Index Fund is not sponsored, endorsed or promoted by ERIA. ERIA makes no representation whatsoever, whether express or implied, and hereby expressly disclaim all warranties (including without limitation, those of merchantability or fitness for a particular purpose or use), with respect to the Index or any data included therein or relating thereto, and in particular disclaim any warranty either as to the quality, accuracy and/or completeness of the Index or any data included therein, the results obtained from the use of the Index and/or the composition of the Index at any particular time on any particular date or otherwise and/or the creditworthiness of any entity, or the likelihood of the occurrence of a credit event or similar event (however defined) with respect to an obligation, in the Index at any particular time on any particular data or otherwise. ERIA shall not be liable (whether in negligence or otherwise) to the parties or any other person for any error in the Index, and ERIA is under no obligation to advise the parties or any person of any error therein.

 

ERIA makes no representation whatsoever, whether express or implied, as to the advisability of purchasing or selling ETFS Diversified-Factor U.S. Large Cap Index Fund , the ability of the Index to track relevant markets’ performances, or otherwise relating to the Index or any transaction or product with respect thereto, or of assuming any risks in connection therewith. ERIA has no obligation to take the needs of any party into consideration in determining, composing or calculating the Index. No party purchasing or selling ETFS Diversified-Factor U.S. Large Cap Index Fund , nor ERIA, shall have any liability to any party for any act or failure to act by ERIA in connection with the determination, adjustment, calculation or maintenance of the Index.

 

The Scientific Beta Developed Europe Multi-Beta Multi-Strategy Equal Weight Index (“ Index ”) referenced herein is the property of EDHEC Risk Institute Asia Ltd (“ERIA”) and have been licensed for use in connection with ETFS Diversified-Factor Developed Europe Index Fund within the framework of ERI Scientific Beta activity. Each party acknowledges and agrees that ETFS Diversified-Factor Developed Europe Index Fund is not sponsored, endorsed or promoted by ERIA. ERIA makes no representation whatsoever, whether express or implied, and hereby expressly disclaim all warranties (including without limitation, those of merchantability or fitness for a particular purpose or use), with respect to the Index or any data included therein or relating thereto, and in particular disclaim any warranty either as to the quality, accuracy and/or completeness of the Index or any data included therein, the results obtained from the use of the Index and/or the composition of the Index at any particular time on any particular date or otherwise and/or the creditworthiness of any entity, or the likelihood of the occurrence of a credit event or similar event (however defined) with respect to an obligation, in the Index at any particular time on any particular data or otherwise. ERIA shall not be liable (whether in negligence or otherwise) to the parties or any other person for any error in the Index, and ERIA is under no obligation to advise the parties or any person of any error therein.

 

ERIA makes no representation whatsoever, whether express or implied, as to the advisability of purchasing or selling ETFS Diversified-Factor Developed Europe Index Fund , the ability of the Index to track relevant markets’ performances, or otherwise relating to the Index or any transaction or product with respect thereto, or of assuming any risks in connection therewith. ERIA has no obligation to take the needs of any party into consideration in determining, composing or calculating the Index. No party purchasing or selling ETFS Diversified-Factor Developed Europe Index Fund , nor ERIA, shall have any liability to any party for any act or failure to act by ERIA in connection with the determination, adjustment, calculation or maintenance of the Index.

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Financial Highlights

The Funds are new and as of the date of this Prospectus, do not have financial information to report. Financial information for the Funds will be available after the Funds have completed a fiscal year of operations.

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ETFS Trust

 

c/o ALPS Distributors, Inc.

 

1290 Broadway, Suite 1100

Denver, Colorado 80203

 

 

The Trust’s current SAI provides additional detailed information about the Funds. The Trust has electronically filed the SAI with the SEC. It is incorporated by reference in this Prospectus.

 

Additional information about the Funds’ investments will be available in the Funds’ annual and semi-annual reports to shareholders. In the annual report you will find a discussion of the market conditions and investment strategies that significantly affected each Fund’s performance during the last fiscal year.

 

To make shareholder inquiries, for more detailed information on a Fund or to request the SAI, annual or semi-annual shareholder reports free of charge, please:

 

Call: 1-844-383-7289
Monday through Friday
8:00 a.m. – 8:00 p.m. (Eastern time)
Write: ETFS Trust
c/o ALPS Distributors, Inc.
1290 Broadway, Suite 1100
Denver, Colorado 80203
       
Visit: www.etfsecurities.com    

 

Information about the Funds (including the SAI) can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. Reports and other information about the Funds are available on the EDGAR Database on the SEC’s Internet site at www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.

 

No person is authorized to give any information or to make any representations about any Fund and its shares not contained in this Prospectus and you should not rely on any other information. Read and keep this Prospectus for future reference.

 

©2014 ETFS Trust

ETFS Funds are distributed by

 

ALPS Distributors, Inc.

 

1290 Broadway, Suite 1100

Denver, Colorado 80203

INVESTMENT COMPANY ACT FILE NO.

811-22986



 

ETFS TRUST

 

STATEMENT OF ADDITIONAL INFORMATION

 

January 8, 2015

 

ETFS Zacks Earnings Large-Cap U.S. Index Fund

 

Ticker: ZLRG

 

ETFS Zacks Earnings Small-Cap U.S. Index Fund

 

 

Ticker: ZSML

 

ETFS Diversified-Factor U.S. Large Cap Index Fund

Ticker: SBUS

 

ETFS Diversified-Factor Developed Europe Index Fund

Ticker: SBEU

 

Principal U.S. Listing Exchange: NYSE Arca, Inc.

 

This Statement of Additional Information (“SAI”) is not a prospectus. The SAI should be read in conjunction with the current prospectus (the “Prospectus”) for the ETFS Zacks Earnings Large-Cap U.S. Index Fund, ETFS Zacks Earnings Small-Cap U.S. Index Fund, ETFS Diversified-Factor U.S. Large Cap Index Fund, and ETFS Diversified-Factor Developed Europe Index Fund (each a “Fund” and together the “Funds”), each a separate series of ETFS Trust (the “Trust”), as may be revised from time to time.

 

The current Prospectus for each Fund is dated January 8, 2015. Capitalized terms used herein that are not defined have the same meaning as in the Prospectus, unless otherwise noted. A copy of the Prospectus for each Fund may be obtained, without charge, by calling 1-844-383-7289, visiting www.etfsecurities.com , or writing to ETFS Trust, c/o ALPS Distributors, Inc., 1290 Broadway, Suite 1100, Denver, Colorado 80203.

 

THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS SAI. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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TABLE OF CONTENTS

 

General Description of the Trust and the Funds 3
Investment Strategies and Risks 3
General Risks 4
Specific Investment Strategies 4
Proxy Voting Policy 9
Portfolio Holdings Disclosure Policy 9
Index Descriptions 10
Investment Limitations 10
Continuous Offering 12
Management of the Trust 12
Brokerage Transactions 21
Additional Information Concerning the Trust 22
Creation and Redemption of Creation Unit Aggregations 23
Regular Holidays 27
Taxes 28
Determination of NAV 33
 
Dividends and Distributions 34
Miscellaneous Information 34
Financial Statements 35
 
Appendix A: Proxy Voting Guidelines A-1
2

GENERAL DESCRIPTION OF THE TRUST AND THE FUNDS

 

The Trust was organized as a Delaware statutory trust on January 9, 2014 and is authorized to issue multiple series or portfolios. The Trust is an open-end management investment company, registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The offering of the Trust’s shares is registered under the Securities Act of 1933, as amended (the “Securities Act”).

 

Each Fund seeks to track the price and yield performance, before fees and expenses, of a particular index (“Index”). ETF Securities Advisors LLC serves as the investment adviser (the “Adviser”) and Index Management Solutions, LLC serves as the sub-adviser (the “Sub-Adviser”) to each Fund (the Adviser and Sub-Adviser may be referred to together herein as the “Advisers”). The Adviser is a directly-owned subsidiary of ETF Securities Limited. The Indexes of the ETFS Zacks Earnings Large-Cap U.S. Index Fund and ETFS Zacks Earnings Small-Cap U.S. Index Fund (each, a “Zacks Earnings Fund” and, together, the “Zacks Earnings Funds”) are created using proprietary methodology developed by Zacks Investment Research, Inc. (“Zacks”). The Indexes of the ETFS Diversified-Factor U.S. Large Cap Index Fund and ETFS Diversified-Factor Developed Europe Index Fund (each, a “Diversified Factor Fund” and, together, the “Diversified Factor Funds”) are created using proprietary methodology developed by EDHEC Risk Institute Asia Ltd. (“EDHEC”). Zacks and EDHEC (each, an “Index Provider” and together, the “Index Providers”) are independent of the Funds and the Advisers. ALPS Distributors, Inc. serves as the distributor (the “Distributor”) of the Creation Units Aggregations of the Funds.

 

Each Fund is an exchange traded fund (“ETF”). Each Fund issues and redeems shares at net asset value per share (“NAV”) only in large blocks of shares, typically 50,000 shares or more (“Creation Units” or “Creation Unit Aggregations”), though this may change from time to time. Creation Units are not expected to consist of less than 25,000 shares. These transactions are usually in exchange for a basket of securities included in the Fund’s Index and/or an amount of cash. As a practical matter, only institutions or large investors purchase or redeem Creation Units. Except when aggregated in Creation Units, shares of the Funds are not redeemable securities.

 

Each Fund intends to qualify each year for treatment as a regulated investment company (a “RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), so that it will not be subject to federal income tax on income and gains that are timely distributed to Fund shareholders. Each Fund will invest its assets, and otherwise conduct its operations, in a manner that is intended to satisfy the qualifying income, diversification and distribution requirements necessary to establish and maintain eligibility for such treatment.

 

Shares of the Funds are listed on a national securities exchange, such as the NYSE Arca, Inc. (the “NYSE Arca” or the “Listing Exchange”), and trade throughout the day on the Listing Exchange and other secondary markets at market prices that may differ from NAV. As in the case of other publicly traded securities, brokers’ commissions on transactions will be based on commission rates charged by the applicable broker.

 

The Trust reserves the right to adjust the prices of shares in the future to maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of the applicable Fund.

 

INVESTMENT STRATEGIES AND RISKS

 

Each Fund seeks to achieve its objective by investing primarily in securities issued by issuers that comprise its relevant Index and through transactions that provide substantially similar exposure to securities in the Index. Each Fund operates as an index fund and will not be actively managed. Adverse performance of a security in a Fund’s portfolio will ordinarily not result in the elimination of the security from the Fund’s portfolio. However, this investment strategy, known as “indexing,” may eliminate some of the risks of active portfolio management, such as poor security selection. In addition, indexing may also help increase after-tax investment performance by keeping portfolio turnover low in comparison to more actively managed investment strategies. Each Fund uses a “replication strategy” approach to try to achieve the Fund’s investment objective. “Replication strategy” is a passive indexing strategy that involves investing in the securities of the Underlying Index in approximately the same proportion as the Underlying Index. However, the Fund may utilize a representative sampling strategy with respect to the Underlying Index when a replication strategy may be detrimental to shareholders, such as when there are practical difficulties or substantial costs involved in compiling a portfolio of equity securities to track the Underlying Index.

 

Each Fund’s investment objective, principal investment strategies and associated risks are described in the Fund’s Prospectus. The sections below supplement these principal investment strategies and risks and describe the Funds’ additional investment policies and the different types of investments that may be made by a Fund as a part of its non-principal investment strategies. With respect to each Fund’s investments, unless otherwise noted, if a percentage limitation on investment is adhered to at the time of investment or contract, a subsequent increase or decrease as a result of market movement or redemption will not result in a violation of such investment limitation.

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Each Fund is considered “diversified” as such term is used in the 1940 Act. With respect to 75% of its total assets, a “diversified” fund is limited by the 1940 Act such that it does not invest more than 5% of its total assets in securities of any one issuer and does not acquire more than 10% of the outstanding voting securities of any one issuer (excluding cash and cash items, government securities, and securities of other investment companies). The remaining 25% of the fund’s total assets may be invested in any manner.

 

GENERAL RISKS

 

An investment in the Funds should be made with an understanding that the value of each Fund’s portfolio securities may fluctuate in accordance with changes in the financial condition of an issuer or counterparty, changes in specific economic or political conditions that affect a particular security or issuer and changes in general economic or political conditions. An investor in the Funds could lose money over short or long periods of time.

 

An investment in the Funds 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 a Fund’s portfolio securities and therefore a decrease in the value of Shares of the Fund). Common stocks are susceptible to general stock market fluctuations and to volatile increases and decreases in value as market confidence and perceptions 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 or 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, generally have inferior rights to receive payments from the issuer in comparison with the rights of creditors or holders of debt obligations or preferred stocks. Further, unlike debt securities, which typically have a stated principal amount payable at maturity (whose value, however, is 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.

 

Although all of the securities in the Indexes are listed on major U.S. or European stock exchanges, there can be no guarantee that a liquid market for such securities will be maintained. 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 Fund’s Shares will be adversely affected if trading markets for the Fund’s portfolio securities are limited or absent, or if bid/ask spreads are wide.

 

Events in the financial sector have resulted, and may continue to result, in an unusually high degree of volatility in the financial markets, both domestic and foreign. Domestic and foreign fixed income and equity markets experienced extreme volatility and turmoil starting in late 2008 and volatility has continued to be experienced in the markets. Issuers that have exposure to the real estate, mortgage and credit markets have been particularly affected, and well-known financial institutions have experienced significant liquidity and other problems. Some of these institutions have declared bankruptcy or defaulted on their debt. It is uncertain whether or for how long these conditions will continue. These events and possible continuing market turbulence may have an adverse effect on Fund performance.

 

Authorized Participants should refer to the section herein entitled “Creation and Redemption of Creation Unit Aggregations” for additional information that may impact them.

 

SPECIFIC INVESTMENT STRATEGIES

 

A description of certain investment strategies and types of investments used by the Funds is set forth below.

 

BORROWING. Although the Funds do not intend to borrow money, a Fund may do so to the extent permitted by the 1940 Act. Under the 1940 Act, a fund may borrow up to 33% of its net assets. A Fund will borrow only for short-term or emergency purposes.

 

Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a Fund’s portfolio. Money borrowed will be subject to interest costs that may or may not be recovered by earnings on the securities purchased. A Fund also may be required to maintain minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.

 

DERIVATIVES. Each Fund may use derivative instruments as part of its investment strategies. Generally, derivatives are financial contracts whose value depends upon, or is derived from, the value of an underlying asset, reference rate or index, and may relate to bonds, interest rates, currencies, commodities, and related indexes. Examples of derivative instruments include forward contracts,

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currency and interest rate swaps, currency options, futures contracts, options on futures contracts and swap agreements. The Fund’s use of derivative instruments will be underpinned by investments in short-term, high-quality instruments, such as U.S. money market securities.

 

With respect to certain kinds of derivative transactions that involve obligations to make future payments to third parties, including, but not limited to, futures contracts, forward contracts, swap contracts, the purchase of securities on a when-issued or delayed delivery basis, or reverse repurchase agreements, under applicable federal securities laws, rules, and interpretations thereof, the Funds must “set aside” liquid assets, or engage in other measures to “cover” open positions with respect to such transactions. For example, with respect to forward contracts and futures contracts that are not contractually required to “cash-settle,” the Funds must cover its open positions by setting aside liquid assets equal to the contracts’ full, notional value. The Funds treat deliverable forward contracts for currencies that are liquid as the equivalent of “cash-settled” contracts. As such, the Funds may set aside liquid assets in an amount equal to the Fund’s daily marked-to-market (net) obligation (i.e., the Fund’s daily net liability if any) rather than the full notional amount under such deliverable forward contracts. Similarly, with respect to futures contracts that are contractually required to “cash-settle” the Funds may set aside liquid assets in an amount equal to the Fund’s daily marked-to-market (net) obligation rather than the notional value. Each Fund reserves the right to modify these policies in the future.

 

Swap Agreements . Each Fund may enter into swap agreements, including interest rate swaps. A typical interest rate swap involves the exchange of a floating interest rate payment for a fixed interest payment. Swap agreements may be used to hedge or achieve exposure to, for example, interest rates, and money market securities without actually purchasing such securities. Each Fund may use swap agreements to invest in a market without owning or taking physical custody of the underlying securities in circumstances in which direct investment is restricted for legal reasons or is otherwise impracticable. Swap agreements will tend to shift the Fund’s investment exposure from one type of investment to another or from one payment stream to another. Depending on their structure, swap agreements may increase or decrease the Fund’s exposure to long- or short-term interest rates (in the United States or abroad), corporate borrowing rates, or other factors, and may increase or decrease the overall volatility of the Fund’s investments and its share price.

 

Futures, Options and Options on Futures Contracts . Each Fund may enter into U.S. options and options on futures contracts. When a Fund purchases a futures contract, it agrees to purchase a specified underlying instrument at a specified future date. When a Fund sells a futures contract, it agrees to sell the underlying instrument at a specified future date. The price at which the purchase and sale will take place is fixed when a Fund enters into the contract. Futures can be held until their delivery dates, or can be closed out before then if a liquid secondary market is available. To the extent a Fund uses futures and options, it will do so only in accordance with applicable requirements of the Commodity Exchange Act (“CEA”) and the rules thereunder.

 

With regard to the Fund, the Adviser will continue to claim relief from the definition of commodity pool operator (“CPO”) under revised U.S. Commodity Futures Trading Commission (“CFTC”) Rule 4.5. Specifically, pursuant to CFTC Rule 4.5, the Adviser may claim exclusion from the definition of CPO, and thus from having to register as a CPO, with regard to a Fund that enters into commodity futures, commodity options or swaps solely for “bona fide hedging purposes,” or that limits its investment in commodities to a “de minimis” amount, as defined in CFTC rules, so long as the Shares of such Fund are not marketed as interests in a commodity pool or other vehicle for trading in commodity futures, commodity options or swaps. It is expected that a Fund will be able to operate pursuant to the limitations under the revised CFTC Rule 4.5 without materially adversely affecting its ability to achieve its investment objective. If, however, these limitations were to make it difficult for a Fund to achieve its investment objective in the future, the Trust may determine to operate a Fund as a regulated commodity pool pursuant to the Adviser’s CPO registration or to reorganize or close a Fund or to materially change the Fund’s investment objective and strategy.

 

The risk of loss in trading futures contracts or uncovered call options in some strategies (e.g., selling uncovered stock index futures contracts) is potentially unlimited. The Funds do not currently plan to use futures and options contracts in this way. The risk of a futures position may still be large as traditionally measured due to the low margin deposits required. In many cases, a relatively small price movement in a futures contract may result in immediate and substantial loss or gain to the investor relative to the size of a required margin deposit. The Funds, however, intend to utilize futures and options contracts in a manner designed to limit its risk exposure to levels comparable to direct investment in stocks.

 

Utilization of futures and options on futures by a Fund involves the risk of imperfect or even negative correlation to the underlying Index if the index underlying the futures contract differs from the Fund’s underlying Index. There is also the risk of loss by a Fund of margin deposits in the event of bankruptcy of a broker with whom a Fund has an open position in the futures contract or option. The purchase of put or call options will be based upon predictions by a Fund as to anticipated trends, which predictions could prove to be incorrect.

 

The potential for loss related to the purchase of an option on a futures contract is limited to the premium paid for the option plus transaction costs. Because the value of the option is fixed at the point of sale, there are no daily cash payments by the purchaser to reflect changes in the value of the underlying contract; however, the value of the option changes daily and that change would be reflected in the NAV of the Fund. The potential for loss related to writing options may be unlimited.

 

Although the Funds intend to enter into futures contracts only if there is an active market for such contracts, there is no assurance that an active market will exist for the contracts at any particular time.

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EQUITY SECURITIES. Equity securities, such as the common stocks of an issuer, are subject to stock market fluctuations and therefore may experience volatile changes in value as market conditions, consumer sentiment or the financial condition of the issuers change. A decrease in value of the equity securities in a Fund’s portfolio may also cause the value of the Fund’s Shares to decline.

 

EXCHANGE TRADED PRODUCTS. Each Fund may invest in exchange traded products (“ETPs”), which include exchange traded funds registered under the 1940 Act, exchange traded commodity trusts and exchange traded notes.

 

EXCHANGE TRADED FUNDS. Each Fund may invest in ETFs. ETFs are investment companies that trade like stocks on a securities exchange at market prices rather than NAV. As a result, ETF shares may trade at a price greater than NAV (premium) or less than NAV (discount). If a Fund invests in an ETF, the Fund will indirectly bear fees and expenses charged by the ETF in addition to the Fund’s direct fees and expenses. Investments in ETFs are also subject to brokerage and other trading costs that could result in greater expenses for a Fund.

 

EXCHANGE-TRADED NOTES. Each Fund may invest in exchange-traded notes (“ETNs”). ETNs generally are senior, unsecured, unsubordinated debt securities issued by a sponsor, such as an investment bank. ETNs are traded on exchanges and the returns are linked to the performance of market indexes. In addition to trading ETNs on exchanges, investors may redeem ETNs directly with the issuer on a periodic basis, typically in a minimum amount of 50,000 units, or hold the ETNs until maturity. The value of an ETN may be influenced by time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in the underlying market, changes in the applicable interest rates, and economic, legal, political or geographic events that affect the referenced market. Because ETNs are debt securities, they are subject to credit risk. If the issuer has financial difficulties or goes bankrupt, the Fund may not receive the return it was promised. If a rating agency lowers an issuer’s credit rating, the value of the ETN may decline and a lower credit rating reflects a greater risk that the issuer will default on its obligation. There may be restrictions on the Fund’s right to redeem its investment in an ETN. There are no periodic interest payments for ETNs, and principal is not protected. The Fund’s decision to sell its ETN holdings may be limited by the availability of a secondary market.

 

FLOATING AND ADJUSTABLE RATE NOTES. Each Fund may invest in floating-rate and adjustable rate obligations, such as demand notes, bonds, and commercial paper. Variable- and floating-rate securities generally are less sensitive to interest rate changes but may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, floating-rate securities will not generally increase in value if interest rates decline. When a Fund holds variable- or floating-rate securities, a decrease (or, in the case of inverse floating-rate securities, an increase) in market interest rates will adversely affect the income received from such securities and the net asset value of the Fund’s shares.

 

These securities may bear interest at a rate that resets based on standard money market indices or are remarketed at current market rates. They may permit the holder to demand payment of principal at any time or at specified intervals not exceeding 397 days. The issuer of such obligations may also have the right to prepay, in its discretion, the principal amount of the obligations plus any accrued interest. The “reset date” of securities held by a Fund may not be longer than 397 days. Given that most floating-rate securities reset their interest rates prior to their final maturity date, the Fund uses the period to the next reset date to calculate the securities contribution to the average portfolio maturity of the Fund.

 

ILLIQUID SECURITIES. Each Fund may invest up to an aggregate amount of 15% of its net assets in illiquid securities (calculated at the time of investment). Illiquid securities include securities subject to contractual or other restrictions on resale and other instruments that lack readily available markets, as determined in accordance with SEC staff guidance.

 

INVESTMENT COMPANY SECURITIES. Each Fund may invest in the securities of other investment companies subject to applicable limitations under Section 12(d)(1) of the 1940 Act. Pursuant to Section 12(d)(1), each Fund may invest in the securities of another investment company (the “acquired company”) provided that the Fund, immediately after such purchase or acquisition, does not own in the aggregate: (i) more than 3% of the total outstanding voting stock of the acquired company; (ii) securities issued by the acquired company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii) securities issued by the acquired company and all other investment companies (other than treasury stock of the Fund) having an aggregate value in excess of 10% of the value of the total assets of the Fund. To the extent allowed by law or regulation, the Fund may invest its assets in securities of investment companies that are money market funds in excess of the limits discussed above.

 

If the Fund invests in and, thus, is a shareholder of, another investment company, the Fund’s shareholders will indirectly bear the Fund’s proportionate share of the fees and expenses paid by such other investment company, including advisory fees, in addition to both the management fees payable directly by the Fund to the Fund’s own investment adviser and the other expenses that the Fund bears directly in connection with the Fund’s own operations.

 

Section 12(d)(1) of the 1940 Act restricts investments by registered investment companies in securities of other registered investment companies, including the Fund. The acquisition of the Fund’s Shares by registered investment companies is subject to the restrictions of Section 12(d)(1) of the 1940 Act, except as may be permitted by exemptive rules under the 1940 Act or as may at some future time

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be permitted by an exemptive order that permits registered investment companies to invest in the Fund beyond the limits of Section 12(d)(1), subject to certain terms and conditions, including that the registered investment company enter into an agreement with the Fund regarding the terms of the investment.

 

The Fund may rely on Section 12(d)(1)(F) and Rule 12d1-3 of the 1940 Act, which provide an exemption from Section 12(d)(1) that allows the Fund to invest all of its assets in other registered funds, including ETFs, if, among other conditions: (a) the Fund, together with its affiliates, acquires no more than three percent of the outstanding voting stock of any acquired fund, and (b) the sales load charged on the Fund’s shares is no greater than the limits set forth in Rule 2830 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc. (“FINRA”).

 

LENDING PORTFOLIO SECURITIES. While the Funds do not currently engage in securities lending, each Fund may lend portfolio securities to certain creditworthy borrowers in U.S. and non-U.S. markets in an amount not to exceed one third (33 1 3 %) of the value of its total assets. The borrowers provide collateral that is marked to market daily, in an amount at least equal to the current market value of the securities loaned. A Fund may terminate a loan at any time and obtain the securities loaned. A Fund receives the value of any interest or cash or non-cash distributions paid on the loaned securities. A Fund cannot vote proxies for securities on loan, but may recall loans to vote proxies if a material issue affecting the Fund’s economic interest in the investment is to be voted upon. Distributions received on loaned securities in lieu of dividend payments ( i.e., substitute payments) would not be considered qualified dividend income.

 

With respect to loans that are collateralized by cash, the borrower will be entitled to receive a fee based on the amount of cash collateral. A Fund is compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral other than cash, a Fund is compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. Any cash collateral may be reinvested in certain short-term instruments either directly on behalf of the lending Fund or through one or more joint accounts or money market funds, which may include those managed by the Adviser.

 

A Fund may pay a portion of the interest or fees earned from securities lending to a borrower as described above, and to one or more securities lending agents that would be approved by the Board of Trustees of the Trust (the “Board”) and who would administer the lending program for the Funds in accordance with guidelines that would be approved by the Board. In such capacity, the lending agent causes the delivery of loaned securities from a Fund to borrowers, arranges for the return of loaned securities to the Fund at the termination of a loan, requests deposit of collateral, monitors the daily value of the loaned securities and collateral, requests that borrowers add to the collateral when required by the loan agreements, and provides recordkeeping and accounting services necessary for the operation of the program.

 

Securities lending involves exposure to certain risks, including operational risk (i.e., the risk of losses resulting from problems in the settlement and accounting process), “gap” risk (i.e., the risk of a mismatch between the return on cash collateral reinvestments and the fees a Fund has agreed to pay a borrower), risk of loss of collateral, credit, legal, counterparty and market risk. While the Funds do not currently engage in securities lending, one or more Funds may do so in the future with the necessary approvals by the Board.

 

MONEY MARKET INSTRUMENTS. Each Fund may invest a portion of its assets in high-quality money market instruments on an ongoing basis to provide liquidity or for other reasons. The instruments in which a Fund may invest include: (i) short-term obligations issued by the U.S. Government; (ii) negotiable certificates of deposit (“CDs”), fixed time deposits and bankers’ acceptances of U.S. and foreign banks and similar institutions; (iii) commercial paper rated at the date of purchase “Prime-1” by Moody’s or “A-1+” or “A-1” by Standard & Poor’s (“S&P”) or, if unrated, of comparable quality as determined by the Fund; and (iv) repurchase agreements. CDs are short-term negotiable obligations of commercial banks. Time deposits are non-negotiable deposits maintained in banking institutions for specified periods of time at stated interest rates. Banker’s acceptances are time drafts drawn on commercial banks by borrowers, usually in connection with international transactions.

 

NON-U.S. SECURITIES. The ETFS Diversified-Factor Developed Europe Index Fund invests primarily in non-U.S. equity securities. Investments in non-U.S. equity securities involve certain risks that may not be present in investments in U.S. securities. For example, non-U.S. securities may be subject to currency risks or to foreign government taxes. There may be less information publicly available about a non-U.S. issuer than about a U.S. issuer, and a foreign issuer may or may not be subject to uniform accounting, auditing and financial reporting standards and practices comparable to those in the U.S. Other risks of investing in such securities include political or economic instability in the country involved, the difficulty of predicting international trade patterns and the possibility of imposition of exchange controls. The prices of such securities may be more volatile than those of domestic securities. With respect to certain foreign countries, there is a possibility of expropriation of assets or nationalization, imposition of withholding taxes on dividend or interest payments, difficulty in obtaining and enforcing judgments against foreign entities or diplomatic

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developments which could affect investment in these countries. Losses and other expenses may be incurred in converting between various currencies in connection with purchases and sales of foreign securities.

 

Non-U.S. stock markets may not be as developed or efficient as, and may be more volatile than, those in the U.S. While the volume of shares traded on non-U.S. stock markets generally has been growing, such markets usually have substantially less volume than U.S. markets. Therefore, a Fund’s investment in non-U.S. equity securities may be less liquid and subject to more rapid and erratic price movements than comparable securities listed for trading on U.S. exchanges. Non-U.S. equity securities may trade at price/earnings multiples higher than comparable U.S. securities and such levels may not be sustainable. There may be less government supervision and regulation of foreign stock exchanges, brokers, banks and listed companies abroad than in the U.S. Moreover, settlement practices for transactions in foreign markets may differ from those in U.S. markets. Such differences may include delays beyond periods customary in the U.S. and practices, such as delivery of securities prior to receipt of payment, that increase the likelihood of a failed settlement, which can result in losses to a Fund. The value of non-U.S. investments and the investment income derived from them may also be affected unfavorably by changes in currency exchange control regulations. Foreign brokerage commissions, custodial expenses and other fees are also generally higher than for securities traded in the U.S. This may cause the ETFS Diversified-Factor Developed Europe Index Fund to incur higher portfolio transaction costs than domestic equity funds. Fluctuations in exchange rates may also affect the earning power and asset value of the foreign entity issuing a security, even one denominated in U.S. dollars. Dividend and interest payments may be repatriated based on the exchange rate at the time of disbursement, and restrictions on capital flows may be imposed.

 

Investments in Europe. The ETFS Diversified-Factor Developed Europe Index Fund invests primarily in companies traded principally on a stock exchange in Europe. Most developed countries in Western Europe are members of the European Union (“EU”), and many are also members of the European Economic and Monetary Union (“EMU”), which requires compliance with restrictions on inflation rates, deficits, and debt levels. Unemployment in certain European nations is historically high and several countries face significant debt problems. These conditions can significantly affect every country in Europe. The euro is the official currency of the EU. The Fund may have significant exposure to the euro and events affecting the euro. Recent market events affecting several of the EU member countries have adversely affected the sovereign debt issued by those countries, and ultimately may lead to a decline in the value of the euro. A significant decline in the value of the euro may produce unpredictable effects on trade and commerce generally and could lead to increased volatility in financial markets worldwide.

 

REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with counterparties that are deemed to present acceptable credit risks. A repurchase agreement is a transaction in which a Fund purchases securities or other obligations from a bank or securities dealer (or its affiliate) and simultaneously commits to resell them to a counterparty at an agreed-upon date or upon demand and at a price reflecting a market rate of interest unrelated to the coupon rate or maturity of the purchased obligations. Each Fund maintains custody of the underlying obligations prior to their repurchase, either through its regular custodian or through a special “tri-party” custodian or sub-custodian that maintains separate accounts for both the Fund and its counterparty. Thus, the obligation of the counterparty to pay the repurchase price on the date agreed to or upon demand is, in effect, secured by such obligations.

 

Repurchase agreements carry certain risks not associated with direct investments in securities, including a possible decline in the market value of the underlying obligations. If their value becomes less than the repurchase price, plus any agreed-upon additional amount, the counterparty must provide additional collateral so that at all times the collateral is at least equal to the repurchase price plus any agreed-upon additional amount. The difference between the total amount to be received upon repurchase of the obligations and the price that was paid by the Fund upon acquisition is accrued as interest and included in its net investment income. Repurchase agreements involving obligations other than U.S. Government securities (such as commercial paper and corporate bonds) may be subject to special risks and may not have the benefit of certain protections in the event of the counterparty’s insolvency. If the seller or guarantor becomes insolvent, the Fund may suffer delays, costs and possible losses in connection with the disposition of collateral.

 

REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase agreements, which involve the sale of securities held by the Fund subject to its agreement to repurchase the securities at an agreed-upon date or upon demand and at a price reflecting a market rate of interest. Reverse repurchase agreements are subject to the Fund’s limitation on borrowings and may be entered into only with banks or securities dealers or their affiliates. While a reverse repurchase agreement is outstanding, the Fund will maintain the segregation, either on its records or with the Trust’s custodian, of cash or other liquid securities, marked-to-market daily, in an amount at least equal to its obligations under the reverse repurchase agreement.

 

Reverse repurchase agreements involve the risk that the buyer of the securities sold by the Fund might be unable to deliver them when that Fund seeks to repurchase. If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the buyer or trustee or receiver may receive an extension of time to determine whether to enforce the Fund’s obligation to repurchase the securities, and the Fund’s use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision.

 

TRACKING STOCKS. Each Fund may invest in tracking stocks. A tracking stock is a separate class of common stock whose value is linked to a specific business unit or operating division within a larger company and which is designed to “track” the performance of

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such business unit or division. The tracking stock may pay dividends to shareholders independent of the parent company. The parent company, rather than the business unit or division, generally is the issuer of tracking stock. However, holders of the tracking stock may not have the same rights as holders of the company’s common stock.

 

U.S. GOVERNMENT SECURITIES. Each Fund will invest in short-term obligations issued or guaranteed by the U.S. Treasury or the agencies or instrumentalities of the U.S. government. Such obligations may be short-, intermediate- or long-term. U.S. government securities are obligations of, or guaranteed by, the U.S. government, its agencies or government-sponsored enterprises. U.S. government securities are subject to market and interest rate risk, and may be subject to varying degrees of credit risk. U.S. government securities include inflation-indexed fixed income securities, such as U.S. Treasury Inflation Protected Securities (TIPS). U.S. government securities include zero coupon securities, which tend to be subject to greater market risk than interest-paying securities of similar maturities.

 

FUTURE DEVELOPMENTS. The Trust’s Board of Trustees (the “Board”) may, in the future, authorize a Fund to invest in securities contracts and investments other than those listed in this SAI and in the Fund’s Prospectus, provided they are consistent with the Fund’s investment objective and do not violate any investment restrictions or policies.

 

PROXY VOTING POLICY

 

Each Fund has delegated proxy voting responsibilities to the Adviser, subject to the Board’s oversight. In delegating proxy responsibilities, the Board has directed that proxies be voted consistent with each Fund’s and its shareholders’ best interests and in compliance with all applicable proxy voting rules and regulations. The Adviser has engaged a third party proxy solicitation firm to assist with voting proxies in a timely manner and who has adopted proxy voting policies and guidelines for this purpose (“Proxy Voting Policies”). A copy of the Proxy Voting Policies is set forth in Appendix A to this SAI. The Trust’s Chief Compliance Officer (“CCO”) is responsible for monitoring the effectiveness of the Proxy Voting Policies. The Proxy Voting Policies have been adopted by the Trust as the policies and procedures that the Adviser will use when voting proxies on behalf of the Funds.

 

The Proxy Voting Policies address, among other things, material conflicts of interest that may arise between the interests of the Funds and the interests of the Adviser. The Proxy Voting Policies will ensure that all issues brought to shareholders are analyzed in light of the Adviser’s fiduciary responsibilities.

 

When available, information regarding how a Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, upon request, by calling 1-844-383-7289 or from the Funds’ website at http://www.etfsecurities.com , and on the SEC’S website at http://www.sec.gov.

 

PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES

 

The Trust has adopted a Portfolio Holdings Policy (the “Policy”) designed to govern the disclosure of each Fund’s portfolio holdings and the use of material non-public information about Fund holdings. The Policy applies to all officers, employees, and agents of the Funds, including the Adviser. The Policy is designed to ensure that the disclosure of information about each Fund’s portfolio holdings is consistent with applicable legal requirements and otherwise in the best interest of the Funds.

 

As exchange-traded funds, information about each Fund’s portfolio holdings is made available on a daily basis in accordance with the provisions of any Order of the SEC applicable to the Funds, regulations of the Funds’ Listing Exchange and other applicable SEC regulations, orders and no-action relief. Such information typically reflects all or a portion of a Fund’s anticipated portfolio holdings as of the next Business Day.

 

A “Business Day” is any day on which the Listing Exchange is open for business. As of the date of this SAI, NYSE Arca observes the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

 

Information about a Fund’s portfolio holdings is made available on a daily basis in accordance with the provisions of any Order of the SEC applicable to each Fund, regulations of each Fund’s Listing Exchange and other applicable SEC regulations, orders and no-action relief. Such information typically reflects all or a portion of the Fund’s anticipated portfolio holdings as of the next Business Day. This information is used in connection with the Creation and Redemption process and is disseminated on a daily basis through the facilities of the Listing Exchange, the National Securities Clearing Corporation (“NSCC”) and/or third-party service providers.

 

Each Fund may disclose on its website at the start of each Business Day the identities and quantities of the securities and other assets held by each Fund that will form the basis of the Fund’s calculation of its NAV on that Business Day. The portfolio holdings so disclosed will be based on information as of the close of business on the prior Business Day and/or trades that have been completed prior to the opening of business on that Business Day and that are expected to settle on that Business Day.

9

Daily access to each Fund’s portfolio holdings with no lag time is permitted to personnel of the Adviser, the Distributor and the Fund’s administrator (“Administrator”), custodian and accountant and other agents or service providers of the Trust who have need of such information in connection with the ordinary course of their respective duties to the Fund. The Fund’s CCO may authorize disclosure of portfolio holdings.

 

Each Fund may disclose its complete portfolio holdings or a portion of its portfolio holdings online at www.etfsecurities.com. Online disclosure of such holdings is publicly available at no charge.

 

Each Fund will disclose its complete portfolio holdings schedule in public filings with the SEC on a quarterly basis, based on the Fund’s fiscal year, within sixty (60) days of the end of the quarter, and will provide that information to shareholders, as required by federal securities laws and regulations thereunder.

 

No person is authorized to disclose a Fund’s portfolio holdings or other investment positions except in accordance with the Policy. The Board reviews the implementation of the Policy on a periodic basis.

 

INDEX DESCRIPTIONS

 

A description of each Index on which a Fund is based is provided in the relevant Fund’s Prospectus under “Principal Investment Strategies” with certain additional details provided below. Additional information about the Indexes of the Zacks Earnings Funds and the Diversified Factor Funds, including the components and weightings of the Indexes, as well as the rules that govern inclusion and weighting in each of the Indexes, is available at www.zacksindexservices.com and www.scientificbeta.com , respectively.

 

Quarterly Index Reconstitution. Each Index is “reconstituted” quarterly after the Market close on the 3rd Friday of March, June, September and December. If the day happens to be a holiday, reconstitution will take place on the following business day.

 

During each reconstitution, securities are screened to determine whether they comply with each Index Provider’s index methodology and are eligible to be included in the Indexes. The date of the determination is sometimes referred to as the “Index measurement date” or the “Screening Point.” Based on this screening, securities that meet the Index requirements are added to that Index, and securities that do not meet such requirements are dropped from that Index.

 

Index Maintenance. Index maintenance occurs throughout the year and includes monitoring and implementing the adjustments for company additions and deletions, stock splits, corporate restructurings and other corporate actions. Corporate actions are generally implemented after the close of trading on the day prior to the ex-date of such corporate actions. To the extent reasonably practicable, such changes will be announced at least two days prior to their implementation.

 

Index Availability: Each Index is calculated and disseminated throughout each day the NYSE Arca is open for trading.

 

Changes to the Index Methodology. Each Index is governed by a published, rules-based methodology. Changes to the methodology will be publicly disclosed at www.zacksindexservices.com and www.scientificbeta.com , respectively, prior to implementation. Sixty days’ notice will be given prior to the implementation of any such change.

 

Index Calculation Agent. Each Index Provider has retained an unaffiliated third party to calculate each Index (the “Calculation Agent”). The Calculation Agent, using the rules-based methodology, will calculate, maintain and disseminate the Index on a daily basis. Each Index Provider will monitor the results produced by the Calculation Agent to help ensure that each Index is being calculated in accordance with the rules-based methodology. In addition, each Index Provider has established policies and procedures designed to prevent non-public information about pending changes to the Index from being used or disseminated in an improper manner. Furthermore, the Adviser has established policies and procedures designed to prevent improper use and dissemination of non-public information about each Fund’s portfolio strategies and to prevent any Fund’s portfolio managers from having any influence on the construction of the Index methodology.

 

INVESTMENT LIMITATIONS

 

The following fundamental investment policies and limitations supplement those set forth in each Fund’s Prospectus. Unless otherwise noted, whenever a fundamental investment policy or limitation states a maximum percentage of a Fund’s assets that may be invested in any security or other asset, or sets forth a policy regarding quality standards, such standard or percentage limitation will be determined immediately after and as a result of the Fund’s acquisition of such security or other asset. Accordingly, other than with respect to a Fund’s limitations on borrowings, any subsequent change in values, net assets, or other circumstances will not be considered when determining whether the investment complies with the Fund’s investment policies and limitations.

 

Each Fund’s fundamental investment policies cannot be changed without the approval of the holders of a majority of the Fund’s outstanding voting securities as defined under the 1940 Act. Each Fund , however, may change the non-fundamental investment

10

policies described below, its investment objective, and its underlying Index without a shareholder vote provided that it obtains Board approval and notifies its shareholders with at least sixty (60) days’ prior written notice of any such change.

 

Fundamental Policies. The following investment policies and limitations are fundamental and may NOT be changed without shareholder approval.

 

A Fund, as a fundamental investment policy, may not:

 

Senior Securities

 

Issue senior securities, except as permitted under the 1940 Act.

 

Borrowing

 

Borrow money, except as permitted under the 1940 Act.

 

Underwriting

 

Act as an underwriter of another issuer’s securities, except to the extent that a Fund may be considered an underwriter within the meaning of the Securities Act in the disposition of portfolio securities.

 

Concentration

 

Purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities) if, as a result, more than 25% of the Fund’s total assets would be invested in the securities of companies whose principal business activities are in the same industry, except that a Fund will invest more than 25% of its total assets in securities of the same industry to approximately the same extent that the Fund’s underlying Index concentrates in the securities of a particular industry or group of industries.

 

Real Estate

 

Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent a Fund from investing in securities or other instruments backed by real estate, real estate investment trusts or securities of companies engaged in the real estate business).

 

Commodities

 

Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent a Fund from purchasing or selling options and futures contracts or from investing in securities or other instruments backed by physical commodities).

 

Loans

 

Lend any security or make any other loan except as permitted under the 1940 Act.

 

This means that no more than 33 1/3% of its total assets would be lent to other parties. This limitation does not apply to purchases of debt securities or to repurchase agreements, or to acquisitions of loans, loan participations or other forms of debt instruments, permissible under the Fund’s investment policies.

 

With respect to issuing Senior Securities , as noted above, a Fund is not permitted to issue senior securities, except that a Fund may borrow from any bank if immediately after such borrowing the value of the Fund’s total assets is at least 300% of the principal amount of all of the Fund’s borrowings (i.e., the principal amount of the borrowings may not exceed 33 1/3% of the Fund’s total assets). In the event that such asset coverage shall at any time fall below 300% a Fund shall, within three days thereafter (not including Sundays and holidays), reduce the amount of its borrowings to an extent that the asset coverage of such borrowing shall be at least 300%. The fundamental investment limitations set forth above limit the Fund’s ability to engage in certain investment practices and purchase securities or other instruments to the extent permitted by, or consistent with, applicable law. As such, these limitations will change as the statute, rules, regulations or orders (or, if applicable, interpretations) change, and no shareholder vote will be required or sought.

 

With respect to Borrowing , as noted above, a Fund may not borrow money, except that a Fund may (i) borrow money from banks for temporary or emergency purposes (but not for leverage or the purchase of investments) and (ii) engage in other transactions permissible under the 1940 Act that may involve a borrowing (such as obtaining short-term credits as are necessary for the clearance of transactions, engaging in delayed-delivery transactions, or purchasing certain futures, forward contracts and options), provided that the combination of (i) and (ii) shall not exceed 33-1/3% of the value of the Fund’s total assets (including the amount borrowed), less the Fund’s liabilities (other than borrowings).

 

Non-Fundamental Policies. The following investment policies are not fundamental and may be changed without shareholder approval.

11

80% Policy

 

Under normal circumstances, each Fund will invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in the types of securities suggested by the Fund’s name.

 

If, subsequent to an investment, the 80% requirement is no longer met, the Fund’s future investments will be made in a manner that will bring the Fund into compliance with this policy. Prior to any change in the Fund’s 80% policy, each Fund will provide shareholders with 60 days’ notice.

 

Illiquid Securities

 

The Funds may not invest, in the aggregate, more than 15% of its net assets in securities with legal or contractual restrictions on resale, securities that are not readily marketable and repurchase agreements with more than seven days to maturity .

 

CONTINUOUS OFFERING

 

The method by which Creation Unit Aggregations of shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Unit Aggregations of shares are issued and sold by the Funds on an ongoing basis, at any point a “distribution,” as such term is used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery requirement 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 Unit Aggregations after placing an order with the Funds’ 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-dealer firms should also note that dealers who are not “underwriters” but are effecting transactions in shares, whether or not participating in the distribution of shares, generally are required to deliver a prospectus. 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. Firms that incur a prospectus delivery obligation with respect to shares of a Fund are reminded that, pursuant to Rule 153 under the Securities Act, a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to an exchange member in connection with the sale on the Listing Exchange is satisfied by the fact that the prospectus is available at the Listing Exchange upon request. The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on an exchange.

 

MANAGEMENT OF THE TRUST

 

Board Responsibilities. The Board of Trustees is responsible for overseeing the management and affairs of the Funds and the Trust. The Board has considered and approved contracts, as described herein, under which certain companies provide essential management and administrative services to the Trust. Like most ETFs, the day-to-day business of the Trust, including the day-to-day management of risk, is performed by third-party service providers, such as the Adviser, Distributor and Administrator. The Board is responsible for overseeing the Trust’s service providers and, thus, has oversight responsibility with respect to the risk management performed by those service providers. Risk management seeks to identify and eliminate or mitigate the potential effects of 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 or the Funds. Under the overall supervision of the Board and the Audit Committee (discussed in more detail below), the service providers to the Funds employ a variety of processes, procedures and controls to identify risks relevant to the operations of the Trust and the Funds to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust’s business ( e.g. , the Adviser is responsible for the day-to-day management of the Fund’s portfolio investments) and, consequently, for managing the risks associated with that activity.

 

The Board’s role in risk management oversight begins before the inception of a Fund, at which time the Fund’s Adviser presents the Board with information concerning the investment objective, strategies and risks of the Fund. Additionally, the Fund’s Adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board oversees the risk management of the Fund’s operations, in part, by requesting periodic reports from and otherwise communicating with various personnel of the Funds and its service providers, including the Trust’s CCO and the Fund’s independent registered public accountants. The Board and, with respect to identified risks that relate to its scope of expertise, the Audit Committee oversee efforts by management and service providers to manage risks to which the Funds may be exposed.

12

The Board is responsible for overseeing the nature, extent and quality of the services provided to the Funds by the Adviser and receives information about those services at its regular meetings. In addition, on at least an annual basis, in connection with its consideration of whether to renew the Advisory Agreement with the Adviser, the Board meets with the Adviser to review such services. Among other things, the Board regularly considers the Adviser’s adherence to each Fund’s investment restrictions and compliance with various Fund policies and procedures and with applicable securities regulations. The Board also reviews information about each Fund’s performance and investments.

 

The Trust’s CCO meets regularly with the Board to review and discuss compliance and other issues. At least annually, the Trust’s CCO provides the Board with a report reviewing the adequacy and effectiveness of the Trust’s policies and procedures and those of its service providers, including the Adviser. The report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last report; material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and material compliance matters since the date of the last report.

 

The Board receives reports from the Trust’s service providers regarding operational risks, portfolio valuation and other matters. Annually, an independent registered public accounting firm reviews with the Audit Committee its audit of the Trust’s financial statements, focusing on major areas of risk encountered by the Trust and noting any significant deficiencies or material weaknesses in the Trust’s internal controls.

 

The Board recognizes that not all risks that may affect a Fund 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 a Fund’s goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, despite the periodic reports the Board receives and the Board’s discussions with the service providers to a Fund, it may not be made aware of all of the relevant information of a particular risk. Most of the Trust’s investment management and business affairs are carried out by or through the Funds’ Adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are carried out may differ from the Trust’s and each other’s in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board’s risk management oversight is subject to substantial limitations.

 

Members of the Board and Officers of the Trust. There are 3 members of the Board, 2 of whom are not interested persons of the Trust, as that term is defined in the 1940 Act (“Independent Trustees”). Graham Tuckwell, an interested person of the Trust, serves as Chairman of the Board. The Trust does not have a lead independent Trustee. The Board is comprised of a majority (66.7%) of Independent Trustees. There is an Audit Committee of the Board that is chaired by an Independent Trustee and comprised solely of Independent Trustees. The Audit Committee chair presides at the Committee meetings, participates in formulating agendas for Committee meetings, and coordinates with management to serve as a liaison between the Independent Trustees and management on matters within the scope of responsibilities of the Committee as set forth in its Board-approved charter. The Trust has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in consideration of, among other things, the fact that the Independent Trustees constitute 66.7% of the Board, the number of Independent Trustees that constitute the Board, the amount of assets under management in the Trust, and the number of Funds overseen by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the Independent Trustees from Fund management.

 

The Board of Trustees has two standing committees: the Audit Committee, and Nominating Committee. The Audit Committee and Nominating Committee are chaired by an Independent Trustee and composed of Independent Trustees.

 

Set forth below are the names, ages, positions with the Trust, length of term of office, and the principal occupations and other directorships held during at least the last five years of each of the persons currently serving as a Trustee of the Trust, as well as information about each officer. The business address of each Trustee and officer is ETFS Trust, 48 Wall Street, New York, NY 10005.

13
Name and Year of
Birth of
Trustee/Officer
  Position(s)
Held with
the Trust,
Term of
Office and
Length of
Time Served
  Principal Occupation(s)
During Past 5 Years
  Number of
Portfolios in
Fund
Complex
Overseen
by Trustee/
Officer+
  Other
Directorships Held
by Trustee During
Past 5 Years
Interested Trustees
                 
               
Graham Tuckwell***
(1956)
  Trustee,
2014 - present
  ETF Securities, Chairman, 2005-present   4   Chairman, ETFS Management Company (Jersey), ETFS Holdings (Jersey) Limited, Gold Bullion Securities Limited, ETFS Metal Securities Australia Limited (formerly known as Gold Bullion Securities Limited), ETFS Oil Securities Limited, 2005-present; Chairman, ETFS Commodity Securities Limited, 2006-present; Chairman, ETFS Foreign Exchange Limited, 2009-present; Chairman, ETFS Hedged Commodity Securities Limited, 2012-present; Chairman, ETFS Commodity Securities Australia Limited, 2013-present; Chairman, Swiss Commodity Securities Limited, 2013-present;  Chairman, ETFS Hedged Metal Securities Limited, 2013-present; Chairman,  ETFS Equity Securities Limited, 2014-present; Director, GO UCITS ETF Solutions PLC, 2008-present; Director, GO ETF Management Limited (Ireland), 2008-present; President and Chief Executive Officer, ETF Securities USA LLC, 2009-present
               
                 
Independent Trustees
                 
               
Stephen O’Grady*
(1946)
  Trustee,
2014 - present 
  GFI Group Inc (GFIG) Financial Brokerage, Head of ETF Unit, February 2011-January 2012; Kellogg Capital, Partner, January 2011-April 2014   4   Trustee, Greenhaven Continuous Commodity ETF (GCC), January 2013-present; Trustee, Acacia Group LLC, June 2014-present; Trustee, Infracap- Master Limited Partnership ETF, November 2014-present
                 
William M. Thomas**
(1962)
  Trustee,
2014 - present
  ActiveETF Partners, Managing Partner, December 2012-present; Curian Capital, Senior Vice President, March 2012-December 2012; Grail Advisers, Chief Executive Officer, May 20008-May 2011   4   President and Interested Trustee, Grail Advisors ETF Trust, 2009-2011; Chairman, Squirrel Island, Maine, Squirrel Island Board of Overseers, 2009-present
               
14
Name and Year of
Birth of
Trustee/Officer
  Position(s)
Held with
the Trust,
Term of
Office and
Length of
Time Served
  Principal Occupation(s)
During Past 5 Years
  Number of
Portfolios in
Fund
Complex
Overseen
by Trustee/
Officer+
  Other
Directorships Held
by Trustee During
Past 5 Years
                 
Officers of the Trust  
                 
               
Benoit Autier***
(1975)
  President,
2014 - present;
Secretary, 2014-present 
  ETFS Trust, President, July 2014-present; ETF Securities Advisors LLC, Managing Director, July 2014-present, Head of Product Management, 2009-present   4   ETF Securities International, Director, December 2010-April 2013
                 
Joe Roxburgh***   (1972)   Treasurer,
2014 - present
  ETF Securities Advisors LLC, Chief Financial Officer, November 2012-present; Alcora Group, Group Finance Director and Company Secretary, April 2006-November 2012    4    
                 
Adam Rezak***
(1969)
  Chief
Compliance Officer,
2014 - present 
  ETF Securities, Chief Compliance Officer, July 2014-present; Guggenheim Partners, Chief Compliance Officer, October 2007-
December 2013 
  4    
                 
Mark Tuttle***
(1970)
  Assistant Secretary,
2014 - present 
  JPMorgan Chase Bank, N.A., Vice President, 2014-present; State Street Bank and Trust Company, Vice President and Counsel, 2007-2013   4    
                 
James R. Nash***
(1981)
  Assistant Secretary,
2014 - present 
   JPMorgan Chase Bank, N.A., Associate, 2014-present; Linedata Services, Associate Product Analyst, 2011-2014; Linedata Services, Quality Assurance Analyst, 2010-2011   4    
               

 

 
 
* Chair of the Audit Committee.
** Chair of the Governance and Nominating Committee.
*** Elected by and serves at the pleasure of the Board.
   
+ As of January 8, 2015.
 

 

Board Committees. The Board has established the following standing committees:

 

Audit Committee . The Board has a standing Audit Committee that is composed of each Independent Trustees of the Trust. The Audit Committee operates under a written charter approved by the Board. The principal responsibilities of the Audit Committee include: recommending which firm to engage as each Fund’s independent registered public accounting firm and whether to terminate this relationship; reviewing the independent registered public accounting firm’s compensation, the proposed scope and terms of its engagement, and the firm’s independence; pre-approving audit and non-audit services provided by each Fund’s independent registered public accounting firm to the Trust and certain other affiliated entities; serving as a channel of communication between the

15

independent registered public accounting firm and the Trustees; reviewing the results of each external audit, including any qualifications in the independent registered public accounting firm’s opinion, any related management letter, management’s responses to recommendations made by the independent registered public accounting firm in connection with the audit, reports submitted to the Committee by the internal auditing department of the Trust’s Administrator that are material to the Trust as a whole, if any, and management’s responses to any such reports; reviewing each Fund’s audited financial statements and considering any significant disputes between the Trust’s management and the independent registered public accounting firm that arose in connection with the preparation of those financial statements; considering, in consultation with the independent registered public accounting firm and the Trust’s senior internal accounting executive, if any, the independent registered public accounting firms’ report on the adequacy of the Trust’s internal financial controls; reviewing, in consultation with each Fund’s independent registered public accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing each Fund’s financial statements; and other audit related matters. All of the Independent Trustees currently serve as members of the Audit Committee. The Audit Committee also acts as the Trust’s qualified legal compliance committee. The Audit Committee meets periodically, as necessary.

 

Nominating Committee . The Board has a standing Nominating Committee that is composed of each Independent Trustees of the Trust. The Nominating Committee operates under a written charter approved by the Board. The principal responsibility of the Nominating Committee is to consider, recommend and nominate candidates to fill vacancies on the Trust’s Board, if any. The Nominating Committee generally will not consider nominees recommended by shareholders. All of the Independent Trustees currently serve as members of the Nominating Committee. The Nominating Committee meets periodically, as necessary.

 

Individual Trustee Qualifications. The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information about the Funds provided to them by management, to identify and request other information they may deem relevant to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund’s shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.

 

The Trust has concluded that Mr. Tuckwell should serve as Trustee of the Fund because of the experience he has gained as Chairman of ETF Securities, and his extensive knowledge of and experience in the financial services industry generally.

 

The Trust has concluded that Mr. O’Grady should serve as Trustee of the Fund because of the experience he has gained as a Partner in charge of the ETF Market Making unit of a prominent financial services firm, and his extensive knowledge of and experience in the financial services industry generally.

 

The Trust has concluded that Mr. Thomas should serve as Trustee of the Fund because of the experience he has gained as chief executive officer of a firm specializing in financial services, his experience in and knowledge of the financial services industry generally, and his service as chairman for another ETF family.

 

Fund Shares Owned by Board Members. The following table shows the dollar amount range of each Trustee’s “beneficial ownership” of shares of the Funds and each other series of the Trust as of the end of the most recently completed calendar year. Dollar amount ranges disclosed are established by the SEC. “Beneficial ownership” is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust collectively own less than 1% of the outstanding shares of the Trust.

 

Name of Trustee   Name of Fund   Dollar
Range of
Equity
Securities
in the
Funds
*
  Aggregate Dollar Range of
Equity Securities in All Registered
Investment Companies Overseen
by Trustee in Family of
Investment Companies **
    Interested Trustee        
             
Graham Tuckwell***   N/A   $0   $0
             
    Independent Trustees        
             
Stephen O’Grady***   N/A   $0   $0
             
William M. Thomas***   N/A   $0   $0

 

 
 
* Values based on Trustees’ ownership as of date of this SAI.  
 
16
 
** These values are based on the Trustees’ ownership as of the fiscal year ended December 31, 2014.  As of such date, the Funds had not yet commenced operations.
*** Graham Tuckwell, Stephen O’ Grady and William M. Thomas were elected to the Board on December 2, 2014.
 

 

 

Board Compensation. The Trust will pay the following fees to the Trustees during its current fiscal year ending December 31, 2015.

 

Name of Trustee   Aggregate
Compensation
from the Trust
  Pension or
Retirement
Benefits
Accrued as
Part of
Company
Expenses
  Estimated Annual
Benefits upon
Retirement
  Total Compensation
from the Funds and
Fund Complex*
    Interested Directors      
                 
Graham Tuckwell   $0   $0   $0   $0
                 
    Independent Directors        
                 
Stephen O’Grady   $25,000   $0   $0   $25,000
                 
William M. Thomas   $25,000   $0   $0   $25,000

 

* The Trust is the only trust in the “Fund Complex.”

 

Control Persons and Principal Holders of Securities. Because the Funds are new there were no beneficial owners as of the date of this SAI.

 

Investment Adviser. ETF Securities Advisors LLC serves as investment adviser to the Funds pursuant to an investment advisory agreement between the Trust and the Adviser (the “Investment Advisory Agreement”). The Adviser is a Delaware limited liability corporation registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and has offices located at 48 Wall Street, New York, NY 10005. The Adviser in a directly-owned subsidiary of ETF Securities Limited. As of January 5, 2015, ETF Securities Limited and its affiliates had assets under management totaling approximately $17.05 billion.

 

Under the Investment Advisory Agreement, the Adviser has overall responsibility for the general management and administration of the Trust. The Adviser provides an investment program for the Funds. The Adviser also arranges for transfer agency, custody, fund administration, and all other non-distribution-related services necessary for the Funds to operate. Each Fund pays the Adviser a fee equal to a percentage of the Fund’s average daily net assets, as set forth below:

 

Fund   Management Fee
ETFS Zacks Earnings Large-Cap U.S. Index Fund   0.65%
ETFS Zacks Earnings Small-Cap U.S. Index Fund   0.65%
ETFS Diversified-Factor U.S. Large Cap Index Fund   0.39%
ETFS Diversified-Factor Developed Europe Index Fund   0.39%

 

For the fiscal year ended December 31, 2014, the Funds had not commenced operations and therefore did not pay any advisory fees.

 

Pursuant to the Investment Advisory Agreement, the Adviser has agreed to pay all expenses of the Funds, except for: (i) brokerage expenses and other fees, charges, taxes, levies or expenses (such as stamp taxes) incurred in connection with the execution of portfolio transactions or in connection with creation and redemption transactions (including without limitation any fees, charges, taxes, levies or expenses related to the purchase or sale of an amount of any currency, or the patriation or repatriation of any security or other asset, related to the execution of portfolio transactions or any creation or redemption transactions); (ii) legal fees or expenses in connection with any arbitration, litigation or pending or threatened arbitration or litigation, including any settlements in connection therewith; (iii)

17

compensation and expenses of each Independent Trustee; (iv) compensation and expenses of counsel to the Independent Trustees; (v) compensation and expenses of the Trust’s CCO; (vi) extraordinary expenses (in each case as determined by a majority of the Independent Trustees); (vii) distribution fees and expenses paid by the Trust under any distribution plan adopted pursuant to Rule 12b-1 under the 1940 Act; (viii) interest and taxes of any kind or nature (including, but not limited to, income, excise, transfer and withholding taxes); (ix) any fees and expenses related to the provision of securities lending services; and (x) the advisory fee payable to the Adviser. The internal expenses of pooled investment vehicles in which a Fund may invest (acquired fund fees and expenses) are not expenses of the Funds and are not paid by the Adviser.

 

The Adviser, from its own resources, including profits from advisory fees received from the Funds, provided such fees are legitimate and not excessive, may make payments to broker-dealers and other financial institutions for their expenses in connection with the distribution of a Fund shares, and otherwise currently pays all distribution costs for the Funds’ shares.

 

The Investment Advisory Agreement, with respect to each Fund, continues in effect for two years from its effective date, and thereafter is subject to annual approval by (i) the Board of Trustees of the Trust or (ii) the vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of each Fund, provided that in either event such continuance also is approved by a vote of a majority of the Trustees of the Trust who are not interested persons (as defined in the 1940 Act) of the Fund, by a vote cast in person at a meeting called for the purpose of voting on such approval. If the shareholders of a Fund fail to approve the Investment Advisory Agreement, the Adviser may continue to serve in the manner and to the extent permitted by the 1940 Act and rules and regulations thereunder.

 

The Investment Advisory Agreement, with respect to each Fund, is terminable without any penalty, by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund, or by the Adviser, in each case on not less than thirty (30) days’ nor more than sixty (60) days’ prior written notice to the other party; provided that a shorter notice period shall be permitted for a Fund in the event its shares are no longer listed on a national securities exchange. The Investment Advisory Agreement will terminate automatically and immediately in the event of its “assignment” (as defined in the 1940 Act).

 

Sub-Adviser. The Adviser has retained Index Management Solutions, LLC (the “Sub-Adviser”), 2005 Market Street, One Commerce Square, Suite 2020, Philadelphia Pennsylvania 19103, to act as sub-adviser to the Funds. The Sub-Adviser was established in 2009 and is a wholly-owned subsidiary of VTL Associates, LLC. Under a sub-advisory agreement dated December 2, 2014 (the “Sub-Advisory Agreement”), the Sub-Adviser is responsible for trading portfolio securities on behalf of the Funds, including selecting broker-dealers to execute purchase and sale transactions as instructed by the Adviser or in connection with any rebalancing or reconstitution of the Index, subject to the supervision of the Adviser and the Board of Trustees. Under a Sub-Advisory Agreement between the Adviser and the Sub-Adviser, the Adviser pays the Sub-Adviser a fee, calculated daily and paid monthly, at the following annual rate based on the average daily net assets of each Fund as follows:

 

Fund Assets Under Management   Fee*
Under $100 million   0.05%
$100 million up to $299,999,999   0.04%
$300 million and above   0.03%

 

*For the fiscal year ended December 31, 2014, the Adviser did not pay any sub-advisory fees as the Funds had not commenced operations.

 

After the initial two-year term, the continuance of the Sub-Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Sub-Advisory Agreement or “interested persons” or of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Sub-Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding voting securities of the Fund. The Sub-Advisory Agreement also may be terminated, at any time, by the Adviser or Sub-Adviser upon 60 days’ written notice to the other party. As used in the Sub-Advisory Agreement, the terms “majority of the outstanding voting securities,” “interested persons” and “assignment” have the same meaning as such terms in the 1940 Act.

 

Portfolio Managers.

 

This section includes information about the Funds’ portfolio managers, including information about other accounts he manages, the dollar range of Shares he owns and how he is compensated.

 

Mike Gompers, Justin V. Lowry and Sean Reichert and are primarily responsible for the day-to-day management of the Funds.

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Mr. Gompers is the Chief Executive Officer for IMS. He is responsible for all the firm’s business operations which includes, direct and indirect responsibility for programs, financial oversight, and all internal/external operations of the organization. He also serves as an additional portfolio manager. Mr. Gompers works closely with all outside vendors associated with the ETF and Indexing strategies.

 

Before joining IMS, Mr. Gompers was an accountant with Gompers & Associates, PLLC in Wheeling, West Virginia. Mr. Gompers earned his B.S. Degree in Accounting from St. Joseph’s University and also his MBA in Accounting from St. Joseph’s University.

 

Mr. Lowry is a portfolio manager with Index Management Solutions, LLC and has been with the firm since its founding in 2009. He has six years of experience in the investment management industry, and currently manages and trades products with nearly $2.5 billion in total fund assets. Mr. Lowry has also worked to create and develop customized indexes that have been developed into exchange traded products. Mr. Lowry graduated with a B.S. in Business Management from St. Joseph’s University.

 

Mr. Reichert is a portfolio manager with Index Management Solutions, LLC and has been with the firm since 2009. He currently manages products with nearly $2.5 billion in total fund assets and facilitates the trading, as well as the cash and tax management for such accounts. Prior to joining IMS, Mr. Reichert worked as an investment consultant for VTL Associates, the parent company of IMS, where he focused on creating asset allocation models for institutional investors. He also worked in the Public Finance department at Janney Montgomery Scott, a regional investment bank. Mr. Reichert graduated with a B.S. in Economics with a concentration in Finance from The Wharton School of The University of Pennsylvania. He is currently a Level II CFA candidate.

 

Other Accounts Managed by the Portfolio Managers. In addition to the Funds, the portfolio managers manage the following other accounts as of December 31, 2014:

 

Responsible Person U.S. Registered Funds* Other Pooled Investments* Other Accounts*
    Performance Fees   Performance Fees
# of
accounts
Assets Under
Management
($)
# of
accounts
Assets Under
Management
($)
# of
accounts
Assets
Under
Management
($)
# of
accounts
Assets Under
Management
($)
# of
accounts
Assets Under
Management
($)
Justin V. Lowry 18 $1.9 billion 3 $592 million 0 $0 0 N/A 0 N/A
Sean Reichert 18 $1.9 billion 3 $592 million 0 $0 0 N/A 0 N/A
Mike Gompers 18 $1.9 billion 3 $592 million 0 $0 0 N/A 0 N/A

 

* None of the accounts managed by the portfolio managers are subject to performance based advisory fees.

 

Portfolio Managers Fund Ownership. As of the date of this SAI, the portfolio managers did not own shares of the Funds.

 

Portfolio Managers Compensation. As portfolio managers of the Funds, Mr. Lowry, Mr. Reichert and Mr. Gompers receive a fixed base salary and incentive awards based on profitability, growth in assets, and long-term investment performance. Key staff members of the Sub-Adviser are eligible to participate in a deferred compensation plan due to their high level of accountability and upon demonstrating a successful long-term performance track record. The value of the award increases during a vesting period based upon the profitability of the firm. Voluntary contributions may be made to a defined contribution plan.

 

Description of Material Conflicts of Interest. Because the portfolio managers manage multiple portfolios for multiple clients, the potential for conflicts of interest exists. The portfolio managers may manage portfolios that have substantially the same investment style as the Fund. However, the portfolios managed by the portfolio managers may not have portfolio compositions identical to those of the Fund due, for example, to specific investment limitations or guidelines present in some portfolios or accounts, but not others. The portfolio managers may purchase securities for one portfolio and not another portfolio, and the performance of securities purchased for one portfolio may vary from the performance of securities purchased for other portfolios.

 

The portfolio managers may place transactions on behalf of other accounts that are directly or indirectly contrary to investment decisions made on behalf of the Fund, or make investment decisions that are similar to those made for the Fund, both of which have the potential to adversely impact the Fund depending on market conditions. For example, the portfolio managers may purchase a security in one portfolio while appropriately selling that same security in another portfolio. In addition, some of these portfolios have fee structures that are or have the potential to be higher than the advisory fees paid by the Fund, which may cause potential conflicts in the allocation of investment opportunities between the Fund and the other accounts. However, the compensation structure for portfolio managers does not generally provide incentive to favor one account over another because that part of a manager’s bonus based on

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performance is not based on the performance of one account to the exclusion of others. There are many other factors considered in determining each portfolio manager’s bonus and there is no formula that is applied to weight the factors listed (see “Compensation of Portfolio Managers and Other Accounts Managed”). In addition, current trading practices do not allow the Sub-Adviser to intentionally favor one portfolio over another as trades are executed as trade orders are received. Portfolio’s rebalancing dates also generally vary between fund families. Program trades created from the portfolio rebalance are generally executed at market on close.

 

Codes of Ethics. The Trust, the Adviser, the Sub-Adviser and the Distributor have each adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act, where applicable. Each Code of Ethics permits personnel subject to that Code of Ethics to invest in securities for their personal investment accounts, subject to certain limitations, including securities that may be purchased or held by the Funds. Each Code of Ethics is on public file with, and is available from, the SEC.

 

Administrator, Custodian, and Transfer Agent. JPMorgan Chase Bank, N.A. (“JPMorgan”) serves as administrator, custodian and transfer agent for the Funds. JPMorgan’s principal address is 383 Madison Avenue, New York, New York 10179. Under the Administration Agreement with the Trust, JPMorgan (“Administrator”), subject to the general supervision of the Trust’s Board of Trustees, provides various administrative, compliance, tax, accounting and financial reporting services for the maintenance and operations of the Trust and the Funds. In addition, JPMorgan makes available the office space, equipment, personnel and facilities required to provide such services. Under the Global Custody Agreement with the Trust, JPMorgan (“Custodian”) holds the Trust’s cash and securities, maintains such cash and securities in separate accounts in the name of the Trust, maintains a statement of accounts for each account of the Trust, and may provide other services pursuant to the Custody Agreement and related agreements. The Custodian, upon the order of the Trust, receives, delivers and releases securities and makes payments for securities purchased by the Trust for the Funds. The Custodian is authorized to appoint one or more sub-custodians and is authorized to appoint foreign custodians or foreign custody managers for Trust investments outside the United States. Pursuant to an Agency Services Agreement with the Trust, JPMorgan (“Transfer Agent”) acts as transfer agent for the Trust’s authorized and issued shares of beneficial interest, and as dividend disbursing agent of the Trust. JPMorgan also provides services, as applicable, for any wholly-owned subsidiary of the Funds. As compensation for the foregoing services, JPMorgan receives certain out-of-pocket costs, transaction fees and asset-based fees which are accrued daily and paid monthly by the Trust from the Trust’s custody account with JPMorgan. The Funds are new and the Adviser had not paid JPMorgan any fees for services to the Funds as of the fiscal year ended December 31, 2014.

 

Distributor. ALPS Distributors, Inc. serves as Distributor for the Trust and its principal address is 1290 Broadway, Suite 1100, Denver, Colorado 80203. The Distributor has entered into a Distribution Agreement with the Trust pursuant to which it will serve as distributor with respect to Creation and Redemption of Creation Unit Aggregations. The Distribution Agreement will continue for two years from its effective date and is renewable annually. Shares are continuously offered for sale by a Fund through the Distributor only in Creation Unit Aggregations, as described in the applicable Prospectus and below in the Creation and Redemption of Creation Unit Aggregations section. Shares in less than Creation Unit Aggregations are not distributed by the Distributor. The Distributor will deliver the applicable Prospectus and, upon request, this SAI to Authorized Participants (as defined below) purchasing Creation Unit Aggregations 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 1934 Act and a member of the Financial Industry Regulatory Authority (“FINRA”). The Distributor is not affiliated with ETF Securities Limited, the Adviser, or any stock exchange.

 

The Distribution Agreement for each Fund will provide that it may be terminated at any time, without the payment of any penalty, on at least sixty (60) days’ prior written notice to the other party (i) by vote of a majority of the Independent Trustees or (ii) by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund. The Distribution Agreement will terminate automatically in the event of its “assignment” (as defined in the 1940 Act).

 

The Distributor may also enter into agreements with securities dealers (“Soliciting Dealers”) who will solicit purchases of Creation Unit Aggregations of shares. Such Soliciting Dealers may also be Authorized Participants (as defined below) or DTC Participants (as defined below).

 

12b-1 Plan. The Trust has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act (the “Plan”) pursuant to which each Fund may reimburse the Distributor up to a maximum annual rate of 0.25% of its average daily net assets.

 

Under the Plan and as required by Rule 12b-1, the Trustees will receive and review after the end of each calendar quarter a written report provided by the Distributor of the amounts expended under the Plan and the purpose for which such expenditures were made. With the exception of the Distributor and its affiliates, no “interested person” of the Trust (as that term is defined in the 1940 Act) and no Trustee of the Trust has a direct or indirect financial interest in the operation of the Plan or any related agreement.

 

The Plan was adopted in order to permit the implementation of the Fund’s method of distribution. However, no such fee is currently paid by the Funds.

 

Intermediary Compensation. The Adviser or its affiliates, out of their own resources and not out of Fund assets ( i.e. , without additional cost to the Funds or their shareholders), may pay certain broker dealers, banks and other financial intermediaries

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(“Intermediaries”) for certain activities related to the Funds, including participation in activities that are designed to make Intermediaries more knowledgeable about exchange traded products, including the Funds, or for other activities, such as marketing and educational training or support. These arrangements are not financed by the Funds and, thus, do not result in increased Fund expenses. They are not reflected in the fees and expenses listed in the fees and expenses sections of any Fund’s Prospectus and they do not change the price paid by investors for the purchase of a Fund’s shares or the amount received by a shareholder as proceeds from the redemption of Fund shares.

 

Such compensation may be paid to Intermediaries that provide services to the Funds, including marketing and education support (such as through conferences, webinars and printed communications). The Adviser periodically assesses the advisability of continuing to make these payments. Payments to an Intermediary may be significant to the Intermediary, and amounts that Intermediaries pay to your adviser, broker or other investment professional, if any, may also be significant to such adviser, broker or investment professional. Because an Intermediary may make decisions about what investment options it will make available or recommend, and what services to provide in connection with various products, based on payments it receives or is eligible to receive, such payments create conflicts of interest between the Intermediary and its clients. For example, these financial incentives may cause the Intermediary to recommend the Funds over other investments. The same conflict of interest exists with respect to your financial adviser, broker or investment professionals if he or she receives similar payments from his or her Intermediary firm.

 

Intermediary information is current only as of the date of this SAI. Please contact your adviser, broker or other investment professional for more information regarding any payments his or her Intermediary firm may receive. Any payments made by the Adviser or its affiliates to an Intermediary may create the incentive for an Intermediary to encourage customers to buy shares of the Funds.

 

If you have any additional questions, please call 1-844-383-7289.

 

BROKERAGE TRANSACTIONS

 

The Adviser assumes general supervision over placing orders on behalf of the Funds for the purchase and sale of portfolio securities. In selecting the brokers or dealers for any transaction in portfolio securities, the Adviser’s policy is to make such selection based on factors deemed relevant, including but not limited to, the breadth of the market in the security; the price of the security; the reasonableness of the commission or mark-up or mark-down, if any; execution capability; settlement capability; back office efficiency; and the financial condition of the broker or dealer, both for the specific transaction and on a continuing basis. The overall reasonableness of brokerage commissions paid 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. Brokers may also be selected because of their ability to handle special or difficult executions, such as may be involved in large block trades, less liquid securities, broad distributions, or other circumstances. The Adviser does not consider the provision or value of research, products or services a broker or dealer may provide, if any, as a factor in the selection of a broker or dealer or the determination of the reasonableness of commissions paid in connection with portfolio transactions. The Trust has adopted policies and procedures that prohibit the consideration of sales of a Fund’s shares as a factor in the selection of a broker or a dealer to execute its portfolio transactions. To the extent creation or redemption transactions are conducted on a cash or “cash in lieu” basis, a Fund may contemporaneously transact with broker-dealers for the purchase or sale of portfolio securities in connection with such transactions (see “Creation and Redemption of Creation Unit Aggregations” herein). Such orders may be placed with an Authorized Participant in its capacity as broker-dealer or with an affiliated broker-dealer of such Authorized Participant. In such cases, the Funds will require such broker-dealer to achieve execution at a price that is at least as favorable to the Fund as the value of such securities used to calculate the Fund’s NAV. The broker-dealer will be required to reimburse the Funds for, among other things, any difference between the price (including applicable brokerage commissions, taxes and transaction costs) at which such securities were bought or sold and the value of such securities used to calculate a Fund’s NAV. This amount will vary depending on the quality of the execution and may be capped at amounts determined by the Adviser in its sole discretion.

 

Brokerage Commissions. The Funds are new and have not paid any brokerage commissions as of the fiscal year ended December 31, 2014.

 

Affiliated Brokers. The Funds are new and have not paid any commissions to any affiliated brokers.

 

Regular Broker-Dealers. The Funds are new and did not acquire securities of its regular brokers or dealers (as defined in the 1940 Act) or of their parents during the fiscal year ended December 31, 2014.

 

Portfolio Turnover. Portfolio turnover may vary from year to year, as well as within a year. High turnover rates are likely to result in comparatively greater brokerage expenses. The overall reasonableness of brokerage commissions is evaluated by the Adviser based upon its knowledge of available information as to the general level of commissions paid by the other institutional investors for comparable services.

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The Funds are new and therefore did not have a portfolio turnover rate for the fiscal year ended December 31, 2014.

 

ADDITIONAL INFORMATION CONCERNING THE TRUST

 

Shares. The Trust was established as a Delaware statutory trust on January 9, 2014, and consists of multiple series of funds (“Funds”). Each Fund issues shares of beneficial interest. The Board may establish additional Funds. The Trust is registered with the SEC as an open-end management investment company.

 

Each share issued by a Fund has a pro rata interest in the assets of the Fund. Shares have no preemptive, 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 a Fund on liquidation.

 

Each share has one vote with respect to matters upon which a shareholder vote is required consistent with the requirements of the 1940 Act and the rules promulgated thereunder. Shares of all Funds vote together as a single class except that if the matter being voted on affects only a particular Fund or 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 (regardless of the Fund) have non-cumulative voting rights for the Board. Under Delaware law, Trustees of the Trust may be removed by vote of the shareholders.

 

Following the creation of the initial Creation Unit Aggregation(s) of shares of a Fund and immediately prior to the commencement of trading in such Fund’s shares, a holder of shares may be a “control person” of the Fund, as defined in the 1940 Act. The Funds cannot accurately predict the length of time for which one or more shareholders may remain a control person or persons of a Fund.

 

Shareholders may make inquiries by writing to the Trust, c/o ALPS Distributors, Inc., 1290 Broadway, Suite 1100, Denver, Colorado 80203.

 

Absent an applicable exemption or other relief from the SEC or its staff, beneficial owners of more than 5% of the shares of a Fund may be subject to the reporting provisions of Section 13 of the 1934 Act and the SEC’s rules promulgated thereunder. In addition, absent an applicable exemption or other relief from the SEC staff, officers and Trustees of the Funds and beneficial owners of 10% of the shares of a Fund (“Insiders”) may be subject to the insider reporting, short-swing profit and short-sale provisions of Section 16 of the 1934 Act and the SEC’s rules promulgated thereunder. Beneficial owners and Insiders should consult with their own legal counsel concerning their obligations under Sections 13 and 16 of the 1934 Act.

 

Termination of the Trust or the Fund. The Trust or a Fund may be terminated by a majority vote of the Board of Trustees or the affirmative vote of a super-majority of the holders of the Trust or a Fund entitled to vote on termination. Although the shares are not automatically redeemable upon the occurrence of any specific event, the Trust’s organizational documents provide that the Board will have the unrestricted power to alter the number of shares in a Creation Unit Aggregation. In the event of a termination of the Trust or the Fund, the Board, in its sole discretion, could determine to permit the shares to be redeemable in aggregations smaller than Creation Unit Aggregations or to be individually redeemable. In such circumstances, the Trust may make redemptions in-kind, for cash, or for a combination of cash and securities.

 

Role of the Depositary Trust Company (“DTC”). DTC acts as Securities Depository for the shares of the Trust. Shares of the Funds are represented by securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC.

 

DTC, a limited-purpose trust company, was created to hold securities of its participants (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities’ certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of which (and/or their representatives) own DTC. More specifically, DTC is owned by a number of DTC Participants and by the NYSE, the AMEX and FINRA. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (“Indirect Participants”).

 

Beneficial ownership of shares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in shares (owners of such beneficial interests are referred to herein as “Beneficial Owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of shares. No Beneficial Owner shall have the right to receive a certificate representing such shares.

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Conveyance of all notices, statements and other communications to Beneficial Owners is effected as follows. Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the shares of a Fund held by 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 and 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 of the Trust. DTC or its nominee, upon receipt of any such distributions, shall immediately credit DTC Participants’ accounts with payments in amounts proportionate to their respective beneficial interests in shares of a Fund 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 aspect of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests, or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants. DTC may decide to discontinue its service with respect to shares of the Trust 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 to find a replacement for DTC to perform its functions at a comparable cost.

 

CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS

 

Creation. The Trust issues and sells shares of the Funds only in Creation Unit Aggregations on a continuous basis through the Distributor, without a sales load, at the NAV next determined after receipt, on any Business Day, of an order in proper form.

 

Fund Deposit. The consideration for purchase of Creation Unit Aggregations of the Funds generally consists of the in-kind deposit of a designated portfolio of equity securities and other instruments closely approximating the holdings of a Fund (the “Deposit Securities”) and an amount of cash denominated in U.S. dollars (the “Cash Component”) computed as described below. Together, the Deposit Securities and the Cash Component constitute the “Fund Deposit,” which represents the minimum initial and subsequent investment amount for a Creation Unit Aggregation of a Fund.

 

Each Fund may permit or require the submission of a basket of equity securities and other instruments, or cash denominated in U.S. dollars that differs from the composition of the published basket. Each Fund may permit or require the consideration for Creation Unit Aggregations to consist solely of cash. Each Fund reserves the right to permit or require the substitution of an amount of cash denominated in U.S. dollars ( i.e. , a “cash in lieu” amount) to be added, at its discretion, to the Cash Component to replace any Deposit Security (typically 102%-110% of the value of any missing Deposit Security). For example, cash may be substituted to replace any Deposit Security that may not be available in sufficient quantity for delivery or that may not be eligible for transfer through the systems of DTC or the Clearing Process (discussed below). The Trust reserves the right to permit or require a “cash in lieu” amount where the delivery of the Deposit Security by the Authorized Participant (as described below) would be prohibited or restricted under applicable securities laws, or in certain other situations at the sole discretion of the Trust.

 

The Cash Component is sometimes also referred to as the “Balancing Amount.” The Cash Component is an amount equal to the difference between the NAV of the shares (per Creation Unit Aggregation) and the value of Deposit Securities. If the Cash Component is a positive number, the Authorized Participant will deliver the Cash Component. If the Cash Component is a negative number, the Authorized Participant will receive the Cash Component. The Cash Component does not include any stamp duty tax or other similar fees and expenses payable upon transfer of beneficial ownership of the Deposit Securities. These are the sole responsibility of the Authorized Participant.

 

The Funds, through the National Securities Clearing Corporation (“NSCC”), makes available on each Business Day, immediately prior to the opening of business on the Listing Exchange (currently 9:30 a.m., Eastern time), the list of the names and the required number of shares of Deposit Securities to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for the Funds. Such Deposit Securities are applicable, subject to any adjustments, as described below, in order to effect creations of Creation Unit Aggregations of a Fund until such time as the next-announced composition of the Deposit Securities is made available.

 

The identity and number of shares of the Deposit Securities required for a Fund Deposit for each Fund changes from time to time based on changes to a Fund’s Underlying Index and other factors.

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Procedures for Creation of Creation Unit Aggregations. To be eligible to place orders with the Distributor and to create a Creation Unit Aggregation of the Funds, an entity must be: (i) a “Participating Party,” i.e. , a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the NSCC (the “Clearing Process”), a clearing agency that is registered with the SEC; or (ii) a DTC Participant. In each case, such entity must have executed an agreement with the Distributor with respect to creations and redemptions of Creation Unit Aggregations (“Participant Agreement”). A Participating Party or DTC Participant that has entered a Participation Agreement is referred to as an “Authorized Participant.” Investors should contact the Distributor for the names of Authorized Participants that have signed a Participant Agreement. All shares of the Funds, however created, will be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant.

 

All orders to create shares must be placed for one or more Creation Unit Aggregations. All orders to create Creation Unit Aggregations must be received by the Distributor from an Authorized Participant no later than the closing time of the regular trading session on the Listing Exchange (“Closing Time”) (ordinarily 4:00 p.m., Eastern time) on the date such orders are placed in order to receive that day’s NAV. All orders must be received in proper form. The date on which an order to create Creation Unit Aggregations is placed is referred to as the “Transmittal Date.” Orders must be transmitted by an Authorized Participant to the Distributor through the use of the Distributor’s electronic interface, by telephone or other transmission method acceptable to the Distributor pursuant to procedures set forth in the Participant Agreement, as described below, which procedures may change from time to time without notice at the discretion of the Trust. Economic or market disruptions or changes, or telephone or other communication failure, may impede the ability to reach the Distributor or an Authorized Participant. On days when the Listing Exchange or U.S. markets close earlier than normal, a Fund may require purchase orders to be placed earlier in the day. All questions as to the number of Deposit Securities to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities, will be determined by the Trust, whose determination shall be final and binding.

 

All orders to create Creation Unit Aggregations through an Authorized Participant shall be placed with an Authorized Participant, in the form required by such Authorized Participant in accordance with the Participant Agreement. In addition, the Authorized Participant may require an investor to make certain representations or enter into agreements with respect to the order, e.g. , to provide for payments of cash, when required. Investors should be aware that their particular broker may not have executed a Participant Agreement and, in that case, orders to create Creation Unit Aggregations of a Fund have to be placed by each investor’s broker through an Authorized Participant that has executed a Participant Agreement. In such cases, there may be additional charges to such investor. At any given time, there may be only a limited number of broker-dealers that have executed a Participant Agreement and only a small number of such Authorized Participants may have international capabilities.

 

Those placing orders for Creation Unit Aggregations 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 Unit Aggregations 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 the Cash Component.

 

Placement of Creation Orders Using the Clearing Process. Fund Deposits made through the Clearing Process must be delivered through a Participating Party that has executed a Participant Agreement. The Participant Agreement authorizes the Distributor to transmit to NSCC, on behalf of the Participating Party, such trade instructions as are necessary to effect the Participating Party’s creation order. Pursuant to such trade instructions to NSCC, the Participating Party agrees to deliver the requisite Deposit Securities and the Cash Component to the Trust, together with such additional information as may be required by the Distributor. An order to create Creation Unit Aggregations through the Clearing Process is deemed received by the Distributor on the Transmittal Date if: (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed.

 

Placement of Creation Orders Outside the Clearing Process. Fund Deposits made outside the Clearing Process must be delivered through a DTC Participant that has executed a Participant Agreement. A DTC Participant who wishes to place an order creating Creation Unit Aggregations to be effected outside the Clearing Process does not need to be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that the creation of Creation Unit Aggregations will instead be effected through a transfer of securities and cash directly through DTC. The Fund Deposit transfer must be ordered by the DTC Participant on the Transmittal Date in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities through DTC to the account of the Fund by no later than 2:00 p.m., Eastern time, on the “Settlement Date.” The Settlement Date is typically the third Business Day following the Transmittal Date. Each Fund reserves the right to settle transactions on a basis other than “T” plus three Business Days ( i.e. , days on which NYSE is open) (“T+3”). In certain cases Authorized Participants will create and redeem Creation Unit Aggregations of the same Fund on the same trade date. In these instances, the Trust reserves the right to settle these transactions on a net basis. On days when the NYSE or U.S. markets close earlier than normal, a Fund may require purchase orders to be placed earlier in the day. All questions as to the number of Deposit Securities to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities, will be determined by the Trust, whose determination shall be final and binding. The amount of cash equal to the Cash Component must be transferred through the Federal

24

Reserve Bank wire transfer system in a timely manner so as to be received no later than 2:00 p.m., Eastern time, on the Settlement Date. An order to create Creation Unit Aggregations 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 required Deposit Securities and the Cash Component are not received by the specified time on the Settlement Date, the Trust may cancel or revoke acceptance of such order. Upon written notice to the Distributor, such canceled or revoked order may be resubmitted the following Business Day using a Fund Deposit as newly constituted to reflect the then current NAV of the Fund. The delivery of Creation Unit Aggregations so created generally will occur no later than the Settlement Date.

 

Creation Unit Aggregations may be created in advance of receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a value greater than the NAV of the shares on the date the order is placed in proper form since, in addition to available Deposit Securities, U.S. cash must be deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) at least 102%, which the Trust may change from time to time, of the market value of the undelivered Deposit Securities (the “Additional Cash Deposit”) with the Fund pending delivery of any missing Deposit Securities.

 

If an Authorized Participant determines to post an Additional Cash Deposit as collateral for any undelivered Deposit Securities, such Authorized Participant must deposit the appropriate amount of federal funds by 2:00 p.m., Eastern time (or such other time as specified by the Trust), on the Settlement Date. If the Authorized Participant does not place its purchase order by the closing time or federal funds are not received in the appropriate amount by such time, then the order may be deemed to be rejected and the Authorized Participant shall be liable to the Fund for losses, if any, resulting therefrom. An additional amount of cash shall be required to be deposited, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to 102%, which the Trust may change from time to time, of the daily marked-to-market value of the missing Deposit Securities. To the extent that missing Deposit Securities are not received by the specified time on the Settlement Date, or in the event a marked-to-market payment is not made within one Business Day following notification by the Distributor that such a payment is required, the Trust may use the Additional Cash Deposit to purchase the missing Deposit Securities.

 

The Authorized Participant will be liable to the Trust for the costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the Transmittal Date plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received or purchased by the Trust and deposited into the Trust. In addition, a Transaction Fee, as listed below, will be charged in all cases. The delivery of Creation Unit Aggregations so created generally will occur no later than the Settlement Date.

 

Cash Purchases. When, in the sole discretion of the Trust, cash purchases of Creation Unit Aggregations of shares are available or specified for the Funds, such purchases shall be effected in essentially the same manner as in-kind purchases thereof. In the case of a cash purchase, the Authorized Participant must pay the cash equivalent of the Deposit Securities it would otherwise be required to provide through an in-kind purchase, plus the same Cash Component required to be paid by an in-kind purchaser. In addition, to offset brokerage and other costs associated with using cash to purchase the requisite Deposit Securities, the Authorized Participant must pay the Transaction Fees required by the Funds. If the Authorized Participant acts as a broker for the Funds in connection with the purchase of Deposit Securities, the Authorized Participant will also be required to pay certain brokerage commissions, taxes, and transaction and market impact costs as discussed under the heading “Brokerage Transactions” herein.

 

Acceptance of Orders for Creation Unit Aggregations. The Trust reserves the absolute right to reject or revoke acceptance of a creation order transmitted to it by the Distributor with respect to a Fund. Orders may be rejected and acceptance may be revoked if, for example: (i) the order is not in proper form; (ii) the investor(s), upon obtaining the shares ordered, would own 80% or more of the currently outstanding shares of the Fund; (iii) the Deposit Securities delivered are not the same as those disseminated through the facilities of the NSCC for that date by the Fund as described above; (iv) acceptance of the Deposit Securities would have certain adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; (vi) acceptance of the Fund Deposit would otherwise, in the discretion of the Trust or the Adviser, have an adverse effect on the Trust or the rights of beneficial owners; or (vii) in the event that circumstances outside the control of the Trust, JPMorgan, the Distributor or the Adviser make it for all practical purposes impossible to process creation orders. Examples of such circumstances include acts of God; public service or utility problems such as fires, floods, extreme weather conditions and power outages resulting in telephone, telecopy and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the Trust, the Adviser, the Sub-Adviser, the Distributor, DTC, NSCC, JPMorgan or a sub-custodian or any other participant in the creation process and similar extraordinary events. The Distributor shall notify a prospective creator of a Creation Unit and/or the Authorized Participant acting on behalf of the creator of a Creation Unit Aggregation of its rejection of the order of such person. The Trust, JPMorgan, a sub-custodian and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits nor shall any of them incur any liability for the failure to give any such notification.

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All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust’s determination shall be final and binding.

 

Creation/Redemption Transaction Fee. Each Fund imposes a “Transaction Fee” on investors purchasing or redeeming Creation Units. The purpose of the Transaction Fee is to protect the existing shareholders of a Fund from the dilutive costs associated with the purchase and redemption of Creation Units. Where a Fund permits cash creations (or redemptions) or cash in lieu of depositing one or more Deposit Securities, the purchaser (or redeemer) may be assessed a higher Transaction Fee to offset the transaction cost to the Fund of buying (or selling) those particular Deposit Securities. Transaction Fees for a Fund will differ from Transaction Fees for other ETFS Funds, depending on the transaction expenses related to the Fund’s portfolio securities, and will be limited to amounts that have been determined by the Adviser to be appropriate. The maximum Transaction Fee, as set forth in the table below for the Fund, may be charged in cases where a Fund permits cash or cash in lieu of Deposit Securities. Investors purchasing or redeeming through the DTC process generally will pay a higher Transaction Fee than will investors doing so through the NSCC process. Also, investors who use the services of a broker or other such intermediary may be charged a fee for such services, in addition to the Transaction Fee imposed by the Fund.

 

The following table sets forth the standard and maximum creation and redemption Transaction Fee for the Fund. These fees may be changed by the Trust.

 

Fund   Standard
Creation/Redemption
Transaction Fee
  Maximum
Creation/Redemption
Transaction Fee
ETFS Zacks Earnings Large-Cap U.S. Index Fund   $250   $250
ETFS Zacks Earnings Small-Cap U.S. Index Fund   $250   $250
ETFS Diversified-Factor U.S. Large Cap Index Fund   $250   $250
ETFS Diversified-Factor Developed Europe Index Fund   $250   $250

 

Placement of Redemption Orders Using the Clearing Process. Orders to redeem Creation Unit Aggregations through the Clearing Process must be delivered through a Participating Party that has executed the Participant Agreement. Except as described herein, an order to redeem Creation Unit Aggregations using the Clearing Process is deemed received by the Trust on the Transmittal Date if: (i) such order is received by JPMorgan (in its capacity as Transfer Agent) not later than the Closing Time on such Transmittal Date, and (ii) all other procedures set forth in the Participant Agreement are properly followed. Such order will be effected based on the NAV of a Fund as next determined. The consideration for redemption of Creation Unit Aggregations of each Fund generally consists of (i) a designated portfolio of equity securities and other instruments that closely approximate the holdings of the Fund (the “Fund Securities”) and (ii) an amount of cash denominated in U.S. dollars (the “Cash Redemption Amount”) as described below. The requisite Fund Securities and the Cash Redemption Amount generally will be transferred by the third NSCC Business Day following the date on which such request for redemption is deemed received.

 

Placement of Redemption Orders Outside the Clearing Process . Orders to redeem Creation Unit Aggregations outside the Clearing Process must be delivered through a DTC Participant that has executed the Participant Agreement. An order to redeem Creation Unit Aggregations outside the Clearing Process is deemed received by the Trust on the Transmittal Date if: (i) such order is received by JPMorgan (in its capacity as Transfer Agent) not later than the Closing Time on such Transmittal Date; (ii) such order is accompanied or followed by the requisite number of shares of the Fund specified in such order, which delivery must be made through DTC to the Custodian no later than 11:00 a.m., Eastern time, on the contracted settlement date; and (iii) all other procedures set forth in the Participant Agreement are properly followed. After the Trust has deemed an order for redemption outside the Clearing Process received, the Trust will initiate procedures to transfer the requisite Fund Securities which are expected to be delivered within three Business Days and the Cash Redemption Amount to the Authorized Participant on behalf of the redeeming Beneficial Owner by the Settlement Date. In certain cases Authorized Participants will redeem and create Creation Unit Aggregations of the same Fund on the same trade date. In these instances, the Trust reserves the right to settle these transactions on a net basis.

 

If the requisite number of shares of a Fund is not delivered on the Transmittal Date as described above, a Fund may reject or revoke acceptance of the redemption request because the Authorized Participant has not satisfied all of the settlement requirements.

 

The current procedures for collateralization of missing shares require, among other things, that any cash collateral shall be in the form of U.S. dollars in immediately available funds and shall be held by the Custodian and marked-to-market daily, and that the fees of the Custodian and any sub-custodians in respect of the delivery, maintenance and redelivery of the cash collateral shall be payable by the Authorized Participant. The Authorized Participant’s agreement will permit the Trust, on behalf of the Fund, to purchase the missing shares or acquire the Deposit Securities and the Cash Component underlying such shares at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Trust of purchasing such shares, Deposit Securities or Cash Component and the value of the collateral.

 

The calculation of the value of the Fund Securities and the Cash Redemption Amount to be delivered upon redemption will be made according to the procedures set forth under Determination of NAV computed on the Business Day on which a redemption order is

26

deemed received by the Trust. Therefore, if a redemption order in proper form is submitted by a DTC Participant not later than the Closing Time on the Transmittal Date, and the requisite number of shares of the Fund are delivered prior to the DTC cut-off time, then the value of the Fund Securities and the Cash Redemption Amount to be delivered will be determined on such Transmittal Date. If, however, a redemption order is submitted by a DTC Participant not later than the Closing Time on the Transmittal Date but either (i) the requisite number of shares of the Fund are not delivered by the DTC cut-off-time on such Transmittal Date, or (ii) the redemption order is not submitted in proper form, then the redemption order will not be deemed received as of the Transmittal Date. In such case, the value of the Fund Securities and the Cash Redemption Amount to be delivered will be computed on the Business Day that such order is deemed received by the Trust on which the shares of the Fund are delivered through DTC by the DTC cut-off-time on such Business Day pursuant to a properly submitted redemption order.

 

A Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities that differs from the exact composition of the Fund Securities but does not differ in NAV.

 

Redemptions of shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and the Funds (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Unit Aggregations for cash to the extent that the Trust could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws. An Authorized Participant or an investor for which it is acting subject to a legal restriction with respect to a particular security included in the Fund Securities applicable to the redemption of a Creation Unit Aggregation may be paid an equivalent amount of cash. The Authorized Participant may request the redeeming Beneficial Owner of the shares to complete an order form or to enter into agreements with respect to such matters as compensating cash payment.

 

Cash Redemptions. A Fund may pay out the proceeds of redemptions of Creation Unit Aggregations solely in cash or through any combination of cash or securities. In addition, an investor may request a redemption in cash that a Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the NAV of its shares based on the NAV of shares of the Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charge for requested cash redemptions specified above, to offset the Trust’s brokerage and other transaction costs associated with the disposition of Fund Securities). Proceeds will be paid to the Authorized Participant redeeming shares on behalf of the redeeming investor as soon as practicable after the date of redemption. If the Authorized Participant acts as a broker for a Fund in connection with the sale of Fund Securities, the Authorized Participant will also be required to pay certain brokerage commissions, taxes, and transaction and market impact costs as discussed under the heading “Brokerage Transactions” herein.

 

Redemptions of shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and each Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Unit Aggregations for cash to the extent that the Trust could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws.

 

In-Kind Redemptions . The ability of the Trust to effect in-kind creations and redemptions is subject, among other things, to the condition that, within the time period from the date of the order to the date of delivery of the securities, there are no days that are holidays in the applicable foreign market. For every occurrence of one or more intervening holidays in the applicable foreign market that are not holidays observed in the U.S. equity market, the redemption settlement cycle may be extended by the number of such intervening holidays. In addition to holidays, other unforeseeable closings in a foreign market due to emergencies may also prevent the Trust from delivering securities within the normal settlement period. The Funds will not suspend or postpone redemption beyond seven days, except as permitted under Section 22(e) of the 1940 Act. Section 22(e) provides that the right of redemption may be suspended or the date of payment postponed with respect to a Fund (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’s portfolio securities or determination of its net asset value is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.

 

REGULAR HOLIDAYS

 

The Funds generally intend to effect deliveries of Creation Unit Aggregations and portfolio securities on a basis of T+3. A Fund may effect deliveries of Creation Unit Aggregations and portfolio securities on a basis other than T+3 in order to accommodate local holiday schedules, to account for different treatment among foreign and U.S. markets of dividend record dates and ex-dividend dates, or under certain other circumstances. The ability of the Trust to effect in-kind creations and redemptions within three Business Days of receipt of an order in good form is subject, among other things, to the condition that, within the time period from the date of the order to the date of delivery of the securities, there are no days that are holidays in the applicable foreign market. For every occurrence of one or more intervening holidays in the applicable foreign market that are not holidays observed in the U.S. equity market, the redemption settlement cycle will be extended by the number of such intervening holidays. In addition to holidays, other unforeseeable closings in a foreign market due to emergencies may also prevent the Trust from delivering securities within the normal settlement period.

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The securities delivery cycles currently practicable for transferring portfolio securities to redeeming investors, coupled with foreign market holiday schedules, will require a delivery process longer than seven calendar days for some Funds, in certain circumstances. The holidays applicable to the Fund during such periods are listed below, as are instances where more than seven days will be needed to deliver redemption proceeds. Although certain holidays may occur on different dates in subsequent years, the number of days required to deliver redemption proceeds in any given year is not expected to exceed the maximum number of days listed below for the Fund. The proclamation of new holidays, the treatment by market participants of certain days as “informal holidays” ( e.g. , days on which no or limited securities transactions occur, as a result of substantially shortened trading hours), the elimination of existing holidays, or changes in local securities delivery practices could affect the accuracy of information set forth herein.

 

Listed below are the anticipated dates in calendar year 2015 in which the regular holidays in non-U.S. markets may impact Fund settlement. This list is based on information available to the Fund. The list is subject to change:

 

Austria

January 1 May 1 October 26 December 31
January 6 May 14 December 8  
April 3 May 25 December 24  
April 6 June 4 December 25  

 

Belgium

January 1 May 1 May 25 December 25
April 3 May 14 July 21  
April 5 May 15 November 1  
April 6 May 24 November 11  

 

Denmark

January 1 April 6 May 15 December 24
April 2 May 1 May 25 December 25
April 3 May 14 June 5 December 31

 

Finland

January 1 April 3 May 14 December 25
January 6 April 6 June 19 December 31
April 2 May 1 December 24  

 

France

January 1 May 1 May 25 December 25
April 3 May 8 July 14  
April 6 May 14 November 11  

 

Germany

January 1 April 6 May 25 December 25
January 6 May 1 June 4 December 31
April 3 May 14 December 24  

 

Greece

January 1 April 3 May 1 December 25
January 6 April 6 June 1  
February 23 April 10 October 28  
March 25 April 13 December 24  

 

Ireland

January 1 April 24 August 3 December 28
March 17 May 1 October 26 December 29
April 3 May 4 December 24  
April 6 June 1 December 25  

 

Italy

January 1 April 6 June 29 December 31
January 6 May 1 December 8  
April 3 June 2 December 25  

 

The Netherlands

January 1 April 27 May 14
April 3 April 30 May 25
April 6 May 5 December 25

 

Norway

January 1 April 6 May 25 December 31
April 2 May 1 December 24  
April 3 May 14 December 25  

 

Portugal

January 1 May 1 October 5 December 25
February 17 June 1 December 1  
April 3 June 4 December 8  
April 6 June 10 December 24  

 

Spain

January 1 April 3 May 25 December 25
January 6 April 6 June 4  
March 19 May 1 October 12  
April 2 May 14 December 8  

 

Sweden

January 1 April 6 June 19 December 31
January 5 April 30 October 30  
January 6 May 1 December 24  
April 3 May 14 December 25  

 

Switzerland

January 1 April 3 May 25 December 8
January 2 April 6 June 4 December 24
January 6 May 1 June 29 December 25
March 19 May 14 September 10 December 31

 

The United Kingdom

January 1 April 3 May 25 December 25
January 2 April 6 August 3 December 28
January 6 May 4 August 31  

 

Redemptions.  The longest redemption cycle for a Fund is a function of the longest redemption cycle among the countries whose securities comprise the Fund. In the calendar year 2015, the dates of regular holidays affecting the following securities markets present the worst-case redemption cycles* for a Fund as follows:

 

Country   Trade
Date
  Settlement
Date
  Number of
Days to
Settle
Ireland   12/22/15   12/30/15   8
    12/23/15   12/31/15   8
Spain   03/30/15   04/07/15   8
    03/31/15   04/08/15   8
    04/01/15   04/09/15   8

* These worst-case redemption cycles are based on information regarding regular holidays, which may be out of date. Based on changes in holidays, longer (worse) redemption cycles are possible.

TAXES

 

The following is a summary of certain federal income tax considerations generally affecting the Funds and their shareholders that supplements the discussion in the Prospectus. No attempt is made to present a comprehensive explanation of the federal, state, local or foreign tax treatment of the Funds or their shareholders, and the discussion here and in the Prospectus is not intended to be a substitute for careful tax planning.

 

The following general discussion of certain federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this Statement of Additional Information. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.

 

The following information should be read in conjunction with the section in the Prospectus entitled “Additional Tax Information.”

 

Taxation of the Funds . Each Fund has elected or will elect and intends to qualify each year to be treated as a separate RIC under Subchapter M of the Code. As such, each Fund should not be subject to federal income tax on its net investment income and capital gains, if any, to the extent that it timely distributes such income and capital gains to its shareholders. In order to qualify for treatment as a RIC, a Fund must distribute annually to its shareholders at least the sum of 90% of its net investment income (generally including the excess of net short-term capital gains over net long-term capital losses) and 90% of its net tax exempt interest income, if any (the “Distribution Requirement”) and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of a Fund’s gross income each taxable year must be derived from dividends, interest, payments with respect to certain

28

securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income derived with respect to its business of investing in such stock, securities or currencies, and net income derived from interests in qualified publicly traded partnerships (the “Qualifying Income Requirement”); and (ii) at the end of each quarter of a Fund’s taxable year, its assets must be diversified so that (a) at least 50% of the market value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater in value than 5% of the value of the Fund’s total assets and to not more than 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer, the securities (other than securities of other RICs) of two or more issuers that it controls and that are engaged in the same, similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships (the “Diversification Requirement”).

 

Each Fund is treated as a separate corporation for federal income tax purposes. Each Fund therefore is considered to be a separate entity in determining its treatment under the rules for RICs described herein and in the Prospectus. Losses in one Fund do not offset gains in any other fund and the requirements (other than certain organizational requirements) for qualifying RIC status are determined at the Fund level rather than at the Trust level.

 

If a Fund fails to satisfy the Qualifying Income Requirement or the Diversification Requirement in any taxable year, such Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect, if a penalty tax is paid with respect to each failure to satisfy the applicable requirements, and the Fund takes certain required actions. Additionally, relief is provided for certain de minimis failures of the Diversification Requirement where a Fund corrects the failure within a specified period of time. In order to be eligible for the relief provisions with respect to a failure to meet the Diversification Requirement, a Fund may be required to dispose of certain assets. If these relief provisions were not available to a Fund and it were to fail to qualify for treatment as a RIC for a taxable year, all of its taxable income would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and its distributions (including capital gains distributions) generally would be taxable as ordinary income dividends to its shareholders, subject to the dividends-received deduction for corporate shareholders and the lower tax rates on qualified dividend income received by noncorporate shareholders. To requalify for treatment as a RIC in a subsequent taxable year, the Fund would be required to satisfy the RIC qualification requirements for that year and to distribute any earnings and profits from any year in which the Fund failed to qualify for tax treatment as a RIC. If a Fund failed to qualify as a RIC for a period greater than two taxable years, it would generally be required to pay a Fund-level tax on certain net built-in gains recognized with respect to certain of its assets upon a disposition of such assets within ten years of qualifying as a RIC in a subsequent year. The Board reserves the right not to maintain the qualification of a Fund for treatment as a RIC if it determines such course of action to be beneficial to shareholders.

 

Each Fund intends to distribute substantially all of its net investment income and its capital gains for each taxable year. If a Fund meets the Distribution Requirement but retains some or all of its income or gains, it will be subject to federal income tax to the extent any such income or gains are not distributed. A Fund may designate certain amounts retained as undistributed net capital gain in a notice to its shareholders, who (i) will be required to include in income for U.S. federal income tax purposes, as long-term capital gain, their proportionate shares of the undistributed amount so designated, (ii) will be entitled to credit their proportionate shares of the income tax paid by the Fund on that undistributed amount against their federal income tax liabilities and to claim refunds to the extent such credits exceed their tax liabilities and (iii) will be entitled to increase their tax basis, for federal income tax purposes, in their Shares in the Fund by an amount equal to the excess of the amount of undistributed net capital gain included in their respective income over their respective income tax credits.

 

A Fund will be subject to a 4% excise tax on certain undistributed income if it does not distribute to its shareholders in each calendar year an amount at least equal to 98% of its ordinary income for the calendar year plus 98.2% of its capital gain net income for the twelve months ended October 31 of such year, subject to an increase for any shortfall in the prior year’s distribution. Each Fund intends to declare and distribute dividends and distributions in the amounts and at the times necessary to avoid the application of this 4% excise tax.

 

A Fund may elect to treat part or all of any “qualified late year loss” as if it had been incurred in the succeeding taxable year in determining the Fund’s taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such “qualified late year loss” as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar year. A “qualified late year loss” generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as “post-October losses”) and certain other late-year losses.

 

Capital losses in excess of capital gains (“net capital losses”) are not permitted to be deducted against a RIC’s net investment income. Instead, for U.S. federal income tax purposes, potentially subject to certain limitations, a Fund may carry net capital losses from any taxable year forward indefinitely to offset its capital gains, if any, in years following the year of the loss. To the extent subsequent capital gains are offset by such losses, they will not result in U.S. federal income tax liability to the Fund and may not be distributed as capital gains to its shareholders. Generally, the Funds may not carry forward any losses other than net capital losses.

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Taxation of Shareholders - Distributions . Each Fund intends to distribute annually to its shareholders substantially all of its investment company taxable income (computed without regard to the deduction for dividends paid), its net tax-exempt income, if any, and any net capital gain (net recognized long-term capital gains in excess of net recognized short-term capital losses, taking into account any capital loss carryovers). The Funds will report to shareholders annually the amounts of dividends paid from ordinary income, the amount of distributions of net capital gain, the portion of dividends which may qualify for the dividends-received deduction for corporations, and the portion of dividends which may qualify for treatment as qualified dividend income, if any.

 

Subject to certain limitations, dividends reported by a Fund as qualified dividend income will be taxable to noncorporate shareholders at rates of up to 20%. Dividends may be reported by a Fund as qualified dividend income if they are attributable to qualified dividend income received by the Fund. Qualified dividend income includes, in general, subject to certain holding period requirements and other requirements, dividend income from certain U.S. and foreign corporations. Subject to certain limitations, eligible foreign corporations include those incorporated in possessions of the United States, those incorporated in certain countries with comprehensive tax treaties with the United States and other foreign corporations if the stock with respect to which the dividends are paid is tradable on an established securities market in the United States. A dividend generally will not be treated as qualified dividend income to the extent that (i) the shareholder has not held the stock on which the dividend was paid for more than 60 days during the 121-day period that begins on the date that is 60 days before the date on which the stock becomes ex-dividend with respect to such dividend or, in the case of certain preferred stock, for more than 90 days during the 181-day period beginning 90 days before such date, (ii) the shareholder is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to substantially similar or related property, or (iii) the shareholder elects to treat such dividend as investment income under section 163(d)(4)(B) of the Code. The holding period requirements described in this paragraph apply to the shareholders’ investments in the Funds and to the Funds’ investments in the underlying dividend paying stock. Dividends received by a Fund from a real estate investment trust (a “REIT”) or another RIC may be treated as qualified dividend income generally only to the extent the dividend distributions are attributable to qualified dividend income received by such REIT or RIC. It is expected that dividends received by a Fund from a REIT and distributed by that Fund to a shareholder generally will be taxable to the shareholder as ordinary income. If 95% or more of a Fund’s gross income (calculated without taking into account net capital gain derived from sales or other dispositions of stock or securities) consists of qualified dividend income, that Fund may report all distributions of such income as qualified dividend income.

 

Certain dividends received by a Fund from U.S. corporations (generally, dividends received by a Fund in respect of any share of stock (1) with a tax holding period of at least 46 days during the 91-day period beginning on the date that is 45 days before the date on which the stock becomes ex-dividend as to that dividend and (2) that is held in an unleveraged position) and distributed and appropriately so reported by the Fund may be eligible for the 70% dividends-received deduction generally available to corporations under the Code. Certain preferred stock must have a holding period of at least 91 days during the 181-day period beginning on the date that is 90 days before the date on which the stock becomes ex-dividend as to that dividend in order to be eligible. Capital gain dividends distributed to a Fund from other regulated investment companies are not eligible for the dividends-received deduction. In order to qualify for the deduction, corporate shareholders in a Fund must meet the minimum holding period requirement stated above with respect to their shares in the Fund, taking into account any holding period reductions from certain hedging or other transactions or positions that diminish their risk of loss with respect to their Fund shares, and, if they borrow to acquire or otherwise incur debt attributable to shares in the Fund, they may be denied a portion of the dividends-received deduction with respect to those shares. The entire dividend, including the otherwise deductible amount, will be included in determining the excess, if any, of a corporation’s adjusted current earnings over its alternative minimum taxable income, which may increase a corporation’s alternative minimum tax liability. Any corporate shareholder should consult its tax adviser regarding the possibility that its tax basis in its shares may be reduced, for U.S. federal income tax purposes, by reason of “extraordinary dividends” received with respect to the shares and, to the extent such basis would be reduced below zero, current recognition of income may be required.

 

Distributions from net short-term capital gains will generally be taxable to shareholders as ordinary income. Distributions from a Fund’s net capital gain will be taxable to shareholders at long-term capital gains rates, regardless of how long shareholders have held their Shares in the Fund. Long-term capital gains are generally taxed to noncorporate shareholders at rates of up to 20%.

 

Although dividends generally will be treated as distributed when paid, any dividend declared by a Fund in October, November or December and payable to shareholders of record in such a month that is paid during the following January will be treated for U.S. federal income tax purposes as received by shareholders on December 31 of the calendar year in which it was declared.

 

If a Fund’s distributions exceed its earnings and profits, all or a portion of the distributions made in the taxable year may be treated as a return of capital to shareholders. A return of capital distribution generally will not be taxable but will reduce the shareholder’s cost basis and result in a higher capital gain or lower capital loss when the Shares on which the distribution was received are sold. After a shareholder’s basis in the Shares has been reduced to zero, distributions in excess of earnings and profits will be treated as gain from the sale of the shareholder’s Shares.

 

Distributions that are reinvested in additional Shares of a Fund through the means of a dividend reinvestment service, if offered by your broker-dealer, will nevertheless be taxable dividends to the same extent as if such dividends had been received in cash.

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U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to a 3.8% Medicare contribution tax on all or a portion of their “net investment income,” which includes taxable interest, dividends, and certain capital gains (including capital gains realized on the sale of Shares). This 3.8% tax also applies to all or a portion of the undistributed net investment income of certain shareholders that are estates and trusts.

 

Distributions of ordinary income and capital gains may also be subject to foreign, state and local taxes depending on a shareholder’s circumstances.

 

Taxation of Shareholders - Sale of Shares . 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 sale of Fund Shares held for a period of one year or less at the time of such sale will, for tax purposes, generally result in short-term capital gains or losses, and a sale of those held for more than one year will generally result in long-term capital gains or losses. Long-term capital gains are generally taxed to noncorporate shareholders at rates of up to 20%.

 

Gain or loss on the sale of Shares in a Fund is measured by the difference between the amount received and the adjusted tax basis of the Shares. Shareholders should keep records of investments made (including Shares acquired through reinvestment of dividends and distributions) so they can compute the tax basis of their Shares. The cost basis of shares in a Fund acquired by purchase will generally be based on the amount paid for the shares and then may be subsequently adjusted for other applicable transactions as required by the Code. The difference between the selling price and the cost basis of shares in a Fund generally determines the amount of the capital gain or loss realized on the sale or exchange of such shares. Shareholders should contact the broker through whom they purchased their shares in a Fund to obtain information with respect to the available cost basis reporting methods and elections for their account.

 

A loss realized on a sale of Shares of a Fund may be disallowed if substantially identical Shares are acquired (whether through the 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 must be adjusted to reflect the disallowed loss. Any loss upon the sale of Shares held for six (6) months or less is treated as long-term capital loss to the extent of any amounts treated as distributions to the shareholder of long-term capital gain (including any amounts credited to the shareholder as undistributed capital gains).

 

Taxation of Fund Investments . Dividends and interest received by a Fund on foreign securities 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 a Fund meets certain requirements, which include a requirement that more than 50% of the value of the Fund’s total assets at the close of its respective taxable year consist of stocks or securities of foreign corporations, then the Fund should be eligible to file an election with the Internal Revenue Service (the “IRS”) that may enable its shareholders, in effect, to receive either the benefit of a foreign tax credit, or a tax deduction, with respect to certain foreign and U.S. possessions income taxes paid by the Fund, subject to certain limitations. Pursuant to this election, the Fund will treat those taxes as dividends paid to its shareholders. Each such shareholder will be required to include a proportionate share of those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating any foreign tax credit the shareholder may be entitled to use against such shareholder’s federal income tax. No deduction for such taxes will be permitted to individuals in computing their alternative minimum tax liability. If a Fund is eligible to, and makes, this election, the Fund will report annually to its shareholders the respective amounts per share of the Fund’s income from sources within, and taxes paid to, foreign countries and U.S. possessions. If a Fund does not make this election, the Fund will be entitled to claim a deduction for certain foreign taxes incurred by the Fund. The ETFS Zacks Earnings Large-Cap U.S. Index Fund, the ETFS Zacks Earning Small-Cap U.S. Fund, and the ETFS Diversified-Factor U.S. Large Cap Index Fund do not expect to satisfy the requirements for passing through to their shareholders any share of foreign taxes paid by such Funds, with the result that shareholders of those Funds will not include such taxes in their gross incomes and will not be entitled to a tax deduction or credit for such taxes on their own tax returns.

 

Certain of the Funds’ investments may be subject to complex provisions of the Code (including provisions relating to hedging transactions, straddles, integrated transactions, foreign currency contracts, forward foreign currency contracts, and notional principal contracts) that, among other things, may affect the character of gains and losses realized by the Funds (e.g., may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the Funds and defer losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also may require a Fund to mark-to-market certain types of positions in its portfolio (i.e., treat them as if they were closed out) which may cause the Fund to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the RIC distribution requirements for avoiding income and excise taxes. The Funds intend to monitor their transactions, intend to make appropriate tax elections, and intend to make appropriate entries in their books and records in order to mitigate the effect of these rules and preserve the Funds’ qualification for treatment as RICs.

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If a Fund acquires any equity interest (under Treasury regulations that may be promulgated in the future, generally including not only stock but also an option to acquire stock such as is inherent in a convertible bond) in certain foreign corporations (i) that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties, or capital gains) or (ii) where at least 50% of the corporation’s assets (computed based on average fair market value) either produce or are held for the production of passive income (“passive foreign investment companies” or “PFICs”), the Fund could be subject to U.S. federal income tax and nondeductible interest charges on “excess distributions” received from such companies or on gain from the sale of stock in such companies, even if all income or gain actually received by the Fund is timely distributed to its shareholders. The Fund would not be able to pass through to its shareholders any credit or deduction for such a tax. A “qualified electing fund” election or a “mark to market” election may be available that would ameliorate these adverse tax consequences, but such elections could require a Fund to recognize taxable income or gain (subject to the distribution requirements applicable to RICs, as described above) without the concurrent receipt of cash. In order to satisfy the distribution requirements and avoid a tax at the Fund level, a Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. Gains from the sale of stock of PFICs may also be treated as ordinary income. In order for a Fund to make a qualified electing fund election with respect to a PFIC, the PFIC would have to agree to provide certain tax information to the Fund on an annual basis, which it might not agree to do. A Fund may limit and/or manage its holdings in PFICs to limit its tax liability or maximize its returns from these investments.

 

Each Fund may be required for federal income tax purposes to mark-to-market and recognize as income for each taxable year its net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. Gain or loss from futures and options contracts on broad-based indexes required to be marked to market will be 60% long-term and 40% short-term capital gain or loss. Application of this rule may alter the timing and character of distributions to shareholders. A Fund may be required to defer the recognition of losses on futures contracts, options contracts and swaps to the extent of any unrecognized gains on offsetting positions held by the Fund. It is anticipated that certain net gain realized from the closing out of futures or options contracts will generally be considered gain from the sale of securities and therefore will generally be qualifying income for purposes of the Qualifying Income Requirement.

 

Tax-Exempt Shareholders . Certain tax-exempt shareholders, including qualified pension plans, individual retirement accounts, salary deferral arrangements, 401(k) plans, and other tax-exempt entities, generally are exempt from federal income taxation except with respect to their unrelated business taxable income (“UBTI”). Under current law, a Fund generally serves to block UBTI from being realized by its tax-exempt shareholders. However, notwithstanding the foregoing, tax-exempt shareholders could realize UBTI by virtue of their investment in a Fund where, for example, (i) the Fund invests in REITs that hold residual interests in real estate mortgage investment conduits (“REMICs”) or (ii) Shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholders within the meaning of section 514(b) of the Code. Charitable remainder trusts are subject to special rules and should consult their tax advisors. There are no restrictions preventing a Fund from holding investments in REITs that hold residual interests in REMICs, and a Fund may do so. The IRS has issued guidance with respect to these issues and prospective shareholders, especially charitable remainder trusts, are strongly encouraged to consult with their tax advisors regarding these issues.

 

Foreign Shareholders . Dividends paid by a Fund to shareholders who are nonresident aliens or foreign entities will be subject to a 30% United States withholding tax unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law to the extent derived from investment income and short-term capital gain or unless such income is effectively connected with a U.S. trade or business carried on in the United States. Nonresident shareholders are urged to consult their own tax advisors concerning the applicability of the United States withholding tax and the proper withholding form(s) to be submitted to a Fund. A non-U.S. shareholder who fails to provide an appropriate IRS Form W-8 may be subject to backup withholding at the appropriate rate.

 

Unless certain non-U.S. entities that hold Fund Shares comply with IRS requirements that will generally require them to report information regarding U.S. persons investing in, or holding accounts with, such entities, a 30% withholding tax may apply to Fund distributions payable to such entities after June 30, 2014 (or, in certain cases, after later dates) and redemptions and certain capital gain dividends payable to such entities after December 31, 2016. A non-U.S. shareholder may be exempt from the withholding described in this paragraph under an applicable intergovernmental agreement between the U.S. and a foreign government, provided that the shareholder and the applicable foreign government comply with the terms of the agreement.

 

Backup Withholding . A Fund will be required in certain cases to withhold (as “backup withholding”) on amounts payable to any shareholder who (1) has provided the Fund either an incorrect tax identification number or no number at all, (2) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends, (3) has failed to certify to the Fund that such shareholder is not subject to backup withholding, or (4) has not certified that such shareholder is a U.S. person (including a U.S. resident alien). The backup withholding rate is 28%. Backup withholding will not be applied to payments that have been subject to the 30% withholding tax on shareholders who are neither citizens nor permanent residents of the U.S.

 

Creation Units . An Authorized Participant who exchanges securities for Creation Units generally will recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and the sum of the exchanger’s aggregate basis in the securities surrendered plus the amount of cash paid for such Creation Units. A person who redeems Creation

32

Units will generally recognize a gain or loss equal to the difference between the exchanger’s basis in the Creation Units and the sum of the aggregate market value of any securities received plus the amount of any cash received for such Creation Units. The IRS, however, may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing “wash sales,” or on the basis that there has been no significant change in economic position.

 

Any capital gain or loss realized upon the creation of Creation Units will generally be treated as long-term capital gain or loss if the securities exchanged for such Creation Units have been held for more than one year. Any capital gain or loss realized upon the redemption of Creation Units will generally be treated as long-term capital gain or loss if the Shares comprising the Creation Units have been held for more than one year. Otherwise, such capital gains or losses will generally be treated as short-term capital gains or losses. Any loss upon a redemption of Creation Units held for six (6) months or less will be treated as a long-term capital loss to the extent of any amounts treated as distributions to the applicable Authorized Participant of long-term capital gain with respect to the Creation Units (including any amounts credited to the Authorized Participant as undistributed capital gains).

 

A Fund has the right to reject an order for Creation Units if the purchaser (or group of purchasers) 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 Code, the Fund would have a basis in the deposit securities different from the market value of such securities on the date of deposit. A Fund also has the right to require information necessary to determine beneficial Share ownership for purposes of the 80% determination. If a Fund does issue Creation Units to a purchaser (or group of purchasers) that would, upon obtaining the Shares so ordered, own 80% or more of the outstanding shares of the Fund, the purchaser (or group of purchasers) may not recognize gain or loss upon the exchange of securities for Creation Units.

 

Persons purchasing or redeeming Creation Units should consult their own tax advisors with respect to the tax treatment of any creation or redemption transaction.

 

Certain Potential Tax Reporting Requirements . Under promulgated Treasury regulations, if a shareholder recognizes a loss on disposition of a Fund’s Shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder (or certain greater amounts over a combination of years), the shareholder must file with the IRS a disclosure statement on IRS Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC are not excepted. Significant penalties may be imposed for the failure to comply with the reporting requirements. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.

 

The foregoing discussion is a summary only and is not intended as a substitute for careful tax planning. Purchasers of Shares should consult their own tax advisors 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 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.

 

DETERMINATION OF NAV

 

The NAV of each Fund’s shares is calculated each day the national securities exchanges are open for trading as of the close of regular trading on the Listing Exchange, generally 4:00 p.m. New York time (the “NAV Calculation Time”). NAV per share is calculated by dividing a Fund’s net assets by the number of Fund shares outstanding.

 

In calculating each Fund’s NAV, Fund investments generally are valued using market valuations. Short-term debt securities with remaining maturities of sixty (60) days or less generally are valued on the basis of amortized cost, which approximates fair value. U.S. fixed income assets may be valued as of the announced closing time for such securities on any day that the Securities Industry and Financial Markets Association announces an early closing time. The values of any assets or liabilities of a Fund that are denominated in a currency other than the U.S. dollar are converted into U.S. dollars using an exchange rate deemed appropriate by the Fund.

 

Investments in futures are valued at market value, which is generally determined using the last reported official closing price or last trading price on the exchange or market on which the futures contract is primarily traded at the time of valuation.  Generally, trading in futures, U.S. government securities (such as U.S. Treasury securities), money market instruments and certain fixed-income securities is substantially completed each day at various times prior to the NAV Calculation Time. The values of such securities used in computing the NAV of a Fund are, unless fair valued, determined as of such times.

 

In certain instances, such as when reliable market valuations are not readily available or are not deemed to reflect current market values, the Fund’s investments will be valued in accordance with the Fund’s pricing policy and procedures. Securities that may be valued using “fair value” pricing may include, but are not limited to, securities for which there are no current market quotations or whose issuer is in default or bankruptcy, securities subject to corporate actions (such as mergers or reorganizations), securities subject

33

to non-U.S. investment limits or currency controls, and securities affected by “significant events.” An example of a significant event is an event occurring after the close of the market in which a security trades but before the Fund’s next NAV Calculation Time that may materially affect the value of the Fund’s investment ( e.g. , government action, natural disaster, or significant market fluctuation). Price movements in U.S. markets that are deemed to affect the value of foreign securities, or reflect changes to the value of such securities, also may cause securities to be “fair valued.”

 

When fair-value pricing is employed, the prices of securities used by a Fund to calculate its NAV may differ from quoted or published prices for the same securities.

 

Fund shares are purchased or sold on a national securities exchange at market prices, which may be higher or lower than NAV. No secondary sales will be made to brokers or dealers at a concession by the Distributor or by the Fund. Purchases and sales of shares in the secondary market, which will not involve the Fund, will be subject to customary brokerage commissions and charges. Transactions in Fund shares will be priced at NAV only if you purchase or redeem shares directly from a Fund in Creation Units.

 

DIVIDENDS AND DISTRIBUTIONS

 

Each Fund intends to pay out dividends, if any, on a quarterly basis. Each Fund intends to distribute its net realized capital gains, if any, to investors annually. The Funds may occasionally be required to make supplemental distributions at some other time during the year. Distributions in cash may be reinvested automatically in additional whole shares only if the broker through whom you purchased shares makes such option available. Your broker is responsible for distributing the income and capital gain distributions to you.

 

The Trust reserves the right to declare special distributions if, in its reasonable discretion, such action is necessary or advisable to preserve the status of a Fund as a RIC or to avoid imposition of income or excise taxes on undistributed income.

 

MISCELLANEOUS INFORMATION

 

Counsel. Morgan, Lewis & Bockius LLP, with offices located at 2020 K Street, NW, Washington, DC 20006, serves as legal counsel to the Trust.

 

Independent Registered Public Accounting Firm. Deloitte & Touche LLP, with offices located at 500 College Road East, Princeton, NJ 08540, serves as the independent registered public accounting firm to the Trust.

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FINANCIAL STATEMENTS

 

ETFS Zacks Earnings Small-Cap U.S. Index Fund

(a portfolio of ETFS Trust)

STATEMENT OF ASSETS AND LIABILITIES

January 2, 2015

 

 

ASSETS:

 

Cash $100,000
   TOTAL ASSETS $100,000
   
Liabilities 0
   
Net assets $100,000
   
Components of Net Assets:  
   Paid-in Capital $100,000
   
Shares of beneficial interest outstanding  
   (unlimited amount authorized, par value $0.0001)  4,000
   
Net asset value per share $25.00

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to

the Statement of Assets and Liabilities.

 

35

ETFS Zacks Earnings Small-Cap U.S. Index Fund

(a portfolio of ETFS Trust)

NOTES TO THE STATEMENT OF ASSETS AND LIABILITIES

January 2, 2015

 

 

1. Organization

 

ETFS Trust (the “Trust”), commencement of operations on January 2, 2015, was organized as a Delaware statutory trust on January 9, 2014 and is authorized to issue multiple series or portfolios. The Trust is an open-end management investment company, registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The offering of the Trust’s shares is registered under the Securities Act of 1933, as amended (the “Securities Act”). The ETFS Zacks Earnings Small-Cap U.S. Index Fund (the “Fund”) is a series of the Trust.

 

The Trust has had no operations to date other than matters relating to its registration and the sale and issuance of 4,000 shares of beneficial interest in the Fund to the Fund’s adviser, ETF Securities Advisors LLC (the “Adviser”), at a net asset value of $25 per share. The Fund’s investment objective seeks to track the price and yield performance, before fees and expenses, of the Zacks Earnings Small-Cap U.S. Index.

 

 

2. Summary of Significant Accounting Policies

 

Use of Estimates:

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in this statement of assets and liabilities. Actual results could differ from those estimates.

 

Organizational and Offering Expenses:

 

All organizational and offering expenses of the Trust will be borne by the Adviser. As a result, organizational and offering expenses are not reflected in the statement of assets and liabilities, and a statement of operations is not presented.

 

The Advisor has agreed to pay the organization and initial offering costs on behalf of the Fund. The organization and initial offering costs include preparation and filing incorporation documents, bylaws, declarations of trust, registration statements, board materials, state and federal registration of shares and audit fees. As a result, the Fund's financial statements do not reflect these organization and offering costs. Total organization and offering costs incurred through January 2, 2015 were approximately $189,000 and these amounts are also not subject to recapture by the Adviser.

 

 

Federal Income Tax:

 

The Fund intends to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended, which includes distributing substantially all of its net investment income and net capital gains to its shareholders. Accordingly, no federal income tax provision is required.

 

3. Investment Advisory and Other Agreements

 

Under the terms of the Trust’s Investment Advisory and Ancillary Services Agreement (the “Advisory Agreement”), the Adviser is subject to the supervision of the Board of Trustees and will be responsible for the day-to-day business of the Trust, including the day-to-day management of risk of the Fund in accordance with the Fund’s investment objectives and policies. As compensation for its advisory services and assumption of Fund expenses, the Adviser is entitled to a management fee, computed daily and payable monthly, at an annual rate of 0.65% of average daily net assets of the Fund, upon commencement of the Fund’s operations. Index Management Solutions, LLC serves as the sub-adviser to the Fund.

 

JPMorgan Chase Bank, N.A., serves as the administrator, custodian and transfer agent to the Trust, and the Fund.

 

ALPS Distributors, Inc. serves as the distributor.

 

4. Related Parties

 

At January 2, 2015, certain officers of the Trust were also employees of the Adviser. The Trust’s officers do not receive fees from the Trust for services in any capacity.

 

5. Concentration of Credit Risk

 

Cash at January 2, 2015, is on deposit at JPMorgan Chase Bank, N.A. in a non-interest bearing account.

36

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Trustees and Shareholder of ETFS Trust:

We have audited the accompanying statement of assets and liabilities of ETFS Zacks Earnings Small-Cap U.S. Index Fund, a portfolio of ETFS Trust (the “Fund”), as of January 2, 2015. This financial statement is the responsibility of the Fund’s management. Our responsibility is to express an opinion on this financial statement based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit of the statement of assets and liabilities provides a reasonable basis for our opinion.

In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of the Fund as of January 2, 2015, in conformity with accounting principles generally accepted in the United States of America.

 

DELOITTE & TOUCHE LLP

Princeton, New Jersey

January 7, 2015

37

 

 

2015 PROXY SEASON

 

AN OVERVIEW OF THE GLASS LEWIS
APPROACH TO PROXY ADVICE

 

UNITED STATES
 
 

 

INTRODUCTION   1
     
Summary of Changes for the 2015 United States Policy Guidelines   1
     
I. A BOARD OF DIRECTORS THAT SERVES SHAREHOLDER INTEREST   3
     
Election of Directors   3
Independence   3
Voting Recommendations on the Basis of Board Independence   5
Committee Independence   5
Independent Chairman   5
Performance   6
Voting Recommendations on the Basis of Performance   6
Board Responsiveness   7
The Role of a Committee Chairman   8
Audit Committees and Performance   8
Standards for Assessing the Audit Committee   9
Compensation Committee Performance   11
Nominating and Governance Committee Performance   13
Board-Level Risk Management Oversight   15
Other Considerations   15
Controlled Companies   17
Significant Shareholders   18
Exceptions for Recent IPOs   18
Dual-Listed Companies   19
Mutual Fund Boards   19
Declassified Boards   20
Mandatory Director Term and Age limits   21
Proxy Access   22
Majority Vote for the Election of Directors   22
The Plurality Vote Standard   22
Advantages of a Majority Vote Standard   23
     
II. TRANSPARENCY AND INTEGRITY IN FINANCIAL REPORTING   24
     
Auditor Ratification   24
Voting Recommendations on Auditor Ratification   24
Pension Accounting Issues   25
     
Ill. THE LINK BETWEEN COMPENSATION AND PERFORMANCE   26
     
Advisory Vote on Executive Compensation (“Say-on-Pay”)   26
Say-on-Pay Voting Recommendations   27
Company Responsiveness   28
Pay for Performance   28
Short-Term Incentives   28
Long-Term lncentives   29
One-Off Awards   29
Recoupment Provisions (“Clawback”)   30
Hedging of Stock   30
Pledging of Stock   30
Compensation Consultant Independence   31

 

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Frequency of Say-on-Pay   31
Vote on Golden Parachute Arrangements   32
Equity-Based Compensation Plan Proposals   32
Option Exchanges   33
Option Backdating, Spring-Loading and Bullet-Dodging   34
Director Compensation Plans   35
Employee Stock Purchase Plans   35
Executive Compensation Tax Deductibility (IRS 162(m) Compliance)   35
     
IV. GOVERNANCE STRUCTURE AND THE SHAREHOLDER FRANCHISE   37
     
Anti-Takeover Measures   37
Poison Pills (Shareholder Rights Plans)   37
NOL Poison Pills   37
Fair Price Provisions   38
Reincorporation   38
Exclusive Forum and Fee-Shifting Bylaw Provisions   39
Authorized Shares   40
Advance Notice Requirements   40
Voting Structure   41
Cumulative Voting   41
Supermajority Vote Requirements   41
Transaction of Other Business   42
Anti-Greenmail Proposals   42
Mutual Funds: Investment Policies and Advisory Agreements   42
Real Estate Investment Trusts   42
Preferred Stock Issuances at REITs   43
Business Development Companies   43
Authorization to Sell Shares at a Price below Net Asset Value   43
     
V. COMPENSATION, ENVIRONMENTAL, SOCIAL AND GOVERNANCE SHAREHOLDER INITIATIVES OVERVIEW   44

 

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Glass Lewis evaluates these guidelines on an ongoing basis and formally updates them on an annual basis. This year we’ve made noteworthy revisions in the following areas, which are summarized below but discussed in greater detail in the relevant section of this document:

 

SUMMARY OF CHANGES FOR
THE 2015 UNITED STATES POLICY GUIDELINES

 

GOVERNANCE COMMITTEE PERFORMANCE

 

We have adopted a policy regarding instances where a board has amended the company’s governing documents to reduce or remove important shareholder rights, or to otherwise impede the ability of shareholders to exercise such right, and has done so without shareholder approval. Examples of board actions that may cause such a recommendation include: the elimination of the ability of shareholders to call a special meeting or to act by written consent; an increase to the ownership threshold required for shareholders to call a special meeting; an increase to vote requirements for charter or bylaw amendments; the adoption of provisions that limit the ability of shareholders to pursue full legal recourse—such as bylaws that require arbitration of shareholder claims or that require shareholder plaintiffs to pay the company’s legal expenses in the absence of a court victory (i.e., “fee-shifting” or “loser pays” bylaws); the adoption of a classified board structure; and the elimination of the ability of shareholders to remove a director without cause. In these instances, depending on the circumstances, we may recommend that shareholders vote against the chairman of the governance committee, or the entire committee.

 

BOARD RESPONSIVENESS TO MAJORITY-APPROVED SHAREHOLDER PROPOSALS

 

Glass Lewis will generally recommend that shareholders vote against all members of the governance committee during whose tenure a shareholder proposal relating to important shareholder rights received support from a majority of the votes cast (excluding abstentions and broker non-votes) and the board failed to respond adequately. Examples of such shareholder proposals include those seeking a declassified board structure, a majority vote standard for director elections, or a right to call a special meeting. We have expanded this policy to specify that in determining whether a board has sufficiently implemented such a proposal, we will examine the quality of the right enacted or proffered by the board for any conditions that may unreasonably interfere with the shareholders’ ability to exercise the right (e.g., overly prescriptive procedural requirements for calling a special meeting).

 

VOTE RECOMMENDATIONS FOLLOWING IPO

 

We have increased our scrutiny of provisions adopted in a company’s charter or bylaws prior to an initial public offering (“IPO”). While Glass Lewis will generally refrain from issuing voting recommendations on the basis of most corporate governance best practices (e.g., board independence, committee membership and structure, meeting attendance, etc.) during the one-year period following an IPO, we will scrutinize certain provisions adopted in the company’s charter or bylaws prior to the IPO. Specifically, we will consider recommending to vote against all members of the board who served at the time of the adoption of an anti-takeover provision, such as a poison pill or classified board, if the provision is not put up for shareholder vote following the IPO. Additionally, consistent with our general approach to boards that adopt exclusive forum provisions or fee-shifting bylaws without shareholder approval, we will recommend that shareholders vote against the governance committee chair in the

 

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case of an exclusive forum provision, and against the entire governance committee in the case of a provision limiting the ability of shareholders to pursue full legal recourse (e.g., “fee-shifting” bylaws), if these provisions are not put up to shareholder vote following the IPO.

 

GLASS LEWIS STANDARDS FOR ASSESSING
“MATERIAL” TRANSACTIONS WITH DIRECTORS

 

With regard to Glass Lewis’ $120,000 threshold 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, we have clarified that we may deem such a transaction to be immaterial where the amount represents less than 1% of the firm’s annual revenues and the board provides a compelling rationale as to why the director’s independence is not affected by the relationship.

 

ADVISORY VOTE ON EXECUTIVE COMPENSATION

 

We have added a discussion of our approach to analyzing one-off awards granted outside of existing incentive programs (see page 29). We have also provided clarification regarding our qualitative and quantitative approach to say-on-pay analysis.

 

EMPLOYEE STOCK PURCHASE PLANS

 

We have added a discussion of our approach to analyzing employee stock purchase plans (see page 35).

 

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ELECTION OF DIRECTORS

 

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 a board can best protect and enhance the interests of shareholders if it is sufficiently independent, has a record of positive performance, and consists of individuals with diverse backgrounds and a breadth and depth of relevant experience.

 

INDEPENDENCE

 

The independence of directors, or lack thereof, is ultimately demonstrated through the decisions they make. In assessing the independence of directors, we will take into consideration, when appropriate, whether a director has a track record indicative of making objective decisions. Likewise, when assessing the independence of directors we will also examine when a director’s 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 director’s relationships with the company, the company’s executives, and other directors. We do this to evaluate whether personal, familial, or financial relationships (not including director compensation) may impact the director’s decisions. We believe that such relationships make it difficult for a director to put shareholders’ interests above the director’s or the related party’s interests. We also believe that a director who owns more than 20% of a company can exert disproportionate influence on the board, and therefore believe such a director’s independence may be hampered, in particular when serving on 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.

 

Affiliated Director – An affiliated director has, (or within the past three years, had) 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 either owns or controls 20% or more of the company’s voting stock, or is an employee or affiliate of an entity that controls such amount, as an affiliate. 4

 

 

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.

2 If a company does not consider a non-employee director to be 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.

 

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We view 20% shareholders as affiliates because they typically have access to and involvement with the management of a company that is fundamentally different from that of ordinary shareholders. More importantly, 20% holders may have interests that diverge from those of ordinary holders, for reasons such as the liquidity (or lack thereof) of their holdings, personal tax issues, etc.

 

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.

 

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 and the company pays the firm, not the individual, for services. 5 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; 6 and any aircraft and real estate dealings between the company and the director’s firm; or
     
1% of either company’s consolidated gross revenue for other business relationships (e.g., where the director is an executive officer of a company that provides services or products to or receives services or products from the company). 7

 

Definition of “Familial” : Familial relationships include a person’s spouse, parents, children, siblings, grandparents, uncles, aunts, cousins, nieces, nephews, in-laws, and anyone (other than domestic employees) who shares such person’s home. A director is an affiliate if: i) he or she has a family member who is employed by the company and receives more than $120,000 in annual compensation; or, ii) he or she has a family member who is employed by the company and the company does not disclose this individual’s compensation.

 

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 a greater amount of income as a result of affiliated transactions with the company rather than through compensation paid by the company (i.e., salary, bonus, etc. as a company employee) faces a conflict between making decisions that are in the best interests of the company versus those in the director’s own best interests. Therefore, we will recommend voting against such a director.

 

Additionally, we believe 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.

 

 

5 We may deem such a transaction to be immaterial where the amount represents less than 1% of the firm’s annual revenues and the board provides a compelling rationale as to why the director’s independence is not affected by the relationship.

6 We will generally take into consideration the size and nature of such charitable entities in relation to the company’s size and industry along with any other relevant factors such as the director’s role at the charity. However, unlike for other types of related party transactions, Glass Lewis generally does not apply a look-back period to affiliated relationships involving charitable contributions; if the relationship between the director and the school or charity ceases, or if the company discontinues its donations to the entity, we will consider the director to be independent.

7 This includes cases where a director is employed by, or closely affiliated with, a private equity firm that profits from an acquisition made by the company. Unless disclosure suggests otherwise, we presume the director is affiliated.

 

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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 8 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 chairman’s 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 company’s audit, compensation, nominating, and governance committees. 9 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.

 

Pursuant to Section 952 of the Dodd-Frank Act, as of January 11, 2013, the SEC approved new listing requirements for both the NYSE and NASDAQ which require that boards apply enhanced standards of independence when making an affirmative determination of the independence of compensation committee members. Specifically, when making this determination, in addition to the factors considered when assessing general director independence, the board’s considerations must include: (i) the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the listed company to the director (the “Fees Factor”); and (ii) whether the director is affiliated with the listing company, its subsidiaries, or affiliates of its subsidiaries (the “Affiliation Factor”).

 

Glass Lewis believes it is important for boards to consider these enhanced independence factors when assessing compensation committee members. However, as discussed above in the section titled Independence, we apply our own standards when assessing the independence of directors, and these standards also take into account consulting and advisory fees paid to the director, as well as the director’s affiliations with the company and its subsidiaries and affiliates. We may recommend voting against compensation committee members who are not independent based on our standards.

 

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 set by the board. This is needlessly complicated when a CEO chairs the board, since a CEO/chairman presumably will have a significant influence over the board.

 

While many companies have an independent lead or presiding director who performs many of the same functions of an independent chairman (e.g., setting the board meeting agenda), we do not believe this alternate form of independent board leadership provides as robust protection for shareholders as an independent chairman.

 

 

8 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 issue giving rise to the concern is not resolved.

9 We will recommend voting against an audit committee member who owns 20% or more of the company’s stock, and we believe that there should be a maximum of one director (or no directors if the committee is comprised of less than three directors) who owns 20% or more of the company’s stock on the compensation, nominating, and governan ce committees.

 

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It can become difficult for a board to fulfill its role of overseer and policy setter when a CEO/chairman controls the agenda and the boardroom discussion. Such control can allow a CEO to have an entrenched position, leading to longer-than-optimal terms, fewer checks on management, less scrutiny of the business operation, and limitations on independent, shareholder-focused goal-setting by the board.

 

A CEO should set the strategic course for the company, with the board’s approval, and the board should enable the CEO to carry out the CEO’s vision for accomplishing the board’s objectives. Failure to achieve the board’s objectives should lead the board to replace that CEO with someone in whom the board has confidence.

 

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 board’s responsibility to select a chief executive who can best serve a company and its shareholders and to replace this person when his or her duties have not been appropriately fulfilled. Such a replacement becomes more difficult and happens less frequently when the chief executive is also in the position of overseeing the board.

 

Glass Lewis believes that the installation of an independent chairman is almost always a positive step from a corporate governance perspective and promotes the best interests of shareholders. Further, the presence of an independent chairman fosters the creation of a thoughtful and dynamic board, not dominated by the views of senior management. Encouragingly, many companies appear to be moving in this direction—one study even indicates that less than 12 percent of incoming CEOs in 2009 were awarded the chairman title, versus 48 percent as recently as 2002. 10 Another study finds that 45 percent of S&P 500 boards now separate the CEO and chairman roles, up from 23 percent in 2003, although the same study found that of those companies, only 25 percent have truly independent chairs. 11

 

We do not recommend that shareholders vote against CEOs who chair the board. However, we typically recommend that our clients 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.

 

Further, where the company has neither an independent chairman nor independent lead director, we will recommend voting against the chair of the governance committee.

 

PERFORMANCE

 

The most crucial test of a board’s commitment to the company and its shareholders lies in the actions of the board and its members. We look at the performance of these individuals as directors and executives of the company and of other companies where they have served.

 

We find that a director’s past conduct is often indicative of future conduct and performance. We often find directors with a history of overpaying executives or of serving on boards where avoidable disasters have occurred serving on the boards of companies with similar problems. 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 PERFORMANCE

 

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, excessive compensation, audit- or accounting-related issues, and/or other indicators of mismanagement or

 

 

10 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).

11 Spencer Stuart Board Index, 2013, p. 5

 

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actions against the interests of shareholders. We will reevaluate such directors based on, among other factors, the length of time passed since the incident giving rise to the concern, shareholder support for the director, the severity of the issue, the director’s role (e.g., committee membership), director tenure at the subject company, whether ethical lapses accompanied the oversight lapse, and evidence of strong oversight at other companies.

 

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.

 

We believe shareholders should avoid electing 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. 12

 

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 director’s fault (we look at these late filing situations on a case-by-case basis).

 

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 company’s performance has been in the bottom quartile of the sector and the directors have not taken reasonable steps to address the poor performance.

 

BOARD RESPONSIVENESS

 

Glass Lewis believes that any time 25% or more of shareholders vote contrary to the recommendation of management, the board should, depending on the issue, demonstrate some level of responsiveness to address the concerns of shareholders. These include instances when 25% or more of shareholders (excluding abstentions and broker non-votes): WITHHOLD votes from (or vote AGAINSD a director nominee, vote AGAINST a management-sponsored proposal, or vote FOR a shareholder proposal. In our view, a 25% threshold is significant enough to warrant a close examination of the underlying issues and an evaluation of whether or not a board response was warranted and, if so, whether the board responded appropriately following the vote. While the 25% threshold alone will not automatically generate a negative vote recommendation from Glass Lewis on a future proposal (e.g., to recommend against a director nominee, against a say-on-pay proposal, etc.), it may be a contributing factor to our recommendation to vote against management’s recommendation in the event we determine that the board did not respond appropriately.

 

As a general framework, our evaluation of board responsiveness involves a review of publicly available disclosures (e.g., the proxy statement, annual report, 8-Ks, company website, etc.) released following the date of the company’s last annual meeting up through the publication date of our most current Proxy Paper. Depending on the specific issue, our focus typically includes, but is not limited to, the following:

 

At the board level, any changes in directorships, committee memberships, disclosure of related party transactions, meeting attendance, or other responsibilities;

 

 

12 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.

 

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Any revisions made to the company’s articles of incorporation, bylaws or other governance documents;

 

Any press or news releases indicating changes in, or the adoption of, new company policies, business practices or special reports; and

 

Any modifications made to the design and structure of the company’s compensation program, as well as an assessment of the company’s engagement with shareholders on compensation issues as discussed in the CD&A, particularly following a material vote against a company’s say-on-pay.

 

Our Proxy Paper analysis will include a case-by-case assessment of the specific elements of board responsiveness that we examined along with an explanation of how that assessment impacts our current vote recommendations.

 

THE ROLE OF A COMMITIEE CHAIRMAN

 

Glass Lewis believes that a designated committee chairman maintains primary responsibility for the actions of his or her respective committee. As such, many of our committee-specific vote recommendations are against the applicable committee chair rather than the entire committee (depending on the seriousness of the issue). However, in cases where we would ordinarily recommend voting against a committee chairman but the chair is not specified, we apply the following general rules, which apply throughout our guidelines:

 

If there is no committee chair, we recommend voting against the longest-serving committee member or, if the longest-serving committee member cannot be determined, the longest-serving board member serving on the committee (i.e., in either case, the “senior director”); and

 

If there is no committee chair, but multiple senior directors serving on the committee, we recommend voting against both (or all) such senior directors.

 

In our view, companies should provide clear disclosure of which director is charged with overseeing each committee. In cases where that simple framework is ignored and a reasonable analysis cannot determine which committee member is the designated leader, we believe shareholder action against the longest serving committee member(s) is warranted. Again, this only applies if we would ordinarily recommend voting against the committee chair but there is either no such position or no designated director in such role.

 

On the contrary, in cases where there is a designated committee chair and 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 any members of the committee who are up for election; rather, we will note the concern with regard to the committee chair.

 

AUDIT COMMITIEES 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.” 13

 

When assessing an audit committee’s performance, we are aware that an audit committee does not prepare financial statements, is not responsible for making the key judgments and assumptions that affect the financial statements, and does not audit the numbers or the disclosures provided to investors. Rather, an audit committee member monitors and oversees the process and procedures that management and auditors perform. The 1999 Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees stated it best:

 

 

13 Audit Committee Effectiveness – What Works Best.” PricewaterhouseCoopers. The Institute of Internal Auditors Research Foundation. 2005.

 

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A proper and well-functioning system exists, therefore, when the three main groups responsible for financial reporting – the full board including the audit committee, financial 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.” 14

 

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 recommend voting against members of an audit committee when such expertise is lacking, we are more likely to recommend voting 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 generally recommend voting in favor of its members. However, we will consider recommending that shareholders vote against the following: 15

 

  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 committee’s 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 member’s attendance at all board and committee meetings. 16

 

 

14 Commission on Public Trust and Private Enterprise. The Conference Board. 2003.

15 As discussed under the section labeled “Committee Chairman,” 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 note the concern with regard to the committee chair.

16 Glass Lewis may exempt certain audit committee members from the above threshold if, upon further analysis of relevant factors such as the director’s experience, the size, industry-mix and location of the companies involved and the director’s attendance at all the companies, we can reasonably determine that the audit committee member is likely not hindered by multiple audit committee commitments.

 

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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 prohibited by the Public Company Accounting Oversight Board (“PCAOB”).

 

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 17 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 18 letter has been issued.

 

13. All members of an audit committee at a time when material accounting fraud occurred at the company. 19

 

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 5 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.

 

 

17 As discussed under the section labeled “Committee Chairman,” 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.

18 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.

19 Research indicates that revenue fraud now accounts for over 60% of SEC fraud cases, and that companies that engage in fraud experience significant negative abnormal stock price declines—facing bankruptcy, delisting, and material asset sales at much higher rates than do non-fraud firms (Committee of Sponsoring Organizations of the Treadway Commission. “Fraudulent Financial Reporting: 1998-2007.” May 2010).

 

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18. All members of the audit committee when there is a disagreement with the auditor and the auditor resigns or is dismissed (e.g., the company receives an adverse opinion on its financial statements from the auditor).

 

19. All members of the audit committee if the contract with the auditor specifically limits the auditor’s liability to the company for damages. 20

 

20. All members of the audit committee who served since the date of the company’s last annual meeting, and when, since the last annual meeting, the company has reported a material weakness that has not yet been corrected, or, when the company has an ongoing material weakness from a prior year that has not yet been corrected.

 

We also take a dim view of audit committee reports that are boilerplate, and which provide little or no information or transparency to investors. When a problem such as a material weakness, restatement or late filings occurs, we take into consideration, in forming our judgment with respect to the audit committee, the transparency of the audit committee report.

 

COMPENSATION COMMITTEE PERFORMANCE

 

Compensation committees have a critical role in determining the compensation of executives. This includes deciding the basis on which compensation is determined, as well as the amounts and types of compensation to be paid. This process begins with the hiring and initial establishment of employment agreements, including the terms for such items as pay, pensions and severance arrangements. It is important in establishing compensation arrangements that compensation be consistent with, and based on the long-term economic performance of, the business’s long-term shareholders returns.

 

Compensation committees are also responsible for the oversight of the transparency of compensation. This oversight includes disclosure of compensation arrangements, the matrix used in assessing pay for performance, and the use of compensation consultants. In order to ensure the independence of the board’s compensation consultant, we believe the compensation committee should only engage a compensation consultant that is not also providing any services to the company or management apart from their contract with the compensation committee. It is important to investors that they have clear and complete disclosure of all the significant terms of compensation arrangements in order to make informed decisions with respect to the oversight and decisions of the compensation committee.

 

Finally, compensation committees are responsible for oversight of internal controls over the executive compensation process. This includes controls over gathering information used to determine compensation, establishment of equity award plans, and granting of equity awards. For example, the use of a compensation consultant who maintains a business relationship with company management may cause the committee to make decisions based on information that is compromised by the consultant’s conflict of interests. Lax controls can also contribute to improper awards of compensation such as through granting of backdated or spring-loaded options, or granting of bonuses when triggers for bonus payments have not been met.

 

Central to understanding the actions of a compensation committee is a careful review of the Compensation Discussion and Analysis (“CD&A”) report included in each company’s proxy. We review the CD&A in our evaluation of the overall compensation practices of a company, as overseen by the compensation committee. The CD&A is also integral to the evaluation of compensation proposals at companies, such as advisory votes on executive compensation, which allow shareholders to vote on the compensation paid to a company’s top executives.

 

 

20 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 consider recommending that shareholders vote against the following: 21

 

1. All members of a compensation committee during whose tenure the committee failed to address shareholder concerns following majority shareholder rejection of the say-on-pay proposal in the previous year. Where the proposal was approved but there was a significant shareholder vote (i.e., greater than 25% of votes cast) against the say-on-pay proposal in the prior year, if the board did not respond sufficiently to the vote including actively engaging shareholders on this issue, we will also consider recommending voting against the chairman of the compensation committee or all members of the compensation committee, depending on the severity and history of the compensation problems and the level of shareholder opposition.

 

2. All members of the compensation committee who are up for election and served when the company failed to align pay with performance (e.g., a company receives an F grade in our pay-for-performance analysis) if shareholders are not provided with an advisory vote on executive compensation at the annual meeting. 22

 

3. Any member of the compensation committee who has served on the compensation committee of at least two other public companies that have consistently failed to align pay with performance and whose oversight of compensation at the company in question is suspect.

 

4. The compensation committee chair if the company consistently has received deficient grades in our pay-for-performance analysis, and if during the past year the company performed the same as or worse than its peers. 23

 

5. All members of the compensation committee (during the relevant time period) if the company entered into excessive employment agreements and/or severance agreements.

 

6. 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.

 

7. All members of the compensation committee if excessive employee perquisites and benefits were allowed.

 

8. The compensation committee chair if the compensation committee did not meet during the year.

 

9. 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.

 

10. All members of the compensation committee when vesting of in-the-money options is accelerated.

 

11. 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.

 

 

21 As discussed under the section labeled “Committee Chairman,” 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 note the concern with regard to the committee chair.

22 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, we will initially only recommend voting against the company’s say-on-pay proposal and will not recommend voting against the members of the compensation committee unless there is a pattern of failing to align pay and performance and/or the company exhibits egregious compensation practices. However, if the company repeatedly fails to align pay and performance, we will then recommend against the members of the compensation committee in addition to recommending voting against the say-on-pay proposal.

23 In cases where a company has received two consecutive D grades, or if its grade improved from an F to a D in the most recent period, and during the most recent year the company performed better than its peers (based on our analysis), we refrain from recommending to vote against the compensation committee 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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  12 . All members of the compensation committee when option exercise prices were spring - loaded or otherwise timed around the release of material information.
     
  13. All members of the compensation committee when a new employment contract is given to an executive that does not include a clawback provision and the company had a material restatement, especially if the restatement was due to fraud.
     
  14 . The chair of the compensation committee where the CD&A provides insufficient or unclear information about performance metrics and goals, where the CD&A indicates that pay is not tied to performance, or where the compensation committee or management has excessive discretion to alter performance terms or increase amounts of awards in contravention of previously defined targets.
     
  15 . All members of the compensation committee during whose tenure the committee failed to implement a shareholder proposal regarding a compensation-related issue, where the proposal received the affirmative vote of a majority of the voting shares at a shareholder meeting, and when a reasonable analysis suggests that the compensation committee (rather than the governance committee) should have taken steps to implement the request. 24

 

NOMINATING AND GOVERNANCE COMMITTEE PERFORMANCE

 

The nominating and governance committee, as an agent for the shareholders, is responsible for the governance by the board of the company and its executives. In performing this role, the committee is responsible and accountable for selection of objective and competent board members. It is also responsible for providing leadership on governance policies adopted by the company, such as decisions to implement shareholder proposals that have received a majority vote. (At most companies, a single committee is charged with these oversight functions; at others, the governance and nominating responsibilities are apportioned among two separate committees.)

 

Consistent with Glass Lewis’ philosophy that boards should have diverse backgrounds and members with a breadth and depth of relevant experience, we believe that nominating and governance committees should consider diversity when making director nominations within the context of each specific company and its industry. In our view, shareholders are best served when boards make an effort to ensure a constituency that is not only reasonably diverse on the basis of age, race, gender and ethnicity, but also on the basis of geographic knowledge, industry experience, board tenure and culture.

 

Regarding the committee responsible for governance, we will consider recommending that shareholders vote against the following: 25

 

  1. All members of the governance committee 26 during whose tenure a shareholder proposal relating to important shareholder rights received support from a majority of the votes cast (excluding abstentions and broker non-votes) and the board has not begun to implement or enact the proposal’s subject matter. 27  Examples of such shareholder proposals include those seeking a declassified board structure, a majority vote standard for director elections, or a right to call a special meeting. In determining whether a board has sufficiently implemented such a proposal, we will examine the quality of the right enacted or proffered by the board for any

 

 

24 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.

25 As discussed in the guidelines section labeled “Committee Chairman, “ 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 note the concern with regard to the committee chair.

26 If the board does not have a committee responsible for governance oversight and the board did not implement a shareholder proposal that received the requisite support, we will recommend voting against the entire board. If the shareholder proposal at issue requested that the board adopt a declassified structure, we will recommend voting against all director nominees up for election.

27 Where a compensation-related shareholder proposal should have been implemented, and when a reasonable analysis suggests that the members of the compensation committee (rather than the governance committee) bear the responsibility for failing to implement the request, we recommend that shareholders only vote against members of the compensation committee.

 

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conditions that may unreasonably interfere with the shareholders’ ability to exercise the right (e.g., overly restrictive procedural requirements for calling a special meeting).

     
  2. The governance committee chair, 28 when the chairman is not independent and an independent lead or presiding director has not been appointed. 29
     
  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 a 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) 30 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.
     
  7. All members of the governance committee during whose tenure the board adopted, without shareholder approval, provisions in its charter or bylaws that, through rules on director compensation, may inhibit the ability of shareholders to nominate directors.
     
  In addition, we may recommend that shareholders vote against the chairman of the governance committee, or the entire committee, where the board has amended the company’s governing documents to reduce or remove important shareholder rights, or to otherwise impede the ability of shareholders to exercise such right, and has done so without seeking shareholder approval. Examples of board actions that may cause such a recommendation include: the elimination of the ability of shareholders to call a special meeting or to act by written consent; an increase to the ownership threshold required for shareholders to call a special meeting; an increase to vote requirements for charter or bylaw amendments; the adoption of provisions that limit the ability of shareholders to pursue full legal recourse—such as bylaws that require arbitration of shareholder claims or that require shareholder plaintiffs to pay the company’s legal expenses in the absence of a court victory (i.e., “fee-shifting” or “loser pays” bylaws); the adoption of a classified board structure; and the elimination of the ability of shareholders to remove a director without cause.

 

Regarding the nominating committee, we will consider recommending that shareholders vote against the following: 31

 

  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.

 

 

28 As discussed in the guidelines section labeled “Committee Chairman,” 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.

29 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 the governance committee chair as we believe the lack of fixed lead or presiding director means that, effectively, the board does not have an independent board leader.

30 A forum selection clause is a bylaw provision stipulating that a certain state, typically where the company is incorporated, which is most often Delaware, shall be the exclusive forum for all intra-corporate disputes (e.g., shareholder derivative actions, assertions of claims of a breach of fiduciary duty, etc.). Such a clause effectively limits a shareholder’s legal remedy regarding appropriate choice of venue and related relief offered under that state’s laws and rulings.

31 As discussed in the guidelines section labeled “Committee Chairman,” 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 note the concern with regard to the committee chair.

 

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  2. The nominating committee chair, if the nominating committee did not meet during the year.
     
  3. In the absence of a governance committee, the nominating committee chair 32 when the chairman is not independent, and an independent lead or presiding director has not been appointed. 33
     
  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. 34
     
  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. 35

 

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 complex hedging or trading strategies, 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 organization’s risk management practices. The final rules, which became effective on February 28, 2010, now explicitly require companies and mutual funds to describe (while allowing for some degree of flexibility) the board’s role in the oversight of risk.

 

When analyzing the risk management practices of public companies, we take note of any significant losses or writedowns on financial assets and/or structured transactions. In cases where a company has disclosed a sizable loss or writedown, and where we find that the company’s board-level risk committee’s poor oversight contributed to the loss, we will 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) 36 , 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.

 

OTHER CONSIDERATIONS

 

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.

 

 

32 As discussed under the section labeled “Committee Chairman,” 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.

33 In the absence of both a governance and a nominating committee, we will recommend voting against the chairman of the board on this basis, unless if the chairman also serves as the CEO, in which case we will recommend voting against the longest-serving director.

34 In the absence of both a governance and a nominating committee, we will recommend voting against the chairman of the board on this basis, unless if the chairman also serves as the CEO, in which case we will recommend voting against the the longest-serving director.

35 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 severity of the issue(s) that initially raised shareholder concern as well as company responsiveness to such matters, and will 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.

36 A committee responsible for risk management could be a dedicated risk committee, the audit committee, or the finance committee, depending on a given company’s board structure and method of disclosure. At some companies, the entire board is charged with risk management.

 

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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 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. Due to 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. 37 Academic literature suggests that one board takes up approximately 200 hours per year of each member’s time. We believe this limits the number of boards on which directors can effectively serve, especially executives at other companies. 38 Further, we note a recent study has shown that the average number of outside board seats held by CEOs of S&P 500 companies is 0.6, down from 0.7 in 2008 and 1.0 in 2003. 39
     
  3 . A director who provides — or a director who has an immediate family member who provides — material consulting or other material professional services to the company. These services may include legal, consulting, or financial services. We question the need for the company to have consulting relationships with its directors. We view such relationships as creating conflicts for directors, since they may be forced to weigh their own interests against shareholder interests when making board decisions. In addition, a company’s decisions regarding where to turn for the best professional services may be compromised when doing business with the professional services firm of one of the company’s directors.
     
  4. A director, or a director who has an immediate family member, engaging in airplane, real estate, or similar deals, including perquisite-type grants from the company, amounting to more than $50,000. Directors who receive these sorts of payments from the company will have to make unnecessarily complicated decisions that may pit their interests against shareholder interests.
     
  5. Interlocking directorships: CEOs or other top executives who serve on each other’s boards create an interlock that poses conflicts that should be avoided to ensure the promotion of shareholder interests above all else. 40
     
  6. All board members who served at a time when a poison pill with a term of longer than one year was adopted without shareholder approval within the prior twelve months. 41 In the event a board is classified and shareholders are therefore unable to vote against all directors, we will recommend voting against the remaining directors the next year they are up for a shareholder vote. If a poison pill with a term of one year or less was adopted without shareholder approval, and without adequate justification, we will consider recommending that shareholders vote against all members of the governance committee. If the board has, without seeking shareholder approval, and without adequate justification, extended the term of a poison pill by one year or less in two consecutive years, we will consider recommending that shareholders vote against the entire board.

 

 

37 Glass Lewis will not recommend voting against the director at the company where he or she serves as an executive officer, only at the other public companies where he or she serves on the board .

38 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 s ix boards .

39 Spencer Stuart Board Index, 2013, p. 6 .

40 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.

41 Refer to Section V. Governance Structure and the Shareholder Franchise for further discussion of our policies regarding anti-takeover measures, including poison pills.

 

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Size of the Board of Directors

 

While we do not believe there is a universally applicable optimum board size, we do believe boards should have at least five directors to ensure sufficient diversity in decision-making and to enable the formation of key board committees with independent directors. Conversely, we believe that boards with more than 20 members will typically suffer under the weight of “too many cooks in the kitchen” and have difficulty reaching consensus and making timely decisions. Sometimes the presence of too many voices can make it difficult to draw on the wisdom and experience in the room by virtue of the need to limit the discussion so that each voice may be heard.

 

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). 42

 

CONTROLLED COMPANIES

 

We believe controlled companies warrant certain exceptions to our independence standards. The board’s function is to protect shareholder interests; however, when an individual, entity (or group of shareholders party to a formal agreement) 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 board 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.

 

  We believe that standing nominating and corporate governance committees at controlled companies are unnecessary. Although having a committee charged with the duties of searching for, selecting, and nominating independent directors can be beneficial, the unique composition of a controlled company’s shareholder base makes such committees weak and irrelevant.
     
  Likewise, we believe that independent compensation committees at controlled companies are unnecessary. Although independent directors are the best choice for approving and monitoring senior executives’ pay, controlled companies serve a unique shareholder population whose voting power ensures the protection of its interests. As such, we believe that having affiliated directors on a controlled company’s compensation committee is acceptable. However, given that a controlled company has certain obligations to minority shareholders we feel that an insider should not serve on the compensation committee. Therefore, Glass Lewis will recommend voting against any insider (the CEO or otherwise) serving on the compensation committee.

 

  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 board’s duties, controlled

 

 

42 The Conference Board, at p. 23 in its May 2003 report “Corporate Governance Best Practices, ld.,” quotes one of its roundtable participants as stating, “[w]hen you’ve got a 20 or 30 person corporate board, it’s one way of assuring that nothing is ever going to happen that the CEO doesn’t want to happen.”

 

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  companies serve a unique shareholder population whose voting power ensures the protection of its interests.

 

Size of the Board of Directors

 

We have no board size requirements for controlled companies.

 

Audit Committee Independence

 

Despite a controlled company’s status, unlike for the other key committees, we nevertheless believe that audit committees should consist solely of independent directors. Regardless of a company’s controlled status, the interests of all shareholders must be protected by ensuring the integrity and accuracy of the company’s financial statements. Allowing affiliated directors to oversee the preparation of financial reports could create an insurmountable conflict of interest.

 

SIGNIFICANT SHAREHOLDERS

 

Where an individual or entity holds between 20-50% of a company’s voting power, we believe it is reasonable to allow proportional representation on the board and committees (excluding the audit committee) based on the individual or entity’s percentage of ownership.

 

EXCEPTIONS FOR RECENT IPOs

 

We believe companies that have recently completed an initial public offering (“IPO”) should be allowed adequate time to fully comply with marketplace listing requirements as well as to meet basic corporate governance standards. We believe a one-year grace period immediately following the date of a company’s IPO is sufficient time for most companies to comply with all relevant regulatory requirements and to meet such corporate governance standards. Except in egregious cases, Glass Lewis refrains from issuing voting recommendations on the basis of corporate governance best practices (e.g., 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 an anti-takeover provision such as a poison pill or classified board: In cases where a board adopts an anti-takeover provision preceding an IPO, we will consider recommending to vote against the members of the board who served when it was adopted if the board: (i) did not also commit to submit the anti-takeover provision to a shareholder vote within 12 months of the IPO; or (ii) did not provide a sound rationale for adopting the anti-takeover provision (such as a sunset for the pill of 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 classified board with an infinite duration or a poison pill with a five to ten year term 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 anti-takeover provision adoption. Such instances are indicative of boards that may subvert shareholders’ best interests following their IPO.

 

  2. Adoption of an exclusive forum provision or fee-shifting bylaw: Consistent with our general approach to boards that adopt exclusive forum provisions or fee-shifting bylaws without shareholder approval (refer to our discussion of nominating and governance committee performance in Section I of the guidelines), we believe shareholders should hold members of the governance committee responsible. In cases where a board adopts an exclusive forum provision for inclusion in a company’s charter or bylaws before the company’s IPO, we will recommend voting against the chairman of the governance committee, or, in the absence

 

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  of such a committee, the chairman of the board, who served during the period of time when the provision was adopted. However given the even stronger impediment on shareholder legal recourse of a fee-shifting bylaw, in cases where a board adopts such a bylaw before the company’s IPO, we will recommend voting against the entire 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.

 

In addition, shareholders should also be wary of companies 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.

 

DUAL-LISTED COMPANIES

 

For those companies whose shares trade on exchanges in multiple countries, and which may seek shareholder approval of proposals in accordance with varying exchange- and country-specific rules, we will apply the governance standards most relevant in each situation. We will consider a number of factors in determining which Glass Lewis country-specific policy to apply, including but not limited to: (i) the corporate governance structure and features of the company including whether the board structure is unique to a particular market; (ii) the nature of the proposals; (iii) the location of the company’s primary listing, if one can be determined; (iv) the regulatory/governance regime that the board is reporting against; and (v) the availability and completeness of the company’s SEC filings.

 

MUTUAL FUND BOARDS

 

Mutual funds, or investment companies, are structured differently from regular public companies (i.e., operating companies). Typically, members of a fund’s adviser are on the board and management takes on a different role from that of regular public companies. 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 fund’s 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 company’s board should be made up of independent directors. This is consistent with a proposed SEC rule on investment company boards. The Investment Company Act requires 40% of the board to be independent, but in 2001, the SEC amended the Exemptive Rules to require that a majority of a mutual fund board be independent. In 2005, the SEC proposed increasing the independence threshold to 75%. In 2006, a federal appeals court ordered that this rule amendment be put back out for public comment, putting it back into “proposed rule” status. Since mutual fund boards play a vital role in overseeing the relationship between the fund and its investment manager, there is greater need for independent oversight than there is for an operating company board.

 

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  2. 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. 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 fund’s chairman and CEO should be separate . Although we believe this would be best at all companies, we recommend voting against the chairman of an investment company’s nominating committee as well as the chairman of the board if the chairman and CEO of a mutual fund are the same person and the fund does not 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://www.sec.gov/news/studies/indchair.pdf )
     
  4 . Multiple funds overseen by the same director: Unlike service on a public company board, mutual fund boards require much less of a time commitment. Mutual fund directors typically serve on dozens of other mutual fund boards , often within the same fund complex . The Investment Company Institute’s (“ICI”) Overview of Fund Governance Practices, 1994-2012, indicates that the average number of funds served by an independent director in 2012 was 53. Absent evidence that a specific director is hindered from being an effective board member at a fund due to service on other funds’ boards , we refrain from maintaining a cap on the number of outside mutual fund boards that we believe a director can serve on.

 

DECLASSIFIED BOARDS

 

Glass Lewis favors the repeal of staggered boards and the annual election of directors. We believe staggered boards are less accountable to shareholders than boards that are elected annually. Furthermore, we feel the annual election of directors encourages board members to focus on shareholder interests.

 

Empirical studies have shown: (i) staggered boards are associated with a reduction in a firm’s valuation; 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. Some research has indicated that shareholders are worse off when a staggered board blocks a transaction; further, when a staggered board negotiates a friendly transaction, no statistically significant difference in premium occurs . 43 Additional research 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.” 44 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 . 45

 

 

43 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).

44 Lucian Bebchuk, Alma Cohen, “The Costs of Entrenched Boards” (2004) .

45 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.

 

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Shareholders have increasingly come to agree with this view. In 2013, 91% of S&P 500 companies had declassified boards, up from approximately 40% a decade ago. 46 Management proposals to declassify boards are approved with near unanimity and shareholder proposals on the topic also receive strong shareholder support; in 2014, shareholder proposals requesting that companies declassify their boards received average support of 84% (excluding abstentions and broker non-votes), whereas in 1987, only 16.4% of votes cast favored board declassification. 47 Further, a growing number of companies, nearly half of all those targeted by shareholder proposals requesting that all directors stand for election annually, either recommended shareholders support the proposal or made no recommendation, a departure from the more traditional management recommendation to vote against shareholder proposals.

 

Given our belief that declassified boards promote director accountability, the empirical evidence suggesting staggered boards reduce a company’s value and the established shareholder opposition to such a structure, Glass Lewis supports the declassification of boards and the annual election of directors.

 

MANDATORY DIRECTOR TERM AND AGE LIMITS

 

Glass Lewis believes that director age and term limits typically are not in shareholders’ best interests. Too often age and term limits are used by boards as a crutch to remove board members who have served for an extended period of time. When used in that fashion, they are indicative of a board that has a difficult time making “tough decisions.”

 

Academic literature suggests that there is no evidence of a correlation between either length of tenure or age and director performance. On occasion, term limits can be used as a means to remove a director for boards that are unwilling to police their membership and to enforce turnover. Some shareholders support term limits as a way to force change when boards are unwilling to do so.

 

While we understand that age limits can be a way to force change where boards are unwilling to make changes on their own, the long-term impact of age limits restricts experienced and potentially valuable board members from service through an arbitrary means. Further, age limits unfairly imply that older (or, in rare cases, younger) directors cannot contribute to company oversight.

 

In our view, a director’s experience can be a valuable asset to shareholders because of the complex, critical issues that boards face. However, we support routine director evaluation, preferably performed independently by an external firm, and periodic board refreshment to foster the sharing of new perspectives in the boardroom and the generation of new ideas and business strategies. Further, we believe the board should evaluate the need for changes to board composition based on an analysis of skills and experience necessary for the company, as well as the results of an independent board evaluation, instead of relying on arbitrary age or tenure limits. When necessary, shareholders can address concerns regarding proper board composition through director elections.

 

We believe that shareholders are better off monitoring the board’s approach to corporate governance and the board’s stewardship of company performance rather than imposing inflexible rules that don’t necessarily correlate with returns or benefits for shareholders.

 

However, if a board adopts term/age limits, it should follow through and not waive such limits. If the board waives its term/age limits, Glass Lewis will consider recommending shareholders vote against the nominating and/or governance committees, unless the rule was waived with sufficient explanation, such as consummation of a corporate transaction like a merger.

 

 

46 Spencer Stuart Board Index, 2013, p. 4

47 Lucian Bebchuk, John Coates IV and Guhan Subramanian, “The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy” .

 

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PROXY ACCESS

 

In lieu of running their own contested election, proxy access would not only allow certain shareholders to nominate directors to company boards but the shareholder nominees would be included on the company’s ballot, significantly enhancing the ability of shareholders to play a meaningful role in selecting their representatives. Glass Lewis generally supports affording shareholders the right to nominate director candidates to management’s proxy as a means to ensure that significant, long-term shareholders have an ability to nominate candidates to the board.

 

Companies generally seek shareholder approval to amend company bylaws to adopt proxy access in response to shareholder engagement or pressure, usually in the form of a shareholder proposal requesting proxy access, although some companies may adopt some elements of proxy access without prompting. Glass Lewis considers several factors when evaluating whether to support proposals for companies to adopt proxy access including the specified minimum ownership and holding requirement for shareholders to nominate one or more directors, as well as company size, performance and responsiveness to shareholders.

 

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 Glass Lewis’ Proxy Paper Guidelines for Shareholder Initiatives, available at www.glasslewis.com.

 

MAJORITY VOTE FOR THE ELECTION OF DIRECTORS

 

In stark contrast to the failure of shareholder access to gain acceptance, majority voting for the election of directors is fast becoming the de facto standard in corporate board elections. In our view, the majority voting proposals are an effort to make the case for shareholder impact on director elections on a company-specific basis. ·

 

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 the first half of 2014, Glass Lewis tracked approximately 28 shareholder proposals seeking to require a majority vote to elect directors at annual meetings in the U.S. While this is roughly on par with what we have reviewed in each of the past several years, it is a sharp contrast to the 147 proposals tracked during all of 2006. This 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 84% of companies in the S&P 500 Index, up from 56% in 2008. 48

 

Investors are also increasingly supporting this measure. During the 2014 proxy season, shareholder proposals requesting that companies adopt a majority voting standard for director elections received, on average, 59% shareholder support (excluding abstentions and broker non-votes). Further, nearly half of these resolutions received majority shareholder support and a number of companies either recommended shareholders vote in favor of or did not make a recommendation for how shareholders should vote on these proposals.

 

THE PLURALITY VOTE STANDARD

 

Today, most US companies still elect directors by a plurality vote standard. Under that standard, if one shareholder holding only one share votes in favor of a nominee (including that director, 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 is the possibility that one or more directors would not receive a majority of votes, resulting in “failed elections.”

 

 

48 Spencer Stuart Board Index, 2013, p. 13

 

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ADVANTAGES OF A MAJORITY VOTE STANDARD

 

If a majority vote standard were implemented, a nominee would have to receive the support of a majority of the shares voted in order to be elected. Thus, shareholders could collectively vote to reject a director they believe will not pursue their best interests. Given that so few directors (less than 100 a year) do not receive majority support from shareholders, we think that a majority vote standard is reasonable since it will neither result in many failed director elections nor reduce the willingness of qualified, shareholder-focused directors to serve in the future. Further, most directors who fail to receive a majority shareholder vote in favor of their election do not step down, underscoring the need for true majority voting.

 

We believe that a majority vote standard will likely lead to more attentive directors . Although shareholders only rarely fail to support directors, the occasional majority vote against a director’s election will likely deter the election of directors with a record of ignoring shareholder interests. Glass Lewis will therefore generally support proposals calling for the election of directors by a majority vote, excepting 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 (i.e., a resignation policy) to actually requiring a majority vote of outstanding shares to elect directors.

 

We feel that the modified approach does not go far enough because requiring a director to resign is not the same as requiring a majority vote to elect a director and does not allow shareholders a definitive voice in the election process. Further, under the modified approach, the corporate governance committee could reject a resignation and, even if it accepts the resignation, the corporate governance committee decides on the director’s replacement. And since the modified approach is usually adopted as a policy by the board or a board committee, it could be altered by the same board or committee at any time.

 

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AUDITOR RATIFICATION

 

The auditor’s role as gatekeeper is crucial in ensuring the integrity and transparency of the financial information necessary for protecting shareholder value. Shareholders rely on the auditor to ask tough questions and to do a thorough analysis of a company’s books to ensure that the information provided to shareholders is complete, accurate, fair, and that it is a reasonable representation of a company’s financial position. The only way shareholders can make rational investment decisions is if the market is equipped with accurate information about a company’s fiscal health. As stated in the October 6, 2008 Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury:

 

“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 auditor’s interests and the public’s interests. Almost without exception, shareholders should be able to annually review an auditor’s performance and to annually ratify a board’s auditor selection. Moreover, in October 2008, the Advisory Committee on the Auditing Profession went even further, and recommended that “to further enhance audit committee oversight and auditor accountability... disclosure in the company proxy statement regarding shareholder ratification [should] include the name(s) of the senior auditing partner(s) staffed on the engagement.” 49

 

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 convened several public roundtable meetings during 2012 to further discuss such matters. Glass Lewis believes auditor rotation can ensure both the independence of the auditor and the integrity of the audit; we will typically recommend supporting proposals to require auditor rotation when the proposal uses a reasonable period of time (usually not less than 5-7 years), particularly at companies with a history of accounting problems.

 

VOTING RECOMMENDATIONS ON AUDITOR RATIFICATION

 

We generally support management’s choice of auditor except when we believe the auditor’s independence or audit integrity has been compromised. Where a board has not allowed shareholders to review and ratify an auditor, we typically recommend voting against the audit committee chairman. When there have been material restatements of annual financial statements or material weaknesses in internal controls, we usually recommend voting against the entire audit committee.

 

Reasons why we may not recommend ratification of an auditor include:

 

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

 

 

49 “Final Report of the Advisory Committee on t he Auditing Profession to the U.S. Department of the Treasury.” p. Vlll:20, October 6, 2008.

 

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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. 50
   
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 auditor’s interests and shareholder interests.

 

PENSION ACCOUNTING ISSUES

 

A pension accounting question occasionally raised in proxy proposals is what effect, if any, projected returns on employee pension assets should have on a company’s net income. This issue often arises in the executive-compensation context in a discussion of the extent to which pension accounting should be reflected in business performance for purposes of calculating payments to executives.

 

Glass Lewis believes that pension credits should not be included in measuring income that is used to award performance-based compensation. Because many of the assumptions used in accounting for retirement plans are subject to the company’s discretion, management would have an obvious conflict of interest if pay were tied to pension income. In our view, projected income from pensions does not truly reflect a company’s performance.

 

 

50 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.

 

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Glass Lewis carefully reviews the compensation awarded to senior executives, as we believe that this is an important area in which the board’s priorities are revealed. Glass Lewis strongly believes executive compensation should be linked directly with the performance of the business the executive is charged with managing. We believe the most effective compensation arrangements provide for an appropriate mix of performance-based short- and long-term incentives in addition to fixed pay elements while promoting a prudent and sustainable level of risk-taking.

 

Glass Lewis believes that comprehensive, timely and transparent disclosure of executive pay is critical to allowing shareholders to evaluate the extent to which pay is aligned 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 a wide variety of financial measures as well as industry-specific performance indicators. However, we believe companies should disclose why the specific performance metrics were selected and how the actions they are designed to incentivize will lead to better corporate performance.

 

Moreover, it is rarely in shareholders’ interests to disclose competitive data about individual salaries below the senior executive level. Such disclosure could create internal personnel discord that would be counterproductive for the company and its shareholders. While we favor full disclosure for senior executives and we view pay disclosure at the aggregate level (e.g., the number of employees being paid over a certain amount or in certain categories) as potentially useful, we do not believe shareholders need or will benefit from detailed reports about individual management employees other than the most senior executives.

 

ADVISORY VOTE ON EXECUTIVE COMPENSATION (“SAY-ON-PAY”)

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) required companies 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 company’s compensation report is standard practice in many non-US countries, and has been a requirement for most companies in the United Kingdom since 2003 and in Australia since 2005. Although say-on-pay proposals are non-binding, a high level of “against” or “abstain” votes indicates substantial shareholder concern about a company’s compensation policies and procedures.

 

Given the complexity of most companies’ compensation programs, Glass Lewis applies a highly nuanced approach when analyzing advisory votes on executive compensation. We review each company’s compensation on a case-by-case basis, recognizing that each company must be examined in the context of industry, size, maturity, performance, financial condition, its historic pay for performance practices, and any other relevant internal or external factors.

 

We believe that each company should design and apply specific compensation policies and practices that are appropriate to the circumstances of the company and, in particular, will attract and retain competent executives and other staff, while motivating them to grow the company’s long-term shareholder value.

 

Where we find those specific policies and practices serve to reasonably align compensation with performance, and such practices are adequately disclosed, Glass Lewis will recommend supporting

 

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the company’s approach. If, however, those specific policies and practices fail to demonstrably link compensation with performance, Glass Lewis will generally recommend voting against the say-on-pay proposal.

 

Glass Lewis reviews say-on-pay proposals on both a qualitative basis and a quantitative basis, with a focus on several main areas:

 

  The overall design and structure of the company’s executive compensation programs including selection and challenging nature of performance metrics;
     
  The implementation and effectiveness of the company’s executive compensation programs including pay mix and use of performance metrics in determining pay levels;
     
  The quality and content of the company’s disclosure;
     
  The quantum paid to executives; and
     
  The link between compensation and performance as indicated by the company’s current and past pay-for-performance grades.

 

We also review any significant changes or modifications, and rationale for such changes, made to the company’s compensation structure or award amounts, including base salaries.

 

SAY-ON-PAY VOTING RECOMMENDATIONS

 

In cases where we find deficiencies in a company’s compensation program’s design, implementation or management, we will recommend that shareholders vote against the say-on-pay proposal. Generally such instances include evidence of a pattern of poor pay-for-performance practices (i.e., deficient or failing pay for performance grades), unclear or questionable disclosure regarding the overall compensation structure (e.g., limited information regarding benchmarking processes, limited rationale for bonus performance metrics and targets, etc.), questionable adjustments to certain aspects of the overall compensation structure (e.g., limited rationale for significant changes to performance targets or metrics, the payout of guaranteed bonuses or sizable retention grants, etc.), and/or other egregious compensation practices.

 

Although not an exhaustive list, the following issues when weighed together may cause Glass Lewis to recommend voting against a say-on-pay vote:

 

  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;
     
  Problematic contractual payments, such as guaranteed bonuses;
     
  Targeting overall levels of compensation at higher than median without adequate justification;
     
  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; and
     
  The terms of the long-term incentive plans are inappropriate (please see “Long-Term Incentives” on page  29).

 

In instances where 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.

 

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COMPANY RESPONSIVENESS

 

At companies that received a significant level of shareholder opposition (25% or greater) to their say-on-pay proposal at the previous annual meeting, we believe the board should demonstrate some level of engagement and responsiveness to the shareholder concerns behind the discontent, particularly in response to shareholder engagement. 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, given that the average approval rate for say-on-pay proposals is about 90% we believe the compensation committee should provide some level of response to a significant vote against, including engaging with large shareholders to identify their concerns. In the absence of any evidence that the board is actively engaging shareholders on these issues and responding accordingly, we may recommend holding compensation committee members accountable for failing to adequately respond to shareholder opposition, giving careful consideration to the level of shareholder protest and the severity and history of 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 practices may include: approving large one-off payments, the inappropriate, unjustified use of discretion, or sustained poor pay for performance practices.

 

PAY FOR PERFORMANCE

 

Glass Lewis believes an integral part of a well-structured compensation package is a successful link between pay and performance. Our proprietary pay-for-performance model was developed to better 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 peers selected using Equilar’s market-based peer groups and across five performance metrics. By measuring the magnitude of the gap between two weighted-average percentile rankings (executive compensation and performance), we grade companies based on a school letter system: “A”, “B”, “F”, etc. 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 more likely to recommend that shareholders vote against the say-on-pay proposal. However, other qualitative factors such as an effective overall incentive structure, the relevance of selected performance metrics, significant forthcoming enhancements or reasonable long-term payout levels may give us cause to recommend in favor of a proposal even when we have identified a disconnect between pay and performance.

 

SHORT-TERM INCENTIVES

 

A short-term bonus or incentive (“STI”) should be demonstrably tied to performance. Whenever possible, we believe a mix of corporate and individual performance measures is appropriate. We would normally expect performance measures for STIs to be based on company-wide or divisional financial measures as well as non-financial factors such as those related to safety, environmental issues, and customer satisfaction. While we recognize that companies operating in different sectors or markets may seek to utilize a wide range of metrics, we expect such measures to be appropriately tied to a company’s business drivers.

 

Further, the target and potential maximum awards that can be achieved under STI awards should be disclosed. Shareholders should expect stretching performance targets for the maximum award to be achieved. Any increase in the potential maximum award should be clearly justified to shareholders.

 

Glass Lewis recognizes that disclosure of some measures may include commercially confidential information. Therefore, we believe it may be reasonable to exclude such information in some cases as long as the company provides sufficient justification for non-disclosure. However, where a short-term

 

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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 over the previous year prima facie appears to be poor or negative, we believe the company should provide a clear explanation of why these significant short-term payments were made.

 

LONG-TERM INCENTIVES

 

Glass Lewis recognizes the value of equity-based incentive programs, which are often the primary long-term incentive for executives. When used appropriately, they can provide a vehicle for linking an executive’s pay to company performance, thereby aligning their interests with those of shareholders. In addition, equity-based compensation can be an effective way to attract, retain and motivate key employees.

 

There are certain elements that Glass Lewis believes are common to most well-structured long-term incentive (“LTI”) plans. These include:

 

  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 company’s 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 while not encouraging excessive risk-taking; and
     
  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 company’s business.

 

While cognizant of the inherent complexity of certain performance metrics, Glass Lewis generally believes that measuring a company’s performance with multiple metrics serves to provide a more complete picture of the company’s performance than a single metric; further, reliance on just one metric may focus too much management attention on a single target and is therefore more susceptible to manipulation. When utilized for relative measurements, external benchmarks such as a sector index or peer group should be disclosed and transparent. The rationale behind the selection of a specific index or peer group should also be disclosed. Internal benchmarks 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 company’s compensation programs, particularly with regard to existing equity-based incentive plans, in linking pay and performance when evaluating new LTI plans to determine the impact of additional stock awards. We will therefore review the company’s pay-for-performance grade (see below for more information) and specifically the proportion of total compensation that is stock-based.

 

ONE-OFF AWARDS

 

Glass Lewis believes shareholders should generally be wary of awards granted outside of the standard incentive schemes outlined above, as such awards have the potential to undermine the integrity of a company’s regular incentive plans, the link between pay and performance or both. We generally believe that if the existing incentive programs fail to provide adequate incentives to executives, companies should redesign their compensation programs rather than make additional grants.

 

However, we recognize that in certain circumstances, additional incentives may be appropriate. In these cases, companies should provide a thorough description of the awards, including a cogent and

 

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convincing explanation of their necessity and why existing awards do not provide sufficient motivation. Further, such awards should be tied to future service and performance whenever possible.

 

Additionally, we believe companies making supplemental awards should also describe if and how the regular compensation arrangements will be affected by these supplemental awards. In reviewing a company’s use of supplemental awards, Glass Lewis will review the terms and size of the grants in the context of the company’s overall incentive strategy and granting practices, as well as the current operating environment.

 

RECOUPMENT PROVISIONS (“CLAWBACKS”)

 

We believe it is prudent for boards to adopt detailed and stringent bonus recoupment policies to prevent executives from retaining performance-based awards that were not truly earned. We believe such “clawback” policies should be triggered in the event of a restatement of financial results or similar revision of performance indicators upon which bonuses were based. Such policies would allow the board to review all performance-related bonuses and awards made to senior executives during the period covered by a restatement and would, to the extent feasible, allow the company to recoup such bonuses in the event that performance goals were not actually achieved. We further believe clawback policies should be subject to only limited discretion to ensure the integrity of such policies.

 

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. However, the SEC has yet to finalize the relevant rules.

 

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.

 

HEDGING OF STOCK

 

Glass Lewis believes that the hedging of shares by executives in the shares of the companies where they are employed severs the alignment of interests of the executive with shareholders. We believe companies should adopt strict policies to prohibit executives from hedging the economic risk associated with their shareownership in the company.

 

PLEDGING OF STOCK

 

Glass Lewis believes that shareholders should examine the facts and circumstances of each company rather than apply a one-size-fits-all policy regarding employee stock pledging. Glass Lewis believes that shareholders benefit when employees, particularly senior executives have “skin-in-the-game” and therefore recognizes the benefits of measures designed to encourage employees to both buy shares out of their own pocket and to retain shares they have been granted; blanket policies prohibiting stock pledging may discourage executives and employees from doing either.

 

However, we also recognize that the pledging of shares can present a risk that, depending on a host of factors, an executive with significant pledged shares and limited other assets may have an incentive to take steps to avoid a forced sale of shares in the face of a rapid stock price decline. Therefore, to avoid substantial losses from a forced sale to meet the terms of the loan, the executive may have an incentive to boost the stock price in the short term in a manner that is unsustainable, thus hurting shareholders in the long-term. We also recognize concerns regarding pledging may not apply to less senior employees, given the latter group’s significantly more limited influence over a company’s stock

 

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price. Therefore, we believe that the issue of pledging shares should be reviewed in that context, as should polices that distinguish between the two groups.

 

Glass Lewis believes that the benefits of stock ownership by executives and employees may outweigh the risks of stock pledging, depending on many factors. As such, Glass Lewis reviews all relevant factors in evaluating proposed policies, limitations and prohibitions on pledging stock, including:

 

The number of shares pledged;
     
The percentage executives’ pledged shares are of outstanding shares;
     
The percentage executives’ pledged shares are of each executive’s shares and total assets;
     
Whether the pledged shares were purchased by the employee or granted by the company;
     
Whether there are different policies for purchased and granted shares;
     
Whether the granted shares were time-based or performance-based;
     
The overall governance profile of the company;
     
The volatility of the company’s stock (in order to determine the likelihood of a sudden stock price drop);
     
The nature and cyclicality, if applicable, of the company’s industry;
     
The participation and eligibility of executives and employees in pledging;
     
The company’s current policies regarding pledging and any waiver from these policies for employees and executives; and
     
Disclosure of the extent of any pledging, particularly among senior executives.

 

COMPENSATION CONSULTANT INDEPENDENCE

 

As mandated by Section 952 of the Dodd-Frank Act, as of January 11, 2013, the SEC approved new listing requirements for both the NYSE and NASDAQ which require compensation committees to consider six factors in assessing compensation advisor independence. These factors include: (1) provision of other services to the company; (2) fees paid by the company as a percentage of the advisor’s total annual revenue; (3) policies and procedures of the advisor to mitigate conflicts of interests; (4) any business or personal relationships of the consultant with any member of the compensation committee; (5) any company stock held by the consultant; and (6) any business or personal relationships of the consultant with any executive officer of the company. According to the SEC, “no one factor should be viewed as a determinative factor.” Glass Lewis believes this six-factor assessment is an important process for every compensation committee to undertake but believes companies employing a consultant for board compensation, consulting and other corporate services should provide clear disclosure beyond just a reference to examining the six points to allow shareholders to review the specific aspects of the various consultant relationships.

 

We believe compensation consultants are engaged to provide objective, disinterested, expert advice to the compensation committee. When the consultant or its affiliates receive substantial income from providing other services to the company, we believe the potential for a conflict of interest arises and the independence of the consultant may be jeopardized. Therefore, Glass Lewis will, when relevant, note the potential for a conflict of interest when the fees paid to the advisor or its affiliates for other services exceeds those paid for compensation consulting.

 

FREQUENCY OF SAY-ON-PAY

 

The Dodd-Frank Act also requires companies to allow shareholders a non-binding vote on the frequency of say-on-pay votes, i.e. every one, two or three years. Additionally, Dodd-Frank requires companies to hold such votes on the frequency of say-on-pay votes at least once every six years.

 

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We believe companies should submit say-on-pay votes to shareholders every year. We believe that the time and financial burdens to a company with regard to an annual vote are relatively small and incremental and are outweighed by the benefits to shareholders through more frequent accountability. Implementing biannual or triennial votes on executive compensation limits shareholders’ ability to hold the board accountable for its compensation practices through means other than voting against the compensation committee. Unless a company provides a compelling rationale or unique circumstances for say-on-pay votes less frequent than annually, we will generally recommend that shareholders support annual votes on compensation.

 

VOTE ON GOLDEN PARACHUTE ARRANGEMENTS

 

The Dodd-Frank Act also requires companies to provide shareholders with a separate non-binding vote on approval of golden parachute compensation arrangements in connection with certain change-in-control transactions. However, if the golden parachute arrangements have previously been subject to a say-on-pay vote which shareholders approved, then this required vote is waived.

 

Glass Lewis believes the narrative and tabular disclosure of golden parachute arrangements benefits all shareholders. Glass Lewis analyzes each golden parachute arrangement on a case-by-case basis, taking into account, among other items: the nature of the change-in-control transaction, the ultimate value of the payments particularly compared to the value of the transaction, the tenure and position of the executives in question before and after the transaction, any new or amended employment agreements entered into in connection with the transaction, and the type of triggers involved (i.e., single vs. double).

 

EQUITY-BASED COMPENSATION PLAN PROPOSALS

 

We believe that equity compensation awards, when not abused, are useful 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.

 

Our analysis is primarily quantitative and focused on the plan’s cost as compared with the business’s operating metrics. We run twenty different analyses, comparing the program with absolute limits we believe are key to equity value creation and with a carefully chosen peer group. In general, our model seeks to determine whether the proposed plan is either absolutely excessive or is more than one standard deviation away from the average plan for the peer group on a range of criteria, including dilution to shareholders and the projected annual cost relative to the company’s financial performance. Each of the twenty analyses (and their constituent parts) is weighted and the plan is scored in accordance with that weight.

 

In our analysis, we compare the program’s expected annual expense with the business’s operating metrics to help determine whether the plan is excessive in light of company performance. We also compare the plan’s expected annual cost to the enterprise value of the firm rather than to market capitalization because the employees, managers and directors of the firm contribute to the creation of enterprise value but not necessarily market capitalization (the biggest difference is seen where cash represents the vast majority of market capitalization). Finally, we do not rely exclusively on relative comparisons with averages because, in addition to creeping averages serving to inflate compensation, we believe that some absolute limits are warranted.

 

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We evaluate equity plans based on certain overarching principles:

 

Companies should seek more shares only when needed;
     
Requested share amounts should be small enough that companies seek shareholder approval every three to four years (or more frequently);
     
If a plan is relatively expensive, it should not grant options solely to senior executives and board members;
     
Annual net share count and voting power dilution should be limited;
     
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;
     
The expected annual cost of the plan should be proportional to the business’s value;
     
The intrinsic value that option grantees received in the past should be reasonable compared with the business’s financial results;
     
Plans should deliver value on a per-employee basis when compared with programs at peer companies;
     
Plans should not permit re-pricing of stock options;
     
Plans should not contain excessively liberal administrative or payment terms;
     
Plans should not count shares in ways that understate the potential dilution, or cost, to common shareholders. This refers to “inverse” full-value award multipliers;
     
Selected performance metrics should be challenging and appropriate, and should be subject to relative performance measurements; and
     
Stock grants should be subject to minimum vesting and/or holding periods sufficient to ensure sustainable performance and promote retention.

 

OPTION EXCHANGES

 

Glass Lewis views option repricing plans and option exchange programs with great skepticism. Shareholders have substantial risk in owning stock and we believe that the employees, officers, and directors who receive stock options should be similarly situated to align their interests with shareholder interests.

 

We are concerned that option grantees who believe they will be “rescued” from underwater options will be more inclined to take unjustifiable risks. Moreover, a predictable pattern of repricing or exchanges substantially alters a stock option’s value because options that will practically never expire deeply out of the money are worth far more than options that carry a risk of expiration.

 

In short, repricings and option exchange programs change the bargain between shareholders and employees after the bargain has been struck.

 

There is one circumstance in which a repricing or option exchange program may be acceptable: if macroeconomic or industry trends, rather than specific company issues, cause a stock’s value to decline dramatically and the repricing is necessary to motivate and retain employees. In this circumstance, we think it fair to conclude that option grantees may be suffering from a risk that was not foreseeable when the original “bargain” was struck. In such a circumstance, we will recommend supporting a repricing only if the following conditions are true:

 

Officers and board members cannot participate in the program;
     
The stock decline mirrors the market or industry price decline in terms of timing and approximates the decline in magnitude;

 

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The exchange is value-neutral or value-creative to shareholders using very conservative assumptions and with a recognition of the adverse selection problems inherent in voluntary programs; and
     
Management and the board make a cogent case for needing to motivate and retain existing employees, such as being in a competitive employment market.

 

OPTION BACKDATING, SPRING-LOADING AND BULLET-DODGING

 

Glass Lewis views option backdating, and the related practices of spring-loading and bullet-dodging, as egregious actions that warrant holding the appropriate management and board members responsible. These practices are similar to re-pricing options and eliminate much of the downside risk inherent in an option grant that is designed to induce recipients to maximize shareholder return .

 

Backdating an option is the act of changing an option’s grant date from the actual grant date to an earlier date when the market price of the underlying stock was lower, resulting in a lower exercise price for the option. Since 2006, Glass Lewis has identified over 270 companies that have disclosed internal or government investigations into their past stock-option grants.

 

Spring-loading is granting stock options while in possession of material, positive information that has not been disclosed publicly. Bullet-dodging is delaying the grants of stock options until after the release of material, negative information. This can allow option grants to be made at a lower price either before the release of positive news or following the release of negative news, assuming the stock s price will move up or down in response to the information. This raises a concern similar to that of insider trading, or the trading on material non-public information.

 

The exercise price for an option is determined on the day of grant, providing the recipient with the same market risk as an investor who bought shares on that date. However, where options were backdated, the executive or the board (or the compensation committee) changed the grant date retroactively. The new date may be at or near the lowest price for the year or period. This would be like allowing an investor to look back and select the lowest price of the year at which to buy shares.

 

A 2006 study of option grants made between 1996 and 2005 at 8,000 companies found that option backdating can be an indication of poor internal controls. The study found that option backdating was more likely to occur at companies without a majority independent board and with a long-serving CEO; both factors, the study concluded, were associated with greater CEO influence on the company’s compensation and governance practices. 51

 

Where a company granted backdated options to an executive who is also a director, Glass Lewis will recommend voting against that executive/director, regardless of who decided to make the award. In addition, Glass Lewis will recommend voting against those directors who either approved or allowed the backdating. Glass Lewis feels that executives and directors who either benefited from backdated options or authorized the practice have breached their fiduciary responsibility to shareholders.

 

Given the severe tax and legal liabilities to the company from backdating, Glass Lewis will consider recommending voting against members of the audit committee who served when options were backdated, a restatement occurs, material weaknesses in internal controls exist and disclosures indicate there was a lack of documentation. These committee members failed in their responsibility to ensure the integrity of the company’s financial reports.

 

When a company has engaged in spring-loading or bullet-dodging, Glass Lewis will consider recommending voting against the compensation committee members where there has been a pattern of granting options at or near historic lows . Glass Lewis will also recommend voting against executives serving on the board who benefited from the spring-loading or bullet-dodging.

 

 

51 Lucian Bebchuk, Yaniv Grinstein and Urs Peyer. “LUCKY CEOs.” November, 2006.

 

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DIRECTOR COMPENSATION PLANS

 

Glass Lewis believes that non-employee directors should receive reasonable and appropriate compensation for the time and effort they spend serving on the board and its committees. However, a balance is required. Fees should be competitive in order to retain and attract qualified individuals, but excessive fees represent a financial cost to the company and potentially compromise the objectivity and independence of non-employee directors. 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.

 

EMPLOYEE STOCK PURCHASE PLANS

 

Glass Lewis believes that employee stock purchase plans (“ESPPs”) can provide employees with a sense of ownership in their company and help strengthen the alignment between the interests of employees and shareholders. We use a quantitative model to estimate the cost of the plan by measuring the expected discount, purchase period, expected purchase activity (if previous activity has been disclosed) and whether the plan has a “lookback” feature, and then compare this cost to ESPPs at similar companies. Except for the most extreme cases, Glass Lewis will generally support these plans given the regulatory purchase limit of $25,000 per employee per year, which we believe is reasonable. We also look at the number of shares requested to see if a ESPP will significantly contribute to overall shareholder dilution or if shareholders will not have a chance to approve the program for an excessive period of time. As such, we will generally recommend against ESPPs that contain “evergreen” provisions that automatically increase the number of shares available under the ESPP each year.

 

EXECUTIVE COMPENSATION TAX DEDUCTIBILITY
(IRS 162(M) COMPLIANCE)

 

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, if the compensation is performance-based and is paid under shareholder-approved plans. Companies therefore submit incentive plans for shareholder approval to take of advantage of the tax deductibility afforded under 162(m) for certain types of compensation.

 

We believe the best practice for companies is to provide robust disclosure to shareholders so that they can make fully-informed judgments about the reasonableness of the proposed compensation plan. To allow for meaningful shareholder review, we prefer that disclosure should include specific performance metrics, a maximum award pool, and a maximum award amount per employee. We also believe it is important to analyze the estimated grants to see if they are reasonable and in line with the company’s peers.

 

We typically recommend voting against a 162(m) proposal where: (i) a company fails to provide at least a list of performance targets; (ii) a company fails to provide one of either a total maximum or an individual maximum; or (iii) the proposed plan or individual maximum award limit is excessive when compared with the plans of the company’s peers.

 

The company’s record of aligning pay with performance (as evaluated using our proprietary pay-for-performance model) also plays a role in our recommendation. Where a company has a record of setting reasonable pay relative to business performance, we generally recommend voting in favor of a

 

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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.

 

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ANTI-TAKEOVER MEASURES

 

POISON PILLS (SHAREHOLDER RIGHTS PLANS)

 

Glass Lewis believes that poison pill plans are not generally in shareholders’ best interests. They can reduce management accountability by substantially limiting opportunities for corporate takeovers. Rights plans can thus prevent shareholders from receiving a buy-out premium for their stock. Typically we recommend that shareholders vote against these plans to protect their financial interests and ensure that they have an opportunity to consider any offer for their shares, especially those at a premium.

 

We believe boards should be given wide latitude in directing company activities and in charting the company’s course. However, on an issue such as this, where the link between the shareholders’ financial interests and their right to consider and accept buyout offers is substantial, we believe that shareholders should be allowed to vote on whether they support such a plan’s implementation. This issue is different from other matters that are typically left to board discretion. Its potential impact on and relation to shareholders is direct and substantial. It is also an issue in which management interests may be different from those of shareholders; thus, ensuring that shareholders have a voice is the only way to safeguard their interests.

 

In certain circumstances, we will support a poison pill that is limited in scope to accomplish a particular objective, such as the closing of an important merger, or a pill that contains what we believe to be a reasonable qualifying offer clause. We will consider supporting a poison pill plan if the qualifying offer clause includes each of the following attributes:

 

  The form of offer is not required to be an all-cash transaction;

 

  The offer is not required to remain open for more than 90 business days;

 

  The offer or is permitted to amend the offer, reduce the offer, or otherwise change the terms;

 

  There is no fairness opinion requirement; and

 

  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.

 

NOL POISON PILLS

 

Similarly, Glass Lewis may consider supporting a limited poison pill in the 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%.

 

 

52 Section 382 of the Internal Revenue Code refers to a “change of ownership” of more than 50 percentage points by one or more 5% shareholders within a three-year period. The statute is intende d to deter the “trafficking” of net operating losses.

 

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Glass Lewis evaluates NOL pills on a strictly case-by-case basis taking into consideration, among other factors, the value of the NOLs to the company, the likelihood of a change of ownership based on the size of the holding and the nature of the larger shareholders, the trigger threshold and whether the term of the plan is limited in duration (i.e., whether it contains a reasonable “sunset” provision) or is subject to periodic board review and/or shareholder ratification. However, we will recommend that shareholders vote against a proposal to adopt or amend a pill to include NOL protective provisions if the company has adopted a more narrowly tailored means of preventing a change in control to preserve its NOLs. For example, a company may limit share transfers in its charter to prevent a change of ownership from occurring.

 

Furthermore, we believe that shareholders should be offered the opportunity to vote on any adoption or renewal of a NOL pill regardless of any potential tax benefit that it offers a company. As such, we will consider recommending voting against those members of the board who served at the time when an NOL pill was adopted without shareholder approval within the prior twelve months and where the NOL pill is not subject to shareholder ratification.

 

FAIR PRICE PROVISIONS

 

Fair price provisions, which are rare, require that certain minimum price and procedural requirements be observed by any party that acquires more than a specified percentage of a corporation’s common stock. The provision is intended to protect minority shareholder value when an acquirer seeks to accomplish a merger or other transaction which would eliminate or change the interests of the minority stockholders. The provision is generally applied against the acquirer unless the takeover is approved by a majority of “continuing directors” and holders of a majority, in some cases a supermajority as high as 80%, of the combined voting power of all stock entitled to vote to alter, amend, or repeal the above provisions.

 

The effect of a fair price provision is to require approval of any merger or business combination with an “interested stockholder” by 51% of the voting stock of the company, excluding the shares held by the interested stockholder. An interested stockholder is generally considered to be a holder of 10% or more of the company’s outstanding stock, but the trigger can vary.

 

Generally, provisions are put in place for the ostensible purpose of preventing a back-end merger where the interested stockholder would be able to pay a lower price for the remaining shares of the company than he or she paid to gain control. The effect of a fair price provision on shareholders, however, is to limit their ability to gain a premium for their shares through a partial tender offer or open market acquisition which typically raise the share price, often significantly. A fair price provision discourages such transactions because of the potential costs of seeking shareholder approval and because of the restrictions on purchase price for completing a merger or other transaction at a later time.

 

Glass Lewis believes that fair price provisions, while sometimes protecting shareholders from abuse in a takeover situation, more often act as an impediment to takeovers, potentially limiting gains to shareholders from a variety of transactions that could significantly increase share price. In some cases, even the independent directors of the board cannot make exceptions when such exceptions may be in the best interests of shareholders. Given the existence of state law protections for minority shareholders such as Section 203 of the Delaware Corporations Code, we believe it is in the best interests of shareholders to remove fair price provisions.

 

REINCORPORATION

 

In general, Glass Lewis believes that the board is in the best position to determine the appropriate jurisdiction of incorporation for the company. When examining a management proposal to reincorporate to a different state or country, we review the relevant financial benefits, generally related to improved corporate tax treatment, as well as changes in corporate governance provisions, especially those

 

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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:

 

  Is the board sufficiently independent?

 

Does the company have anti-takeover protections such as a poison pill or classified board in place?

 

Has the board been previously unresponsive to shareholders (such as failing to implement a shareholder proposal that received majority shareholder support)?

 

  Do shareholders have the right to call special meetings of shareholders?

 

  Are there other material governance issues of concern at the company?

 

  Has the company’s performance matched or exceeded its peers in the past one and three years?

 

How has the company ranked in Glass Lewis’ pay-for-performance analysis during the last three years?

 

  Does the company have an independent chairman?

 

We note, however, that we will only support shareholder proposals to change a company’s place of incorporation in exceptional circumstances.

 

EXCLUSIVE FORUM AND FEE-SHIFTING BYLAW PROVISIONS

 

Glass Lewis recognizes that companies may be subject to frivolous and opportunistic lawsuits, particularly in conjunction with a merger or acquisition, that are expensive and distracting. In response, companies have sought ways to prevent or limit the risk of such suits by adopting bylaws regarding where the suits must be brought or shifting the burden of the legal expenses to the plaintiff, if unsuccessful at trial.

 

Glass Lewis believes that charter or bylaw provisions limiting a shareholder’s choice of legal venue are not in the best interests of shareholders. Such clauses may effectively discourage the use of shareholder 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 unless the company: (i) provides a compelling argument on why the provision would directly benefit shareholders; (ii) provides evidence of abuse of legal process in other, non-favored jurisdictions; (iii) narrowly tailors such provision to the risks involved; and (iv) maintains a strong record of good corporate governance practices.

 

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).

 

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Similarly, some companies have adopted bylaws requiring plaintiffs who sue the company and fail to receive a judgment in their favor pay the legal expenses of the company. These bylaws, also known as “fee-shifting” or “loser pays” bylaws, will likely have a chilling effect on even meritorious shareholder lawsuits as shareholders would face an strong financial disincentive not to sue a company. Glass Lewis therefore strongly opposes the adoption of such fee-shifting bylaws and, if adopted without shareholder approval, will recommend voting against the governance committee.

 

AUTHORIZED SHARES

 

Glass Lewis believes that adequate capital stock is important to a company’s operation. When analyzing a request for additional shares, we typically review four common reasons why a company might need additional capital stock:

 

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 company’s 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 company’s cash position and its ability to secure financing through borrowing or other means. We look at the company’s history of capitalization and whether the company has had to use stock in the recent past as a means of raising capital.

 

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. Similar concerns may also lead us to recommend against a proposal to conduct a reverse stock split if the board does not state that it will reduce the number of authorized common shares in a ratio proportionate to the split.

 

While we think that having adequate shares to allow management to make quick decisions and effectively operate the business is critical, we prefer that, for significant transactions, management come to shareholders to justify their use of additional shares rather than providing a blank check in the form of a large pool of unallocated shares available for any purpose.

 

ADVANCE NOTICE REQUIREMENTS

 

We typically recommend that shareholders vote against proposals that would require advance notice of shareholder proposals or of director nominees.

 

These proposals typically attempt to require a certain amount of notice before shareholders are allowed to place proposals on the ballot. Notice requirements typically range between three to six months prior to the annual meeting. Advance notice requirements typically make it impossible for a shareholder who misses the deadline to present a shareholder proposal or a director nominee that might be in the best interests of the company and its shareholders.

 

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We believe shareholders should be able to review and vote on all proposals and director nominees. Shareholders can always vote against proposals that appear with little prior notice. Shareholders, as owners of a business, are capable of identifying issues on which they have sufficient information and ignoring issues on which they have insufficient information. Setting arbitrary notice restrictions limits the opportunity for shareholders to raise issues that may come up after the window closes.

 

VOTING STRUCTURE

 

CUMULATIVE VOTING

 

Cumulative voting increases the ability of minority shareholders to elect a director by allowing shareholders to cast as many shares of the stock they own multiplied by the number of directors to be elected. As companies generally have multiple nominees up for election, cumulative voting allows shareholders to cast all of their votes for a single nominee, or a smaller number of nominees than up for election, thereby raising the likelihood of electing one or more of their preferred nominees to the board. It can be important when a board is controlled by insiders or affiliates and where the company’s ownership structure includes one or more shareholders who control a majority-voting block of company stock.

 

Glass Lewis believes that cumulative voting generally acts as a safeguard for shareholders by ensuring that those who hold a significant minority of shares can elect a candidate of their choosing to the board. This allows the creation of boards that are responsive to the interests of all shareholders rather than just a small group of large holders.

 

We review cumulative voting proposals on a case-by-case basis, factoring in the independence of the board and the status of the company’s governance structure. But we typically find these proposals on ballots at companies where independence is lacking and where the appropriate checks and balances favoring shareholders are not in place. In those instances we typically recommend in favor of cumulative voting.

 

Where a company has adopted a true majority vote standard (i.e., where a director must receive a majority of votes cast to be elected, as opposed to a modified policy indicated by a resignation policy only), Glass Lewis will recommend voting against cumulative voting proposals due to the incompatibility of the two election methods. For companies that have not adopted a true majority voting standard but have adopted some form of majority voting, Glass Lewis will also generally recommend voting against cumulative voting proposals if the company has not adopted antitakeover protections and has been responsive to shareholders.

 

Where a company has not adopted a majority voting standard and is facing both a shareholder proposal to adopt majority voting and a shareholder proposal to adopt cumulative voting, Glass Lewis will support only the majority voting proposal. When a company has both majority voting and cumulative voting in place, there is a higher likelihood of one or more directors not being elected as a result of not receiving a majority vote. This is because shareholders exercising the right to cumulate their votes could unintentionally cause the failed election of one or more directors for whom shareholders do not cumulate votes.

 

SUPERMAJORITY VOTE REQUIREMENTS

 

Glass Lewis believes that supermajority vote requirements impede shareholder action on ballot items critical to shareholder interests. An example is in the takeover context, where supermajority vote requirements can strongly limit the voice of shareholders in making decisions on such crucial matters as selling the business. This in turn degrades share value and can limit the possibility of buyout premiums to shareholders. Moreover, we believe that a supermajority vote requirement can enable a small group of shareholders to overrule the will of the majority shareholders. We believe that a simple majority is appropriate to approve all matters presented to shareholders.

 

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TRANSACTION OF OTHER BUSINESS

 

We typically recommend that shareholders not give their proxy to management to vote on any other business items that may properly come before an annual or special meeting. In our opinion, granting unfettered discretion is unwise.

 

ANTI-GREENMAIL PROPOSALS

 

Glass Lewis will support proposals to adopt a provision preventing the payment of greenmail, which would serve to prevent companies from buying back company stock at significant premiums from a certain shareholder. Since a large or majority shareholder could attempt to compel a board into purchasing its shares at a large premium, the anti-greenmail provision would generally require that a majority of shareholders other than the majority shareholder approve the buyback.

 

MUTUAL FUNDS: INVESTMENT POLICIES AND ADVISORY AGREEMENTS

 

Glass Lewis believes that decisions about a fund’s structure and/or a fund’s relationship with its investment advisor or sub-advisors are generally best left to management and the members of the board, absent a showing of egregious or illegal conduct that might threaten shareholder value. As such, we focus our analyses of such proposals on the following main areas:

 

  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 fund’s investment objective or strategy.

 

We generally support amendments to a fund’s investment advisory agreement absent a material change that is not in the best interests of shareholders. A significant increase in the fees paid to an investment advisor would be reason for us to consider recommending voting against a proposed amendment to an investment advisory agreement. However, in certain cases, we are more inclined to support an increase in advisory fees if such increases result from being performance-based rather than asset-based. Furthermore, we generally support sub-advisory agreements between a fund’s advisor and sub-advisor, primarily because the fees received by the sub-advisor are paid by the advisor, and not by the fund.

 

In matters pertaining to a fund’s investment objective or strategy, we believe shareholders are best served when a fund’s objective or strategy closely resembles the investment discipline shareholders understood and selected when they initially bought into the fund. As such, we generally recommend voting against amendments to a fund’s investment objective or strategy when the proposed changes would leave shareholders with stakes in a fund that is noticeably different than when originally purchased, and which could therefore potentially negatively impact some investors’ diversification strategies.

 

REAL ESTATE INVESTMENT TRUSTS

 

The complex organizational, operational, tax and compliance requirements of Real Estate Investment Trusts (“REITs”) provide for a unique shareholder evaluation. In simple terms, a REIT must have a minimum of 100 shareholders (the “100 Shareholder Test”) and no more than 50% of the value of its shares can be held by five or fewer individuals (the “5/50 Test”). At least 75% of a REITs’ assets must be in real estate, it must derive 75% of its gross income from rents or mortgage interest, and it must pay out 90% of its taxable earnings as dividends. In addition, as a publicly traded security listed on a stock exchange, a REIT must comply with the same general listing requirements as a publicly traded equity.

 

In order to comply with such requirements, REITs typically include percentage ownership limitations in their organizational documents, usually in the range of 5% to 10% of the REITs outstanding shares. Given the complexities of REITs as an asset class, Glass Lewis applies a highly nuanced approach in our evaluation of REIT proposals, especially regarding changes in authorized share capital, including preferred stock.

 

      A-42     

 

PREFERRED STOCK ISSUANCES AT REITS

 

Glass Lewis is generally against the authorization of preferred shares that allows the board to determine the preferences, limitations and rights of the preferred shares (known as “blank-check preferred stock”). We believe that granting such broad discretion should be of concern to common shareholders, since blank-check preferred stock could be used as an antitakeover device or in some other fashion that adversely affects the voting power or financial interests of common shareholders. However, given the requirement that a REIT must distribute 90% of its net income annually, it is inhibited from retaining capital to make investments in its business. As such, we recognize that equity financing likely plays a key role in a REIT’s growth and creation of shareholder value. Moreover, shareholder concern regarding the use of preferred stock as an anti-takeover mechanism may be allayed by the fact that most REITs maintain ownership limitations in their certificates of incorporation. For these reasons, along with the fact that REITs typically do not engage in private placements of preferred stock (which result in the rights of common shareholders being adversely impacted), we may support requests to authorize shares of blank-check preferred stock at REITs.

 

BUSINESS DEVELOPMENT COMPANIES

 

Business Development Companies (“BDCs”) were created by the U.S. Congress in 1980; they are regulated under the Investment Company Act of 1940 and are taxed as regulated investment companies (“RICs”) under the Internal Revenue Code. BDCs typically operate as publicly traded private equity firms that invest in early stage to mature private companies as well as small public companies. BDCs realize operating income when their investments are sold off, and therefore maintain complex organizational, operational, tax and compliance requirements that are similar to those of REITs—the most evident of which is that BDCs must distribute at least 90% of their taxable earnings as dividends.

 

AUTHORIZATION TO SELL SHARES AT A PRICE BELOW NET ASSET VALUE

 

Considering that BDCs are required to distribute nearly all their earnings to shareholders, they sometimes need to offer additional shares of common stock in the public markets to finance operations and acquisitions. However, shareholder approval is required in order for a BDC to sell shares of common stock at a price below Net Asset Value (“NAV”). Glass Lewis evaluates these proposals using a case-by-case approach, but will recommend supporting such requests if the following conditions are met:

 

  The authorization to allow share issuances below NAV has an expiration date of one year or less from the date that shareholders approve the underlying proposal (i.e. the meeting date);

 

  The proposed discount below NAV is minimal (ideally no greater than 20%);

 

  The board specifies that the issuance will have a minimal or modest dilutive effect (ideally no greater than 25% of the company’s then-outstanding common stock prior to the issuance); and

 

  A majority of the company’s independent directors who do not have a financial interest in the issuance approve the sale.

 

In short, we believe BDCs should demonstrate a responsible approach to issuing shares below NAV, by proactively addressing shareholder concerns regarding the potential dilution of the requested share issuance, and explaining if and how the company’s past below-NAV share issuances have benefitted the company.

 

      A-43     

 

 

Glass Lewis generally believes decisions regarding day-to-day management and policy decisions, including those related to social, environmental or political issues, are best left to management and the board as they in almost all cases have more and better information about company strategy and risk. However, when there is a clear link between the subject of a shareholder proposal and value enhancement or risk mitigation, Glass Lewis will recommend in favor of a reasonable, well-crafted shareholder proposal where the company has failed to or inadequately addressed the issue.

 

We believe that shareholders should not attempt to micromanage a 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 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, as well as those that promote more and better disclosure of relevant risk factors where such disclosure is lacking or inadequate.

 

For a detailed review of our policies concerning compensation, environmental, social and governance shareholder initiatives, please refer to our comprehensive Proxy Paper Guidelines for Shareholder Initiatives , available at www.glasslewis.com.

 

      A-44     

 

DISCLAIMER

 

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 2015 Glass, Lewis & Co., LLC. All Rights Reserved.

 

      A-45     

 

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PART C: OTHER INFORMATION

 

Item 28 . Exhibits
   
(a)(1) Certificate of Trust of ETFS Trust (the “Registrant” or the “Trust”) dated January 9, 2014 and as filed with the state of Delaware on January 10, 2014, is incorporated herein by reference to Exhibit (a)(1) of the Registrant’s Initial Registration Statement on Form N-1A, as filed with the U.S. Securities Exchange Commission (the “SEC”) via EDGAR Accession No. 0000930413-14-003692 on August 15, 2014.
   
(a)(2) Registrant’s Declaration of Trust dated January 9, 2014 is incorporated herein by reference to Exhibit (a)(2) of the Registrant’s Initial Registration Statement on Form N-1A, as filed with the SEC via EDGAR Accession No. 0000930413-14-003692 on August 15, 2014.
   
(b) Registrant’s By-Laws dated August 4, 2014 are incorporated herein by reference to Exhibit (b) of the Registrant’s Initial Registration Statement on Form N-1A, as filed with the SEC via EDGAR Accession No. 0000930413-14-003692 on August 15, 2014.
   
(c) Not applicable.
   
(d)(1) Investment Advisory Agreement dated December 2, 2014 between the Registrant and ETF Securities Advisors LLC is filed herewith.
   
(d)(2) Sub-Advisory Agreement dated January 5, 2015 between ETF Securities Advisors LLC and Index Management Solutions, LLC is filed herewith.
   
(e)(1) Distribution Agreement dated December 22, 2014 between the Registrant and ALPS Distributors, Inc. is filed herewith.
   
(e)(2) Form of Authorized Participant Agreement is filed herewith.
   
(f) Not applicable.
   
(g) Global Custody Agreement dated December 4, 2014 between the Registrant and JPMorgan Chase Bank, N.A. is filed herewith.
   
(h)(1) Administration Agreement dated January 6, 2015 between the Registrant and JPMorgan Chase Bank, N.A. is filed herewith.
   
(h)(2) Agency Services Agreement dated December 4, 2014 between the Registrant and JPMorgan Chase Bank, N.A. is filed herewith.
   
(i) Opinion and Consent of Counsel, Morgan, Lewis & Bockius LLP, is filed herewith.
   
(j) Consent of independent registered public accountants, Deloitte & Touche LLP, is filed herewith.
   
(k) Not applicable.
   
(l) Not applicable.
1
(m) Distribution and Service Plan, adopted December 2, 2014, is field herewith.
   
(n) Not applicable.
   
(o) Not applicable.
   
(p)(1) Code of Ethics of the Registrant is filed herewith.
   
(p)(2) Code of Ethics of ETF Securities Advisors LLC is filed herewith.
   
(p)(3) Code of Ethics of Index Management Solutions, LLC is filed herewith.
   
(p)(4) Code of Ethics of ALPS Distributors, Inc. is filed herewith.
   
(q) Powers of Attorney for Stephen O’Grady, Joe Roxburgh , M. William Thomas and Graham Tuckwell are filed herewith.
   
Item 29 . Persons Controlled by or under Common Control with the Registrant

 

Not Applicable.

 

Item 30 . Indemnification

 

The Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any officer, agent, employee, adviser or principal underwriter of the Trust, nor shall any Trustee be responsible for the act or omission of any other Trustee, and, subject to the provisions of the By-Laws, the Trust out of its assets may indemnify and hold harmless each and every Trustee and officer of the Trust from and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or related to such Trustee’s or officer’s performance of his or her duties as a Trustee or officer of the Trust; provided that nothing herein contained shall indemnify, hold harmless or protect any Trustee or officer from or against any liability to the Trust or any Shareholder 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.

 

Every note, bond, contract, instrument, certificate or undertaking and every other act or thing whatsoever issued, executed or done by or on behalf of the Trust or the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been issued, executed or done only in or with respect to their or his or her capacity as Trustees or Trustee, and such Trustees or Trustee shall not be personally liable thereon.

 

Insofar as indemnification for liability arising under the Securities Act of 1933 (the “Securities Act”) may be permitted to Trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question

2

whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

Item 31 . Business and other Connections of the Investment Advisers

 

ETF Securities Advisors LLC (the “Adviser”) serves as investment adviser for each series of the Trust. The principal address of ETF Securities is 48 Wall Street New York, NY 10005. ETF Securities is an investment adviser registered under the Investment Advisers Act of 1940.

 

Index Management Solutions, LLC (the “Sub-Adviser”) serves as sub-adviser for each series of the Trust. The principal address of the Sub-Adviser is 2005 Market Street, One Commerce Square, Suite 2020, Philadelphia Pennsylvania 19103. The Sub-Adviser is an investment adviser registered under the Investment Advisers Act of 1940.

 

Any other business, profession, vocation or employment of a substantial nature in which each director or principal officer of the Adviser and Sub-Adviser is or has been, at any time during the last two fiscal years, engaged for his or her own account or in the capacity of director, officer, employee, partner or trustee are as follows:

 

ETF Securities Advisors LLC

 

Name and Position with ETF
Securities Advisors LLC
Name of Other Company Connection with Other Company
Adam Rezak – Chief Compliance Officer Guggenheim Partners Chief Compliance Officer
Adam Rezak – Chief Compliance Officer ALPS Distributors Inc. Registered Representative
Benoit Autier – Managing Director ALPS Distributors Inc. Registered Representative

 

Index Management Solutions, LLC

 

Name and Position with Index
Management Solutions, LLC
Name of Other Company Connection with Other Company
Michael Gompers
Chief Executive Officer,
Chief Compliance Officer
VTL Associates, LLC Chief Operating Officer
RevenueShares Trust Treasurer, Principal Financial Officer

 

Additional information as to any other business, profession, vocation or employment of a substantial nature engaged in by each such officer and director is included in the Trust’s Statement of Additional Information.

3
Item 32 . Principal Underwriters

 

(a) ALPS Distributors, Inc. acts as the distributor for the Registrant and the following investment companies: 1290 Funds, 13D Activist Fund, ALPS Series Trust, Arbitrage Funds, AQR Funds, Babson Capital Funds Trust, BBH Trust, BLDRS Index Funds Trust, Broadview Funds Trust, Brown Management Funds, Caldwell & Orkin Funds, Inc., Campbell Multi-Strategy Trust, Centaur Mutual Funds Trust, Centre Funds, Century Capital Management Trust, Columbia ETF Trust, CornerCap Group of Funds, Cortina Funds, Inc., CRM Mutual Fund Trust, Cullen Funds, DBX ETF TRUST, db-X Exchange-Traded Funds Inc., Centre Funds, ETFS Trust, EGA Emerging Global Shares Trust, EGA Frontier Diversified Core Fund, Financial Investors Trust, Firsthand Funds, Griffin Institutional Access Real Estate Fund, Heartland Group, Inc., Henssler Funds, Inc., Holland Balanced Fund, IndexIQ Trust, Index IQ ETF Trust, James Advantage Funds, Lattice Strategies Trust, Laudus Trust, Laudus Institutional Trust, Litman Gregory Funds Trust, Longleaf Partners Funds Trust, Mairs & Power Funds Trust, Oak Associates Funds, Pax World Series Trust I, Pax World Funds Trust III, PowerShares QQQ 100 Trust Series 1, Reality Shares EFT Trust, Resource Real Estate Diversified Income Fund, RiverNorth Funds, Russell Exchange Traded Funds Trust, Smead Funds Trust, SPDR Dow Jones Industrial Average ETF Trust, SPDR S&P 500 ETF Trust, SPDR S&P MidCap 400 ETF Trust, Stadion Investment Trust, Stone Harbor Investment Funds, Transparent Value Trust, USCF ETF Trust, Wakefield Alternative Series Trust, Wasatch Funds, WesMark Funds, Westcore Trust, Whitebox Mutual Funds, Williams Capital Liquid Assets Fund, Wilmington Funds and WisdomTree Trust.

 

(b) To the best of Registrant’s knowledge, the directors and executive officers of ALPS Distributors, Inc., are as follows:

 

Name* Position with Underwriter Positions with Fund
Edmund J. Burke Director None
Jeremy O. May President, Director None
Thomas A. Carter Executive Vice President, Director None
Bradley J. Swenson Senior Vice President, Chief Compliance Officer None
Robert J. Szydlowski Senior Vice President, Chief Technology Officer None
Aisha J. Hunt Senior Vice President, General Counsel and Assistant Secretary None
Eric T. Parsons Vice President, Controller and Assistant Treasurer None
Randall D. Young** Secretary None
Gregg Wm. Givens** Vice President, Treasurer and Assistant Secretary None
Douglas W. Fleming** Assistant Treasurer None
Steven Price Vice President, Deputy Chief Compliance Officer None
Liza Orr Vice President, Attorney None
Margo Rocklin Vice President, Attorney None
Taylor Ames Vice President, PowerShares None
Troy A. Duran Senior Vice President, Chief Financial Officer None
James Stegall Vice President None
Gary Ross Senior Vice President None
Kevin Ireland Senior Vice President None
Mark Kiniry Senior Vice President None
Tison Cory Vice President, Intermediary Operations None
Hilary Quinn Vice President None
Jennifer Craig Assistant Vice President None

 

* Except as otherwise noted, the principal business address for each of the above directors and executive officers is 1290 Broadway, Suite 1100, Denver, Colorado 80203.

 

** The principal business address for Messrs. Young, Givens and Fleming is 333 W. 11 th Street, 5 th Floor, Kansas City, Missouri 64105.

 

Item 33.   Location of Accounts and Records:

 

Books or other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, and the rules promulgated thereunder, are maintained as follows:

 

Registrant:

48 Wall Street

New York, NY 10005

 

Adviser:

ETF Securities Advisors LLC

48 Wall Street

New York, NY 10005

 

Sub-Adviser:

Index Management Solutions, LLC

2005 Market Street

One Commerce Square Suite 2020

Philadelphia, PA 19103

 

Distributor:

ALPS Distributors, Inc.

1290 Broadway Suite 1100

Denver, CO 80203

 

Custodian:

JPMorgan Chase Bank, N.A.

383 Madison Avenue

New York, NY 10179

 

Item 34 . Management Services

 

Not Applicable.

 

Item 35 . Undertakings

 

Not Applicable.

4

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933 (the “Securities Act”) and the Investment Company Act of 1940, the Registrant has duly caused this Pre-Effective Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the city of New York and state of New York, on this 6th day of January, 2015.

 

  ETFS Trust  
     
  /s/ Benoit Autier*  
  Benoit Autier
President
 

 

Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment No. 2 to the Registration Statement has been signed below by the following persons in the capacity and on the date indicated.

 

Signatures   Title   Date
         
/s/ Graham Tuckwell*   Trustee and Chairman of the Board   January 6, 2015
Graham Tuckwell        
         
/s/ Joe Roxburgh*   Treasurer   January 6, 2015
Joe Roxburgh        
         
/s/ Stephen O’Grady*   Trustee   January 6, 2015
Stephen O’Grady        
         
/s/ M. William Thomas*   Trustee   January 6, 2015
M. William Thomas        

 

*By: /s/ Benoit Autier  
  Benoit Autier
(Attorney-in-Fact)
5

Exhibit Index

 

(d)(1) Investment Advisory Agreement dated December 2, 2014 between the Registrant and ETF Securities Advisors LLC
   
(d)(2) Sub-Advisory Agreement dated January 5, 2015 between ETF Securities Advisors LLC and Index Management Solutions, LLC
   
(e)(1) Distribution Agreement dated December 22, 2014 between the Registrant and ALPS Distributors, Inc.
   
(e)(2) Form of Authorized Participant Agreement
   
(g) Global Custody Agreement dated December 4, 2014 between the Registrant and JPMorgan Chase Bank, N.A.
   
(h)(1) Administration Agreement dated January 6, 2015 between the Registrant and JPMorgan Chase Bank, N.A.
   
(h)(2) Agency Services Agreement dated December 4, 2014 between the Registrant and JPMorgan Chase Bank, N.A.
   
(i) Opinion and Consent of Counsel, Morgan, Lewis & Bockius LLP
   
(j) Consent of independent registered public accountants, Deloitte & Touche LLP
   
(m) Distribution and Service Plan, adopted December 2, 2014
   
(p)(1) Code of Ethics of the Registrant
   
(p)(2) Code of Ethics of ETF Securities Advisors LLC
   
(p)(3) Code of Ethics of Index Management Solutions, LLC
   
(p)(4) Code of Ethics of ALPS Distributors, Inc.
   
(q) Powers of Attorney for Stephen O’Grady, Joe Roxburgh , M. William Thomas and Graham Tuckwell
6

Exhibit 99.(d)(1)

 

INVESTMENT ADVISORY AGREEMENT

 

AGREEMENT (“Agreement”) made as of this 2nd day of December, 2014, between ETF Securities Advisors LLC (the “Adviser”) and ETFS Trust, a statutory trust organized under the laws of the State of Delaware (the “Trust”).

 

WHEREAS, the Adviser is principally engaged in the business of rendering investment management services and is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”); and

 

WHEREAS, the Trust is engaged in the business of an investment company and is registered as such under the Investment Company Act of 1940, as amended (the “1940 Act”); and

 

WHEREAS, the Trust is authorized to issue shares of beneficial interest in separate series with each such series representing interests in a separate portfolio of securities and other assets; and

 

WHEREAS, the Trust intends to offer shares representing interests in the series listed on Schedule A attached hereto (each an “Initial Fund”); and

 

WHEREAS, the Trust desires to appoint the Adviser to serve as the investment adviser with respect to each Initial Fund; and

 

WHEREAS, the Trust may, from time to time, offer shares representing interests in one or more additional series (each, an “Additional Fund” and collectively, the “Additional Funds”); and

 

WHEREAS, the Trust may desire to appoint the Adviser as the investment adviser with respect to one or more of the “Additional Funds” (each such Additional Fund and Initial Fund being referred to herein individually as a “Fund” and collectively as the “Funds”); and

 

WHEREAS, the Adviser is willing to provide investment management services to the Funds on the terms and conditions hereinafter set forth;

 

NOW THEREFORE, the parties hereto hereby agree as follows:

 

1. Appointment of the Adviser

 

The Trust hereby appoints the Adviser to act as investment adviser for each Initial Fund for the period and on terms set forth herein. The Adviser accepts such appointment and agrees to render such services for the compensation set forth herein. In the event that the Trust desires to retain the Adviser to render investment advisory services hereunder with respect to an Additional Fund, and the Adviser is willing to render such services, Schedule A shall be amended in accordance with Section 10(b) whereupon such Additional Fund shall become a Fund hereunder. The Adviser shall be deemed to be an independent contractor and shall, unless otherwise expressly provided for or authorized, in this Agreement or another writing by the Trust and the Adviser, have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.

1

2. Duties of the Adviser

 

(a) The Trust acknowledges and agrees that it is contemplated that the Adviser will manage the investment operations and composition of each Fund of the Trust and render investment advice for each Fund. The Adviser may, at its own expense, select and contract with one or more investment sub-advisers to manage the investment operations and composition of each Fund of the Trust and render investment advice for each Fund. The services provided by the Adviser or any such sub-adviser shall include: (i) furnishing continuously an investment program for each Fund; (ii) managing the investment and reinvestment of Fund assets; (iii) determining which investments shall be purchased, held, sold or exchanged for each Fund and what portion, if any, of the assets of each Fund shall be held uninvested; (iv) making changes on behalf of the Trust in the investments for each Fund; (v) providing the Trust with records concerning the activities that the Trust is required to maintain; and (vi) rendering reports to the Trust’s officers and Board of Trustees concerning the Adviser’s discharge of the foregoing responsibilities. In addition, the Adviser will arrange for other necessary services, including custodial, transfer agency and administration. The Adviser shall furnish to the Trust all office facilities, equipment, services and executive and administrative personnel necessary for managing the investment program of the Trust for each Fund. The Adviser may enter into arrangements with its ultimate parent or other persons affiliated or unaffiliated with the Adviser for the provision of certain personnel and facilities to the Adviser to enable the Adviser to fulfill its duties and obligations under this Agreement.

 

(b) The Adviser shall discharge the foregoing responsibilities subject to the supervision and control of the Board of Trustees of the Trust and in compliance with such policies as the Trustees may from time to time establish, each Fund’s investment objective and policies as set forth in the then current prospectus and statement of additional information for such Fund contained in the Trust’s Registration Statement on Form N-1A, as amended or supplemented from time to time, the Trust’s compliance manual, as in effect from time to time, and applicable laws and regulations.

 

3. Certain Records and Reports

 

Any records required to be maintained and preserved pursuant to the provisions of Rule 31a-1 and Rule 31a-2 under the 1940 Act that are prepared or maintained by the Adviser (or any investment sub-adviser) on behalf of the Trust are the property of the Trust and will be surrendered promptly to the Trust at its request (the “Records”). The Adviser agrees to preserve the Records for the periods prescribed in Rule 31a-2 under the 1940 Act. The Trust and the Adviser agree to furnish to each other, if applicable, current prospectuses, proxy statements, reports to shareholders, certified copies of their financial statements, and such other information with regard to their affairs as each may reasonably request. The Adviser shall keep confidential any information obtained in connection with its duties hereunder and disclose such information only if the Trust has authorized such disclosure or if such disclosure is expressly required or lawfully requested by applicable federal or state regulatory authorities.

2

4. Advisory Fees/Allocation of Expenses

 

(a) For the services to be provided by the Adviser hereunder with respect to each Fund, the Trust shall pay to the Adviser a fee at the rate set forth on Schedule A attached hereto. Schedule A shall be amended from time to time to reflect the addition and/or termination of any Fund as a Fund hereunder and to reflect any change in the advisory fees payable with respect to any Fund duly approved in accordance with Section 10(b) hereunder. All fees payable hereunder shall be accrued daily and paid as soon as practical after the last day of each month.

 

In any case of commencement or termination of this Agreement with respect to any Fund during any calendar month, the fee with respect to such Fund for that month shall be reduced proportionately based upon the number of calendar days during which it is in effect, and the fee shall be computed upon the average daily net assets of such Fund for the days during which it is in effect.

 

(b) The Adviser agrees to pay all expenses of the Trust, except for: (i) brokerage expenses and other fees, charges, taxes, levies or expenses (such as stamp taxes) incurred in connection with the execution of portfolio transactions or in connection with creation and redemption transactions (including without limitation any fees, charges, taxes, levies or expenses related to the purchase or sale of an amount of any currency, or the patriation or repatriation of any security or other asset, related to the execution of portfolio transactions or any creation or redemption transactions); (ii) legal fees or expenses in connection with any arbitration, litigation or pending or threatened arbitration or litigation, including any settlements in connection therewith; (iii) compensation and expenses of the Trustees of the Trust who are not officers, directors/trustees, partners or employees of the Adviser or its affiliates (the “Independent Trustees”); (iv) compensation and expenses of counsel to the Independent Trustees, (v) compensation and expenses of the Trust’s chief compliance officer; (vi) extraordinary expenses (in each case as determined by a majority of the Independent Trustees); (vii) distribution fees and expenses paid by the Trust under any distribution plan adopted pursuant to Rule 12b-1 under the 1940 Act; (viii) interest and taxes of any kind or nature (including, but not limited to, income, excise, transfer and withholding taxes); (ix) any fees and expense related to the provision of securities lending services; and (x) the advisory fee payable to the Adviser hereunder. The internal expenses of pooled investment vehicles in which a Fund may invest (acquired fund fees and expenses) are not expenses of the Trust and are not paid by the Adviser. The payment or assumption by the Adviser of any expense of the Trust that the Adviser is not required by this Agreement to pay or assume shall not obligate the Adviser to pay or assume the same or any similar expense of the Trust on any subsequent occasion.
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5. Limitation of Liability Under the Declaration of Trust

 

The Declaration of Trust establishing the Trust provides that no Trustee, shareholder, officer, employee or agent of the Trust shall be subject to any personal liability in connection with Trust property or the affairs of the Trust and that all persons should shall look solely to the Trust property or to the property of one or more specific Funds for satisfaction of claims of any nature arising in connection with the affairs of the Trust.

 

6. Regulation

 

The Adviser shall submit to all regulatory and administrative bodies having jurisdiction over the services provided pursuant to this Agreement any information, reports or other material which any such body by reason of this Agreement may request or require pursuant to applicable laws and regulations.

 

7. Provision of Certain Information by the Adviser

 

The Adviser will promptly notify the Trust in writing of the occurrence of any of the following events:

 

(a) the Adviser fails to be registered as an investment adviser under the Advisers Act or under the laws of any jurisdiction in which the Adviser is required to be registered as an investment adviser in order to perform its obligations under this Agreement;

 

(b) the Adviser is served or otherwise receives notice of any action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, public board or body, involving the affairs of the Trust; and

 

(c) the chief executive officer or parent company of the Adviser or the portfolio manager of any Fund changes.

 

8. Limitation of Liability of the Adviser

 

Neither the Adviser nor its officers, directors, employees, agents, affiliated persons or controlling persons or assigns shall be liable for any error of judgment or mistake of law or for any loss suffered by the Trust or its shareholders in connection with the matters to which this Agreement relates; provided that no provision of this Agreement shall be deemed to protect the Adviser against any liability to the Trust or its shareholders resulting from any willful misfeasance, bad faith or gross negligence in the performance of its duties or obligations hereunder, the reckless disregard of its duties or obligations hereunder, or breach of its fiduciary duty to the Trust, any Fund or its shareholders.

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9. Force Majeure

 

Notwithstanding any other provision of this Agreement, the Adviser shall not be liable for any loss suffered by the Trust or its shareholders caused directly or indirectly by circumstances beyond the Adviser’s reasonable control including, without limitation, government restrictions, exchange or market rulings, suspensions of trading, acts of civil or military authority, national emergencies, labor difficulties, fires, earthquakes, floods or other catastrophes, acts of God, wars, riots or failures of communication or power supply. In the event of equipment breakdowns beyond its reasonable control, the Adviser shall take reasonable steps to minimize service interruptions, but shall have no liability with respect thereto.

 

10. Duration, Termination and Amendment

 

(a) Duration. This Agreement shall become effective with respect to each Initial Fund on the date hereof and, with respect to any Additional Fund, on the date Schedule A is amended to reflect such Additional Fund in accordance with paragraph (b) below. Unless terminated in accordance with this Section 10, the Agreement shall remain in full force and effect for two years from the date hereof with respect to each Initial Fund and, with respect to each Additional Fund, for two years from the date on which such Fund becomes a Fund hereunder. Subsequent to such initial periods of effectiveness, this Agreement shall continue in full force and effect for periods of one year thereafter with respect to each Fund so long as such continuance with respect to such Fund is specifically approved at least annually (i) by either the Board of Trustees of the Trust or by vote of a “majority of the outstanding voting securities” (as defined in the 1940 Act) of such Fund, and (ii) in either event, by the vote of a majority of the Trustees of the Trust who are not parties to this Agreement or “interested persons” (as defined in the 1940 Act) of any such party (“Independent Trustees”) cast in person at a meeting called for the purpose of voting on such approval. If the shareholders of any Fund fail to approve the Agreement or any continuance of the Agreement as provided herein, the Adviser may continue to serve hereunder in the manner and to the extent permitted by the 1940 Act and rules and regulations thereunder. The foregoing requirement that continuance of this Agreement be “specifically approved at least annually” shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder.

 

(b) Amendment. Any amendment to this Agreement that is material shall become effective with respect to a Fund only upon approval of the Adviser, the Board of Trustees of the Trust, including a majority of the Independent Trustees of the Trust cast in person at a meeting called for the purpose of voting such approval and, if required under the 1940 Act, a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund.

 

(c) Approval, Amendment or Termination by a Fund. Any approval, amendment or termination of this Agreement with respect to a Fund will not require the approval of a majority of the outstanding voting securities of any other Fund or the approval of a majority of the outstanding voting securities of the Trust, unless such approval is required by applicable law.
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(d) Automatic Termination. This Agreement shall automatically and immediately terminate in the event of its “assignment” (as defined in the 1940 Act).

 

(e) Termination. This Agreement may be terminated with respect to any Fund at any time, without payment of any penalty, by vote of the Board of Trustees of the Trust, including a majority of the Independent Trustees of the Trust, or by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of that Fund, or by the Adviser, in each case on not less than 30 days’ nor more than 60 days’ prior written notice to the other party; provided, that a shorter notice period shall be permitted for a Fund in the event its shares are no longer listed on a national securities exchange.

 

11. Services Not Exclusive

 

The services of the Adviser to the Trust hereunder are not to be deemed exclusive, and the Adviser shall be free to render similar services to others (including other investment companies and to engage in other activities) so long as its services hereunder are not impaired thereby.

 

12. Use of the Name ETFS

 

The Adviser has consented to the use by the Trust of the name “ETFS” in the name of the Trust and each Fund. Such consent is conditioned upon the employment of the Adviser or an affiliate as the investment adviser to the Fund. The name “ETFS” may be used from time to time in other connections and for other purposes by the Adviser and any of its affiliates and/or any entity managed by the Adviser or its affiliates. The Adviser may require the Trust and the Funds to cease using “ETFS” in the name of the Trust and the Funds if the Funds cease to employ, for any reason, the Adviser, any successor thereto or any affiliate thereof as investment adviser of a Fund.

 

13. Custody

 

Nothing in this Agreement will require the Adviser to take or receive physical possession of cash, securities, or other investments of any Fund.

 

14. Miscellaneous

 

(a) Notice. All notices required to be given pursuant to this Agreement shall be delivered or mailed to the last known business address of the Trust or the Adviser in person or by registered mail or a private mail or delivery service providing the sender with notice of receipt. Notice shall be deemed given on the date delivered or mailed in accordance with this section. .

 

(b) Severability. Should any portion of this Agreement for any reason be held to be void in law or in equity, the Agreement shall be construed, insofar as is possible, as if such portion had never been contained herein.

 

(c) Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware (without giving effect to its conflict of law principles) and the applicable provisions of the 1940 Act. To the extent that the applicable laws of the State
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    of Delaware, or any of the provisions herein, conflict with the applicable provisions of the 1940 Act, the latter shall control.

 

(d) Execution By Counterpart. This Agreement may be executed in any number of counterparts, all of which together shall constitute one agreement.

 

(e) Survival After Termination. The rights and obligations set forth in Sections 3, 5 and 8 shall survive the termination of this Agreement.

 

(f) Permissible Interests. Trustees, officers, agents and shareholders of the Trust are or may be interested in the Adviser (or any successor thereof) as directors, partners, officers, agents, shareholders or otherwise; directors, partners, officers, agents and shareholders of the Adviser are or may be interested in the Trust as Trustees, officers, agents, shareholders or otherwise; and the Adviser (or any successor thereof) is or may be interested in the Trust as a shareholder or otherwise.

 

(g) Entire Agreement. This Agreement contains the entire understanding and agreement of the parties.
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IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed as of the date first set forth above.

 

ETFS TRUST   ETF SECURITIES ADVISORS LLC
     
By:   /s/ Benoit Autier   By: /s/ Benoit Autier
  Name: Benoit Autier     Name: Benoit Autier
  Title: President     Title: Managing Director
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Schedule A

to the Investment Advisory Agreement

Dated as of December 2, 2014

between ETFS Trust

and ETF Securities Advisors LLC

 

Name of Series: Fee %
ETFS Zacks Earnings Large-Cap US Index Fund 0.65%
ETFS Zacks Earnings Small-Cap US Index Fund 0.65%
ETFS Diversified-Factor U.S. Large Cap Index Fund 0.39%
ETFS Diversified-Factor Developed Europe Index Fund 0.39%
A- 1

Exhibit 99.(d)(2)

SUB-ADVISORY AGREEMENT

 

SUB-ADVISORY AGREEMENT (the “Agreement”) made as of this 5th day of January 2015 by and between ETF Securities Advisors LLC, a Delaware limited liability company with its principal place of business at 48 Wall Street New York, NY 10005 (the “Adviser”), and Index Management Solutions LLC, a Pennsylvania limited liability company with its principal place of business at One Commerce Square, 2005 Market Street, Suite 2020, Philadelphia, PA 19103(the “Sub-Adviser”), with respect to each series of ETFS Trust, a statutory trust organized under the laws of the State of Delaware (the “Trust”), identified on Schedule A to this Agreement (each, a “Fund” and collectively, the “Funds”).

 

WITNESSETH

 

WHEREAS, the Adviser is principally engaged in the business of rendering investment management services and is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”); and

 

WHEREAS, the Sub-Adviser is principally engaged in the business of rendering investment management services and is registered as an investment adviser under the Advisers Act;

 

WHEREAS, the Adviser has entered into an Investment Advisory Agreement dated December 2, 2014 with the Trust, an investment company registered under the Investment Company Act of 1940, as amended (the “Investment Company Act” or “1940 Act”);

 

WHEREAS, the Investment Advisory Agreement contemplates that the Adviser may appoint one or more sub-advisers to manage the investment operations and composition of each Fund and render investment advice for each Fund; and

 

WHEREAS, the Board of Trustees of the Trust (the “Board” or the “Trustees”) and the Adviser desire to retain the Sub-Adviser to render investment advisory and other services to the Funds in the manner and on the terms hereinafter set forth;

 

WHEREAS, the Adviser has the authority under the Investment Advisory Agreement, subject to the approval of the Board, to select sub-advisers for each Fund; and

 

WHEREAS, the Sub-Adviser is willing to provide investment management services to the Funds on the terms and conditions hereinafter set forth;

 

NOW, THEREFORE, the parties hereto agree as follows:

 

 

1. Appointment of the Sub-Adviser

 

The Adviser hereby appoints the Sub-Adviser to act as sub-adviser for each Fund, subject to the supervision and oversight of the Adviser and the Board and in compliance with such policies as the Trustees may from time to time establish, for the period and in accordance with the terms and conditions set forth herein. The Sub-Adviser accepts such appointment and agrees to render the services and assume the obligations set forth herein for the compensation herein provided. The Sub-Adviser shall be deemed to be an independent contractor and shall, unless otherwise expressly provided for or authorized, have no authority to act for or represent the Adviser, the Trust or a Fund in any way or otherwise be deemed an agent of the Adviser, the Trust or a Fund.

 

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2. Duties of the Sub-Adviser. Subject to supervision and oversight of the Adviser and the Board of Trustees (the “Board”), and in accordance with the terms and conditions of the Agreement, the Sub-Adviser shall, with respect to all of the securities and other assets of the Funds (the “Assets”), perform certain of the day-to-day operations of the Funds, including the day-to-day trading, rebalancing and cash management of the Assets, in accordance with the Funds’ respective investment objectives, policies and restrictions as stated in each Fund’s prospectus and statement of additional information, as currently in effect and as amended or supplemented from time to time (referred to collectively as the “Prospectus”), and subject to the following:

 

(a) In the performance of its duties and obligations under this Agreement, the Sub-Adviser shall act in conformity with the Trust’s Declaration of Trust (as defined herein), as may be modified, amended or supplemented from time to time, the By-Laws of the Trust (as defined herein), as may be modified, amended or supplemented from time to time, the Prospectus of the Funds, the instructions and directions of the Adviser and of the Board, the terms and conditions of exemptive and no-action relief granted to the Trust as amended from time to time and the Trust’s policies and procedures and will conform to and comply in all material respects with the requirements of the 1940 Act, the Advisers Act, the Internal Revenue Code of 1986, as amended (the “Code”), and all other applicable federal and state laws and regulations, as each is amended from time to time.

 

(b) Unless responsibility for placing orders with respect to transactions in securities or other assets held or to be acquired by the Funds has been retained by the Adviser or delegated by the Adviser to another sub-adviser, the Sub-Adviser will place orders with respect to transactions in securities or other assets held or to be acquired by the Fund with or through such persons, brokers or dealers chosen by the Sub-Adviser to carry out the policy with respect to brokerage set forth in the Funds’ Prospectus or as the Board or the Adviser may direct in writing from time to time, in conformity with all federal securities laws and subject to the following:

 

(i) In executing Fund transactions and selecting brokers or dealers, the Sub-Adviser will use its best efforts to seek on behalf of each Fund the best overall terms available. In assessing the best overall terms available for any transaction, the Sub-Adviser shall consider all factors that it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission, if any, both for the specific transaction and on a continuing basis.

 

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(ii) The Sub-Adviser is not authorized to engage in “soft dollar” transactions on behalf of the Funds.

 

(iii) The Sub-Adviser is authorized to allocate purchase and sale orders for securities to brokers or dealers (including brokers and dealers that are affiliated with the Adviser, Sub-Adviser or the Trust’s principal underwriter) if the Sub-Adviser believes that the quality of the transaction and the commission are comparable to what they would be with other qualified firms. In no instance, however, will the Assets be purchased from or sold to the Adviser, Sub-Adviser, the Trust’s principal underwriter, or any affiliated person of either the Trust, Adviser, the Sub-Adviser or the principal underwriter, acting as principal in the transaction, except to the extent permitted by the Securities and Exchange Commission (“SEC”) and the 1940 Act.

 

(iv) When the Sub-Adviser deems the purchase or sale of a security to be in the best interest of the Funds as well as other clients of the Sub-Adviser, the Sub-Adviser may, to the extent permitted by applicable law and regulations, aggregate the order for securities to be sold or purchased. In such event, the Sub-Adviser will allocate securities so purchased or sold, as well as the expenses incurred in the transaction, in a manner the Sub-Adviser reasonably considers to be equitable and consistent with its fiduciary obligations to the Funds and to such other clients under the circumstances.

 

(v) The Adviser may enter into a sub-advisory agreement with another sub-adviser pursuant to which that sub-adviser shall be responsible for determining, from time to time, what Assets will be purchased, retained or sold by the Funds, and for providing the Sub-Adviser with such information concerning the securities or other assets to be purchased or sold on behalf of the Funds reasonably necessary to execute the transactions, including the identity of such security or asset, the number of shares or principal amount to be purchased or sold, and the timing of and restrictions, if any, on the purchase or sale. In the event that such sub-advisory agreement is terminated, or as otherwise determined by the Adviser, the Sub-Adviser may assume responsibility for determining the purchase, retention or selling of Assets by the Fund. However, during the term of such other sub-advisory agreement and, unless and until the Sub-Adviser agrees to assume responsibility for the determination of what Assets will be purchased, retained or sold by the Funds, the Sub-Adviser shall have no responsibility or liability for such services. The Sub-Adviser shall provide to the Adviser or any other sub-adviser of the Funds such information and reports regarding the Funds’ investments that the Adviser or such other sub-adviser deems appropriate or may reasonably request.

 

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(c) The Sub-Adviser shall maintain all books and records with respect to transactions involving the Assets required by subparagraphs (b)(1), (5), (6), (7), (8), (9) and (10) and paragraph (f) of Rule 31a-1 under the 1940 Act. The Sub-Adviser shall keep the books and records relating to the Assets required to be maintained by the Sub-Adviser under this Agreement and shall timely furnish to the Adviser all information relating to the Sub-Adviser’s services under this Agreement needed by the Adviser to keep the other books and records of the Fund required by Rule 31a-1 under the 1940 Act. The Sub-Adviser agrees that all records that it maintains on behalf of a Fund are property of the Fund and the Sub-Adviser will surrender promptly to the Fund any of such records upon the Fund’s request; provided, however, that the Sub-Adviser may retain a copy of such records. In addition, for the duration of this Agreement, the Sub-Adviser shall preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records as are required to be maintained by it pursuant to this Agreement, and shall transfer said records to any successor sub-adviser upon the termination of this Agreement (or, if there is no successor sub-adviser, to the Adviser).

 

(d) The Sub-Adviser shall provide the Fund’s custodian on each business day with information relating to all transactions concerning the Assets and shall provide the Adviser with such information upon request of the Adviser and shall otherwise cooperate with and provide reasonable assistance to the Adviser, the Trust’s administrator, the Fund’s custodian and foreign custodians, the Trust’s transfer agent and pricing agents and all other agents and representatives of the Trust.

 

(e) The Adviser acknowledges that the Sub-Adviser performs investment advisory services for various other clients in addition to the Funds and, to the extent it is consistent with applicable law and the Sub-Adviser’s fiduciary obligations, the Sub-Adviser may give advice and take action with respect to any of those other clients which may differ from the advice given or the timing or nature of action taken for a particular Fund.

 

(f) The Sub-Adviser shall promptly notify the Adviser of any financial condition that is reasonably and foreseeably likely to impair the Sub-Adviser’s ability to fulfill its commitment under this Agreement.

 

(g) The Sub-Adviser shall, unless and until otherwise directed by the Adviser or the Board and consistent with the best interests of each Fund, be responsible for exercising (or not exercising in its discretion) all rights of security holders with respect to securities held by each Fund, including but not limited to: reviewing proxy solicitation materials, voting and handling proxies and converting, tendering exchanging or redeeming securities.

 

(h) In performance of its duties and obligations under this Agreement, the Sub-Adviser shall not consult with any other sub-adviser to the Funds or a sub-adviser to a portfolio that is under common control with the Funds concerning the Assets, except as permitted by the policies and procedures of the Funds and subparagraph (b)(v) of this Section 1 . The Sub-Adviser shall not provide investment advice to any assets of the Funds other than the Assets.

 

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(i) The Sub-Adviser shall maintain books and records with respect to the Funds’ securities transactions and keep the Board and the Adviser fully informed on an ongoing basis as agreed by the Adviser and the Sub-Adviser of all material facts concerning the Sub-Adviser and its key investment personnel providing services with respect to the Funds and the investment and the reinvestment of the Assets of the Funds. The Sub-Adviser shall furnish to the Adviser or the Board such reasonably requested regular, periodic and special reports, balance sheets or financial information, and such other information with regard to its affairs as the Adviser or Board may reasonably request and the Sub-Adviser will attend meetings with the Adviser and/or the Trustees, as reasonably requested, to discuss the foregoing. Upon the request of the Adviser, the Sub-Adviser shall also furnish to the Adviser any other information relating to the Assets that is required to be filed by the Adviser or the Trust with the SEC or sent to shareholders under the 1940 Act (including the rules adopted thereunder) or any exemptive or other relief that the Adviser or the Trust obtains from the SEC.

 

(j) The Sub-Adviser shall, in accordance with procedures and methods established by the Board, which may be amended from time to time, and in conjunction with the Adviser, promptly notify the Adviser and the Trust’s administrator/fund accountant of securities in a Fund which the Sub-Adviser believes should be fair valued in accordance with the Trust’s Valuation Procedures. Such fair valuation may be required when the Sub-Adviser becomes aware of significant events that may affect the pricing of all or a portion of a Fund’s portfolio. The Sub-Adviser will provide reasonable assistance in determining the fair value of the Assets, as necessary, and use reasonable efforts to arrange for the provision of valuation information or a price(s) from a party(ies) independent of the Sub-Adviser for which market prices are not readily available, it being understood that the Sub-Adviser will not be responsible for determining the value of any such security.

2. Duties of the Adviser. The Adviser shall continue to have responsibility for all services to be provided to the Funds pursuant to the Advisory Agreement and shall oversee and review the Sub-Adviser’s performance of its duties under this Agreement; provided, however, that in connection with its management of the Assets, nothing herein shall be construed to relieve the Sub-Adviser of responsibility for compliance in all material respects with the Trust’s Declaration of Trust (as defined herein), the Prospectus, the instructions and directions of the Board, the requirements of the 1940 Act, the Code, and all other applicable federal and state laws and regulations, as each is amended from time to time.

 

3. Delivery of Documents. The Adviser has furnished the Sub-Adviser with copies of each of the following documents:

 

(a) The Trust's Agreement and Declaration of Trust, as filed with the Secretary of State of Delaware (such Agreement and Declaration of Trust, as in effect on the date of this Agreement and as amended from time to time, herein called the “Declaration of Trust”);

 

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(b) By-Laws of the Trust (such By-Laws, as in effect on the date of this Agreement and as amended from time to time, are herein called the “By-Laws”);

 

(c) Prospectus of the Funds;

 

(d) Resolutions of the Board approving the engagement of the Sub-Adviser as a sub-adviser to the Funds;

 

(e) Resolutions, policies and procedures adopted by the Board with respect to the Assets to the extent such resolutions, policies and procedures may affect the duties of the Sub-Adviser hereunder; and

 

(f) A list of the Trust’s principal underwriter and each affiliated person of the Adviser, the Trust or the principal underwriter.

 

The Adviser shall promptly furnish the Sub-Adviser from time to time with copies of all amendments of or supplements to the foregoing. Until so provided, the Sub-Adviser may continue to rely on those documents previously provided. The Adviser shall not, and shall not permit any of the Funds to use the Sub-Adviser’s name or make representations regarding Sub-Adviser or its affiliates without prior written consent of Sub-Adviser, such consent not to be unreasonably withheld. Notwithstanding the foregoing, the Sub-Adviser’s approval is not required when the information regarding the Sub-Adviser used by the Adviser or the Fund is limited to information disclosed in materials provided by the Sub-Adviser to the Adviser and the information is used (a) as required by applicable law, rule or regulation, in the Prospectus of the Fund or in Fund shareholder reports or proxy statements; or (b) as may be otherwise specifically approved in writing by the Sub-Adviser prior to use.

 

4. Compensation to the Sub-Adviser. For the services to be provided by the Sub-Adviser pursuant to this Agreement, the Adviser will pay the Sub-Adviser, and the Sub-Adviser agrees to accept as full compensation therefor, a sub-advisory fee at the rate specified in Schedule B which is attached hereto and made part of this Agreement. The fee will be calculated based on the average daily value of the Assets under the Sub-Adviser’s management and will be paid to the Sub-Adviser monthly. Except as may otherwise be prohibited by law or regulation (including any then current SEC staff interpretation), the Sub-Adviser may, in its sole discretion and from time to time, waive a portion of its fee.

 

In the event of termination of this Agreement, the fee provided in this Section shall be computed on the basis of the period ending on the last business day on which this Agreement is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month.

 

5. Expenses. The Sub-Adviser will furnish, at its expense, all necessary facilities and personnel, including salaries, expenses and fees of any personnel required for the Sub-Adviser to perform its duties under this Agreement and administrative facilities, including bookkeeping, and all equipment necessary for the efficient conduct of the Sub-Adviser’s duties under this Agreement. The Sub-Adviser may enter into an agreement with the Funds to limit the operating expenses of the Fund.

 

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6. Indemnification.

 

The Sub-Adviser shall indemnify and hold harmless the Adviser, the Trust, all affiliated persons thereof (within the meaning of Section 2(a)(3) of the Investment Company Act) and all controlling persons (as described in Section 15 of the Securities Act of 1933, as amended) from and against any and all claims, losses, liabilities or damages (including reasonable attorney’s fees and other related expenses) however arising from or in connection with the performance of the Sub-Adviser’s obligations under this Agreement; provided, however, that the Sub-Adviser’s obligation under this Section 6 shall be reduced to the extent that the claim against, or the loss, liability or damage experienced by the Adviser, is caused by or is otherwise directly related to the Adviser’s own willful misfeasance, bad faith or gross negligence, or to the reckless disregard of its duties under this Agreement.

 

The Adviser shall indemnify and hold harmless the Sub-Adviser from and against any and all claims, losses, liabilities or damages (including reasonable attorney’s fees and other related expenses) however arising from or in connection with the performance of the Adviser’s obligations under this Agreement; provided, however, that the Adviser’s obligation under this Section 6 shall be reduced to the extent that the claim against, or the loss, liability or damage experienced by the Sub-Adviser, is caused by or is otherwise directly related to the Sub-Adviser’s own willful misfeasance, bad faith or gross negligence, or to the reckless disregard of its duties under this Agreement.

 

7. Representations and Warranties of Sub-Adviser. The Sub-Adviser represents and warrants to the Adviser and the Funds as follows:

 

(a) The Sub-Adviser is registered as an investment adviser under the Advisers Act and will continue to be so registered so long as this Agreement remains in effect;

 

(b) The Sub-Adviser will immediately notify the Adviser of the occurrence of any event that would substantially impair the Sub-Adviser’s ability to fulfill its commitment under this Agreement or disqualify the Sub-Adviser from serving as an investment adviser of an investment company pursuant to Section 9(a) of the 1940 Act. The Sub-Adviser will also promptly notify the Funds and the Adviser if it is served or otherwise receives notice of any action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, government agency, self-regulatory organization, public board or body, involving the affairs of the Funds or the Sub-Adviser;

 

(c) The Sub-Adviser will notify the Adviser immediately upon detection of (a) any material failure to manage the Fund(s) in accordance with the Fund(s)’ stated investment objectives and policies or any applicable law, rule, or regulation; or (b) any material breach of any of the Fund(s)’ or the Sub-Adviser’s policies, guidelines or procedures;
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(d) The Sub-Adviser is fully authorized under all applicable law to enter into this Agreement and serve as Sub-Adviser to the Funds and to perform the services described under this Agreement;

 

(e) The Sub-Adviser is a limited liability company duly organized and validly existing under the laws of the commonwealth of Pennsylvania with the power to own and possess its assets and carry on its business as it is now being conducted;

 

(f) The execution, delivery and performance by the Sub-Adviser of this Agreement are within the Sub-Adviser’s powers and have been duly authorized by all necessary action on the part of its members, and no action by or in respect of, or filing with, any governmental body, agency or official is required on the part of the Sub-Adviser for the execution, delivery and performance by the Sub-Adviser of this Agreement, and the execution, delivery and performance by the Sub-Adviser of this Agreement do not contravene or constitute a default under (i) any provision of applicable law, rule or regulation, (ii) the Sub-Adviser’s governing instruments, or (iii) any agreement, judgment, injunction, order, decree or other instrument binding upon the Sub-Adviser;

 

(g) This Agreement is a valid and binding agreement of the Sub-Adviser;

 

(h) The Form ADV of the Sub-Adviser previously provided to the Adviser is a true and complete copy of the form filed with the SEC and the information contained therein is accurate and complete in all material respects as of its filing date, and does not omit to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading;

 

(i) The Sub-Adviser shall not divert any Fund’s portfolio securities transactions to a broker or dealer in consideration of such broker or dealer’s promotion or sales of shares of the Fund, any other series of the Trust, or any other registered investment company;

 

(j) The Sub-Adviser agrees to maintain an appropriate level of errors and omissions and professional liability insurance coverage.

 

8. Representations and Warranties of the Adviser. The Adviser represents and warrants to the Sub-Adviser and the Funds as follows:

 

(a) The Adviser is registered as an investment adviser under the Advisers Act and will continue to be so registered so long as this Agreement remains in effect;

 

(b) The Adviser will immediately notify the Sub-Adviser of the occurrence of any event that would substantially impair the Adviser’s ability to fulfill its commitment under this Agreement or disqualify the Adviser from serving as an investment adviser of an investment company pursuant to Section 9(a) of the 1940 Act. The Adviser will also promptly notify the Funds and the Sub-Adviser if it is served or otherwise receives notice of any action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, government agency, self-regulatory organization, public board or body, involving the affairs of the Funds or the Adviser;

 

8
 

(c) The Adviser will notify the Sub-Adviser immediately upon detection of any material breach of any of the Fund(s)’ or the Adviser’s policies, guidelines or procedures;
(d) The Adviser is fully authorized under all applicable law to enter into this Agreement and serve as Adviser to the Funds and to perform the services described under this Agreement;

 

(e) The Adviser is a limited liability company duly organized and validly existing under the laws of the state of Delaware with the power to own and possess its assets and carry on its business as it is now being conducted;

 

(f) The execution, delivery and performance by the Adviser of this Agreement are within the Adviser’s powers and have been duly authorized by all necessary action on the part of its members, and no action by or in respect of, or filing with, any governmental body, agency or official is required on the part of the Adviser for the execution, delivery and performance by the Adviser of this Agreement, and the execution, delivery and performance by the Adviser of this Agreement do not contravene or constitute a default under (i) any provision of applicable law, rule or regulation, (ii) the Adviser’s governing instruments, or (iii) any agreement, judgment, injunction, order, decree or other instrument binding upon the Adviser;

 

(g) This Agreement is a valid and binding agreement of the Adviser;

 

(h) The Form ADV of the Adviser previously provided to the Sub-Adviser is a true and complete copy of the form filed with the SEC and the information contained therein is accurate and complete in all material respects as of its filing date, and does not omit to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading;

 

(i) The Adviser shall not divert any Fund’s portfolio securities transactions to a broker or dealer in consideration of such broker or dealer’s promotion or sales of shares of the Fund, any other series of the Trust, or any other registered investment company;

 

(j) The Adviser agrees to maintain an appropriate level of errors and omissions and professional liability insurance coverage.

 

9
 

9. Duration and Termination.

 

(a) Duration . This Agreement shall become effective upon the date first above written, provided that this Agreement shall not take effect with respect to a Fund unless it has first been approved by a vote of a majority of those Trustees of the Trust who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval and by vote of a majority of the Fund’s outstanding securities. This Agreement shall continue in effect for a period of two years from the date hereof, subject thereafter to being continued in force and effect from year to year if specifically approved each year by the Board or by the vote of a majority of the Fund’s outstanding voting securities. In addition to the foregoing, each renewal of this Agreement must be approved by the vote of a majority of the Board who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. Prior to voting on the renewal of this Agreement, the Board may request and evaluate, and the Sub-Adviser shall furnish, such information as may reasonably be necessary to enable the Board to evaluate the terms of this Agreement.

 

(b) Termination . Notwithstanding whatever may be provided herein to the contrary, this Agreement may be terminated at any time, without payment of any penalty:

 

(i) By vote of a majority of the Board, or by vote of a majority of the outstanding voting securities of the Funds, or by the Adviser, in each case, upon sixty (60) days’ written notice to the Sub-Adviser;

 

(ii) By the Sub-Adviser upon sixty (60) days’ written notice to the Adviser and the Board.

 

This Agreement shall terminate automatically and immediately in the event of its assignment, or in the event of a termination of the Advisory Agreement with the Trust. As used in this Section 9 , the terms “assignment” and “vote of a majority of the outstanding voting securities” shall have the respective meanings set forth in the 1940 Act and the rules and regulations thereunder, subject to such exceptions as may be granted by the SEC under the 1940 Act.

 

10. Compliance Program of the Sub-Adviser. The Sub-Adviser hereby represents and warrants that:

 

(a) in accordance with Rule 206(4)-7 under the Advisers Act, the Sub-Adviser has adopted and implemented and will maintain written policies and procedures reasonably designed to prevent violation by the Sub-Adviser and its supervised persons (as such term is defined in the Advisers Act) of the Advisers Act and the rules the SEC has adopted under the Advisers Act; and

 

(b) to the extent that the Sub-Adviser’s activities or services could affect the Funds, the Sub-Adviser has adopted and implemented and will maintain written policies and procedures that the Trust’s chief compliance officer determines are reasonably designed to prevent violation of the “federal securities laws” (as such term is defined in Rule 38a-1 under the 1940 Act) by the Funds and the Sub-Adviser (the policies and procedures referred to in this Section 10(b) , along with the policies and procedures referred to in Section 10(a) , are referred to herein as the Sub-Adviser’s “Compliance Program”).

 

10
 

11. Confidentiality . Subject to the duty of the Adviser or Sub-Adviser to comply with applicable law, including any demand of any regulatory or taxing authority having jurisdiction, the parties hereto shall treat as confidential all non-public information pertaining to the Funds and the actions of the Sub-Adviser and the Funds in respect thereof. It is understood that any information or recommendation supplied by the Sub-Adviser in connection with the performance of its obligations hereunder is to be regarded as confidential and for use only by the Adviser, the Funds, the Board, or such persons as the Adviser may designate in connection with the Funds. It is also understood that any information supplied to the Sub-Adviser in connection with the performance of its obligations hereunder is to be regarded as confidential and for use only by the Sub-Adviser in connection with its obligation to provide investment advice and other services to the Funds. The Sub-Adviser shall maintain and enforce adequate security procedures with respect to all materials, records, documents and data relating to any of its responsibilities pursuant to this Agreement including all means for the effecting of investment transactions.

 

12. Reporting of Compliance Matters.

 

(a) The Sub-Adviser shall promptly provide to the Trust’s Chief Compliance Officer (“CCO”) the following documents:

 

(i) reasonable access, at the Sub-Adviser’s principal office or such other place as may be mutually agreed to by the parties, to all SEC examination correspondences, including correspondences regarding books and records examinations and “sweep” examinations, issued during the term of this Agreement, in which the SEC identified any concerns, issues or matters (such correspondences are commonly referred to as “deficiency letters”) relating to any aspect of the Sub-Adviser’s investment advisory business and the Sub-Adviser’s responses thereto; provided that the Sub-Adviser may redact from such correspondences client specific confidential information, material subject to the attorney-client privilege, and material non-public information, that the Sub-Adviser reasonably determines should not be disclosed to the Trust’s CCO;

 

(ii) a report of any material violations of the Sub-Adviser’s Compliance Program or any “material compliance matters” (as such term is defined in Rule 38a-1 under the 1940 Act) that have occurred with respect to the Sub-Adviser’s Compliance Program;

 

(iii) on a quarterly basis, a report of any material changes to the policies and procedures that compose the Sub-Adviser’s Compliance Program;

 

(iv) a copy of the Sub-Adviser’s chief compliance officer’s report (or similar document(s) which serve the same purpose) regarding his or her annual review of the Sub-Adviser’s Compliance Program, as required by Rule 206(4)-7 under the Advisers Act; and

11
 

 

(v) an annual (or more frequently as the Trust’s CCO may reasonably request) representation regarding the Sub-Adviser’s compliance with Section 7 and Section 10 of this Agreement.

 

(b) The Sub-Adviser shall also provide the Trust’s CCO with reasonable access, during normal business hours, to the Sub-Adviser’s facilities for the purpose of conducting pre-arranged on-site compliance related due diligence meetings with personnel of the Sub-Adviser.

 

13. Names.

 

(a) The Name “ETF Securities.” The Adviser grants to the Sub-Adviser a sublicense to use the name “ETF Securities” (the “Name”). The foregoing authorization by the Adviser to the Sub-Adviser to use the Name is not exclusive of the right of the Adviser itself to use, or to authorize others to use, the Name; the Sub-Adviser acknowledges and agrees that, as between the Sub-Adviser and the Adviser, the Adviser has the right to use, or authorize others to use, the Name. The Sub-Adviser shall only use the Name in a manner consistent with uses approved by the Adviser, which approval may be revoked by the Adviser upon reasonable notice. Notwithstanding the foregoing, neither the Sub-Adviser nor any affiliate or agent of it shall make reference to or use the Name or any of Adviser’s respective affiliates or clients names without the prior approval of Adviser, which approval shall not be unreasonably withheld or delayed. The Sub-Adviser hereby agrees to make all reasonable efforts to cause any affiliate or agent of the Sub-Adviser to satisfy the foregoing obligation. Upon termination of this Agreement, the Sub-Adviser agrees to cease use of the Name and to remove all uses of and references to the Name as soon as reasonably practicable.

 

(b) The Name “Index Management Solutions.” The Sub-Adviser grants to the Adviser a sublicense to use the name “Index Management Solutions” (the “Name”). The foregoing authorization by the Sub-Adviser to the Adviser to use the Name is not exclusive of the right of the Sub-Adviser itself to use, or to authorize others to use, the Name; the Adviser acknowledges and agrees that, as between the Sub-Adviser and the Adviser, the Sub-Adviser has the right to use, or authorize others to use, the Name. The Adviser shall (1) only use the Name in a manner consistent with uses approved by the Sub-Adviser. Notwithstanding the foregoing, neither the Adviser nor any affiliate or agent of it shall make reference to or use the Name or any of Sub-Adviser’s respective affiliates or clients names without the prior approval of Sub-Adviser, which approval shall not be unreasonably withheld or delayed. The Adviser hereby agrees to make all reasonable efforts to cause any affiliate or agent of the Adviser to satisfy the foregoing obligation.

12
 

 

14. Governing Law. This Agreement shall be governed by the internal laws of the State of Delaware, without regard to conflict of law principles; provided, however, that nothing herein shall be construed as being inconsistent with the 1940 Act.

 

15. Severability. Should any part of this Agreement be held invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors.

 

16. Notice. Any notice, advice or report to be given pursuant to this Agreement shall be deemed sufficient if delivered or mailed by registered, certified or overnight mail, postage prepaid addressed by the party giving notice to the other party at the last address furnished by the other party:

 

To the Adviser at:

ETF Securities Advisors LLC

48 Wall Street

New York, NY 10005

Attention: Benoit Autier

To the Trust’s CCO at:

ETFS Trust

c/o ETF Securities Advisors LLC

48 Wall Street

New York, NY 10005

Attention: Adam Rezak

To the Sub-Adviser at:

Index Management Solutions LLC

One Commerce Square

2005 Market Street, Suite 2020

Philadelphia, PA 19103

Attention: Michael J. Gompers

 

17. Amendment of Agreement. This Agreement may be amended only by written agreement of the Adviser and the Sub-Adviser and only in accordance with the provisions of the 1940 Act and the rules and regulations promulgated thereunder.

 

18. Entire Agreement. This Agreement embodies the entire agreement and understanding between the parties hereto, and supersedes all prior agreements and understandings relating to this Agreement’s subject matter. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument.

13
 

 

19. Interpretation. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the 1940 Act will be resolved by reference to such term or provision of the 1940 Act and to interpretations thereof, if any, by the United States courts or, in the absence of any controlling decision of any such court, by rules, regulations or orders of the SEC validly issued pursuant to the 1940 Act. Specifically, the terms “vote of a majority of the outstanding voting securities,” “interested persons,” “assignment,” and “affiliated persons,” as used herein will have the meanings assigned to them by Section 2(a) of the 1940 Act. In addition, where the effect of a requirement of the 1940 Act reflected in any provision of this Agreement is relaxed by a rule, regulation or order of the SEC, whether of special or of general application, such provision will be deemed to incorporate the effect of such rule, regulation or order.

 

20. Headings. The headings in the sections of this Agreement are inserted for convenience of reference only and will not constitute a part hereof.

 

In the event the terms of this Agreement are applicable to more than one Fund of the Trust, the Adviser is entering into this Agreement with the Sub-Adviser on behalf of the respective Funds severally and not jointly, with the express intention that the provisions contained in each numbered paragraph hereof shall be understood as applying separately with respect to each Fund as if contained in separate agreements between the Adviser and Sub-Adviser for each such Fund. In the event that this Agreement is made applicable to any additional Funds by way of a Schedule executed subsequent to the date first indicated above, provisions of such Schedule shall be deemed to be incorporated into this Agreement as it relates to such Fund so that, for example, the execution date for purposes of Section 9 of this Agreement with respect to such Fund shall be the execution date of the relevant Schedule.

 

21. Miscellaneous.

 

(a) A copy of the Certificate of Trust is on file with the Secretary of State of Delaware, and notice is hereby given that the obligations of this instrument are not binding upon any of the Trustees, officers or shareholders of the Fund or the Trust.

 

(b) Where the effect of a requirement of the 1940 Act or Advisers Act reflected in any provision of this Agreement is altered by a rule, regulation or order of the SEC, whether of special or general application, such provision shall be deemed to incorporate the effect of such rule, regulation or order.

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below as of the day and year first written above.

 

ADVISER: SUB-ADVISER:
ETF Securities Advisors LLC Index Management Solutions LLC
 

 

 

 

By:   /s/ Benoit Autier By: /s/ Michael J. Gompers
   
Name: Benoit Autier Name: Michael J. Gompers
   
Title: Chief Executive Officer Title:  CEO/COO

 

14
 

 

Schedule A

to the

Sub-Advisory Agreement

Dated as of 5 th January, 2015 between

ETF Securities Advisors LLC

and

Index Management Solutions LLC

 

 

 

ETFS Trust

 

ETFS Zacks Earnings Large-Cap US Index Fund

ETFS Zacks Earnings Small-Cap US Index Fund

ETFS Diversified-Factor Large Cap US Index Fund

ETFS Diversified-Factor Developed Europe Index Fund

 

 

Agreed and Accepted:

 

ADVISER: SUB-ADVISER:

 

ETF Securities Advisors LLC Index Management Solutions LLC
 

 

 

 

By:   /s/ Benoit Autier By: /s/ Michael J. Gompers
   
Name: Benoit Autier Name: Michael J. Gompers
   
Title: Chief Executive Officer Title:  CEO/COO

 

 

 

B- 1
 

 

Schedule B

to the

Sub-Advisory Agreement

Dated as of 5 th January, 2015 between

ETF Securities Advisors LLC and

Index Management Solutions LLC

 

A. Sub-Advisory Fee . Pursuant to Section 4, the Adviser shall pay the Sub-Adviser compensation at an annual rate based on a percentage of the average daily net assets of each Fund as follows:

 

Fund Fee

ETFS Zacks Earnings Large-Cap US Index

Fund

AUM<$100m 0.05%  
$100m<=AUM<$300m 0.04%  
AUM>= $300m 0.03%  

ETFS Zacks Earnings Small-Cap US Index

Fund

AUM<$100m 0.05%  
$100m<=AUM<$300m 0.04%  
AUM>= $300m 0.03%  
ETFS Diversified-Factor U.S. Large-Cap Index Fund AUM<$100m 0.05%  
$100m<=AUM<$300m 0.04%  
AUM>= $300m 0.03%  
ETFS Diversified-Factor Developed Europe Index Fund AUM<$100m 0.05%  
$100m<=AUM<$300m 0.04%  
AUM>= $300m 0.03%  

 

 

Agreed and Accepted: 

ADVISER: SUB-ADVISER:
   
ETF Securities Advisors LLC Index Management Solutions LLC
 

 

 

 

By:   /s/ Benoit Autier By: /s/ Michael J. Gompers
   
Name: Benoit Autier Name: Michael J. Gompers
   
Title: Chief Executive Officer Title:  CEO/COO

 

 

 

B- 2

Exhibit 99(e)(1)

 

DISTRIBUTION AGREEMENT

 

THIS AGREEMENT is made as of December 22, 2014, between ETFS Trust, a Delaware statutory trust (the “Fund”), and ALPS Distributors, Inc., a Colorado corporation (“ALPS”).

 

WHEREAS, the Fund is an open-end investment company offering a number of portfolios of securities, each investing primarily in equity securities selected to reflect the performance of a particular market index, having filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form N-1A under the Securities Act of 1933, as amended (the “1933 Act”), and the Investment Company Act of 1940, as amended (the “1940 Act”);

 

WHEREAS, ALPS is registered as a broker-dealer under the Securities Exchange Act of 1934 (the “1934 Act”) and a member of the Financial Industry Regulatory Authority (“FINRA”);

 

WHEREAS, the Fund intends to create and redeem shares of beneficial interest, par value $.001 per Share (the “Shares”) of each portfolio on a continuous basis at their net asset value only in aggregations constituting a Creation Unit, as such term is defined in the registration statement;

 

WHEREAS, the Shares of each portfolio will be listed on the NYSE Arca (“Arca”) and traded under the symbols set forth in Appendix A hereto;

 

WHEREAS, the Fund desires to retain ALPS to act as the distributor with respect to the issuance and distribution of Creation Units of Shares of each portfolio, hold itself available to receive and process orders for such Creation Units in the manner set forth in the Fund’s prospectus, and to enter into arrangements with broker-dealers who may solicit purchases of Shares and with broker-dealers and others to provide for servicing of shareholder accounts and for distribution assistance, including broker-dealer and shareholder support; and

 

WHEREAS, ALPS desires to provide the services described herein to the Fund.

 

NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties agree as follows.

 

1. ALPS Appointment and Duties.

 

(a) The Fund hereby appoints ALPS as the exclusive distributor for Creation Unit aggregations of Shares of each portfolio listed in Appendix A hereto, as may be amended from time to time, and to perform the duties that are set forth in Appendix B hereto as amended from time to time, upon the terms and conditions hereinafter set forth. ALPS hereby accepts such appointment and agrees to furnish such specified services. ALPS shall for all purposes be deemed to be an independent contractor and
 
shall, except as otherwise expressly authorized in this Agreement, have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund.

 

(b) ALPS may employ or associate itself with a person or persons or organizations as ALPS believes to be desirable in the performance of its duties hereunder; provided that, in such event, the compensation of such person or persons or organizations shall be paid by and be the sole responsibility of ALPS, and the Fund shall bear no cost or obligation with respect thereto; and provided further that ALPS shall not be relieved of any of its obligations under this Agreement in such event and shall be responsible for all acts of any such person or persons or organizations taken in furtherance of this Agreement to the same extent it would be for its own acts.

 

2. ALPS Compensation; Expenses .

 

(a) ALPS will bear all expenses in connection with the performance of its services under this Agreement, except as otherwise provided herein. ALPS will not bear any of the costs of Fund personnel. Other Fund expenses incurred shall be borne by the Fund or the Fund’s investment adviser, including, but not limited to, initial organization and offering expenses; the blue sky registration and qualification of Shares for sale in the various states in which the officers of the Fund shall determine it advisable to qualify such Shares for sale (including registering the Fund as a broker or dealer or any officer of the Fund as agent or salesman in any state); litigation expenses; taxes; costs of preferred shares; expenses of conducting repurchase offers for the purpose of repurchasing Fund shares; administration, transfer agency, and custodial expenses; interest; Fund directors’ or trustees’ fees; brokerage fees and commissions; state and federal registration fees; advisory fees; insurance premiums; fidelity bond premiums; Fund and investment advisory related legal expenses; costs of maintenance of Fund existence; printing and delivery of materials in connection with meetings of the Fund’s directors or trustees; printing and mailing of shareholder reports, prospectuses, statements of additional information, other offering documents and supplements, proxy materials, and other communications to shareholders; securities pricing data and expenses in connection with electronic filings with the Securities and Exchange Commission (the “SEC”).

 

3. Documents . The Fund has furnished or will furnish, upon request, ALPS with copies of the Fund’s Declaration of Trust, advisory agreement, custodian agreement, transfer agency agreement, administration agreement, current prospectus, statement of additional information, periodic Fund reports, and all forms relating to any plan, program or service offered by the Fund. The Fund shall furnish, within a reasonable time period, to ALPS a copy of any amendment or supplement to any of the above-mentioned documents. Upon request, the Fund shall furnish promptly to ALPS any additional documents necessary or advisable to perform its functions hereunder. As used in this Agreement the terms “registration statement,” “prospectus” and “statement of additional information” shall mean any registration statement, prospectus and statement of additional information filed
2
by the Fund with the SEC and any amendments and supplements thereto that are filed with the SEC.

 

4. Insurance . ALPS agrees to maintain fidelity bond and liability insurance coverages which are, in scope and amount, consistent with coverages customary for distribution activities relating to the Fund. ALPS shall notify the Fund upon receipt of any notice of material, adverse change in the terms or provisions of its insurance coverage. Such notification shall include the date of change and the reason or reasons therefore. ALPS shall notify the Fund of any material claims against it, whether or not covered by insurance, and shall notify the Fund from time to time as may be appropriate of the total outstanding claims made by it under its insurance coverage.

 

5. Right to Receive Advice .

 

(a) Advice of the Fund and Service Providers . If ALPS is in doubt as to any action it should or should not take, ALPS may request directions, advice, or instructions from the Fund or, as applicable, the Fund’s investment adviser, custodian, or other service providers.

 

(b) Advice of Counsel . If ALPS is in doubt as to any question of law pertaining to any action it should or should not take, ALPS may request advice from counsel of its own choosing (who may be counsel for the Fund, the Fund’s investment adviser, or ALPS, at the option of ALPS).

 

(c) Conflicting Advice . In the event of a conflict between directions, advice or instructions ALPS receives from the Fund or any service provider and the advice ALPS receives from counsel, ALPS may in its sole discretion rely upon and follow the advice of counsel. ALPS will provide the Fund with prior written notice of its intent to follow advice of counsel that is materially inconsistent with directions, advice or instructions from the Fund. Upon request, ALPS will provide the Fund with a copy of such advice of counsel.

 

6. Standard of Care; Limitation of Liability; Indemnification .

 

(a) ALPS shall be obligated to act in good faith and to exercise commercially reasonable care and diligence in the performance of its duties under this Agreement.

 

(b) In the absence of willful misfeasance, bad faith, negligence, or reckless disregard by ALPS in the performance of its duties, obligations, or responsibilities set forth in this Agreement, ALPS and its affiliates, including their respective officers, directors, and employees, shall not be liable for, and the Fund agrees to indemnify, defend and hold harmless such persons from, all taxes, charges, expenses, assessments, claims, and liabilities (including, without limitation, reasonable attorneys’ fees and disbursements and liabilities arising under applicable federal and state laws) arising directly from the following:
3
(i) the inaccuracy of factual information furnished to ALPS by the Fund or the Fund’s investment adviser, custodians, or other service providers;

 

(ii) any untrue statement of a material fact or omission of a material fact required to be stated or necessary in order to make the statements not misleading under the 1933 Act, the 1940 Act, or any other statute or the common law, in any registration statement, prospectus, statement of additional information, shareholder report, or other information filed or made public by the Fund (as amended from time to time), except to the extent the statement or omission was made in reliance upon, and in conformity with, information furnished to the Fund by or on behalf of ALPS;

 

(iii) any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which this Agreement relates;

 

(iv) ALPS’ reliance on any instruction, direction, notice, instrument or other information that ALPS reasonably believes to be genuine; or

 

(v) loss of data or service interruptions caused by equipment failure.

 

(c) ALPS shall indemnify and hold harmless the Fund, the Fund’s investment adviser and their respective officers, directors, agents, and employees from and against any and all taxes, charges, expenses, assessments, claims, and liabilities (including, without limitation, reasonable attorneys’ fees and disbursements and liabilities arising under applicable federal and state laws) arising directly from ALPS’ willful misfeasance, bad faith, negligence, or reckless disregard in the performance of its duties, obligations, or responsibilities set forth in this Agreement.

 

(d) Notwithstanding anything in this Agreement to the contrary, neither party shall be liable under this Agreement to the other party hereto for any punitive, consequential, special or indirect losses or damages. Any indemnification payable by a party to this Agreement shall be net of insurance maintained by the indemnified party as of the time the claim giving rise to indemnity hereunder is alleged to have arisen to the extent it covers such claim.

 

7. Activities of ALPS . The services of ALPS under this Agreement are not to be deemed exclusive, and ALPS shall be free to render similar services to others. The Fund recognizes that from time to time directors, officers and employees of ALPS may serve as directors, officers and employees of other corporations or businesses (including other investment companies) and that such other corporations and businesses may include ALPS as part of their name and that ALPS or its affiliates may enter into distribution agreements or other agreements with such other corporations and businesses.

 

8. Accounts and Records . The accounts and records maintained by ALPS shall be the property of the Fund. ALPS shall prepare, maintain and preserve such accounts and records as required by the 1940 Act and other applicable securities laws, rules and
4
regulations. ALPS shall surrender such accounts and records to the Fund , in the form in which such accounts and records have been maintained or preserved , promptly upon receipt of instructions from the Fund. The Fund shall have access to such accounts and records at all times during ALPS’ normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by ALPS to the Fund at the Fund’s expense. ALPS shall assist the Fund, the Fund’s independent auditors, or, upon approval of the Fund, any regulatory body, in any requested review of the Fund’s accounts and records, and reports by ALPS or its independent accountants concerning its accounting system and internal auditing controls will be open to such entities for audit or inspection upon reasonable request. ALPS or its undersigned as defined by Rule 17a-4 of the Securities and Exchange Act (the “Exchange Act”), shall have access to all electronic communications, including password access to the system storing the electronic communications, of registered representatives of ALPS that are associated with the Fund and are required to be maintained under Rule 17a-4 of the Exchange Act and FINRA Rules 3110 and 3010. Electronic storage media maintained by the Fund will comply with Rule 17a-4 of the Exchange Act.

 

9. Confidential and Proprietary Information . ALPS agrees that it will, on behalf of itself and its officers and employees, treat all transactions contemplated by this Agreement, and all records and information relative to the Fund and its current and former shareholders and other information germane thereto, as confidential and as proprietary information of the Fund and not to use, sell, transfer, or divulge such information or records to any person for any purpose other than performance of its duties hereunder, except after prior notification to and approval in writing from the Fund, which approval shall not be unreasonably withheld. Approval may not be withheld where ALPS may be exposed to civil, regulatory, or criminal proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when requested by the Fund. When requested to divulge such information by duly constituted authorities, ALPS shall use reasonable commercial efforts to request confidential treatment of such information. ALPS shall have in place and maintain physical, electronic, and procedural safeguards reasonably designed to protect the security, confidentiality, and integrity of, and to prevent unauthorized access to or use of records and information relating to the Fund and its current and former shareholders.

 

10. Compliance with Rules and Regulations . ALPS shall comply (and to the extent ALPS takes or is required to take action on behalf of the Fund hereunder shall cause the Fund to comply) with all applicable requirements of the 1940 Act and other applicable laws, rules, regulations, orders and code of ethics, as well as all investment restrictions, policies and procedures adopted by the Fund of which ALPS has knowledge (it being understood that ALPS is deemed to have knowledge of all investment restrictions, policies or procedures set out in the Fund’s public filings or otherwise provided to ALPS). Except as set out in this Agreement, ALPS assumes no responsibility for such compliance by the Fund. ALPS shall maintain at all times a program reasonably designed to prevent violations of the federal securities laws (as defined in Rule 38a-1 under the 1940 Act) with respect to the services provided, and shall provide to the Fund a certification to such effect no less than annually or as otherwise reasonably requested by the Fund. ALPS shall make available its
5
compliance personnel and shall provide at its own expense summaries and other relevant materials relating to such program as reasonably requested by the Fund.

 

11. Representations and Warranties of ALPS . ALPS represents and warrants to the Fund that:

 

(a) It is duly organized and existing as a corporation and in good standing under the laws of the State of Colorado.

 

(b) It is empowered under applicable laws and by its Articles of Incorporation and By-laws to enter into and perform this Agreement.

 

(c) All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement.

 

(d) It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement in accordance with industry standards.

 

(e) ALPS has conducted a review of its supervisory controls system and has made available to the Fund the most current report of such review and any updates thereto. Every time ALPS conducts a review of its supervisory control system it will make available to the Fund for inspection a report of such review and any updates thereto. ALPS shall immediately notify the Fund of any changes in how it conducts its business that would materially change the results of its most recent review of its supervisory controls system and any other changes to ALPS’ business that would affect the business of the Fund or the Fund’s investment adviser.

 

12. Representations and Warranties of the Fund. The Fund represents and warrants to ALPS that:

 

(a) It is a trust duly organized and existing and in good standing under the laws of the state of Delaware and is registered with the SEC as an open-end management investment company.

 

(b) It is empowered under applicable laws and by its Declaration of Trust and By-laws to enter into and perform this Agreement.

 

(c) The Board of Trustees of the Fund has duly authorized it to enter into and perform this Agreement.

 

(d) Notwithstanding anything in this Agreement to the contrary, the Fund agrees not to make any modifications to its registration statement or adopt any policies which would affect materially the obligations or responsibilities of ALPS hereunder without the prior written approval or ALPS, which approval shall not be unreasonably withheld or delayed.
6
13. Duties of the Fund .

 

(a) ALPS and the Fund shall regularly consult with each other regarding ALPS’ performance of its obligations under this Agreement. In connection therewith, the Fund shall submit to ALPS at a reasonable time in advance of filing with the SEC reasonably final copies of any amended or supplemented registration statement (including exhibits) under the 1933 Act and the 1940 Act; provided, however, that nothing contained in this Agreement shall in any way limit the Fund’s right to file at any time such amendments to any registration statement and/or supplements to any prospectus or statement of additional information, of whatever character, as the Fund may deem advisable, such right being in all respects absolute and unconditional.

 

(b) The Fund agrees to issue Creation Unit aggregations of Shares of the Fund and to request The Depository Trust Company to record on its books the ownership of such Shares in accordance with the book-entry system procedures described in the prospectus in such amounts as ALPS has requested through the transfer agent in writing or other means of data transmission, as promptly as practicable after receipt by the Fund of the requisite deposit securities and cash component (together with any fees) and acceptance of such order, upon the terms described in the Registration Statement. The Fund may reject any order for Creation Units or stop all receipts of such orders at any time upon reasonable notice to ALPS, in accordance with the provisions of the Prospectus.

 

(c) The Fund agrees that it will take all action necessary to register an indefinite number of Shares under the 1933 Act. The Fund shall make available to ALPS, at ALPS’ expense, such number of copies of its prospectus, statement of additional information, and periodic reports as ALPS may reasonably request. The Fund will furnish to ALPS copies of all information, financial statements and other papers, which ALPS may reasonably request for use in connection with the distribution of Creation Units.

 

(d) The Fund agrees to execute any and all documents and to furnish any and all information and otherwise to take all actions that may be reasonably necessary in connection with the qualification of the Shares for sale in such states as ALPS may designate. The Fund will keep ALPS informed of the jurisdictions in which Creation Units of the Fund are authorized for sale and shall promptly notify ALPS of any change in this information.

 

14. Anti-Money Laundering . ALPS agrees to maintain an anti-money laundering program in compliance with Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) and all applicable laws and regulations promulgated thereunder. ALPS confirms that, as soon as possible, following the request from the Fund, ALPS will supply the Fund with copies of ALPS’ anti-money laundering policy and procedures, and such other relevant certifications and representations regarding such policy and procedures as
7
the Fund may reasonably request from time to time. ALPS will provide, to the Fund, any Financial Crimes Enforcement Network (FinCEN) request received pursuant to USA Patriot Act Section 314(a), which the Fund may then provide to its transfer agent.

 

15. Liaison with Accountants . ALPS shall act as a liaison with the Fund’s independent public accountants and shall provide account analysis, fiscal year summaries, and other audit-related schedules with respect to the services provided to the Fund. ALPS shall take all reasonable action in the performance of its duties under this Agreement to assure that the necessary information is made available to such accountants as reasonably requested or required by the Fund.

 

16. Business Interruption Plan . ALPS shall maintain in effect a business interruption plan, and enter into any agreements necessary with appropriate parties making reasonable provisions for emergency use of electronic data processing equipment customary in the industry. In the event of equipment failures, ALPS shall, at no additional expense to the Fund, take commercially reasonable steps to minimize service interruptions.

 

17. Duration and Termination of this Agreement .

 

(a) Initial Term . This Agreement shall become effective as of the date first written above (the “Start Date”) and shall continue thereafter throughout the period that ends two (2) years after the Start Date (the “Initial Term”).

 

(b) Renewal Term . If not sooner terminated pursuant to subsection (c) of this Section 17, this Agreement shall renew at the end of the Initial Term and shall thereafter continue for successive annual periods, provided such continuance is specifically approved at least annually (i) by the Fund’s Board of Trustees or (ii) by a vote of a majority of the outstanding voting securities of the relevant portfolio of the Fund, provided that in either event the continuance is also approved by the majority of the Trustees of the Fund who are not interested persons (as defined in the 1940 Act) of any party to this Agreement by vote cast in person at a meeting called for the purpose of voting on such approval. If a plan under Rule 12b-1 of the 1940 Act is in effect, continuance of the plan and this Agreement must be approved at least annually by a majority of the Trustees of the Fund who are not interested persons (as defined in the 1940 Act) and have no financial interest in the operation of such plan or in any agreements related to such plan, cast in person at a meeting called for the purpose of voting on such approval.

 

(c) This Agreement is terminable at any time without penalty on sixty (60) days’ written notice by the Fund’s Board of Trustees, by vote of the holders of a majority of the outstanding voting securities of the relevant portfolio, or by ALPS.

 

(d) Deliveries Upon Termination . Upon termination of this Agreement, ALPS agrees to cooperate in the orderly transfer of distribution duties and shall deliver to the Fund or as otherwise directed by the Fund (at the expense of the Fund) all records and other documents made or accumulated in the performance of its duties for the Fund
8
  hereunder. In the event ALPS gives notice of termination under this Agreement, it will continue to provide the services contemplated hereunder after such termination at the contractual rate for up to 120 days, provided that the Fund uses all reasonable commercial efforts to appoint such replacement on a timely basis.

 

18. Assignment . This Agreement will automatically terminate in the event of its assignment (as defined in the 1940 Act); provided, however, that the Fund may assign this Agreement upon obtaining the prior written consent of ALPS.

 

19. Governing Law . The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of Colorado and the 1940 Act and the rules thereunder. To the extent that the laws of the State of Colorado conflict with the 1940 Act or such rules, the latter shall control.

 

20. Names . The obligations of the Fund entered into in the name or on behalf thereof by any director, shareholder, representative, or agent thereof are made not individually, but in such capacities, and are not binding upon any of the directors, shareholders, representatives or agents of the Fund personally, but bind only the property of the Fund, and all persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund.

 

21. Amendments to this Agreement . This Agreement may only be amended by the parties in writing.

 

22. Notices . All notices and other communications hereunder shall be in writing, shall be deemed to have been given when received or when sent by telex or facsimile, and shall be given to the following addresses (or such other addresses as to which notice is given):

 

 

To ALPS:

 

ALPS Distributors, Inc.

1290 Broadway, Suite 1100

Denver, Colorado 80203

Attn: General Counsel

Fax: (303) 623-7850

 

To the Fund:

 

ETFS Trust

c/o ETF Securities Advisors LLC

48 Wall Street

New York, NY 10005

 

Attn: Adam Rezak

Fax: (212) 918-4801

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23. Counterparts . This Agreement may be executed by the parties hereto on any number of counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument.

 

24. Entire Agreement . This Agreement embodies the entire agreement and understanding among the parties and supersedes all prior agreements and understandings relating to the subject matter hereof; provided, however, that ALPS may embody in one or more separate documents its agreement, if any, with respect to delegated duties and oral instructions.

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

 

  ETFS TRUST
     
  By: /s/ Benoit Autier
  Name:  Benoit Autier
  Title: President
     
  ALPS DISTRIBUTORS, INC.
     
  By: /s/ Jeremy O. May
  Name: Jeremy O. May
  Title President
10

APPENDIX A

 

LIST OF PORTFOLIOS

 

ETFS Zacks Earnings Large-Cap U.S. Index Fund

 

ETFS Zacks Earnings Small-Cap U.S. Index Fund

 

ETFS Diversified-Factor Large Cap US Index Fund

 

ETFS Diversified-Factor Developed Europe Index Fund

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APPENDIX B

 

SERVICES

 

(a) The Fund grants to ALPS the exclusive right to receive all orders for purchases of Creation Units of each portfolio from participating parties (“Authorized Participants”) which have entered into a participant agreement with ALPS and the transfer agent in accordance with the registration statement (“Participant Agreements”) and to transmit such orders to the Fund in accordance with the registration statement; provided, however, that nothing herein shall affect or limit the right and ability of the Fund to accept deposit securities and related cash components through or outside the clearing process, and as provided in and in accordance with the registration statement. The Fund acknowledges that ALPS shall not be obligated to accept any certain number of orders for Creation Units.

 

(b) ALPS agrees to act as agent of the Fund with respect to the continuous distribution of Creation Units of the Fund as set forth in the registration statement and in accordance with the provisions thereof. ALPS further agrees as follows: (a) ALPS shall enter into Participant Agreements among Authorized Participants, ALPS, and the transfer agent in accordance with the registration statement; (b) ALPS shall generate and transmit confirmations of Creation Unit purchase order acceptances to the purchaser; (c) ALPS shall deliver copies of the prospectus to purchasers of such Creation Units and upon request the statement of additional information; and (d) ALPS shall maintain telephonic, facsimile and/or access to direct computer communications links with the transfer agent.

 

(c) (i) ALPS agrees to use all reasonable efforts, consistent with its other business, to facilitate the purchase of Creation Units through Authorized Participants in accordance with the procedures set forth in the prospectus and the Participant Agreements.

 

(ii) ALPS shall, at its own expense, execute selected or soliciting dealer agreements with registered broker-dealers and other eligible entities providing for the purchase of Creation Units of Shares of the Fund and related promotional activities, in the forms as approved by the Board of Directors or Trustees of the Fund. The Fund shall not furnish or cause to be furnished to any person or display or publish any information or materials relating to the Fund (including, without limitation, promotional materials and sales literature, advertisements, press releases, announcements, statements, posters, signs or other similar material), except such information and materials that have been approved in writing by ALPS. Furthermore, ALPS shall clear and file all advertising, sales, marketing and promotional materials of the Funds with FINRA.

 

(d) ALPS agrees to administer the Fund’s distribution plan on behalf of the Fund. ALPS shall, at its own expense, set up and maintain a system of recording and payments for fees and reimbursement of expenses disseminated pursuant to this Agreement and any other related agreements under the Fund’s Rule 12b-1 Plans and shall, pursuant to the 1940 Act, report such

12

payment activity under the Distribution Plan to the Fund at least quarterly.

 

(e) All activities by ALPS and its agents and employees which are primarily intended to result in the sale of Creation Units shall comply with the registration statement, the instructions of the Board of Directors or Trustees of the Fund and all applicable laws, rules and regulations including, without limitation, all rules and regulations made or adopted pursuant to the 1940 Act by the SEC or any securities association registered under the 1934 Act, including FINRA and the Arca.

 

(g) Except as otherwise noted in the registration statement, the offering price for all Creation Units of Shares will be the aggregate net asset value of the Shares per Creation Unit of the portfolio, as determined in the manner described in the registration statement.

 

(h) If and whenever the determination of net asset value is suspended and until such suspension is terminated, no further orders for Creation Units will be processed by ALPS except such unconditional orders as may have been placed with ALPS before it had knowledge of the suspension. In addition, the Fund reserves the right to suspend sales and ALPS’ authority to process orders for Creation Units on behalf of the Fund, upon due notice to ALPS, if, in the judgment of the Fund, it is in the best interests of the Fund to do so. Suspension will continue for such period as may be determined by the Fund.

 

(i) ALPS is not authorized by the Fund to give any information or to make any representations other than those contained in the registration statement or prospectus or contained in shareholder reports or other material that may be prepared by or on behalf of the Fund for ALPS’ use.

 

(j) The Board of Directors or Trustees shall approve the form of any Soliciting Dealer Agreement to be entered into by ALPS.

 

(k) At the request of the Fund, ALPS shall enter into agreements, in the form specified by the Fund, with participants in the system for book-entry of The Depository Trust Company and the NSCC as described in the prospectus.

 

(l) ALPS shall ensure that all direct requests for prospectuses, statements of additional of information and periodic fund reports, as applicable, are fulfilled. In addition, ALPS shall arrange to provide Arca (and any other national stock exchange on which the Shares may be listed) with copies of prospectuses to be provided to purchasers in the secondary market. ALPS will generally make it known in the brokerage community that prospectuses and statements of additional information are available, including by (i) advising the Arca on behalf of its member firms of the same, (ii) making such disclosure in all marketing and advertising materials prepared and/or filed by ALPS with FINRA, and (iii) as may otherwise be required by the SEC.

 

(m) ALPS agrees to make available, at the Fund’s request, one or more members of its staff to attend Board meetings of the Fund in order to provide information with regard to the

13

ongoing distribution process and for such other purposes as may be requested by the Board of Directors or Trustees of the Fund.

 

(n) ALPS will review all sales and marketing materials for compliance with applicable laws and conditions of any applicable exemptive order, and file such materials with FINRA when necessary or appropriate. All such sales and marketing materials must be approved, in writing, by ALPS prior to use.

14

Exhibit 99.(e)(2)

 

AUTHORIZED PARTICIPANT AGREEMENT

FOR

ETFS TRUST

 

This Authorized Participant Agreement (the “Agreement”) is entered into by and between ALPS Distributors, Inc. (the “Distributor”) and __________________________________ (the “Authorized Participant” or “AP”) and is subject to acceptance by J.P. Morgan (“ETF Administrator” or the “Transfer Agent”). The Transfer Agent serves as the transfer agent for the ETFS Trust (the “Company” or the “Trust”) and is an Index Receipt Agent as that term is defined in the rules of the National Securities Clearing Corporation (“NSCC”). The Distributor, the Transfer Agent and the Authorized Participant acknowledge and agree that the Company shall be a third party beneficiary of this Agreement, and shall receive the benefits contemplated by this Agreement, to the extent specified herein. The Distributor has been retained to provide services as principal underwriter of the Company acting on an agency basis in connection with the sale and distribution of shares of beneficial interest, par value $0.00 per share (sometimes referred to as “Shares”), of each of the separate investment portfolios of the Company (each such portfolio a “Fund” and collectively, the “Funds”) named on Annex I to this Agreement, as may be updated from time to time to add or remove Funds.

 

As specified in the Company’s prospectus and statement of additional information incorporated therein (collectively, the “Prospectus”) included as part of its registration statement, as amended, on Form N-1A (No. 333-________) (“Registration Statement”), the Shares of any Fund offered thereby may be purchased or redeemed only in aggregations of a specified number of Shares referred to therein and herein as a “Creation Unit.” All references to “cash” shall refer to U.S. dollars (“USD”). The number of Shares constituting a Creation Unit of each Fund is set forth in the Prospectus. Creation Units of Shares may be purchased only by or through an Authorized Participant that has entered into an Authorized Participant Agreement with the Distributor. The Prospectus provides that Creation Units generally will be sold in exchange for an in-kind deposit of a designated portfolio of equity securities (the “Deposit Securities”) and an amount of cash computed as described in the Prospectus (the “Cash Component”), plus a purchase “Transaction Fee” as described in the Prospectus, delivered to the Company by the Authorized Participant for its own account or acting on behalf of another party. Together, the Deposit Securities and the Cash Component constitute the “Creation Deposit,’ which represents the minimum initial and subsequent investment amount for Shares of any Fund of the Company. References to the Prospectus are to the then current Prospectus as it may be supplemented or amended from time to time. Capitalized terms not otherwise defined herein are used herein as defined in the Prospectus.

 

This Agreement is intended to set forth certain premises and the procedures by which the Authorized Participant may purchase and/or redeem Creation Units of Shares (i) through the Continuous Net Settlement (“CNS”) clearing processes of NSCC as such processes have been enhanced to effect purchases and redemptions of Creation Units, such processes being referred to herein as the “CNS Clearing Process,” or (ii) outside the CNS Clearing Process (i.e., through the manual process of The Depository Trust Company (“DTC”) (the “DTC Process”). The procedures for processing an order to purchase Shares (each a “Purchase Order”) and an order to redeem Shares (each a “Redemption Order”) are described in the Company’s Prospectus and in Annex II to this Agreement. All Purchase and Redemption Orders must be made pursuant to the procedures set forth in the Prospectus and Annex II hereto, as each may

1

be amended by the Company from time to time. An Authorized Participant may not place a Purchase Order before the fifth (5 th ) Business Day (as defined below) following execution and delivery to the Distributor of this Agreement and notification by the Distributor of the Authorized Participant’s status. An Authorized Participant may not cancel a Purchase Order or a Redemption Order after an order is placed by the Authorized Participant.

 

The parties hereto in consideration of the premises and of the mutual

agreements contained herein agree as follows:

 

1.   STATUS OF AUTHORIZED PARTICIPANT .

 

(a) The Authorized Participant hereby represents, covenants and warrants that with respect to Purchase Orders or Redemption Orders of Creation Units of Shares of any Fund (i) through the CNS Clearing Process, it is a member of NSCC and an Authorized Participant in the CNS System of NSCC (as defined in the Fund’s Prospectus, a “Participating Party”), and/or (ii) outside the CNS Clearing Process, it is a DTC Participant (as defined in the Fund’s Prospectus, a “DTC Participant”). The Authorized Participant may place Purchase Orders or Redemption Orders for Creation Units either through the CNS Clearing Process or outside the CNS Clearing Process, subject to the procedures for purchase and redemption set forth in this Agreement, the Prospectus and Annex II hereto (“Execution of Orders”). Any change in the foregoing status of the Authorized Participant shall terminate this Agreement and the Authorized Participant shall give prompt written notice to the Distributor, the Company and the Transfer Agent of such change.

 

(b) The Authorized Participant hereby represents and warrants that it, unless Section 1(c) is applicable, (i) is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended, (ii) is qualified to act as a broker or dealer in the states or other jurisdictions where it transacts business, and (iii) is a member in good standing of the Financial Industry Regulatory Authority (“FINRA”), and the Authorized Participant agrees that it will maintain such registrations, qualifications, and membership in good standing and in full force and effect throughout the term of this Agreement. The Authorized Participant is a qualified institutional buyer as defined in Rule 144A under the Securities Act of 1933, as amended (the “1933 Act”). The Authorized Participant agrees to comply with all applicable United States federal laws, the laws of the states or other jurisdictions concerned, and the rules and regulations promulgated thereunder and with the Constitution, By-Laws and Conduct Rules of FINRA, and that it will not offer or sell Shares of any Fund of the Company in any state or jurisdiction where they may not lawfully be offered and/or sold.

 

(c) If the Authorized Participant is offering or selling Shares of any Fund of the Company in jurisdictions outside the several states, territories and possessions of the United States (“US”) and is not otherwise required to be registered, qualified, or a member of FINRA as set forth above, the Authorized Participant nevertheless agrees (i) to observe the applicable laws of the jurisdiction in which such offer and/or sale is made, (ii) to comply with the full disclosure requirements of the 1933 Act and the regulations promulgated thereunder and (iii) to conduct its business in accordance with the spirit of FINRA Conduct Rules.

 

(d) The Authorized Participant represents, covenants and warrants that it has established and presently maintains an anti-money laundering program (the “Program”) reasonably designed to prevent the Authorized Participant from being used as a conduit for

2

money laundering or other illicit purposes or the financing of terrorist activities, and is in compliance with the Program and all anti-money laundering laws, regulations and rules now or hereafter in effect that are applicable to it, including, without limitation, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT ACT”).

 

(e) The Authorized Participant understands and acknowledges that the method by which Creation Units of Shares will be created and traded may raise certain issues under applicable securities laws. For example, because new Creation Units of Shares may be issued and sold by the Company on an ongoing basis, at any point a “distribution,” as such term is used in the 1933 Act, may be occurring. The Authorized Participant understands and acknowledges that some activities on its part, depending on the circumstances, may result in its being deemed a participant in a distribution in a manner which could render it a statutory underwriter and subject it to the prospectus delivery and liability provisions of the 1933 Act. The Authorized Participant should review the “Continuous Offering” section of the Statement of Additional Information (the “SAI”) and consult with its own counsel in connection with entering into this Agreement and placing an Order (defined below). The Authorized Participant also understands and acknowledges that dealers who are not “underwriters” but are effecting transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus.

 

(f) The Authorized Participant has the capability to send and receive communications via authenticated telecommunication facility to and from the Distributorand the Authorized Participant’s custodian. The Authorized Participant shall confirm such capability to the satisfaction of the Distributor and its custodian prior to placing its first Order with the ETF Administrator (whether it is a Purchase Order or a Redemption Order).

 

2.   EXECUTION OF PURCHASE ORDERS AND REDEMPTION ORDERS .

 

(a) All Purchase Orders or Redemption Orders shall be made in accordance with the terms of the Prospectus and the procedures described in Annex II hereto. Each party hereto agrees to comply with the provisions of such documents to the extent applicable to it. It is contemplated that the telephone lines used by the ETF Administrator or the Transfer Agent will be recorded, and the Authorized Participant hereby consents to the recording of all calls with the ETF Administrator. The Company reserves the right to issue additional or other procedures relating to the manner of purchasing or redeeming Creation Units and the Authorized Participant agrees to comply with such procedures as may be issued from time to time, including but not limited to the Cash Collateral Settlement Procedures that are referenced in Annex II hereto.

 

(b) The Authorized Participant acknowledges and agrees on behalf of itself and any party for which it is acting (whether as a customer or otherwise) that delivery of a Purchase Order or Redemption Order shall be irrevocable, provided that the Company and the Distributor on behalf of the Company reserves the right to reject any Purchase Order until the trade is released as described in Annex II hereto and any Redemption Order that is not in “proper form” as defined in the Prospectus.

 

(c) With respect to any Redemption Order, the Authorized Participant also acknowledges and agrees on behalf of itself and any party for which it is acting (whether as a

3

customer or otherwise) to return to the Company any dividend, distribution or other corporate action paid to it or to the party for which it is acting in respect of any Deposit Security that is transferred to the Authorized Participant or any party for which it is acting that, based on the valuation of such Deposit Security at the time of transfer, should have been paid to the Company. With respect to any Redemption Order, the Authorized Participant also acknowledges and agrees on behalf of itself and any party for which it is acting (whether as a customer or otherwise) that the Company is entitled to reduce the amount of money or other proceeds due to the Authorized Participant or any party for which it is acting by an amount equal to any dividend, distribution or other corporate action to be paid to it or to the party for which it is acting in respect of any Deposit Security that is transferred to the Authorized Participant or any party for which it is acting that, based on the valuation of such Deposit Security at the time of transfer, should be paid to the Fund. With respect to any Purchase Order, the Transfer Agent, on behalf of the Company, acknowledges and agrees to return to the Authorized Participant or any party for which it is acting any dividend, distribution or other corporate action paid to the Company in respect of any Deposit Security that is transferred to the Company that, based on the valuation of such Deposit Security at the time of transfer, should have been paid to the Authorized Participant or any party for which it is acting.

 

3.   NSCC.

 

Solely with respect to Purchase Orders or Redemption Orders effected through the CNS Clearing Process, the Authorized Participant, as a Participating Party, hereby authorizes the Transfer Agent to transmit to the NSCC on behalf of the Authorized Participant such instructions, including amounts of the Deposit Securities and Cash Component as are necessary, consistent with the instructions issued by the Authorized Participant to ETF Administrator. The Authorized Participant agrees to be bound by the terms of such instructions issued by the Transfer Agent and reported to NSCC as though such instructions were issued by the Authorized Participant directly to NSCC.

 

4.   PROSPECTUS, MARKETING MATERIALS AND REPRESENTATIONS .

 

(a) The Distributor will provide to the Authorized Participant copies of the then current Prospectus and any printed supplemental information in reasonable quantities upon request. The Distributor represents, warrants and agrees that it will notify the Authorized Participant when a revised, supplemented or amended Prospectus for any Fund is available and deliver or otherwise make available to the Authorized Participant copies of such revised, supplemented or amended Prospectus at such time and in such numbers as to enable the Authorized Participant to comply with any obligation it may have to deliver such Prospectus to customers. The Distributor will make such revised, supplemented or amended Prospectus available to the Authorized Participant no later than its effective date. The Distributor shall be deemed to have complied with this Section 4 when the Authorized Participant has received such revised, supplemented or amended prospectus by email at [ i nsert e-mail address ], in printable form, with such number of hard copies as may be agreed from time to time by the parties promptly thereafter.

 

(b) The Distributor represents and warrants that (i) the Registration Statement and the Prospectus contained therein conforms in all material respects to the requirements of the 1933 Act and the rules and regulations of the Securities and Exchange Commission (the “SEC”) thereunder and do not and will not, as of the applicable effective date as to the Registration

4

Statement and any amendment thereto and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) the sale and distribution of the Shares as contemplated herein will not conflict with or result in a breach or violation of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company, any Fund or the Distributor; and (iii) no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issuance and sale of the Shares, except the registration under the 1933 Act of the Shares.

 

(c) The Authorized Participant represents, warrants and agrees that it will not make any representations concerning Shares other than those contained in the Company’s then current Prospectus or in any promotional materials or sales literature furnished to the Authorized Participant by the Distributor. The Authorized Participant agrees not to furnish or cause to be furnished to any person or display or publish any information or materials relating to Shares (including, without limitation, promotional materials and sales literature, advertisements, press releases, announcements, statements, posters, signs or other similar materials), except such information and materials as may be furnished to the Authorized Participant by the Distributor and such other information and materials as may be approved in writing by the Distributor. The Authorized Participant understands that neither the Company nor any of its Funds will be advertised or marketed as an open-end investment company, (i.e., as a mutual fund), which offers redeemable securities, and that any advertising materials will prominently disclose that the Shares are not redeemable shares of the Company. In addition, the Authorized Participant understands that any advertising material that addresses redemptions of Shares, including the Prospectus, will disclose that the owners of Shares may acquire Shares and tender Shares for redemption to the Company in whole Creation Units only.

 

(d) Notwithstanding the foregoing, the Authorized Participant may without the written approval of the Distributor prepare and circulate in the regular course of its business research reports that include information, opinions or recommendations relating to Shares (i) for public dissemination, provided that such research reports compare the relative merits and benefits of Shares with other products and are not used for purposes of marketing Shares and (ii) for internal use by the Authorized Participant.

 

5.   TITLE TO SECURITIES; RESTRICTED SHARES .

 

The Authorized Participant represents on behalf of itself and any party for which it acts that upon delivery of a portfolio of Deposit Securities to the Custodian in accordance with the terms of the Prospectus, the Company will acquire good and unencumbered title to such securities, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims, including, without limitation, any restriction upon the sale or transfer of such securities imposed by (i) any agreement or arrangement entered into by the Authorized Participant or any party for which it is acting in connection with a Purchase Order or (ii) any provision of the 1933 Act and any regulations thereunder (except that portfolio securities of issuers other than U.S. issuers shall not be required to have been registered under the 1933 Act if exempt from such registration), or of the applicable laws or regulations of any other applicable jurisdiction and (iii) no such securities are “restricted securities” as such term is used in Rule 144(a)(3)(i) promulgated under the 1933 Act.

5

6.   CASH COMPONENT AND FEES .

 

(a)          For Domestic Funds: The Authorized Participant hereby agrees that as between the Company and itself or any party for which it acts in connection with a Purchase Order for any Domestic Fund, it will make available in same day funds for each purchase of Shares an amount of cash sufficient to pay the Cash Component and any other amounts of cash due to the Company in connection with the purchase of any Creation Unit of Shares (including the purchase Transaction Fee for in-kind and cash purchases and the additional variable charge for cash purchases (when, in the sole discretion of the Company, cash purchases are available or specified as described in the Prospectus)) (the “Cash Amount”) which shall be made through DTC to an account maintained by the Custodian and shall be provided in same day or immediately available funds on or before the settlement date in accordance with the Company’s Prospectus and as described in Annex II hereto (“Contractual Settlement Date”). The Authorized Participant hereby agrees to ensure that the Cash Amount will be received by the Company on or before the Contractual Settlement Date, and in the event payment of such Cash Amount has not been made by such Contractual Settlement Date, the Authorized Participant agrees on behalf of itself or any party for which it acts in connection with a Purchase Order to pay the full Cash Amount, plus interest, computed at such reasonable rate as may be specified by the Company from time to time. The Authorized Participant may require its customer to enter into a written agreement with the Authorized Participant with respect to such matters.

 

7.   ROLE OF AUTHORIZED PARTICIPANT.

 

(a) The Authorized Participant acknowledges and agrees that for all purposes of this Agreement, the Authorized Participant will be deemed to be an independent contractor, and will have no authority to act as agent for the Company, any Fund, the Distributor or the Custodian, in any matter or in any respect. The Authorized Participant agrees to make itself and its employees available, upon request, during normal business hours to consult with the Company, the Distributor, the Custodian, or the Authorized Participant’s custodian or their designees concerning the performance of the Authorized Participant’s responsibilities under this Agreement.

 

(b) In executing this Agreement, the Authorized Participant agrees in connection with any purchase or redemption transactions in which it acts for a customer or for any other Authorized Participant or indirect participant, or any other shareholder in an underlying shares account (“Beneficial Owner”), that it shall extend to any such party all of the rights, and shall be bound by all of the obligations, of a DTC Participant in addition to any obligations that it undertakes hereunder or in accordance with the Prospectus.

 

(c) The Authorized Participant agrees to maintain records of all sales of Shares made by or through it and to furnish copies of such records to the Company or the Distributor upon the request of the Company or the Distributor.

 

8.   AUTHORIZED PERSONS OF THE AUTHORIZED PARTICIPANT.

 

Concurrently with the execution of this Agreement and from time to time thereafter as may be requested by the Company or the Distributor, the Authorized Participant shall deliver to the Distributor and the Company, with copies to the Transfer Agent at the address specified

6

below, duly certified as appropriate by its Secretary or other duly authorized official, a certificate in a form approved by the Company (see Annex III to this Agreement) setting forth the names and signatures of all persons authorized to give instructions relating to any activity contemplated hereby or any other notice, request or instruction on behalf of the Authorized Participant (each such person an “Authorized Person”). Such certificate may be accepted and relied upon by the Distributor and the Company as conclusive evidence of the facts set forth therein and shall be considered to be in full force and effect until delivery to the Distributor and the Company of a superseding certificate in a form approved by the Company bearing a subsequent date. Upon the termination or revocation of authority of such Authorized Person by the Authorized Participant, the Authorized Participant shall give immediate written notice of such fact to the Distributor and the Company and such notice shall be effective upon receipt by both the Distributor and the Company. The Distributor shall issue to each Authorized Participant a unique personal identification number (“PIN Number”) by which such Authorized Participant shall be identified and instructions issued by the Authorized Participant hereunder shall be authenticated. The PIN Number shall be kept confidential and only provided to Authorized Persons. If after issuance, an Authorized Participant’s PIN Number is changed, the new PIN Number will become effective on a date mutually agreed upon by the Authorized Participant and the Distributor.

 

9.   REDEMPTION.

 

The Authorized Participant understands and agrees that Redemption Orders may be submitted only on days that the US stock exchange where the Shares are principally listed (as specified in the Prospectus) (the “Listing Exchange”) is open for trading or business.

 

(a) The Authorized Participant represents and warrants that it will not attempt to place a Redemption Order for the purpose of redeeming any Creation Unit of Shares of any Fund unless it first ascertains that it or its customer, as the case may be, owns outright or has full legal authority and legal and beneficial right to tender for redemption the requisite number of Creation Units of Shares of the relevant Fund to be redeemed and to the entire proceeds of the redemption and that such Shares have not been loaned or pledged to another party and are not the subject of a repurchase agreement, securities lending agreement or any other arrangement that would preclude the delivery of such Shares to the Transfer Agent in accordance with the Prospectus or as otherwise required by the Company. The Authorized Participant understands that Shares of any Fund may be redeemed only when one or more Creation Units of Shares of a Beneficial Owner are held in the account of a single Authorized Participant.

 

(b) In the case of a resident Australian or New Zealand holder notwithstanding the foregoing, the Authorized Participant understands and agrees that such holder is only entitled to receive cash upon its redemption of Creation Units of Shares. In the Redemption Order the Authorized Participant will be required to confirm that an in-kind redemption request has not been submitted on behalf of a beneficial owner who is an Australian resident.

 

10.   BENEFICIAL OWNERSHIP.

 

(a) The Authorized Participant represents and warrants to the Distributor and the Company that (based upon the number of outstanding Shares of each such Fund made publicly available by the Company) it does not, and will not in the future, hold for the account of any single Beneficial Owner of Shares of the relevant Fund, eighty percent (80%) or more of the

7

currently outstanding Shares of such relevant Fund, so as to cause the Fund to have a basis in the portfolio securities deposited with the Fund with respect to such Fund different from the market value of such portfolio securities on the date of such deposit, pursuant to section 351 of the Internal Revenue Code of 1986, as amended. The Authorized Participant agrees that the confirmation relating to any order for one or more Creation Units of Shares of any Fund shall state as follows:

 

“Purchaser represents and warrants that, after giving effect to the purchase of Shares to which this confirmation relates, it will not hold 80% or more of the outstanding Shares of the relevant Fund of the Company and that it will not treat such purchase as eligible for tax-free treatment under Section 351 of the Internal Revenue Code of 1986, as amended. If purchaser is a dealer, it agrees to deliver similar written confirmations to any person purchasing any of the Shares to which this confirmation relates from it.”

 

(b) The Company and its Transfer Agent and Distributor shall have the right to require information from the Authorized Participant regarding Shares’ ownership of each Fund, and to rely thereon to the extent necessary to make a determination regarding ownership of 80% or more of the currently outstanding Shares of any Fund by a Beneficial Owner as a condition to the acceptance of a deposit of Deposit Securities.

 

11.   INDEMNIFICATION.

 

This Section 11 shall survive the termination of this Agreement.

 

(a)   The Authorized Participant hereby agrees to indemnify and hold harmless the Distributor, the Company, the Transfer Agent, their respective subsidiaries, affiliates, directors, officers, employees and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each an “AP Indemnified Party”) from and against any loss, liability, cost and expense (including attorneys’ fees) incurred by such AP Indemnified Party as a result of (i) any breach by the Authorized Participant of any provision of this Agreement that relates to such Authorized Participant; (ii) any failure on the part of the Authorized Participant to perform any of its obligations set forth in the Agreement; (iii) any failure by the Authorized Participant to comply with applicable laws, including rules and regulations of self-regulatory organizations; (iv) actions of such AP Indemnified Party in reliance upon any instructions issued in accordance with Annex II, III or IV hereto (as each may be amended from time to time) reasonably believed by the Distributor and/or the Transfer Agent to be genuine and to have been given by the Authorized Participant, or (v)(1) any representation by the Authorized Participant, its employees or its agents or other representatives about the Shares, any AP Indemnified Party or the Company that is not consistent with the Company’s then-current Prospectus made in connection with the offer or the solicitation of an offer to buy or sell Shares and (2) any untrue statement or alleged untrue statement of a material fact contained in any research reports, marketing material and sales literature described in Section 4 hereof or any alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent that such statement or omission relates to the Shares, any AP Indemnified Party or the Company, unless, in either case, such representation, statement or omission was made or included by the Authorized Participant at the written direction of the Company or the Distributor or is based upon any omission or alleged omission by the Company or the

8

Distributor to state a material fact in connection with such representation, statement or omission necessary to make such representation, statement or omission not misleading. The Authorized Participant and the Distributor understand and agree that the Company as a third party beneficiary to this Agreement is entitled and intends to proceed directly against the Authorized Participant in the event that the Authorized Participant fails to honor any of its obligations pursuant to this Agreement that benefit the Company. The Authorized Participant shall not be liable to the AP Indemnified Party for any damages arising out of mistakes or errors in data provided to the Authorized Participant, or mistakes or errors by, or out of interruptions or delays of communications with the AP Indemnified Parties due to any action of a service provider to the Company.

 

(b)   The Distributor hereby agrees to indemnify and hold harmless the Authorized Participant, its respective subsidiaries, affiliates, directors, officers, employees and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each a “Distributor Indemnified Party”) from and against any loss, liability, cost and expense (including attorneys’ fees) incurred by such Distributor Indemnified Party as a result of (i) any breach by the Distributor of any provision of this Agreement that relates to the Distributor; (ii) any failure on the part of the Distributor to perform any of its obligations set forth in this Agreement; (iii) any failure by the Distributor to comply with applicable laws, including rules and regulations of self-regulatory organizations; (iv) actions of such Distributor Indemnified Party in reliance upon any instructions issued or representations made in accordance with Annex II, III and IV hereto (as each may be amended from time to time) reasonably believed by the Authorized Participant to be genuine and to have been given by the Distributor, or (v) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement of the Company as originally filed with the SEC or in any amendment thereof, or in any prospectus or any statement of additional information, or any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in connection with the Authorized Participant’s acting in its capacity as an Authorized Participant. The Distributor shall not be liable to any Distributor Indemnified Party for any damages arising out of mistakes or errors in data provided to the Distributor, or mistakes or errors by, or out of interruptions or delays of communications with the Distributor Indemnified Parties, due to any action of a service provider to the Company.

 

(c) This Section 11 shall not apply to the extent any such losses, liabilities, damages, costs and expenses are incurred as a result or in connection with any gross negligence, bad faith or willful misconduct on the part of the AP Indemnified Party or the Distributor Indemnified Party, as the case may be. The term “affiliate” in this Section 11 shall include, with respect to any person, entity or organization, any other person, entity or organization which directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such person, entity or organization.

 

12.   LIMITATION OF LIABILITY.

 

(a) The Distributor and the Transfer Agent undertake to perform such duties and only such duties as are expressly set forth herein, or expressly incorporated herein by reference, and no implied covenants or obligations shall be read into this Agreement against the Distributor or the Transfer Agent.

9

(b) In the absence of bad faith, gross negligence or willful misconduct on its part, neither the Distributor, nor the Transfer Agent, whether acting directly or through agents or attorneys as provided in paragraph (d) below, shall be liable for any action taken, suffered or omitted or for any error of judgment made by any of them in the performance of their duties hereunder. Neither the Distributor nor the Transfer Agent shall be liable for any error of judgment made in good faith unless the party exercising such shall have been grossly negligent in ascertaining the pertinent facts necessary to make such judgment. In no event shall the Distributor or the Transfer Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profit), even if such parties have been advised of the likelihood of such loss or damage and regardless of the form of action. In no event shall the Distributor or the Transfer Agent be liable for the acts or omissions of DTC, NSCC or any other securities depository or clearing corporation.

 

(c) Neither the Distributor nor the Transfer Agent shall be responsible or liable for any failure or delay in the performance of their obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; terrorism; sabotage; epidemics; riots; interruptions; loss or malfunction of utilities, computer (hardware or software) or communications service; accidents; labor disputes; acts of civil or military authority or governmental actions.

 

(d) The Distributor and the Transfer Agent may conclusively rely upon, and shall be fully protected in acting or refraining from acting upon, any communication authorized hereby and upon any written or oral instruction, notice, request, direction or consent reasonably believed by them to be genuine.

 

(e) The Transfer Agent shall not be required to advance, expend or risk its own funds or otherwise incur or become exposed to financial liability in the performance of its duties hereunder, except as may be required as a result of its own gross negligence, willful misconduct or bad faith.

 

(f) Tax Liability . To the extent any payment of any transfer tax, sales or use tax, stamp tax, recording tax, value added tax or any other similar tax or government charge applicable to the creation or redemption of any Creation Unit of Shares of any Fund made pursuant to this Agreement is imposed, the Authorized Participant shall be responsible for the payment of such tax or government charge regardless of whether or not such tax or charge is imposed directly on the Authorized Participant. To the extent the Company or the Distributor is required by law to pay any such tax or charge, the Authorized Participant agrees to promptly indemnify such party for any such payment, together with any applicable penalties, additions to tax or interest thereon.

 

13.   INFORMATION ABOUT CREATION DEPOSITS.

 

The Authorized Participant understands that the number and names of the designated portfolio of Deposit Securities to be included in the current Creation Deposit for each Fund will be made available by NSCC on each day that the Listing Exchange is open for trading and will also be made available on each such day through the facilities of the NSCC.

10

14.   ACKNOWLEDGMENT .

 

The Authorized Participant acknowledges receipt of the Prospectus and represents that it has reviewed and understands such documents.

 

15.   NOTICES.

 

Except as otherwise specifically provided in this Agreement, all notices required or permitted to be given pursuant to this Agreement shall be given in writing and delivered by personal delivery or by postage prepaid registered or certified United States first class mail, return receipt requested, or by telex, telegram or facsimile or similar means of same day delivery (with a confirming copy by mail). Unless otherwise notified in writing, all notices to the Company shall be at the address or telephone, facsimile or telex numbers as follows:

 

Attn:

 

Copy to:

 

All notices to the Authorized Participant, the Distributor and the Transfer Agent shall be directed to the address or telephone, facsimile or telex numbers indicated below the signature line of such party.

 

16.   EFFECTIVENESS, TERMINATION AND AMENDMENT.

 

(a) This Agreement shall become effective five (5) Business Days after execution and delivery to the Distributor upon notice by the Distributor to the Authorized Participant. A “Business Day” shall mean each day the Listing Exchange is open for regular trading. This Agreement may be terminated at any time by any party upon sixty (60) days prior written notice to the other parties and may be terminated earlier by the Company or the Distributor at any time in the event of a breach by the Authorized Participant of any provision of this Agreement or the procedures described or incorporated herein. This Agreement supersedes any prior such agreement between or among the parties.

 

(b) This Agreement may be amended by the Company or the Distributor from time to time without the consent of any Beneficial Owner by the following procedure. The Company or the Distributor will mail a copy of the amendment to the Authorized Participant and the Company or Distributor, as applicable. For purposes of this Agreement, mail will be deemed received by the recipient thereof on the fifth (5th) Business Day following the deposit of such mail into the U.S. Postal system. If neither the Authorized Participant nor the other party objects in writing to the amendment within five (5) days after its receipt, the amendment will become part of this Agreement in accordance with its terms.

 

17.   GOVERNING LAW; CONSENT TO JURISDICTION .

 

This Agreement shall be governed by and construed in accordance with the laws of the State of New York (regardless of the laws that might otherwise govern under applicable New York conflict of laws principles) as to all matters, including matters of validity, construction, effect, performance and remedies. Each party hereto irrevocably consents to the jurisdiction of the courts of the State of New York and of any federal court located in the Borough of

11

Manhattan in such State in connection with any action, suit or other proceeding arising out of or relating to this Agreement or any action taken or omitted hereunder, and waives any claim of forum non conveniens and any objections as to laying of venue. Each party further waives personal service of any summons, complaint or other process and agrees that service thereof may be made by certified or registered mail directed to such party at such party’s address for purposes of notices hereunder. Each party hereto hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement.

 

18.   SUCCESSORS AND ASSIGNS.

 

This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns.

 

19.   ASSIGNMENT.

 

Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party without the prior written consent of the other parties, except that any entity into which a party hereto may be merged or converted or with which it may be consolidated or any entity resulting from any merger, conversion, or consolidation to which such party hereunder shall be a party, or any entity succeeding to all or substantially all of the business of the party, shall be the successor of the party under this Agreement. The party resulting from any such merger, conversion, consolidation or succession shall notify the other parties hereto of the change. Any purported assignment in violation of the provisions hereof shall be null and void.

 

20.   INTERPRETATION.

 

The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement.

 

21.   ENTIRE AGREEMENT.

 

This Agreement, along with any other agreement or instrument delivered pursuant to this Agreement, supersede all prior agreements and understandings between the parties with respect to the subject matter hereof.

 

22.   SEVERANCE.

 

If any provision of this Agreement is held by any court or any act, regulation, rule or decision of any other governmental or supra national body or authority or regulatory or self-regulatory organization to be invalid, illegal or unenforceable for any reason, it shall be invalid, illegal or unenforceable only to the extent so held and shall not affect the validity, legality or enforceability of the other provisions of this Agreement and this Agreement will be construed as if such invalid, illegal, or unenforceable provision had never been contained herein, unless the Distributor determines in its discretion, after consulting with the Company, that the provision of this Agreement that was held invalid, illegal or unenforceable does affect the validity, legality or enforceability of one or more other provisions of this Agreement, and that this Agreement should not be continued without the provision that was held invalid, illegal or

12

unenforceable, and in that case, upon the Distributor’s notification of the Company of such a determination, this Agreement shall immediately terminate and the Distributor will so notify the Authorized Participant immediately.

 

23.   NO STRICT CONSTRUCTION.

 

The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction will be applied against any party.

 

24.   SURVIVAL.

 

Section 11 (Indemnification) hereof shall survive the termination of this Agreement.

 

25.   OTHER USAGES.

 

The following usages shall apply in interpreting this Agreement: (i) references to a governmental or quasigovernmental agency, authority or instrumentality shall also refer to a regulatory body that succeeds to the functions of such agency, authority or instrumentality; and (ii) “including” means “including, but not limited to.”

 

26.   COUNTERPARTS.

 

This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.

 

[Signature Page Follows]

13

IN WITNESS WHEREOF , the parties have caused this Agreement to be executed and delivered as of the day and year written below.

 

DATED:    
     
  ALPS DISTRIBUTORS, INC.  
  BY:
 
 
  NAME:
 
 
  TITLE:
 
 
  ADDRESS:   1290 Broadway, Suite 1100, Denver CO  80203  
  TELEPHONE: 303.623.2577  
  FACSIMILE:   303.623.7850  
     
     
  [NAME OF AUTHORIZED PARTICIPANT]  
  BY:
 
 
  NAME:
 
 
  TITLE:
 
 
  ADDRESS:
 
 
  TELEPHONE:
 
 
  FACSIMILE:
 
 
     
     
  ACCEPTED BY: J.P. MORGAN , AS TRANSFER AGENT  
  BY:
 
 
  NAME:
 
 
  TITLE:
 
 
  ADDRESS:
 
 
  TELEPHONE:
 
 
  FACSIMILE:
 
 
14

ANNEX I

TO

AUTHORIZED PARTICIPANT AGREEMENT

FOR ETFS TRUST

 

ETFS Zacks Earnings Large-Cap U.S. Index Fund (____)

ETFS Zacks Earnings Small-Cap U.S. Index Fund (____)

ETFS Diversified-Factor U.S. Large-Cap Index Fund (____)

ETFS Diversified-Factor Developed Europe Index Fund (____)

15

ANNEX II

TO

AUTHORIZED PARTICIPANT AGREEMENT

FOR ETFS TRUST

 

PROCEDURES FOR PROCESSING

PURCHASE ORDERS AND REDEMPTION ORDERS

 

This Annex II to the Authorized Participant Agreement (the “Agreement”) supplements the Prospectus with respect to the procedures to be used by (i) the Transfer Agent and Distributor in processing Purchase Orders and (ii) the Transfer Agent in processing Redemption Orders and, together with Purchase Orders, “Orders”). Capitalized terms, unless otherwise defined in this Annex II, have the meanings attributed to them in the Authorized Participant Agreement or the Prospectus.

 

An Authorized Participant is required to have signed the Authorized Participant Agreement. Upon acceptance of the Agreement and execution thereof by the Company and in connection with the initial Purchase Order submitted by the Authorized Participant, the Distributor will assign a unique PIN Number to each Authorized Person authorized to act for an Authorized Participant. This will allow an Authorized Participant through its Authorized Person(s) to place a Purchase Order or Redemption Order with respect to the purchase or redemption of Creation Units of Shares of the Trust.

 

TO PLACE AN ORDER FOR PURCHASE OR REDEMPTION OF CREATION UNITS

 

1. Placing an Order .

 

a.    General . To the extent possible, Orders shall be submitted through the Internet (“Web Order Site” or “Electronic Interface”) as described in section 1.b. below. If the Electronic Interface is not available, Orders may be placed by telephone, as described in section 1.c. If a Purchase Order is not complete prior to the Order Cut-Off Time (as defined below), the Order will not be processed. Redemption Orders that are not completed prior to the Order Cut-Off Time will be processed on the next Business Day.

 

b.     Using the Electronic Interface to Initiate the Order . An Authorized Person for the Authorized Participant will log in to the Electronic Interface prior to the cut-off time for placing Orders with the Fund (the “Order Cut-Off Time”) set forth in the particular Fund’s order form (“Order Form”) and enter the terms of the Order. An Order is not complete until it has been approved by both the Authorized Participant and the Distributor under the terms of the Prospectus and the Agreement, in accordance with the procedures outlined below.

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Orders submitted through the Electronic Interface must be in accordance with the terms of this Agreement, the Prospectus, the Web Order Site, the Electronic Interface User Agreement (the “Electronic Interface Agreement,” which must be separately entered into by the Authorized Participant) and the applicable Electronic Interface User Guide (or any successor documents). To the extent that any provision of this Agreement (including this Annex) is inconsistent with any provision of any Electronic Interface Agreement, the Electronic Interface Agreement shall control with respect to Distributor’s provision of the Web Order Site; provided, however, it is not the intention of the parties to otherwise modify the rights, duties and obligations of the parties under the Agreement, which shall remain in full force and effect until otherwise expressly modified or terminated in accordance with its terms. Notwithstanding the forgoing, the Authorized Participant acknowledges that references to the applicable Electronic Interface User Guide (or any successor documents) contained herein are for instructional purposes only, and such Electronic Interface User Guide (or any successor documents) does not contain any additional representations, warranties or obligations by the Trust, the Trustee, the Transfer Agent, the Distributor or their respective agents.

 

c.    Calling to Initiate the Order . In the event the Electronic Interface service is unavailable, an Authorized Person for the Authorized Participant may call the Distributor’s telephone representative at the number listed on the Order Form prior to the Order Cut-Off Time to receive an Order Number, as described further below. The telephone call must be answered and concluded, and the Order must be complete, prior to the Order Cut-Off Time. Non-standard Orders generally must be arranged with the Trust in advance of Order placement. The Order Form (as may be revised from time to time) is incorporated into and made a part of this Agreement.

 

Upon verifying the authenticity of the caller (as determined by the use of the appropriate PIN Number) and the terms of the Order, the telephone representative will issue a unique order number (the “Order Number”) and record the terms of the Order in an electronic mail version of the Order Form. All Orders with respect to the purchase or redemption of Creation Units are required to be in writing (by email or, as provided below, by facsimile) and accompanied by the designated Order Number. During or following the call, the telephone representative will transmit the written Order Form to the Authorized Participant by electronic mail, indicating the approval of the Distributor of the written Order Form.

 

To complete an Order, the Authorized Participant must respond to the telephone representative with its approval of the written Order Form by electronic mail prior to the Order Cut-Off Time. If the Authorized Participant detects an error or mistake in the written Order Form, it must return a corrected written Order Form to the telephone representative by electronic mail prior to the Order Cut-Off Time, indicating its approval of the corrected written Order Form. The telephone representative will review the corrected written Order Form and notify the Authorized Participant of the approval or rejection thereof by the Distributor. The Order will be complete upon approval in writing by both the Authorized Participant and the Distributor. If an Order is not complete prior to the Order Cut-Off Time, the Order will be invalid and will not be processed.

17

If the Authorized Participant is unable to send or receive electronic mail, it must inform the telephone representative when submitting the terms of its Order or as soon as such inability arises. Communication by facsimile may then be substituted for electronic mail in the steps described above, provided that each transmission is clearly marked with the time of transmission.

 

INCOMING TELEPHONE CALLS ARE QUEUED AND WILL BE HANDLED IN THE SEQUENCE RECEIVED. ACCORDINGLY, DO NOT HANG UP AND REDIAL. CALLS MUST BE CONCLUDED PRIOR TO THE ORDER CUT-OFF TIME. CALLS THAT ARE IN PROGRESS OR ARE UNANSWERED IN THE QUEUE AT OR AFTER THE ORDER CUT-OFF TIME WILL BE VERBALLY DENIED. INCOMING CALLS THAT ARE RECEIVED AFTER THE ORDER CUT-OFF TIME WILL NOT BE ANSWERED BY THE TELEPHONE REPRESENTATIVE. ALL TELEPHONE CALLS WILL BE RECORDED BY THE TELEPHONE REPRESENTATIVE.

 

NOTE THAT THE TELEPHONE CALL IN WHICH THE ORDER NUMBER IS ISSUED INITIATES THE ORDER PROCESS BUT DOES NOT ALONE CONSTITUTE THE ORDER. AN ORDER IS ONLY COMPLETED AND PROCESSED UPON WRITTEN APPROVAL BY BOTH THE AUTHORIZED PARTICIPANT AND THE DISTRIBUTOR.

 

d. Settlement .

 

(i) CNS Clearing Process . In general, the securities making up a Creation Unit must be delivered through the NSCC to a DTC account maintained at the Fund’s custodian on or before the Contractual Settlement Date (defined below). The Authorized Participant must also make available on or before the Contractual Settlement Date, by means satisfactory to the Fund, immediately available or same day funds estimated by the Fund to be sufficient to pay any applicable Cash Component related to an Order. Any excess funds will be returned following settlement of the issue of the Creation Unit. The “Contractual Settlement Date” is the earlier of: (i) the date upon which all of the required securities, any Cash Component and any other cash amounts which may be due are delivered to the Fund; and (ii) trade date plus three (T +3) business days. Creation Units will be issued through the NSCC in accordance with the terms and conditions of the NSCC systems from time to time adopted and communicated to NSCC participants.

 

Any settlement outside the CNS Clearing Process may be subject to additional requirements and fees as discussed in the Prospectus.

18
(ii) Outside the CNS Clearing Process .

 

(a) In general, securities making up a Creation Unit must be delivered to an account maintained at the applicable local Subcustodian on or before the International Contractual Settlement Date (defined below). The Authorized Participant must also make available on or before the International Contractual Settlement Date, by means satisfactory to the Fund, immediately available or same day funds estimated by the Fund to be sufficient to pay any Cash Component of the Creation Unit, together with any applicable fees. Any excess funds will be returned following settlement of the issue of the Creation Unit. The “International Contractual Settlement Date” will be the earlier of: (i) the date upon which all of the required securities making up a Creation Unit, and any related Cash Component and other cash amounts due are delivered to the Fund; and (ii) the latest day for settlement on the customary settlement cycle in the jurisdiction(s) where any of such securities are customarily traded.

 

Except as provided in the next two paragraphs, a Creation Unit will not be issued outside of the CNS Clearing Process until the transfer of good title to the Fund of the securities and the payment of any Cash Component and applicable fees have been completed. When the Subcustodian confirms to the Fund’s Custodian that the required securities (or, when permitted in the sole discretion of the Fund, the cash value thereof) have been delivered to the account of the relevant Subcustodian, the Custodian shall cause the delivery of the Creation Unit.

 

In the event that a deposit of securities is incomplete on the settlement date for a Creation Unit, the Fund may issue a Creation Unit notwithstanding such deficiency in reliance on the undertaking of the Authorized Participant to deliver the missing securities as soon as possible, which undertaking shall be secured by the Authorized Participant’s delivery and maintenance of collateral consisting of U.S. Dollar cash having a value at least equal to [ XXX% ] of the value of the missing securities. The parties hereto agree that the delivery of such collateral shall be made in accordance with cash collateral settlement provided to the Trust by the Transfer Agent. Moreover, the Fund, acting in good faith, may purchase the missing securities at any time and the Authorized Participant agrees to accept liability for any shortfall between the cost to the Fund of purchasing such securities and the value of the collateral, which may be sold by the Fund at such time, and in such manner, as the Fund may determine in its sole discretion.

 

(b) Cash redeems shall be settled outside the CNS process.
19
2. Further Information Regarding the Placement of Orders by the Internet .

 

a. Certain Acknowledgements. The Authorized Participant acknowledges and agrees (i) that the Trust, the Trustee, the Distributor and their respective agents will review any Order placed through the Web Order Site manually before it is executed and that such manual review may result in a delay in execution of such Order; (ii) that during periods of heavy market activity or other times, it may be difficult to place Orders via the Web Order Site and the Authorized Participant may place Orders as otherwise set forth in Attachment A; and (iii) that any transaction information, content, or data downloaded or otherwise obtained through the use of the Web Order Site are done at the Authorized Participant’s own discretion and risk.

 

EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED IN THE ELECTRONIC INTERFACE AGREEMENT AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE AUTHORIZED PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE WEB ORDER SITE IS PROVIDED “AS IS,” “AS AVAILABLE” WITH ALL FAULTS AND WITHOUT ANY WARRANTY OF ANY KIND. SPECIFICALLY, WITHOUT LIMITING THE FOREGOING, ALL WARRANTIES, CONDITIONS, OTHER CONTRACTUAL TERMS, REPRESENTATIONS, INDEMNITIES AND GUARANTEES WITH RESPECT TO THE WEB ORDER SITE, WHETHER EXPRESS, IMPLIED OR STATUTORY, ARISING BY LAW, CUSTOM, PRIOR ORAL OR WRITTEN STATEMENTS BY THE TRUST, THE TRUSTEE, THE DISTRIBUTOR OR THEIR RESPECTIVE AGENTS, AFFILIATES, LICENSORS OR OTHERWISE (INCLUDING, BUT NOT LIMITED TO AS TO TITLE, SATISFACTORY QUALITY, ACCURACY, COMPLETENESS, UNINTERRUPTED USE, NON-INFRINGEMENT, TIMELINESS, TRUTHFULNESS, SEQUENCE, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE AND ANY IMPLIED WARRANTIES, CONDITIONS AND OTHER CONTRACTUAL TERMS ARISING FROM TRADE USAGE, COURSE OF DEALING OR COURSE OF PERFORMANCE) ARE HEREBY OVERRIDDEN, EXCLUDED AND DISCLAIMED.

 

b.    Election to Terminate Placing Orders by Internet . The Authorized Participant may elect at any time to discontinue placing Orders through the Web Order Site without providing notice under the Agreement.

 

3. Acknowledgment Regarding Telephone and Internet Transactions. During periods of heavy market activity or other times, the Authorized Participant acknowledges it may be difficult to reach the Trust by telephone or to transact business over the Internet via the Web Order Site. Technological irregularities may also make the use of the Internet and Web Order Site slow or unavailable at times. The Trust may terminate the receipt of redemption or exchange Orders by telephone or the Internet at any time, in which case the Authorized Participant may redeem or exchange Shares by communication through facsimile. All Orders must be complete, including written approval by the Authorized Participant and the Distributor, prior to the Order Cut-Off Time.

 

4. Purchase of Creation Units Without Receipt of Deposit Securities. Creation Units of
20

the Fund may be purchased in advance of receipt by the Trust of all or a portion of the applicable Deposit Securities, provided that the Authorized Participant deposits an initial deposit of cash with the Trust having a value greater than the net asset value of the Shares on the date the Order is placed in proper form. In addition to available Deposit Securities and cash that generally comprise a Creation Unit, cash must be deposited in an amount equal to [ XXX% ] of the market value of any undelivered Deposit Securities (the “Additional Cash Deposit”). The Order shall be deemed to be received on the Business Day on which the Order is placed provided that the Order is completed in proper form prior to the Order Cut-Off Time on such date and cash in the appropriate amount is deposited with the Custodian by 1:00 p.m. Eastern Time or such other time as designated by the Custodian on the settlement date. If the Order is not completed in proper form by the Order Cut-Off Time or federal funds in the appropriate amount are not received by 1:00 p.m. Eastern Time on the settlement date, then the Order will be rejected as invalid and the Authorized Participant shall be liable to the Trust for losses, if any, resulting therefrom. An additional amount of cash shall be required to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain an amount of cash on deposit with the Trust at least equal to [ XXX% ] of the daily marked to market value of the missing Deposit Securities. In the event that additional cash is not paid, the Trust may use the cash on deposit to purchase the missing Deposit Securities. The Authorized Participant will be liable to the Trust for the costs incurred by the Trust in connection with any such purchases and the Authorized Participant shall be liable to the Trust for any shortfall between the cost to the Trust of purchasing any missing Deposit Securities and the value of the collateral. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the Purchase Order was deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Custodian or purchased by the Trust and deposited into the Trust. The Trust shall charge and the Authorized Participant agrees to pay to the Trust the Transaction Fee and any additional fees prescribed in the Prospectus. The delivery of Creation Units of the Fund so created will occur no later than the prescribed settlement date following the day on which the Purchase Order is deemed received by the Distributor.

21

ANNEX III

TO

AUTHORIZED PARTICIPANT AGREEMENT

FOR ETFS TRUST

 

FORM OF CERTIFIED AUTHORIZED PERSONS OF THE AP

 

The following are the names, titles and signatures of all persons (each an “Authorized Person”) authorized to give instructions relating to any activity contemplated by this Agreement or any other notice, request or instruction on behalf of the AP pursuant to this Agreement.

 

Name:
 
 
Title:
 
 
Signature:
 
 
   
Name:
 
 
Title:
 
 
Signature:
 
 
   
Name:
 
 
Title:
 
 
Signature:
 
 

 

The undersigned, [name], [title], [company], does hereby certify that the persons listed above have been duly elected to the offices set forth beneath their names, that they presently hold such offices, that they have been duly authorized to act as Authorized Persons of this Institution in its capacity as an AP pursuant to the Agreement by and among ALPS Distributors, Inc., as Distributor and [name of the AP], dated [date] and that their signatures set forth above are their own true and genuine signatures.

 

In Witness Whereof, the undersigned has hereby set his/her hand and the seal of [company].

 

Date:    
  [name,  title]  
22

ANNEX IV

TO

AUTHORIZED PARTICIPANT AGREEMENT

FOR ETFS TRUST

 

THE AP ACCOUNTS

FOR DELIVERY OF DEPOSIT SECURITIES

 

The accounts into which the ETFS Trust should deposit the securities constituting the Deposit Securities of each Fund upon redemption by the AP are set forth below:

 

  Name of AP:    
  Account Name:    
  Account Number:    
  Other Reference Number:    
23

ANNEX V

ORDER ENTRY SYSTEM/

ELECTRONIC INTERFACE TERMS AND CONDITIONS

 

This Annex shall govern use by Authorized Participant of the electronic order entry system for placing Purchase Orders and Redemption Orders for Shares (the “System”). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Authorized Participant Agreement (the “AP Agreement”). In the event of any conflict between the terms of this Annex V and the main body of the AP Agreement with respect to the placing of Purchase Orders and Redemption Orders, the terms of this Annex V shall control.

 

1.         (a) Authorized Participant shall provide to the Distributor a duly executed authorization letter, in a form satisfactory to Distributor, identifying those Authorized Persons who will access the System. Authorized Participant shall notify the Distributor in writing in the event that any person’s status as an Authorized Person is revoked or terminated as soon as possible, in order to give the Distributor a reasonable opportunity to terminate such Authorized Person’s access to the System.

 

(b) It is understood and agreed that each Authorized Person shall be designated as an authorized user of Authorized Participant for the purpose of the AP Agreement. Upon termination of the AP Agreement, the Authorized Participant’s and each Authorized Person’s access rights with respect to System shall be immediately revoked.

 

2.         Distributor grants to Authorized Participant a personal, nontransferable and nonexclusive license to use the System solely for the purpose of transmitting Purchase Orders and Redemption Orders and otherwise communicating with Distributor in connection with the same. Authorized Participant shall use the System solely for its own internal and proper business purposes. Except as set forth herein, no license or right of any kind is granted to Authorized Participant with respect to the System. Authorized Participant acknowledges that Distributor and its suppliers retain and have title and exclusive proprietary rights to the System. Authorized Participant further acknowledges that all or a part of the System may be copyrighted or trademarked (or a registration or claim made therefor) by Distributor or its suppliers. Authorized Participant shall not take any action with respect to the System inconsistent with the foregoing acknowledgments. Authorized Participant may not copy, distribute, sell, lease or provide, directly or indirectly, the System or any portion thereof to any other person or entity without Distributor’s prior written consent. Authorized Participant may not remove any statutory copyright notice or other notice included in the System. Authorized Participant shall reproduce any such notice on any reproduction of any portion of the System and shall add any statutory copyright notice or other notice upon Distributor’s request.

 

3.         (a) Authorized Participant acknowledges that any user manuals or other documentation (whether in hard copy or electronic form) (collectively, the “Material”), which is delivered or made available to Authorized Participant regarding the System is the exclusive and confidential property of Distributor. Authorized Participant shall keep the Material confidential by using the same care and discretion that Authorized Participant uses with respect to its own confidential property and trade secrets, but in no event less than reasonable care. Authorized Participant may make such copies of the Material as is reasonably necessary for Authorized Participant to use the System and shall reproduce Distributor’s proprietary markings on any such copy. The foregoing shall not in any way be deemed to affect the

24

copyright status of any of the Material which may be copyrighted and shall apply to all Material whether or not copyrighted. DISTRIBUTOR AND ITS SUPPLIERS MAKE NO WARRANTIES, EXPRESS OR IMPLIED, CONCERNING THE MATERIAL OR ANY PRODUCT OR SERVICE, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

 

(b)   Upon termination of the Agreement for any reason, Authorized Participant shall return to Distributor all copies of the Material which is in Authorized Participant’s possession or under its control.

 

4.         Authorized Participant agrees that it shall have sole responsibility for maintaining adequate security and control of the user IDs, passwords and codes for access to the System, which shall not be disclosed to any third party without the prior written consent of Distributor. Distributor shall be entitled to rely on the information received by it from the Authorized Participant and Distributor may assume that all such information was transmitted by or on behalf of an Authorized Person regardless of by whom it was actually transmitted.

 

5.         Distributor shall have no liability in connection with the use of the System, the access granted to the Authorized Participant and its Authorized Persons hereunder, or any transaction effected or attempted to be effected by the Authorized Participant hereunder, except for damages incurred by the Authorized Participant as a direct result of Distributor’s gross negligence or willful misconduct. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IT IS HEREBY AGREED THAT IN NO EVENT SHALL DISTRIBUTOR OR ANY MANUFACTURER OR SUPPLIER OF EQUIPMENT, SOFTWARE OR SERVICES BE RESPONSIBLE OR LIABLE FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES WHICH THE AUTHORIZED PARTICIPANT MAY INCUR OR EXPERIENCE BY REASON OF ITS HAVING ENTERED INTO OR RELIED ON THIS AGREEMENT, OR IN CONNECTION WITH THE ACCESS GRANTED TO AUTHORIZED PARTICIPANT HEREUNDER, OR ANY TRANSACTION EFFECTED OR ATTEMPTED TO BE EFFECTED BY AUTHORIZED PARTICIPANT HEREUNDER, EVEN IF DISTRIBUTOR OR SUCH MANUFACTURER OR SUPPLIER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, NOR SHALL DISTRIBUTOR OR ANY SUCH MANUFACTURER OR SUPPLIER BE LIABLE FOR ACTS OF GOD, MACHINE OR COMPUTER BREAKDOWN OR MALFUNCTION, INTERRUPTION OR MALFUNCTION OF COMMUNICATION FACILITIES, LABOR DIFFICULTIES OR ANY OTHER SIMILAR OR DISSIMILAR CAUSE BEYOND SUCH PERSON’S REASONABLE CONTROL.

 

6.         Distributor reserves the right to revoke Authorized Participant’s access to the System immediately and without notice upon any breach by the Authorized Participant of the terms and conditions of this Annex V.

 

7.         Distributor shall acknowledge through the System its receipt of each Purchase Order or Redemption Order communicated through the System, and in the absence of such acknowledgment Distributor shall not be liable for any failure to act in accordance with such orders and Authorized Participant may not claim that such Purchase Order or Redemption Order was received by Distributor. Distributor may in its discretion decline to act upon any instructions or communications that are insufficient or incomplete or are not received by Distributor in sufficient time for Distributor to act upon, or in accordance with such instructions or communications.

25

8.         Authorized Participant agrees to use reasonable efforts to prevent the transmission through the System of any software or file which contains any viruses, worms, harmful component or corrupted data and agrees not to use any device, software, or routine to interfere or attempt to interfere with the proper working of the Systems.

 

9.         Authorized Participant acknowledges and agrees that encryption may not be available for every communication through the System, or for all data. Authorized Participant agrees that Distributor may deactivate any encryption features at any time, without notice or liability to Authorized Participant, for the purpose of maintaining, repairing or troubleshooting its systems.

26

Exhibit 99.(g)

 

 

 

Global Custody Agreement - New York - General - May 2012

 

 

 

Table of contents

 

1. INTENTION OF THE PARTIES; DEFINITIONS 1
1.1 Intention of the Parties 1
1.2 Definitions; Interpretation 1
     
2. WHAT J.P. MORGAN IS REQUIRED TO DO 5
2.1 Set Up Accounts 5
2.2 Cash Account 6
2.3 Segregation of Assets; Nominee Name 6
2.4 Settlement of Transactions 7
2.5 Contractual Settlement Date Accounting 7
2.6 Actual Settlement Date Accounting 8
2.7 Income Collection (AutoCredit®) 8
2.8 Miscellaneous Administrative Duties 9
2.9 Corporate Actions 10
2.10 Class Action Litigation 10
2.11 Proxies 10
2.12 Statements of Account 11
2.13 Access to J.P. Morgan’s Records 11
2.14 Maintenance of Financial Assets at Subcustodian Locations 12
2.15 Tax Relief Services 12
2.16 Foreign Exchange Transactions 12
2.17 Notifications 13
2.18 Sealed Envelopes 13
     
3. INSTRUCTIONS 16
3.1 Acting on Instructions; Method of Instruction and Unclear Instructions 16
3.2 Verification and Security Procedures 16
3.3 Instructions; Contrary to Law/Market Practice 16
3.4 Cut-Off Times 17
3.5 Electronic Access 17
     
4. FEES, EXPENSES AND OTHER AMOUNTS OWING TO J.P. MORGAN 17
4.1 Fees and Expenses 17
4.2 Overdrafts 17
4.3 J.P. Morgan’s Right Over Securities; Set-off 18
     
5. SUBCUSTODIANS, SECURITIES DEPOSITORIES, AND OTHER AGENTS 18
5.1 Appointment of Subcustodians; Use of Securities Depositories 18
5.2 Liability for Subcustodians 19
     
6. ADDITIONAL PROVISIONS 20
6.1 Representations of the Customer and J.P. Morgan 20
6.2 The Customer is Liable to J.P. Morgan Even if it is Acting for Another Person 21
6.3 Special Settlement Services 21
     
7. WHEN J.P. MORGAN IS LIABLE TO THE CUSTOMER 21

 

Global Custody Agreement - New York - General - May 2012

 

 

 

7.1 Standard of Care; Liability 21
7.1 Standard of Care; Liability 21
7.2 Force Majeure 22
7.3 J.P. Morgan May Consult With Counsel 22
7.4 J.P. Morgan Provides Diverse Financial Services and May Generate Profits as a Result 23
7.5 Assets Held Outside J.P. Morgan’s Control 23
7.6 Ancillary services 23
7.7 Service Locations 23
     
8. TAXATION 24
8.1 Tax Obligations 24
8.2 Tax Relief Services 24
     
9. TERMINATION 25
9.1 Termination 25
9.2 Exit Procedure 26
     
10. MISCELLANEOUS 26
10.1 Notifications 26
10.2 Successors and Assigns 26
10.3 Entire Agreement 27
10.4 Information Concerning Deposits at J.P. Morgan’s Non-US Branch 27
10.5 Insurance 27
10.6 Security Holding Disclosure 27
10.7 USA PATRIOT Act Disclosure 27
10.8 Governing Law and Jurisdiction 28
10.9 Severability; Waiver; and Survival 28
10.10 Confidentiality 28
10.11 Counterparts 29
10.12 No Third Party Beneficiaries 29
SCHEDULE 1 Agent and Cash Network 30
SCHEDULE 2 Form of Board Resolution 41
SCHEDULE 3 J.P. Morgan Worldwide Securities Services Custody Restricted Markets Schedule 42
SCHEDULE 4 ETFS Trust - List of Funds 45
ANNEX A Electronic Access 46
Appendix 1 48
Appendix 2 49

 

Global Custody Agreement - New York - General - May 2012

 

 

 

GLOBAL CUSTODY AGREEMENT

 

This Agreement, dated December 4, 2014, is between JPMORGAN CHASE BANK, NATIONAL ASSOCIATION (“J.P. Morgan”), with a place of business at 383 Madison Avenue, New York, NY 10017; and ETFS TRUST , a Delaware statutory trust and registered investment company under the Investment Company Act of 1940 (“1940 Act”), on behalf of each Fund (defined below) with a place of business at 48 Wall Street, 11th Floor, New York, NY 10005.

 

1. INTENTION OF THE PARTIES; DEFINITIONS

 

1 .1 Intention of the Parties

 

(a) This Agreement sets out the terms on which J.P. Morgan will provide custodial, settlement and other associated services to each series of ETFS Trust (each a “Fund” and together the “Funds”) as listed on Schedule 4 hereto ( collectively, “the Customer”). J.P. Morgan will be responsible for the performance of only those duties expressly set forth in this Agreement.
     
(b) Investing in Financial Assets and cash in foreign jurisdictions may involve risks of loss or other burdens and costs. The Customer acknowledges that J.P. Morgan is not providing any legal, tax or investment advice in providing the services under this Agreement and will not be liable for any losses resulting from Country Risk.
     
(c) The terms and conditions of this Agreement are applicable only to the services which are specified in this Agreement.
     
(d) This Agreement shall constitute a separate agreement as between each Fund and J.P. Morgan, as if each Fund had executed a separate instrument with J.P. Morgan, and no Fund shall have any liability for the obligations of any other Fund hereunder such that the property held by J.P. Morgan for each Fund is the property of only that Customer. For the avoidance of doubt, the foregoing shall not relieve any party from any right or obligations it may have pursuant to another agreement or pursuant to Applicable Law.

 

1.2 Definitions; Interpretation

 

(a) As used herein, the following terms have the meaning hereinafter stated.
     
  “Account” has the meaning set forth in Section 2.1 of this Agreement.
     
  “Affiliate” means an entity controlling, controlled by, or under common control with, J.P. Morgan or the Customer, as the case may be.
     
  “Affiliated Subcustodian Bank” means a Subcustodian that is both a subsidiary of JPMorgan Chase & Co. and either (i) a bank chartered or incorporated in the United States of America or (ii) a branch or subsidiary of such a bank.

 

Global Custody Agreement - New York - General - May 2012  

1

 

 

“Applicable Law” means any applicable statute, treaty, rule, regulation or common law and any applicable decree, injunction, judgment, order, formal interpretation or ruling issued by a court or governmental entity.
     
  “Authorized Person” means any person who has been designated by written notice from the Customer in the form as provided by J.P. Morgan (or by written notice in the form as provided by J.P. Morgan from any agent designated by the Customer, including, without limitation, an investment manager) to act on behalf of the Customer under this Agreement and any person who has been given an access code by a security administrator appointed by the Customer which allows the provision of Instructions. Such persons will continue to be Authorized Persons until such time as J.P. Morgan receives and has had reasonable time to act upon Instructions from the Customer (or its agent) that any such person is no longer an Authorized Person.
     
  “Cash Account” has the meaning set forth in Section 2.1(a)(ii).
     
  “Confidential Information” means and includes all non-public information concerning the Customer or the Accounts which J.P. Morgan receives in the course of providing services under this Agreement. Nevertheless, the term Confidential Information shall not include information which is or becomes available to the general public by means other than J.P. Morgan’s breach of the terms of this Agreement or information which J.P. Morgan obtains on a non-confidential basis from a person who is not known to be subject to any obligation of confidence to any person with respect to that information.
     
  “Corporate Action” means any subscription right, bonus issue, stock repurchase plan, redemption, exchange, tender offer, or similar matter with respect to a Financial Asset in the Securities Account that requires discretionary action by the beneficial owner of the Security, but does not include rights with respect to class action litigation or proxy voting.
     
  “Country Risk” means the risk of investing or holding assets in a particular country or market, including, but not limited to, risks arising from nationalization, expropriation or other governmental actions; the country’s financial infrastructure, including prevailing custody, tax and settlement practices; laws applicable to the safekeeping and recovery of Financial Assets and cash held in custody; the regulation of the banking and securities industries, including changes in market rules; currency restrictions, devaluations or fluctuations; and market conditions affecting the orderly execution of securities transactions or the value of assets.
     
  “Eligible Foreign Custodian” means: (i) a banking institution or trust company, incorporated or organized under the laws of a country other than the United States, that is regulated as such by that country’s government or an agency thereof; and (ii) a majority-owned direct or indirect subsidiary of a U.S. bank or bank holding company which subsidiary is incorporated or organized under the laws of a country other than the United States.
     
  “Eligible Securities Depository” shall have the same meaning as in Rule 17f-7 under the 1940 Act as the same may be amended from time to time, or any
     

Global Custody Agreement - New York - General - May 2012  

2

 

 

other entity (other than an Eligible Securities Depository) that shall have been so qualified by exemptive order, rule or other appropriate action of the SEC.
     
  “Entitlement Holder” means the person named on the records of a Securities Intermediary as the person having a Securities Entitlement against the Securities Intermediary.
     
  “Foreign Custody Manager” has the meaning as set forth in paragraph (a) of Section 2.19.
     
  “Financial Asset” means a Security and refers, as the context requires, either to the asset itself or to the means by which a person’s claim to it is evidenced, including a Security, a security certificate, or a Securities Entitlement. “Financial Asset” does not include cash.
     
  “Instruction” means an instruction that has been verified in accordance with a Security Procedure or, if no Security Procedure is applicable, which J.P. Morgan believes in good faith to have been given by an Authorized Person.
     
  “J.P. Morgan Indemnitees” means J.P. Morgan, its Affiliates, its Subcustodians, and their respective nominees, directors, officers, employees and agents.
     
  “J.P. Morgan’s London Branch” means the London branch office of JPMorgan Chase Bank, N.A.
     
  “Liabilities” means any liabilities, losses, claims, costs, damages, penalties, fines, obligations, taxes (other than taxes based solely on J.P. Morgan’s income), or expenses of any kind whatsoever (whether actual or contingent and including, without limitation, reasonable attorneys’, accountants’, consultants’ or experts’ fees and disbursements and, where relevant, any and all amounts owing to J.P. Morgan by the Customer’s counterparty in connection with collateral/control accounts established at J.P. Morgan pursuant to the Customer’s Instruction) outstanding from time to time.
     
  “Sealed Envelope” means a sealed envelope which the Customer requests J.P. Morgan to hold in custody. Nothing in this definition shall obligate J.P. Morgan to accept any such Sealed Envelope.
     
  “Securities” means shares, stocks, debentures, bonds, notes or other like obligations, whether issued in certificated or uncertificated form, and any certificates, receipts (e.g., American Depository Receipts (“ADRs”)), warrants or other instruments representing rights to receive, purchase or subscribe for the same that are commonly traded or dealt in on securities exchanges or financial markets or other obligations of an issuer, or shares, participations and interests in an issuer recognized in the country in which it is issued or dealt in as a medium for investment and any other property as may be acceptable to J.P. Morgan for the Securities Account.
     
  “Securities Account” means each Securities custody account on J.P. Morgan’s records to which Financial Assets are or may be credited under this Agreement.
     
  “Securities Depository” means any securities depository, dematerialized book entry system or similar system for the central handling of Securities, whether or not acting in that capacity.

 

Global Custody Agreement - New York - General - May 2012  

3

 

 

“Securities Entitlement” means the rights and property interests of an Entitlement Holder with respect to a Financial Asset as set forth in Part 5 of Article 8 of the Uniform Commercial Code of the State of New York, as the same may be amended from time to time.
     
  “Securities Intermediary” means J.P. Morgan, a Subcustodian, a Securities Depository, and any other financial institution which in the ordinary course of business maintains Securities custody accounts for others and acts in that capacity.
     
  “Security Procedure” means a security procedure to be followed by the Customer upon the issuance of an Instruction and/or by J.P. Morgan upon the receipt of an Instruction, so as to enable J.P. Morgan to verify that such Instruction is authorized, as set forth in service level documentation in effect from time to time between the parties with respect to the services set forth in this Agreement, or as otherwise agreed in writing by the parties. A Security Procedure may, without limitation, involve the use of algorithms, codes, passwords, encryption or telephone call backs, and may be updated by J.P. Morgan from time to time upon notice to the Customer. The Customer acknowledges that the Security Procedure is designed to verify the authenticity of, and not detect errors in, Instructions. For the avoidance of doubt, the parties agree that a SWIFT message issued in the name of the Customer through any third party utility agreed upon by the parties as being a method for providing Instructions and authenticated in accordance with that utility’s customary procedures, shall be deemed to be an authorized Instruction.
     
  “Subcustodian” means any of the subcustodians appointed by J.P. Morgan from time to time to hold Securities and act on its behalf in different jurisdictions (and being at the date of this Agreement the entities listed in Schedule 1) and includes any Affiliated Subcustodian Bank.

 

(b) Headings are for reference and convenience only and are not intended to affect interpretation.
(c) References to Articles and Sections are to Articles and Sections of this Agreement and references to sub-sections and paragraphs are to sub-sections of the Sections and paragraphs of the sub-sections in which they appear.
(d) Unless the context requires otherwise, references in this Agreement to “persons” shall include legal as well as natural entities; references importing the singular shall include the plural (and vice versa); use of the generic masculine pronoun shall include the feminine; use of the term “including” shall be deemed to mean “including but not limited to,” and references to appendices and numbered sections shall be to such addenda and provisions herein; all such addenda are hereby incorporated in this Agreement by reference.
     
  “U.S. Bank” means a U.S. bank as defined in Rule 17f-5(a)(7) under the 1940 Act.

 

Global Custody Agreement - New York - General - May 2012  

4

 

 

2. WHAT J.P. MORGAN IS REQUIRED TO DO
     
2.1 Set Up Accounts
     
    (a) J.P. Morgan will establish and maintain the following accounts (“Accounts”):

 

(i) one or more Securities Accounts in the name of the Customer, on behalf of each Fund (or in another name requested by the Customer that is acceptable to J.P. Morgan) for Financial Assets, which may be held by J.P. Morgan or a Subcustodian or a Securities Depository for J.P. Morgan on behalf of the Customer, including as an Entitlement Holder; and

  

(ii) one or more accounts in the name of the Customer, on behalf of each Fund (or in another name requested by the Customer that is acceptable to J.P. Morgan) (“Cash Account”) for any and all cash in any currency received by or on behalf of J.P. Morgan for the account of the Customer.

 

  Notwithstanding paragraph 2.1(a)(ii), cash held in respect of those markets where the Customer is required to have a cash account in its own name held directly with the relevant Subcustodian or Securities Depository will be held in that manner and will not be part of the Cash Account.
     
(b) At the request of the Customer, additional Accounts may be opened in the future, and such additional Accounts shall be subject to the terms of this Agreement.
     
(c) In the event that the Customer requests the opening of any additional Account for the purpose of holding collateral pledged by the Customer to a securities exchange, clearing corporation, or other central counterparty (a “Counterparty”) to secure trading activity by the Customer, or the pledge to a Counterparty of cash or individual Securities held in an Account, that Account (or the pledged cash or Securities) shall be subject to the collateral arrangements in effect between J.P. Morgan and the Counterparty in addition to the terms of this Agreement.
     
(d) J.P. Morgan’s obligation to open Accounts pursuant to Section 2.1(a) is conditional upon J.P. Morgan receiving such of the following documents as J.P. Morgan may require:

 

(i) a certified copy of the Customer’s constitutional documents as currently in force;

 

(ii) evidence reasonably satisfactory to J.P. Morgan of the due authorization and execution of this Agreement by the Customer (for example by a certified copy of a resolution of the Customer’s board of directors or equivalent governing body, substantially in the form set out in Schedule 2);

 

Global Custody Agreement - New York - General - May 2012  

5

 

 

  (iii) A fund manager mandate completed by the fund manager designated by the Customer; and
     
  (iv) in the case of any Account opened in a name not that of the Customer, documentation with respect to that name similar to that set forth in sub-sections (i) - (iii).

 

  2.2 Cash Account

 

(a) Any amount standing to the credit of the Cash Account will be either:

 

  (i) deposited during the period it is credited to the Accounts in one or more deposit accounts at J.P. Morgan’s head office or at one of its non-U.S. branch offices and will constitute a debt owing to the Customer by J.P. Morgan as a banker, provided that any cash so deposited with a non- U.S. branch office will be payable exclusively by that branch office in the applicable currency, subject to compliance with Applicable Law, including, without limitation, any restrictions on transactions in the applicable currency imposed by the country of the applicable currency; or
     
(ii) placed by J.P. Morgan with a bank or other financial institution in the country in which the applicable currency is issued, in which case the deposit will constitute a debt owing to the Customer by that bank or other financial institution and not J.P. Morgan, payable exclusively in the applicable currency at that bank or financial institution.

 

  (b) Any amounts credited by J.P. Morgan to the Cash Account on the basis of a notice or an interim credit from a third party, may be reversed if J.P. Morgan does not receive final payment in a timely manner. J.P. Morgan will notify the Customer promptly of any such reversal.

 

  2.3 Segregation of Assets; Nominee Name

 

(a) J.P. Morgan will identify in its books that Financial Assets credited to the Customer’s Securities Account belong to the Customer (except as otherwise may be agreed by J.P. Morgan and the Customer).
     
(b) To the extent permitted by Applicable Law or market practice, J.P. Morgan will require each Subcustodian to identify in its own books that Financial Assets held at such Subcustodian by J.P. Morgan on behalf of its customers belong to customers of J.P. Morgan, such that it is readily apparent that the Financial Assets do not belong to J.P. Morgan or the Subcustodian.
     
(c) J.P. Morgan is authorized, in its discretion:

 

  (i) to hold in bearer form, such Financial Assets as are customarily held in bearer form or are delivered to J.P. Morgan or its Subcustodian in bearer form;
     
(ii) to hold Securities in or deposit Securities with any Securities Depository;

 

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(iii) to hold Securities in omnibus accounts on a fungible basis and to accept delivery of Securities of the same class and denomination as those deposited with J.P. Morgan or its Subcustodian;
     
  (iv) to register in the name of the Customer, J.P. Morgan, a Subcustodian, a Securities Depository, or their respective nominees, such Financial Assets as are customarily held in registered form; and
     
(v) to decline to accept any asset or property which it deems to be unsuitable or inconsistent with its custodial operations provided it will notify the Customer as soon as reasonably practicable of such decision.

 

  2.4 Settlement of Transactions
     
    Subject to Article 3 and Section 4.2 of this Agreement, J.P. Morgan will act in accordance with Instructions with respect to settlement of transactions. Settlement will be conducted in accordance with prevailing standards of the market in which the transaction occurs. Without limiting the generality of the foregoing, the Customer authorizes J.P. Morgan to deliver Securities or payment in accordance with applicable market practice in advance of receipt or settlement of consideration expected in connection with such delivery or payment, and the Customer acknowledges and agrees that such action alone will not of itself constitute negligence, fraud, or willful misconduct of J.P. Morgan, and the risk of loss arising from any such action will be borne by the Customer. In the case of the failure of the Customer’s counterparty (or other appropriate party) to deliver the expected consideration as agreed, J.P. Morgan will notify the Customer in the event such failure relates to market and rebalance trades, and contact the Counterparty to seek settlement in the event such failure relates to ETF creation or redemption activity. If the Customer’s counterparty continues to fail to deliver the expected consideration, J.P. Morgan will provide information reasonably requested by the Customer that J.P. Morgan has in its possession to allow the Customer to enforce rights that the Customer has against the Customer’s counterparty, but neither J.P. Morgan nor its Subcustodians will be obliged to institute legal proceedings, file a proof of claim in any insolvency proceeding or take any similar action.

 

  2.5 Contractual Settlement Date Accounting

 

(a) J.P. Morgan will effect book entries on a contractual settlement date accounting basis as described below with respect to the settlement for those Financial Assets and transactions as to which J.P. Morgan customarily offers contractual settlement date accounting. J.P. Morgan reserves the right to restrict in good faith the availability of contractual settlement date accounting for credit or operational reasons.

 

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(i) Sales: On the settlement date for a sale, J.P. Morgan will credit the Cash Account with the proceeds of the sale and, if not already delivered, transfer the relevant Financial Assets to an account at J.P. Morgan pending settlement of the transaction.
     
(ii) Purchases: On the settlement date for a purchase (or earlier, if market practice requires delivery of the purchase price before the settlement date), J.P. Morgan will debit the Cash Account for the settlement amount and credit a separate account at J.P. Morgan. J.P. Morgan will then post the Securities Account as awaiting receipt of the expected Financial Assets. The Customer will not be entitled to the delivery of Financial Assets until J.P. Morgan or a Subcustodian actually receives them.

 

    Upon request, J.P. Morgan shall provide the Customer with a list of those markets for which it provides contractual settlement date accounting. J.P. Morgan may add markets to or remove markets from such list upon reasonable notice to the Customer.
     
(b) J.P. Morgan may reverse any debit or credit made pursuant to Section 2.5(a) prior to a transaction’s actual settlement upon notice to the Customer in cases where J.P. Morgan reasonably believes that the transaction will not settle in the ordinary course within a reasonable time. The Customer will be responsible for any costs or Liabilities resulting from such reversal. The Customer acknowledges that the procedures described in Section 2.5 are of an administrative nature, and J.P. Morgan does not undertake to make loans and/or Financial Assets available to the Customer.

 

  2.6 Actual Settlement Date Accounting
     
    With respect to settlement of a transaction that is not posted to the Account on the contractual settlement date as referred to in Section 2.5, J.P. Morgan will post the transaction on the date on which the cash or Financial Assets received as consideration for the transaction is actually received and settled by J.P. Morgan.

 

  2.7 Income Collection (AutoCredit®)

 

(a) J.P. Morgan will monitor information publicly available in the applicable market about forthcoming income payments on the Financial Assets, and will promptly notify the Customer of such information.
     
(b) J.P. Morgan will credit the Cash Account with income proceeds on Financial Assets on the anticipated payment date, net of any taxes that are withheld by J.P. Morgan or any third party (“AutoCredit”) for those Financial Assets and/or markets as to which J.P. Morgan customarily offers an AutoCredit service. J.P. Morgan reserves the right to restrict in good faith the availability of AutoCredit for credit or operational reasons. Upon request, J.P. Morgan shall provide the Customer with a

 

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    list of AutoCredit eligible markets. J.P. Morgan may add markets to or remove markets from the list of AutoCredit markets upon notice to the Customer that is reasonable in the circumstances. J.P. Morgan may reverse AutoCredit credits upon oral or written notification to the Customer if J.P. Morgan believes that the corresponding payment will not be received by J.P. Morgan within a reasonable period or the credit was incorrect.
     
(c) When the AutoCredit service is not available, income on Financial Assets, net of any taxes withheld by J.P. Morgan or any third party, will be credited only after actual receipt and reconciliation by J.P. Morgan.
     
(d) J.P. Morgan will use reasonable efforts to contact appropriate parties to collect unpaid interest, dividends or redemption proceeds and notify the Customer of the late payment, but neither J.P. Morgan nor its Subcustodians will be obliged to file any formal notice of default, institute legal proceedings, file a proof of claim in any insolvency proceeding or take any similar action.

 

  2.8 Miscellaneous Administrative Duties

 

(a) Until J.P. Morgan receives Instructions to the contrary, J.P. Morgan will:

 

(i) present all Financial Assets for which J.P. Morgan has received notice of a call for redemption or that have otherwise matured, and all income and interest coupons and other income items that call for payment upon presentation;
     
(ii) execute in the name of the Customer such certificates as may be required to obtain payment in respect of Financial Assets; and
     
(iii) exchange interim or temporary documents of title held in the Securities Account for definitive documents of title.

 

(b) In the event that, as a result of holding of Financial Assets in an omnibus account, the Customer receives fractional interests in Financial Assets arising out of a Corporate Action or class action litigation, J.P. Morgan will credit the Customer with the amount of cash it would have received had the Financial Assets not been held in an omnibus account, and the Customer shall relinquish to J.P. Morgan its interest in such fractional interests.
     
(c) If some, but not all, of an outstanding class of Financial Assets is called for redemption, J.P. Morgan may allot the amount redeemed among the respective beneficial holders of such a class of Financial Assets on a pro rata basis or in a similar manner J.P. Morgan deems fair and equitable.
     
(d) J.P. Morgan reserves the right to reverse any transactions that are credited to the Accounts due to mis-postings and other such similar

 

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    actions. If such action results in a loss to Customer, J.P. Morgan will be liable for such loss, subject to Section 7 of this Agreement.

 

  2.9 Corporate Actions

 

(a) J.P. Morgan will act in accordance with local market practice to obtain information concerning Corporate Actions that is publicly available in the local market. J.P. Morgan also will review information obtained from sources to which it subscribes for information concerning such Corporate Actions. J.P. Morgan will promptly provide that information (or summaries that reflect the material points concerning the applicable Corporate Action) to the Customer or its Authorized Person.
     
(b) J.P. Morgan will act in accordance with the Customer’s Instructions in relation to such Corporate Actions. If the Customer fails to provide J.P. Morgan with timely Instructions with respect to any Corporate Action, neither J.P. Morgan nor its Subcustodians or their respective nominees will take any action in relation to that Corporate Action, except as otherwise agreed in writing by J.P. Morgan and the Customer or as may be set forth by J.P. Morgan as a default action in the notification it provides under Section 2.9(a) with respect to that Corporate Action.

 

  2.10 Class Action Litigation
     
    Any notices received by J.P. Morgan’s corporate actions department about settled securities class action litigation that requires action by affected owners of the underlying Financial Assets will be promptly notified to the Customer if J.P. Morgan, using reasonable care and diligence in the circumstances, identifies that the Customer was a shareholder and held the relevant Financial Assets in custody with J.P. Morgan at the relevant time. J.P. Morgan will not make filings in the name of the Customer in respect to such notifications except as otherwise agreed in writing between the Customer and J.P. Morgan. The services set forth in this Section 2.10 are available only in certain markets, details of which are available from J.P. Morgan on request.

 

  2.11 Proxies

 

(a) J.P. Morgan will monitor information distributed to holders of Financial Assets about upcoming shareholder meetings, promptly notify the Customer of such information and, subject to Section 2.11(c), act in accordance with the Customer’s Instructions in relation to such meetings (the “Proxy Voting Service”).
     
(b) The Proxy Voting Service is available only in certain markets, details of which are available from J.P. Morgan on request. Provision of the Proxy Voting Service is conditional upon receipt by J.P. Morgan of a duly completed enrollment form as well as additional documentation that may be required for certain markets.
     
(c) The Proxy Voting Service does not include physical attendance at shareholder meetings. Requests for physical attendance at shareholder

 

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    meetings can be made but they will be evaluated and agreed to by J.P. Morgan on a case by case basis.
     
  (d) The Customer acknowledges that the provision of the Proxy Voting Service may be precluded or restricted under a variety of circumstances. These circumstances include, but are not limited to:

 

  (i) the Financial Assets being on loan or out for registration;
     
  (ii) the pendency of conversion or another corporate action;
     
  (iii) the Financial Assets being held in a margin or collateral account at J.P. Morgan or another bank or broker, or otherwise in a manner which affects voting;
     
  (iv) local market regulations or practices, or restrictions by the issuer; and
     
  (v) J.P. Morgan being required to vote all shares held for a particular issue for all of J.P. Morgan’s customers on a net basis (i.e., a net yes or no vote based on voting instructions received from all its customers). Where this is the case, J.P. Morgan will notify the Customer.

 

  2.12 Statements of Account
       
    (a) J.P. Morgan will provide the Customer with electronic access to Account information (the “Information”) that will enable the Customer to generate or receive reports and statements of account for each Account, identifying cash and Financial Assets held in the Account as well as Account transactions. The Customer will review the Information and give J.P. Morgan written notice of (i) any suspected error or omission or (ii) the Customer’s inability to access any such Information. The Customer will provide J.P. Morgan such notice within a reasonable time after (x) the Information is made available to the Customer or (y) the Customer discovers that it is unable to access the Information, as the case may be.
       
    (b) The Customer acknowledges that information available to it electronically with respect to transactions posted after the close of the prior business day may not be accurate due to mis-postings, delays in updating Account records, and other causes. J.P. Morgan will not be liable for any loss or damage arising out of any such information accessed electronically that is subsequently updated or corrected by the close of business on the first business day after the original transaction was posted.
       
  2.13 Access to J.P. Morgan’s Records
       
    (a) J.P. Morgan will allow the Customer’s auditors and independent public accountants such reasonable access to the records of J.P. Morgan relating to the Accounts as may be required in connection with their examination of books and records pertaining to the Customer’s affairs.

 

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    Subject to restrictions under the relevant local law, J.P. Morgan shall direct any Subcustodian to permit the Customer’s auditors and independent public accountants, reasonable access to the records of any Subcustodian of Financial Assets held in the Securities Account as may be required in connection with such examination.
     
  (b) J.P. Morgan will, upon reasonable written notice, allow the Customer reasonable access during normal working hours to the records of J.P. Morgan relating to the Accounts. J.P. Morgan may impose reasonable restrictions on the number of individuals allowed access, the frequency and length of such access, and the scope of the records made available. The Customer shall reimburse J.P. Morgan for the reasonable cost of copying, collating and researching archived information.

 

  2.14 Maintenance of Financial Assets at Subcustodian Locations
     
    (a) Unless Instructions require another location acceptable to J.P. Morgan, Financial Assets will be held in the country or jurisdiction in which their principal trading market is located, where such Financial Assets may be presented for payment, where such Financial Assets were acquired, or where such Financial Assets are located. J.P. Morgan reserves the right to refuse to accept delivery of Financial Assets or cash in countries and jurisdictions other than those referred to in Schedule 1 to this Agreement, as in effect from time to time. J.P. Morgan may modify Schedule 1 to this Agreement upon notice to the Customer.
       
    (b) J.P. Morgan reserves the right to restrict the services it provides in certain markets that are deemed by J.P. Morgan to be restricted markets from time to time. A current list of these markets, and a summary of the related restrictions, is set forth on Schedule 3. J.P. Morgan may update Schedule 3 from time to time upon notice to the Customer.
       
  2.15 Tax Relief Services
     
    J.P. Morgan will provide tax relief services as provided in Section 8.2.
     
  2.16 Foreign Exchange Transactions
     
    To facilitate the administration of the Customer’s trading and investment activity, J.P. Morgan may, but will not be obliged to, enter into spot or forward foreign exchange contracts with the Customer, or an Authorized Person, and may also provide foreign exchange contracts and facilities through its Affiliates or Subcustodians. Instructions, including standing Instructions, may be issued with respect to such contracts and facilities, but J.P. Morgan may establish rules or limitations concerning any foreign exchange contract or facility made available. In all cases where J.P. Morgan or its Affiliates or Subcustodians enter into foreign exchange contracts or facilities with the Customer, J.P. Morgan will not be executing or otherwise placing any foreign exchange transaction as the Customer’s agent, and the terms and conditions of such

 

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    foreign exchange contracts or facilities (as the case may be) will apply to such transactions. With respect to the Customer’s foreign exchange contracts or facilities with J.P. Morgan, J.P. Morgan will be acting as the Customer’s principal counterparty on such foreign exchange contracts or facilities (as the case may be).
     
  2.17 Notifications
     
    If the Customer has agreed to access information concerning the Accounts through J.P. Morgan’s website, J.P. Morgan may make any notifications required under this Agreement by posting it on the website.
     
  2.18 Sealed Envelopes
     
    From time to time, at the Customer’s request, J.P. Morgan may agree to hold certain Sealed Envelopes in custody for the Customer. Notwithstanding anything in this Agreement to the contrary, J.P. Morgan’s sole responsibility with regards to Sealed Envelopes will be to hold them in J.P. Morgan’s or in a Subcustodian’s possession. J.P. Morgan shall not be responsible for verifying the content of any Sealed Envelope purported to contain assets or assessing the value, validity or transferability of any such assets (including the existence or value of any investments contained in any Sealed Envelope). With respect to Sealed Envelopes, neither J.P. Morgan nor its Subcustodians will be obligated to perform any service or action described in this Agreement, including, but not limited to, asset servicing, tax services, corporate actions, income or dividend collection, settlement services or class action litigation.
       
  2.19 Compliance with Rule 17f-5 - Foreign Custody Manager Delegation

 

  (a) The Customer’s board of trustees (or equivalent body) (hereinafter “Board”) hereby delegates to J.P. Morgan, and, except as to the country or countries as to which J.P. Morgan may, from time to time, advise the Customer that it does not accept such delegation, J.P. Morgan hereby accepts the delegation to it, of the obligation to perform as the Customer’s “Foreign Custody Manager” (as that term is defined in rule 17f-5(a)(3) as promulgated under the 1940 Act), including for the purposes of: (i) selecting Eligible Foreign Custodians (as that term is defined in rule 17f-5(a)(1), and as the same may be amended from time to time, or that have otherwise been exempted pursuant to an SEC exemptive order) to hold foreign Financial Assets and cash, (ii) evaluating the contractual arrangements with such Eligible Foreign Custodians (as set forth in rule 17f-5(c)(2)) and (iii) monitoring such foreign custody arrangements (as set forth in rule 17f-5(c)(3)).
     
  (b) In connection with the foregoing, J.P. Morgan shall:
       
  (i) provide written reports notifying the Customer’s Board of the placement of Financial Assets and cash with particular Eligible Foreign Custodians and of any material change in the

 

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  arrangements with such Eligible Foreign Custodians, with such reports to be provided to Customer’s Board at such times as the Board deems reasonable and appropriate based on the circumstances of the Customer’s foreign custody arrangements (and, until further notice from the Customer, such reports shall be provided not less than quarterly with respect to the placement of Financial Assets and cash with particular Eligible Foreign Custodians and with reasonable promptness upon the occurrence of any material change in the arrangements with such Eligible Foreign Custodians);
       
  (ii) exercise such reasonable care, prudence and diligence in performing as the Customer’s Foreign Custody Manager as a person having responsibility for the safekeeping of foreign Financial Assets and cash would exercise;
       
  (iii) in selecting an Eligible Foreign Custodian, first have determined that foreign Financial Assets and cash placed and maintained in the safekeeping of such Eligible Foreign Custodian shall be subject to reasonable care, based on the standards applicable to custodians in the relevant market, after having considered all factors relevant to the safekeeping of such foreign Financial Assets and cash, including, without limitation, those factors set forth in rule 17f-5(c) (1) (i)-(iv);
       
  (iv) determine that the written contract with an Eligible Foreign Custodian requires that the Eligible Foreign Custodian shall provide reasonable care for foreign Financial Assets and cash based on the standards applicable to custodians in the relevant market; and
       
  (v) have established a system to monitor the continued appropriateness of maintaining foreign Financial Assets and cash with particular Eligible Foreign Custodians and of the governing contractual arrangements; it being understood, however, that in the event that J.P. Morgan shall have determined that the existing Eligible Foreign Custodian in a given country would no longer afford foreign Financial Assets and cash reasonable care and that no other Eligible Foreign Custodian in that country would afford reasonable care, J.P. Morgan shall promptly so advise the Customer and shall then act in accordance with the Instructions of the Customer with respect to the disposition of the affected foreign Financial Assets and cash.

 

  Subject to (b)(i)-(v) above, J.P. Morgan is hereby authorized to place and maintain foreign Financial Assets and cash on behalf of the Customer with Eligible Foreign Custodians pursuant to a written contract deemed appropriate by J.P. Morgan.
     
  (c) Except as expressly provided herein, the Customer shall be solely responsible to assure that the maintenance of foreign Financial Assets and cash hereunder complies with the rules, regulations,

 

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  interpretations and exemptive orders as promulgated by or under the authority of the SEC.
     
  (d) J.P. Morgan represents to the Customer that it is a U.S. Bank as defined in Rule 17f-5(a) (7). The Customer represents to J.P. Morgan that: (1) the foreign Financial Assets and cash being placed and maintained in J.P. Morgan’s custody are subject to the 1940 Act, as the same may be amended from time to time; (2) (i) its Board has determined that it is reasonable to rely on J.P. Morgan to perform as the Customer’s Foreign Custody Manager or (ii) its Board or its investment adviser shall have determined that the Customer may maintain foreign Financial Assets and cash in each country in which the Customer’s Financial Assets and cash shall be held hereunder and determined to accept Country Risk. Nothing contained herein shall require J.P. Morgan to make any selection or to engage in any monitoring on behalf of the Customer that would entail consideration of Country Risk.
     
  (e) J.P. Morgan shall provide to the Customer such information relating to Country Risk as is specified in Appendix 1 hereto. The Customer hereby acknowledges that: (i) such information is solely designed to inform the Customer of market conditions and procedures and is not intended as a recommendation to invest or not invest in particular markets; and (ii) J.P. Morgan has gathered the information from sources it considers reliable, but that J.P. Morgan shall have no responsibility for inaccuracies or incomplete information.

 

  2.20 Compliance with SEC Rule 17f-7 (“rule 17f-7”)
     
  (a) J.P. Morgan shall, for consideration by the Customer, provide an analysis in accordance with maintaining the Customer’s foreign Financial Assets and cash with each Eligible Securities Depository used by J.P. Morgan as of the date hereof (or, in the case of an Eligible Securities Depository not used by J.P. Morgan as of the date hereof, prior to the initial placement of the Customer’s foreign Financial Assets and cash at such Depository) and at which any foreign Financial Assets and cash of the Customer are held or are expected to be held. The foregoing analysis will be provided to the Customer at J.P. Morgan’s Website. In connection with the foregoing, the Customer shall notify J.P. Morgan of any Eligible Securities Depositories at which it does not choose to have its foreign Financial Assets and cash held. J.P. Morgan shall monitor the custody risks associated with maintaining the Customer’s foreign Financial Assets and cash at each such Eligible Securities Depository on a continuing basis and shall promptly notify the Customer or its adviser of any material changes in such risks.
     
  (b) J.P. Morgan shall exercise reasonable care, prudence and diligence in performing the requirements set forth in Section 2.20(a) above.
     
  (c) Based on the information available to it in the exercise of diligence, J.P. Morgan shall determine the eligibility under rule 17f-7 of each

 

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      depository before including it on Appendix 2 hereto and shall promptly advise the Customer if any Eligible Securities Depository ceases to be eligible. (Eligible Securities Depositories used by J.P. Morgan as of the date hereof are set forth in Appendix 2 hereto, and as the same may be amended on notice to the Customer from time to time.)
       
3. INSTRUCTIONS
     
  3.1 Acting on Instructions; Method of Instruction and Unclear Instructions
     
    (a) The Customer authorizes J.P. Morgan to accept, rely upon and/or act upon any Instructions received by it without inquiry. The Customer will indemnify the J.P. Morgan Indemnitees against, and hold each of them harmless from, any Liabilities that may be imposed on, incurred by, or asserted against the J.P. Morgan Indemnitees as a result of any action or omission taken in accordance with any Instruction unless the Liabilities results from an act of negligence, fraud or willful misconduct on the part of a J.P. Morgan Indemnitee with respect to the manner in which such Instruction is followed.
       
    (b) To the extent possible, instructions to J.P. Morgan shall be sent via electronic instruction or trade information system acceptable to J.P. Morgan or via facsimile transmission. Where reasonably practicable, the Customer will use automated and electronic methods of sending Instructions.
       
    (c) J.P. Morgan shall promptly notify an Authorized Person if J.P. Morgan determines that an Instruction does not contain all information reasonably necessary for J.P. Morgan to carry out the Instruction. J.P. Morgan may decline to act upon an Instruction if it does not receive clarification or confirmation reasonably satisfactory to it. J.P. Morgan will not be liable for any loss arising from any reasonable delay in carrying out any such Instruction while it seeks information, clarification or confirmation or in declining to act upon any Instruction for which it does not receive clarification reasonably satisfactory to it.
       
3.2 Verification and Security Procedures
     
  (a) J.P. Morgan and the Customer shall comply with any applicable Security Procedures with respect to the delivery or authentication of Instructions and shall separately ensure that any codes, passwords or similar devices are reasonably safeguarded. 
       
  (b) Either party may record any of their telephone communications. 
       
3.3 Instructions; Contrary to Law/Market Practice  
     
  J.P. Morgan need not act upon Instructions which it reasonably believes to be contrary to law, regulation or market practice, and J.P. Morgan shall be under no duty to investigate whether any Instructions comply with Applicable Law or market practice. In the event J.P. Morgan does not act upon such Instructions, J.P. Morgan will notify the Customer where reasonably practicable.

 

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  3.4 Cut-Off Times
     
    J.P. Morgan has established cut-off times for receipt of Instructions, which will be made available to the Customer. If J.P. Morgan receives an Instruction after its established cut-off time, J.P. Morgan will attempt to act upon the Instruction on the day requested if J.P. Morgan deems it practicable to do so or otherwise as soon as practicable after that day.
     
  3.5 Electronic Access
     
    Access by the Customer to certain applications or products of J.P. Morgan via J.P. Morgan’s web site or otherwise shall be governed by this Agreement and the terms and conditions set forth in Annex A.
     
4. FEES, EXPENSES AND OTHER AMOUNTS OWING TO J.P. MORGAN
   
  4.1 Fees and Expenses
     
    The Customer will pay J.P. Morgan for its services under this Agreement such fees as may be agreed upon in writing from time to time, together with J.P. Morgan’s reasonable out-of-pocket or incidental expenses, including, but not limited to, legal fees and tax or related fees incidental to processing charged directly or indirectly by governmental authorities, issuers, or their agents. Invoices will be payable within thirty (30) days of the date of the invoice. If the Customer disputes an invoice it shall nevertheless pay on or before the date that payment is due such portion of the invoice that is not subject to a bona fide dispute. J.P. Morgan may deduct amounts invoiced from the Cash Account except to the extent that the Customer has objected to the invoice within thirty (30) days of the date of the invoice (or such other period as the parties may agree in writing). Without prejudice to J.P. Morgan’s other rights, J.P. Morgan reserves the right to charge interest on overdue amounts from the due date until actual payment at such rate as J.P. Morgan customarily charges for similar overdue amounts.
     
  4.2 Overdrafts
     
    If a debit to any currency in the Cash Account results in a debit balance, then J.P. Morgan may, in its discretion, (i) advance an amount equal to the overdraft, (ii) refuse to settle in whole or in part the transaction causing such debit balance, or (iii) if any such transaction is posted to the Securities Account, reverse any such posting. If J.P. Morgan elects to make such an advance, the advance will be deemed a loan to the Customer, payable on demand, bearing interest at the applicable rate charged by J.P. Morgan from time to time, for such overdrafts, from the date of such advance to the date of payment (including after the date any judgment may be entered against the Customer with respect to any overdraft) and otherwise on the terms on which J.P. Morgan makes similar overdrafts available from time to time. No prior action or course of dealing on J.P. Morgan’s part with respect to the settlement of transactions on the Customer’s behalf will be asserted by the Customer against J.P. Morgan for J.P. Morgan’s refusal to make advances to the Cash Account or to settle any transaction for which the Customer does not have

 

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    sufficient available funds in the applicable currency in the Account. The Customer shall be deemed to be in default with respect to any such advance upon the occurrence of any event of the type specified in section 365(e)(1) of the U.S. Bankruptcy Code, as amended from time to time.
     
  4.3 J.P. Morgan’s Right Over Securities; Set-off
     
    (a) Without prejudice to J.P. Morgan’s rights under Applicable Law, J.P. Morgan and its Affiliates shall have, and the Customer grants to J.P. Morgan a first priority, perfected and continuing security interest in and a lien on all cash, Financial Assets and any other property of every kind that are credited to the Account or otherwise held for the Customer by J.P. Morgan ( “Account Assets” ) as security for any and all Liabilities of the Customer to J.P. Morgan or any of its Affiliates, and J.P. Morgan shall be entitled without notice to the Customer, to withhold delivery of such Account Assets, sell or otherwise realize any of such Account Assets and to apply the proceeds and any other monies credited to the Cash Account in satisfaction of such Liabilities. For this purpose, J.P. Morgan may make such currency conversions as may be necessary at its then current rates for the sale and purchase of relevant currencies.
       
    (b) Without prejudice to J.P. Morgan’s rights under Applicable Law, J.P. Morgan may set off against any Liabilities of the Customer to J.P. Morgan or any of its Affiliates, any amount in any currency (i) standing to the credit of any of the Customer’s accounts (whether deposit or otherwise) with any J.P. Morgan branch or office or with any Affiliate of J.P. Morgan or (ii) owed to the Customer by any J.P. Morgan branch or office or by any Affiliate of J.P. Morgan. For this purpose, J.P. Morgan shall be entitled to accelerate the maturity of any fixed term deposits and to effect such currency conversions as may be necessary at its current rates for the sale and purchase of the relevant currencies.
       
5. SUBCUSTODIANS, SECURITIES DEPOSITORIES, AND OTHER AGENTS
   
  5.1 Appointment of Subcustodians; Use of Securities Depositories
     
    (a) J.P. Morgan is authorized under this Agreement to act through and hold the Customer’s Financial Assets with Subcustodians. J.P. Morgan will use reasonable care in the selection, monitoring and continued appointment of such Subcustodians. In addition, J.P. Morgan and each Subcustodian may deposit Securities with, and hold Securities in any Securities Depository on such terms as such Securities Depository customarily operates and the Customer will provide J.P. Morgan with such documentation or acknowledgements that J.P. Morgan may require to hold the Financial Assets in such Securities Depository.
       
    (b) Unless required otherwise by Applicable law in the relevant market, any agreement J.P. Morgan enters into with a Subcustodian for holding J.P. Morgan’s customers’ assets will provide that such assets will not be subject to any right, charge, security interest, lien or claim of any kind

 

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      in favor of such Subcustodian or its creditors except a claim for payment for their safe custody or administration, or, in the case of cash deposits, except for liens or rights in favor of creditors of the Subcustodian arising under bankruptcy, insolvency or similar law, and that the beneficial ownership thereof will be freely transferable without the payment of money or value other than for safe custody or administration. J.P. Morgan shall be responsible for all claims for payment of fees for safe custody or administration so that no Subcustodian exercises any claim for such payment against the Customer’s assets. Where a Subcustodian deposits Securities with a Securities Depository, J.P. Morgan will cause the Subcustodian to identify on its records that the Securities deposited by the Subcustodian at such Securities Depository belong to J.P. Morgan, as agent. This Section 5.1(b) will not apply to the extent of any special agreement or arrangement made by the Customer with any particular Subcustodian.
     
    (c) J.P. Morgan is not responsible for the selection or monitoring of any Securities Depository and will not be liable for any act or omission by (or the insolvency of) any Securities Depository. In the event the Customer incurs a loss due to the negligence, willful default, or insolvency of a Securities Depository, J.P. Morgan will make reasonable efforts, in its discretion, to seek recovery from the Securities Depository, but J.P. Morgan will not be obligated to institute legal proceedings, file proof of claim in any insolvency proceeding, or take any similar action.
       
  5.2 Liability for Subcustodians
     
    (a) Subject to Section 7.1(b), J.P. Morgan will be liable for direct losses incurred by the Customer that result from:
       
        (i) the failure by a Subcustodian to use reasonable care in the provision of custodial services by it in accordance with the standards prevailing in the relevant market or from the fraud or willful misconduct of such Subcustodian in the provision of custodial services by it; or
         
        (ii) the insolvency of any Affiliated Subcustodian Bank.
         
    (b) Subject to Section 5.1(a) and J.P. Morgan’s duty to use reasonable care in the monitoring of a Subcustodian’s financial condition as reflected in its published financial statements and other publicly available financial information concerning it customarily reviewed by J.P. Morgan in its oversight process, J.P. Morgan will not be responsible for any losses (whether direct or indirect) incurred by the Customer that result from the insolvency of any Subcustodian which is not a branch or an Affiliated Subcustodian Bank.
       
    (c) J.P. Morgan reserves the right to add, replace or remove Subcustodians. J.P. Morgan will give prompt notice of any such action, which will be advance notice if practicable. Upon request by the

 

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      Customer, J.P. Morgan will identify the name, address and principal place of business of any Subcustodian and the name and address of the governmental agency or other regulatory authority that supervises or regulates such Subcustodian.
     
6. ADDITIONAL PROVISIONS
   
  6.1 Representations of the Customer and J.P. Morgan
     
    (a) The Customer represents, warrants and covenants that (i) it has full authority and power, and has obtained all necessary authorizations and consents, to deposit and control the Financial Assets, Sealed Envelopes and cash in the Accounts, to use J.P. Morgan as its custodian in accordance with the terms of this Agreement, to borrow money (either short term or intraday borrowings in order to settle transactions prior to receipt of covering funds), grant a lien over Financial Assets as contemplated by Section 4.3, and enter into foreign exchange transactions; (ii) assuming execution and delivery of this Agreement by J.P. Morgan, this Agreement is the Customer’s legal, valid and binding obligation, enforceable against the Customer in accordance with its terms and it has full power and authority to enter into and has taken all necessary corporate action to authorize the execution of this Agreement; (iii) it has not relied on any oral or written representation made by J.P. Morgan or any person on its behalf, and acknowledges that this Agreement sets out to the fullest extent the duties of J.P. Morgan; (iv) it is a resident of the United States and shall notify J.P. Morgan of any changes in residency; (v) the Financial Assets, Sealed Envelopes and cash deposited in the Accounts (other than those assets held in Accounts established pursuant to certain account control agreements (“Control Account Assets”) among the Customer, J.P. Morgan and secured party named therein) are not subject to any encumbrance or security interest whatsoever and the Customer undertakes that, so long as Liabilities of the Customer under or in connection with this Agreement are outstanding, it will not create or permit to subsist any encumbrance or security interest over such Financial Assets, Sealed Envelopes or cash (other than Control Account Assets); (vi) no delivery of Securities by the Customer to J.P. Morgan and no Instruction by the Customer with respect to such Securities will contravene Applicable Law; and (vii) none of the Financial Assets, Sealed Envelopes and cash to be held under this Agreement are “plan assets” as defined in Section 3(42) of the Employee Retirement Income Security Act of 1974, as amended, or the regulations thereunder except as otherwise expressly notified to J.P. Morgan.
       
    J.P. Morgan may rely upon the certification by the Customer to it of certain information as may be required to perform J.P. Morgan’s obligations under this Agreement and the Customer shall indemnify J.P. Morgan against all losses, liability, claims or demands arising directly or indirectly from it reasonably relying upon any such certified information.

 

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  (b) J.P. Morgan represents and warrants that (i) assuming execution and delivery of this Agreement by the Customer, this Agreement is J.P. Morgan’s legal, valid and binding obligation, enforceable against J.P. Morgan in accordance with its terms and (ii) it has full power and authority to enter into and has taken all necessary corporate action to authorize the execution of this Agreement.
   
  6.2 The Customer is Liable to J.P. Morgan Even if it is Acting for Another Person
       
    If the Customer is acting as an agent or for another person as envisaged in Section 2.1(a) in respect of any transaction, cash, or Financial Asset, J.P. Morgan nevertheless will treat the Customer as its principal for all purposes under this Agreement. In this regard, the Customer will be liable to J.P. Morgan as a principal in respect of any transactions relating to the Account. The foregoing will not affect any rights J.P. Morgan might have against the Customer’s principal or the other person envisaged by Section 2.1(a).
       
  6.3 Special Settlement Services
     
    J.P. Morgan may, but shall not be obliged to, make available to the Customer from time to time special settlement services (including continuous linked settlement) for transactions involving Securities, cash, foreign exchange, and other instruments or contracts. The Customer shall comply, and shall cause its Authorized Persons to comply, with the requirements of any external settlement agency through which such settlements may be processed, including, without limitation, its rules and by-laws, where applicable.
       
7. WHEN J.P. MORGAN IS LIABLE TO THE CUSTOMER
       
  7.1 Standard of Care; Liability
       
  (a) J.P. Morgan will use reasonable care in performing its obligations under this Agreement. In the absence of negligence, fraud or willful misconduct, J.P. Morgan will not be in violation of this Agreement with respect to any matter as to which it has satisfied its obligation of reasonable care.
       
  (b) J.P. Morgan will be liable for the Customer’s direct damages to the extent they result from J.P. Morgan’s fraud, negligence or willful misconduct in performing its duties as set out in this Agreement and to the extent provided in Section 5.2(a). Nevertheless, under no circumstances will J.P. Morgan be liable for any indirect, incidental, consequential or special damages (including, without limitation, lost profits) of any form incurred by any person or entity, whether or not foreseeable and regardless of the type of action in which such a claim may be brought, with respect to the Accounts, J.P. Morgan’s performance under this Agreement, or J.P. Morgan’s role as custodian.
       
  (c) The Customer will indemnify the J.P. Morgan Indemnitees against, and hold them harmless from, any Liabilities that may be imposed on, incurred by or asserted against any of the J.P. Morgan Indemnitees in connection with or arising out of (i) J.P. Morgan’s performance under this Agreement, provided the J.P. Morgan Indemnitees have not acted

 

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      with negligence or engaged in fraud or willful misconduct in connection with the Liabilities in question or (ii) any J.P. Morgan Indemnitee’s status as a holder of record of the Customer’s Financial Assets. Nevertheless, the Customer will not be obligated to indemnify any J.P. Morgan Indemnitee under the preceding sentence with respect to any Liability for which J.P. Morgan is liable under Section 5.2(a) of this Agreement.
       
  (d) The Customer agrees that J.P. Morgan provides no service in relation to, and therefore has no duty or responsibility to: (i) question Instructions or make any suggestions to the Customer or an Authorized Person regarding such Instructions; (ii) supervise or make recommendations with respect to investments or the retention of Financial Assets; (iii) advise the Customer or an Authorized Person regarding any default in the payment of principal or income of any Security other than as provided in Section 2.7(b) of this Agreement; and (iv) evaluate or report to the Customer or an Authorized Person regarding the financial condition of any broker, agent or other party to which J.P. Morgan is instructed to deliver Financial Assets or cash. J.P. Morgan is not responsible or liable in any way for the genuineness or validity of any Security or instrument received, delivered or held by J.P. Morgan in physical form that appears to be genuine and valid.
       
  7.2 Force Majeure
       
    J.P. Morgan will maintain and update from time to time business continuation and disaster recovery procedures with respect to its global custody business that it determines from time to time meet reasonable commercial standards. J.P. Morgan will have no liability, however, for any damage, loss, expense or liability of any nature that the Customer may suffer or incur, caused by an act of God, fire, flood, civil or labor disturbance, war, terrorism, act of any governmental authority or other act or threat of any authority (de jure or de facto), legal constraint, fraud or forgery (other than on the part of J.P. Morgan or its employees), malfunction of equipment or software (except where such malfunction is primarily and directly attributable to J.P. Morgan’s negligence in maintaining the equipment or software), currency re-denominations, failure of or the effect of rules or operations of any external funds transfer system, inability to obtain or interruption of external communications facilities, or any other cause beyond the reasonable control of J.P. Morgan (including without limitation, the non-availability of appropriate foreign exchange).
       
  7.3 J.P. Morgan May Consult With Counsel
       
    J.P. Morgan will be entitled to rely on, and may act upon the advice of professional advisors in relation to matters of law, regulation or market practice (which may be the professional advisors of the Customer), and will not be liable to the Customer under this Agreement for any action taken or omitted pursuant to such advice, provided that J.P. Morgan exercised reasonable care in the selection of such professional advisors. J.P. Morgan will consult with Customer prior to obtaining the advice of a professional advisor in the event J.P. Morgan intends to seek reimbursement for such professional advisor’s fees

 

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    from the Customer. Further, this clause will not restrict or otherwise limit any liability that J.P. Morgan would otherwise incur under this Agreement for actions taken or omitted prior to seeking such advice.
     
  7.4 J.P. Morgan Provides Diverse Financial Services and May Generate Profits as a Result
     
    The Customer hereby authorizes J.P. Morgan to act under this Agreement notwithstanding that: (a) J.P. Morgan or any of its divisions, branches or Affiliates may have a material interest in transactions entered into by the Customer with respect to the Account or that circumstances are such that J.P. Morgan may have a potential conflict of duty or interest, including the fact that J.P. Morgan or its Affiliates may act as a market maker in the Financial Assets to which Instructions relate, provide brokerage services to other customers, act as financial adviser to the issuer of such Financial Assets, act in the same transaction as agent for more than one customer, have a material interest in the issue of the Financial Assets; or earn profits from any of the activities listed herein and (b) J.P. Morgan or any of its divisions, branches or Affiliates may be in possession of information tending to show that the Instructions received may not be in the best interests of the Customer. J.P. Morgan is not under any duty to disclose any such information.
     
  7.5 Assets Held Outside J.P. Morgan’s Control
     
    J.P. Morgan will not be obliged to (a) hold Financial Assets or cash with any person not agreed to by J.P. Morgan or (b) register or record Financial Assets in the name of any person not agreed to by J.P. Morgan. Furthermore, J.P. Morgan will not be obliged to register or record on J.P. Morgan’s records Financial Assets held outside J.P. Morgan’s control. If, however, the Customer makes any such request and J.P. Morgan agrees to the request, the consequences of doing so will be at the Customer’s own risk. J.P. Morgan shall not be liable for any losses incurred as a result and may be precluded from providing some of the services referred to in this Agreement (for example, and without limitation, income collection, proxy voting, class action litigation and Corporate Action notification and processing).
     
  7.6 Ancillary Services
     
    J.P. Morgan and its Subcustodians may use third party delivery services and providers of information regarding non-core custody services matters such as pricing, proxy voting, corporate actions and class action litigation and use local agents to provide extraordinary services such as attendance at annual meetings of issuers of Securities. Although J.P. Morgan will use reasonable care (and cause its Subcustodians to use reasonable care) in the selection and retention of such third party providers and local agents, it will not be responsible for any errors or omissions made by them in providing the relevant information or services.
     
  7.7 Service Locations
     
    J.P. Morgan maintains various operational/service centers and locations through the United States and foreign jurisdictions. The services provided

 

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    under this Agreement may be provided from one or more such locations. J.P. Morgan may change the operational/service centers and locations as it deems necessary or appropriate for its business concerns.
       
8. TAXATION
       
  8.1 Tax Obligations
       
    (a) The Customer will pay or reimburse J.P. Morgan, and confirms that J.P. Morgan is authorized to deduct from any cash received or credited to the Cash Account, any taxes or levies required by any revenue or governmental authority for whatever reason in respect of the Customer’s Accounts.
       
  (b) The Customer will provide to J.P. Morgan such certifications, declarations, documentation, and information as it may require in connection with taxation, and warrants that, when given, this information is true and correct in every respect, not misleading in any way, and contains all material information. The Customer undertakes to notify J.P. Morgan immediately if any information requires updating or correcting. J.P. Morgan provides no service of controlling or monitoring, and therefore has no duty in respect of, or liability for any taxes, penalties, interest or additions to tax, payable or paid that result from (i) the inaccurate completion of documents by the Customer or any third party; (ii) provision to J.P. Morgan or a third party of inaccurate or misleading information by the Customer or any third party; (iii) the withholding of material information by the Customer or any third party; or (iv) any delay by any revenue authority or any other cause beyond J.P. Morgan’s control.
       
  (c) If J.P. Morgan does not receive appropriate certifications, documentation and information then, as and when appropriate and required, additional tax shall be deducted from all income received in respect of the Financial Assets issued (including, but not limited to, United States non-resident alien tax and/or backup withholding tax).
       
  (d) The Customer will be responsible in all events for the timely payment of all taxes relating to the Financial Assets in the Securities Account; provided, however, that J.P. Morgan will be responsible for any penalty or additions to tax due solely as a result of J.P. Morgan’s negligent acts or omissions with respect to paying or withholding tax or reporting interest, dividend or other income paid or credited to the Cash Account.
       
  8.2 Tax Relief Services
       
    (a) Subject to the provisions of this Section, J.P. Morgan will provide (i) a “relief at source” service to obtain a reduction of withholding tax withheld as may be available in the applicable market in respect of income payments on Financial Assets credited to the Securities Account that J.P. Morgan believes may be available to the Customer and/or (ii) a tax reclaim service on certain qualifying Financial Assets. To defray

 

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      expenses pertaining to nominal tax claims, J.P. Morgan may from time-to-time set minimum thresholds as to a de minimis value of tax reclaims or reduction of withholding which it will pursue in respect of income payments under this Section.
       
  (b) The provision of a tax relief service by J.P. Morgan is conditional upon J.P. Morgan receiving from the Customer (i) a declaration of its identity and place of residence and (ii) certain other documentation (pro forma copies of which are available from J.P. Morgan), prior to the receipt of Financial Assets in the Account and/or the payment of income.
       
  (c) J.P. Morgan will perform tax relief services only with respect to taxation levied by the revenue authorities of the countries advised to the Customer from time to time and J.P. Morgan may, by notification in writing, in its absolute discretion, supplement or amend the countries in which the tax relief services are offered. Other than as expressly provided in this Section 8.2, J.P. Morgan will have no responsibility with regard to the Customer’s tax position or status in any jurisdiction.
       
9. TERMINATION
       
  9.1 Termination
       
  (a) The initial term of this Agreement shall be for a period of three years following the date on which J.P. Morgan commenced providing services under the Agreement. Following the initial term, either party may terminate this Agreement on one hundred and twenty (120) days’ written notice to the other party.
       
    (b) Notwithstanding Section 9.1(a):

 

    (i) Either party may terminate this Agreement immediately on written notice to the other party in the event that a material breach of this Agreement by the other party has not been cured within thirty (30) days’ of that party being given written notice of the material breach;
         
  (ii) Either party may terminate this Agreement immediately on written notice to the other party upon the other party being declared bankrupt, entering into a composition with creditors, obtaining a suspension of payment, being put under court controlled management, being subject to an involuntary order for the transfer of all or part of its business by a statutory authority, having any of its issued shares suspended from trading on any exchange on which they are listed (if applicable) or being the subject of a similar measure;
         
    (iii) J.P. Morgan may terminate this Agreement on sixty (60) days’ written notice to the Customer in the event that J.P. Morgan reasonably determines that the Customer

 

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has ceased to satisfy J.P. Morgan’s customary credit requirements; and
     
  (iv) The Customer may terminate this Agreement at any time on sixty (60) days’ written notice to J.P. Morgan upon payment of a termination fee. The termination fee will be an amount equal to six (6) times the average monthly fees paid during the six month period prior to the Customer’s notice of termination, or since the date J.P. Morgan commenced providing services under this Agreement if that period is less than six months.

 

9.2 Exit Procedure
     
    The Customer will provide J.P. Morgan full details of the persons to whom J.P. Morgan must deliver Financial Assets and cash within a reasonable period before the effective time of termination of this Agreement. If the Customer fails to provide such details in a timely manner, J.P. Morgan shall be entitled to continue to be paid fees under this Agreement until such time as it is able to deliver the Financial Assets and cash to its successor custodian, but J.P. Morgan may take such steps as it reasonably determines to be necessary to protect itself following the effective time of termination, including ceasing to provide transaction settlement services in the event that J.P. Morgan is unwilling to assume any related credit risk.  J.P. Morgan will in any event be entitled to deduct any amounts owing to it prior to delivery of the Financial Assets and cash (and, accordingly, J.P. Morgan will be entitled to sell Financial Assets and apply the sale proceeds in satisfaction of amounts owing to it). The Customer will reimburse J.P. Morgan promptly for all out-of-pocket expenses it incurs in delivering Financial Assets upon termination. Termination will not affect any of the liabilities either party owes to the other arising under this Agreement prior to such termination.

  

10. MISCELLANEOUS

 

10.1 Notices

 

Notices pursuant to Section 9 of this Agreement shall be sent or served by registered mail, overnight delivery services, such as Federal Express (FedEx) or United Parcel Service (UPS), etc., courier services or hand delivery to the address of the respective parties as set out on the first page of this Agreement, unless notice of a new address is given to the other party in writing.
     
  10.2 Successors and Assigns

 

This Agreement will be binding on each of the parties’ successors and assigns. The parties agree that neither party can assign or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of the other party, which consent will not be unreasonably withheld or delayed; except J.P. Morgan may assign this Agreement without the Customer’s consent to (a) any Affiliate or subsidiary of J.P. Morgan or (b) in connection with a merger, reorganization, stock sale or sale of all or substantially all of J.P. Morgan’s custody business.

 

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  10.3 Entire Agreement
     
    This Agreement, including the Schedules, Exhibits, and Riders, (and any separate agreement which J.P. Morgan and the Customer may enter into with respect to any Cash Account), sets out the entire Agreement between the parties in connection with the subject matter hereof, and this Agreement supersedes any other agreement, statement or representation relating to custody, whether oral or written. Amendments must be in writing and, except where this Agreement provides for amendments by notice from J.P. Morgan, signed by both parties.
     
  10.4 Information Concerning Deposits at J.P. Morgan’s Non-US Branch
     
    Under U.S. federal law, deposit accounts that the Customer maintains in J.P. Morgan’s foreign branches (outside of the U.S.) are not insured by the Federal Deposit Insurance Corporation. In the event of J.P. Morgan’s liquidation, foreign branch deposits have a lesser preference than U.S. deposits, and such foreign deposits are subject to cross-border risks.
     
  10.5 Insurance
     
    The Customer acknowledges that J.P. Morgan will not be required to maintain any insurance coverage specifically for the benefit of the Customer. J.P. Morgan will, however, provide summary information regarding its own general insurance coverage to the Customer upon written request.
     
  10.6 Security Holding Disclosure
     
    With respect to Securities and Exchange Commission Rule 14b-2 under The U.S Shareholder Communications Act, regarding disclosure of beneficial owners to issuers of Securities, J.P. Morgan is instructed not to disclose the name, address or Security positions of the Customer in response to shareholder communications requests regarding the Account.
     
  10.7 USA PATRIOT Act Disclosure
     
    Section 326 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) requires J.P. Morgan to implement reasonable procedures to verify the identity of any person that opens a new Account with it. Accordingly, the Customer acknowledges that Section 326 of the USA PATRIOT Act and J.P. Morgan’s identity verification procedures require J.P. Morgan to obtain information which may be used to confirm the Customer’s identity, including without limitation the Customer’s name, address and organizational documents (“identifying information”). The Customer may also be asked to provide information about its financial status such as its current audited and unaudited financial statements. The Customer agrees to provide J.P. Morgan with and consents to J.P. Morgan obtaining from third parties any such identifying and financial information required as a condition of opening an account with or using any service provided by J.P. Morgan.

 

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10.8 Governing Law and Jurisdiction
     
    This Agreement will be construed, regulated, and administered under the laws of the United States or State of New York, as applicable, without regard to New York’s principles regarding conflict of laws, except that the foregoing shall not reduce any statutory right to choose New York law or forum. The United States District Court for the Southern District of New York will have the sole and exclusive jurisdiction over any lawsuit or other judicial proceeding relating to or arising from this Agreement. If that court lacks federal subject matter jurisdiction, the Supreme Court of the State of New York, New York County will have sole and exclusive jurisdiction. Either of these courts will have proper venue for any such lawsuit or judicial proceeding, and the parties waive any objection to venue or their convenience as a forum. The parties agree to submit to the jurisdiction of any of the courts specified and to accept service of process to vest personal jurisdiction over them in any of these courts. The parties further hereby knowingly, voluntarily and intentionally waive, to the fullest extent permitted by applicable law, any right to a trial by jury with respect to any such lawsuit or judicial proceeding arising or relating to this Agreement or the transactions contemplated hereby. To the extent that in any jurisdiction the Customer may now or hereafter be entitled to claim, for itself or its assets, immunity from suit, execution, attachment (before or after judgment) or other legal process, the Customer shall not claim, and it hereby irrevocably waives, such immunity.
     
  10.9 Severability; Waiver; and Survival

 

    (a) If one or more provisions of this Agreement are held invalid, illegal or unenforceable in any respect on the basis of any particular circumstances or in any jurisdiction, the validity, legality and enforceability of such provision or provisions under other circumstances or in other jurisdictions and of the remaining provisions will not in any way be affected or impaired.
       
    (b) Except as otherwise provided herein, no failure or delay on the part of either party in exercising any power or right under this Agreement operates as a waiver, nor does any single or partial exercise of any power or right preclude any other or further exercise, or the exercise of any other power or right. No waiver by a party of any provision of this Agreement, or waiver of any breach or default, is effective unless it is in writing and signed by the party against whom the waiver is to be enforced.
       
    (c) The parties’ rights, protections, and remedies under this Agreement shall survive its termination.

  

  10.10 Confidentiality

 

    (a) Subject to Clause 10.10(b) J.P. Morgan will hold all Confidential Information in confidence and will not disclose any Confidential Information except as may be required by Applicable Law, a regulator with jurisdiction over J.P. Morgan’s business, or with the consent of the Customer.

 

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    (b) The Customer authorizes J.P. Morgan to disclose Confidential Information to:

 

      (i) any Subcustodian, subcontractor, agent, Securities Depository, securities exchange, broker, third party agent, proxy solicitor, issuer, or any other person that J.P. Morgan believes it is reasonably required in connection with J.P. Morgan’s provision of relevant services under this Agreement;
         
      (ii) its professional advisors, auditors or public accountants;
         
      (iii) its Affiliates and branches; and
         
      (iv) any revenue authority or any governmental entity in relation to the processing of any tax relief claim.
         
(c) Except as otherwise required by Applicable Law or as needed to enforce the terms of this Agreement, the parties shall hold the terms and conditions, including, without limitation, any commercial terms, of this Agreement in confidence.

   

10.11 Counterparts
     
    This Agreement may be executed in several counterparts each of which will be deemed to be an original and together will constitute one and the same agreement.
     
  10.12 No Third Party Beneficiaries
     
    A person who is not a party to this Agreement shall have no right to enforce any term of this Agreement.

 

ETFS Trust   JPMORGAN CHASE BANK, N.A. 
     
         
By:  /s/ Benoit Autier   By:  /s/ Brian Eckert
Name: Benoit Autier   Name: Brian Eckert
Title: President   Title: Vice President
Date: December 4, 2014   Date: December 22, 2014

 

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SCHEDULE 1
AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES) Last Updated November 14, 2014

 

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK
         
ARGENTINA   HSBC Bank Argentina S.A.
Avenida Martin Garcia 464, 2nd Floor
C1106ABJ Buenos Aires
ARGENTINA
  HSBC Bank Argentina S.A.
Buenos Aires
         
AUSTRALIA   JPMorgan Chase Bank, N.A.**
Level 19, 55 Collins Street
Melbourne 3000
AUSTRALIA
  Australia and New Zealand Banking Group Ltd.
Melbourne
         
AUSTRIA   UniCredit Bank Austria AG
Julius Tandler Platz - 3
A-1090 Vienna
AUSTRIA
  J.P. Morgan AG**
Frankfurt
         
BAHRAIN   HSBC Bank Middle East Limited
1st Floor, Building No 2505, Road No 2832
Al Seef 428
BAHRAIN
  HSBC Bank Middle East Limited
Al Seef
         
BANGLADESH   Standard Chartered Bank
Portlink Tower
Level-6, 67 Gulshan Avenue
Gulshan
Dhaka-1212
BANGLADESH
  Standard Chartered Bank
Dhaka
         
BELGIUM   BNP Paribas Securities Services S.C.A.
Boulevard Louis Schmidt 2
3rd Floor
1040 Brussels
BELGIUM
  J.P. Morgan A.G.**
Frankfurt
         
BERMUDA   HSBC Bank Bermuda Limited
6 Front Street
Hamilton HM 11
BERMUDA
  HSBC Bank Bermuda Limited
Hamilton
         
BOTSWANA   Standard Chartered Bank Botswana Limited
5th Floor, Standard House
P.O. Box 496
Queens Road, The Mall
Gaborone
BOTSWANA
  Standard Chartered Bank Botswana Limited
Gaborone
         
BRAZIL   J.P. Morgan S.A. DTVM**
Rua Dr. Renato Paes de Barros, 1017, Floor 9
Sao Paulo SP 04530-001
BRAZIL
  J.P. Morgan S.A. DTVM**
Sao Paulo
         
BULGARIA   Citibank Europe plc
Serdika Offices
10th Floor
48 Sitnyakovo Blvd
Sofia 1505
BULGARIA
  ING Bank N.V.
Sofia

 

** J.P. Morgan affiliate Page 1 of 11 Correspondent banks are listed for information only.
 
AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES)

 

Last Updated November 14, 2014

 

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK
         
CANADA   Canadian Imperial Bank of Commerce
Commerce Court West
Security Level
Toronto Ontario M5L 1G9
CANADA

Royal Bank of Canada
155 Wellington Street West, 2nd Floor
Toronto Ontario M5V 3L3
CANADA
  Royal Bank of Canada
Toronto
         
CHILE   Banco Santander Chile
Bandera 140, Piso 4
Santiago
CHILE
  Banco Santander Chile
Santiago
         
CHINA A-SHARE   HSBC Bank (China) Company Limited
33/F, HSBC Building, Shanghai ifc
8 Century Avenue, Pudong
Shanghai 200120

THE PEOPLE’S REPUBLIC OF CHINA
  HSBC Bank (China) Company Limited
Shanghai
         
CHINA B-SHARE   HSBC Bank (China) Company Limited
33/F, HSBC Building, Shanghai ifc
8 Century Avenue, Pudong
Shanghai 200120

THE PEOPLE’S REPUBLIC OF CHINA
  JPMorgan Chase Bank, N.A.**


JPMorgan Chase Bank, N.A., Hong Kong**
Hong Kong
         
CHINA CONNECT   JPMorgan Chase Bank, N.A.**
48th Floor, One Island East
18 Westlands Road, Quarry Bay

HONG KONG
  JPMorgan Chase Bank, N.A.**
Hong Kong
         
COLOMBIA   CorpBanca Investment Trust Colombia S.A.
Carrera 7 No. 99-53, Piso 18
Bogota
COLOMBIA
  Banco CorpBanca Investment Trust S.A.
Bogot
á
         
*COSTA RICA*   Banco BCT, S.A.
150 Metros Norte de la Catedral Metropolitana
Edificio BCT
San Jose
COSTA RICA
  Banco BCT, S.A.
San Jose
         
*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION*
         
CROATIA   Privredna Banka Zagreb d.d.
Radnicka cesta 50
10000 Zagreb
CROATIA
  Zagrebacka Banka d.d.
Zagreb
         
CYPRUS   HSBC Bank plc
109-111, Messogian Ave.
115 26 Athens
CYPRUS
  J.P. Morgan AG**
Frankfurt

 

** J.P. Morgan affiliate Page 2 of 11 Correspondent banks are listed for information only.
 
AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES)

 

Last Updated November 14, 2014

 

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK
         
CZECH REPUBLIC   UniCredit Bank Czech Republic and Slovakia, a.s.
BB Centrum - FILADELFIE
Zeletavska 1525-1
140 92 Prague 1
CZECH REPUBLIC
  Ceskoslovenska obchodni banka, a.s.
Prague
         
DENMARK   Nordea Bank Danmark A/S
Christiansbro
Strandgade 3
P.O. Box 850
DK-0900 Copenhagen C
DENMARK
  Nordea Bank Danmark A/S
Copenhagen C
         
EGYPT   Citibank, N.A.
4 Ahmed Pasha Street
Garden City
Cairo
EGYPT
  Citibank, N.A.
Cairo
         
ESTONIA   Swedbank AS
Liivalaia 8
15040 Tallinn
ESTONIA
  J.P. Morgan AG**
Frankfurt
         
FINLAND   Nordea Bank Finland Plc
Aleksis Kiven katu 3-5
FIN-00020 NORDEA Helsinki
FINLAND
  J.P. Morgan AG**
Frankfurt
         
FRANCE   BNP Paribas Securities Services S.C.A.
Les Grands Moulins de Pantin
9, rue du Debarcadere
93500 Pantin
FRANCE
  J.P. Morgan AG**
Frankfurt
         
GERMANY   Deutsche Bank AG
Alfred-Herrhausen-Allee 16-24
D-65760 Eschborn
GERMANY

J.P. Morgan AG#**
Junghofstrasse 14
60311 Frankfurt
GERMANY

# Custodian for local German custody clients only.
  J.P. Morgan AG**
Frankfurt
         
GHANA   Standard Chartered Bank Ghana Limited
Accra High Street
P.O. Box 768
Accra
GHANA
  Standard Chartered Bank Ghana Limited
Accra
         
GREECE   HSBC Bank plc
Messogion 109-111
11526 Athens
GREECE
  J.P. Morgan AG**
Frankfurt

 

** J.P. Morgan affiliate Page 3 of 11 Correspondent banks are listed for information only.
 
AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES)

 

Last Updated November 14, 2014

 

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK
         
HONG KONG   JPMorgan Chase Bank, N.A.**
48th Floor, One Island East
18 Westlands Road, Quarry Bay

HONG KONG
  JPMorgan Chase Bank, N.A.**
Hong Kong
         
HUNGARY   Deutsche Bank AG
Hold utca 27
H-1054 Budapest
HUNGARY
  ING Bank N.V.
Budapest
         
*ICELAND*   Islandsbanki hf.
Kirkjusandur 2
IS-155 Reykjavik
ICELAND
  Islandsbanki hf.
Reykjavik
         
*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION*
         
INDIA   JPMorgan Chase Bank, N.A.**
6th Floor, Paradigm ‘B’ Wing
Mindspace, Malad (West)
Mumbai 400 064
INDIA
  JPMorgan Chase Bank, N.A.**
Mumbai
         
INDONESIA   Deutsche Bank AG
Deutsche Bank Building
80 Jl. Inman Bonjol
Jakarta 10310
INDONESIA
  Deutsche Bank AG
Jakarta
         
IRELAND   JPMorgan Chase Bank, N.A.**
25 Bank Street, Canary Wharf
London E14 5JP
UNITED KINGDOM
  J.P. Morgan AG**
Frankfurt
         
ISRAEL   Bank Leumi le-lsrael B.M.
35, Yehuda Halevi Street
65136 Tel Aviv
ISRAEL
  Bank Leumi le-lsrael B.M.
Tel Aviv
         
ITALY   BNP Paribas Securities Services S.C.A.
Via Asperto, 5
20123 Milan
ITALY
  J.P. Morgan AG**
Frankfurt
         
JAPAN   Mizuho Bank, Ltd.
4-16-13, Tsukishima
Chuo-ku
Tokyo 104-0052
JAPAN

The Bank of Tokyo-Mitsubishi UFJ, Limited
1-3-2 Nihombashi Hongoku-cho
Chuo-ku
Tokyo 103-0021
JAPAN
  JPMorgan Chase Bank, N.A.**
Tokyo

 

** J.P. Morgan affiliate Page 4 of 11 Correspondent banks are listed for information only.
 
AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES)

 

Last Updated November 14, 2014

 

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK
         
*JORDAN*   Standard Chartered Bank
Shmeissani Branch
Al-Thaqafa Street
Building # 2
P.O.BOX 926190
Amman - 11110 Jordan
JORDAN
  Standard Chartered Bank
Amman - 11110
         
*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION*
         
KAZAKHSTAN   JSC Citibank Kazakhstan
Park Palace, Building A, Floor 2
41 Kazybek Bi
Almaty 050010
KAZAKHSTAN
  JSC Citibank Kazakhstan
Almaty
         
KENYA   Standard Chartered Bank Kenya Limited
Chiromo

48 Westlands Road
Nairobi 00100
KENYA
  Standard Chartered Bank Kenya Limited
Nairobi
         
KUWAIT   HSBC Bank Middle East Limited
Kuwait City, Qibla Area
Hamad Al-Saqr Street, Kharafi Tower
G/1/2 Floors
Safat 13017
KUWAIT
  HSBC Bank Middle East Limited
Safat
         
LATVIA   Swedbank AS
Balasta dambis 1a
Riga LV-1048
LATVIA
  Swedbank AS
Riga
         
LEBANON   HSBC Bank Middle East Limited
HSBC Main Building
Riad El Solh, P.O. Box 11-1380
1107-2080 Beirut
LEBANON
  JPMorgan Chase Bank, N.A.**
New York
         
LITHUANIA   AB SEB Bankas
12 Gedimino pr.
LT 2600 Vilnius
LITHUANIA
  AB SEB Bankas
Vilnius


J.P. Morgan AG**
Frankfurt
         
LUXEMBOURG   BNP Paribas Securities Services S.C.A.
33, Rue de Gasperich
L-5826 Hesperange
LUXEMBOURG
  J.P. Morgan AG**
Frankfurt
         
*MALAWI*   Standard Bank Limited, Malawi
1st Floor Kaomba House
Cnr Glyn Jones Road & Victoria Avenue
Blantyre
MALAWI
  Standard Bank Limited, Malawi
Blantyre
         
* RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION*

 

                  Global Custody

 

** J.P. Morgan affiliate Page 5 of 11 Correspondent banks are listed for information only.
 
AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES)  

 

Last Updated November 14, 2014

 

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK
         
MALAYSIA   HSBC Bank Malaysia Berhad
2 Leboh Ampang
12th Floor, South Tower
50100 Kuala Lumpur
MALAYSIA
  HSBC Bank Malaysia Berhad
Kuala Lumpur
         
MAURITIUS   The Hongkong and Shanghai Banking Corporation Limited
HSBC Centre
18 Cybercity
Ebene
MAURITIUS
  The Hongkong and Shanghai Banking Corporation Limited
Ebene
         
MEXICO   Banco Nacional de Mexico, S.A.
Act. Roberto Medellin No. 800 3er Piso Norte
Colonia Santa Fe
01210 Mexico, D.F.

MEXICO
  Banco Santander (Mexico), S.A.
Mexico, D.F.
         
MOROCCO   Societe Generale Marocaine de Banques
55 Boulevard Abdelmoumen
Casablanca 20100
MOROCCO
  Attijariwafa Bank S.A.
Casablanca
         
NAMIBIA   Standard Bank Namibia Limited
Mutual Platz
Cnr. Stroebel and Post Streets
P.O.Box 3327
Windhoek
NAMIBIA
  The Standard Bank of South Africa Limited
Johannesburg
         
NETHERLANDS   BNP Paribas Securities Services S.C.A.
Herengracht 595
1017 CE Amsterdam
NETHERLANDS
  J.P. Morgan AG**
Frankfurt
         
NEW ZEALAND   JPMorgan Chase Bank, N.A.**
Level 13, 2 Hunter Street
Wellington 6011
NEW ZEALAND
  Westpac Banking Corporation
Wellington
         
NIGERIA   Stanbic IBTC Bank Plc
Plot 1712
Idejo Street
Victoria Island
Lagos
NIGERIA
  Stanbic IBTC Bank Plc
Lagos
         
NORWAY   Nordea Bank Norge ASA
Essendropsgate 7
PO Box 1166
NO-0107 Oslo
NORWAY
  Nordea Bank Norge ASA
Oslo

 

** J.P. Morgan affiliate Page 6 of 11 Correspondent banks are listed for information only.
 
AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES)  

 

Last Updated November 14, 2014

 

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK
         
OMAN   HSBC Bank Oman S.A.O.G.
2nd Floor Al Khuwair
PO Box 1727 PC 111
Seeb
OMAN
  HSBC Bank Oman S.A.O.G.
Seeb
         
PAKISTAN   Standard Chartered Bank (Pakistan) Limited
P.O. Box 4896
Ismail Ibrahim Chundrigar Road
Karachi 74000
PAKISTAN
  Standard Chartered Bank (Pakistan) Limited
Karachi
         
*PALESTINIAN
TERRITORIES*
  HSBC Bank Middle East Limited
Jaffa Street
P.O. Box 2067
Amman
PALESTINIAN AUTONOMOUS AREA
  HSBC Bank Middle East Limited
Amman

JPMorgan Chase Bank, N.A.**
New York
         
*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION*
         
PERU   Citibank del Peru S.A.
Av. Canaval y Moreryra 480 Piso 4
San Isidro, Lima 27
PERU
  Citibank del Peru S.A.
San Isidro, Lima
         
PHILIPPINES   The Hongkong and Shanghai Banking Corporation Limited
7/F HSBC Centre
3058 Fifth Avenue West
Bonifacio Global City
1634 Taguig City
PHILIPPINES
  The Hongkong and Shanghai Banking Corporation Limited
Taguig City
         
POLAND   Bank Handlowy w. Warszawie S.A.
ul. Senatorska 16
00-923 Warsaw
POLAND
  mBank S.A.
Warsaw
         
PORTUGAL   BNP Paribas Securities Services S.C.A.
Avenida D.João II, Lote 1.18.01, Bloco B,
7° andar
1998-028 Lisbon

PORTUGAL
  J.P. Morgan AG**
Frankfurt
         
QATAR   HSBC Bank Middle East Limited
2nd Floor, Ali Bin Ali Tower
Building 150 (Airport Road)
PO Box 57
Doha
QATAR
  HSBC Bank Middle East Limited
Doha
         
ROMANIA   Citibank Europe plc
145 Calea Victoriei
1st District
010072 Bucharest
ROMANIA
  ING Bank N.V.

 

** J.P. Morgan affiliate Page 7 of 11 Correspondent banks are listed for information only.
 
AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES)  

 

Last Updated November 14, 2014

 

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK
         
RUSSIA   J.P. Morgan Bank International (Limited Liability Company)**
10, Butyrsky Val
White Square Business Centre
Floor 12
Moscow 125047
RUSSIA
  JPMorgan Chase Bank, N.A.**
New York
A/C JPMorgan Chase Bank London
         
SAUDI ARABIA   HSBC Saudi Arabia Limited
2/F HSBC Building
Olaya Road, Al-Murooj
Riyadh 11413
SAUDI ARABIA
  HSBC Saudi Arabia Limited
Riyadh
         
SERBIA   Unicredit Bank Srbija a.d.
Airport City Belgrade
Omladinskih Brigada 88
11070 Belgrade
SERBIA
  Unicredit Bank Srbija a.d.
Belgrade
         
SINGAPORE   DBS Bank Ltd
10 Toh Guan Road
DBS Asia Gateway, Level 04-11 (4B)
608838
SINGAPORE
  Oversea-Chinese Banking Corporation
Singapore
         
SLOVAK REPUBLIC   UniCredit Bank Czech Republic and Slovakia, a.s.
Sancova 1/A
SK-813 33 Bratislava
SLOVAK REPUBLIC
  J.P. Morgan AG**
Frankfurt
         
SLOVENIA   UniCredit Banka Slovenija d.d.
Smartinska 140
SI-1000 Ljubljana
SLOVENIA
  J.P. Morgan AG**
Frankfurt
         
SOUTH AFRICA   FirstRand Bank Limited
1 Mezzanine Floor, 3 First Place, Bank City
Cnr Simmonds and Jeppe Streets
Johannesburg 2001
SOUTH AFRICA
  The Standard Bank of South Africa Limited
Johannesburg
         
SOUTH KOREA   Standard Chartered Bank Korea Limited
47 Jongro, Jongro-Gu
Seoul 110-702
SOUTH KOREA
  Standard Chartered Bank Korea Limited
Seoul
         
SPAIN   Santander Investment, S.A.
Ciudad Grupo Santander
Avenida de Cantabria, s/n
Edificio Ecinar, planta baja
Boadilla del Monte
28660 Madrid
SPAIN
  J.P. Morgan AG**
Frankfurt

 

** J.P. Morgan affiliate Page 8 of 11 Correspondent banks are listed for information only.
 
AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES)  

 

Last Updated November 14, 2014

 

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK
         
SRI LANKA   The Hongkong and Shanghai Banking Corporation Limited
24 Sir Baron Jayatillaka Mawatha
Colombo 1
SRI LANKA
  The Hongkong and Shanghai Banking Corporation Limited
Colombo
         
SWEDEN   Nordea Bank AB (publ)
Hamngatan 10
SE-105 71 Stockholm
SWEDEN
  Svenska Handelsbanken
Stockholm
         
SWITZERLAND   UBS AG
45 Bahnhofstrasse
8021 Zurich
SWITZERLAND
  UBS AG
Zurich
         
TAIWAN   JPMorgan Chase Bank, N.A.**
8th Floor, Cathay Xin Yi Trading Building
No. 108, Section 5, Xin Yi Road
Taipei 11047
TAIWAN
  JPMorgan Chase Bank, N.A.**
Taipei
         
*TANZANIA*   Stanbic Bank Tanzania Limited
Stanbic Centre
Corner Kinondoni and A.H.Mwinyi Roads
P.O. Box 72648
Dar es Salaam
TANZANIA
  Stanbic Bank Tanzania Limited
Dar es Salaam
         
* RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION*
 
THAILAND   Standard Chartered Bank (Thai) Public Company Limited
14th Floor, Zone B
Sathorn Nakorn Tower
90 North Sathorn Road Bangrak
Silom, Bangrak
Bangkok 10500
THAILAND
  Standard Chartered Bank (Thai) Public Company Limited
Bangkok
         
TRINIDAD AND
TOBAGO
  Republic Bank Limited
9-17 Park Street
Port of Spain
TRINIDAD AND TOBAGO
  Republic Bank Limited
Port of Spain
         
TUNISIA   Banque Internationale Arabe de Tunisie, S.A.
70-72 Avenue Habib Bourguiba
P.O. Box 520
Tunis 1000
TUNISIA
  Banque Internationale Arabe de Tunisie, S.A.
Tunis
         
TURKEY   Citibank A.S.
Inkilap Mah., Yilmaz Plaza
O. Faik Atakan Caddesi No: 3
34768 Umraniye-Istanbul
TURKEY
  JPMorgan Chase Bank, N.A.**
Istanbul

 

** J.P. Morgan affiliate Page 9 of 11 Correspondent banks are listed for information only.
 
AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES)  

 

Last Updated November 14, 2014

 

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK
         
UGANDA   Standard Chartered Bank Uganda Limited
5 Speke Road
P.O. Box 7111
Kampala
UGANDA
  Standard Chartered Bank Uganda Ltd
Kampala
         
*UKRAINE*   PJSC Citibank
16-g Dymyrova Street
03150 Kiev
UKRAINE
  JPMorgan Chase Bank, N.A.**
New York
A/C JPMorgan Chase Bank London
         
*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION*
 
UNITED ARAB
EMIRATES - ADX
  HSBC Bank Middle East Limited
Emaar Square, Level 4, Building No. 5
P.O. Box 502601
Dubai
UNITED ARAB EMIRATES
  The National Bank of Abu Dhabi
Abu Dhabi
         
UNITED ARAB
EMIRATES - DFM
  HSBC Bank Middle East Limited
Emaar Square, Level 4, Building No. 5
P.O. Box 502601
Dubai
UNITED ARAB EMIRATES
  The National Bank of Abu Dhabi
Abu Dhabi
         
UNITED ARAB
EMIRATES - NASDAQ
DUBAI
  HSBC Bank Middle East Limited
Emaar Square, Level 4, Building No. 5
P.O. Box 502601
Dubai
UNITED ARAB EMIRATES
  J.P. Morgan Chase Bank, N.A.
New York
A/C JPMorgan Chase Bank London
         
UNITED KINGDOM   JPMorgan Chase Bank, N.A.**
25 Bank Street, Canary Wharf
London E14 5JP
UNITED KINGDOM
  JPMorgan Chase Bank, N.A.**
London
       
  Deutsche Bank AG Depository and Clearing
Centre
10 Bishops Square

London E1 6EG
UNITED KINGDOM
  Varies by currency
         
UNITED STATES   JPMorgan Chase Bank, N.A.**
4 New York Plaza
New York NY 10004
UNITED STATES
  JPMorgan Chase Bank, N.A.**
New York
         
URUGUAY   Banco Itaú Uruguay S.A.
Zabala 1463
11000 Montevideo
URUGUAY
  Banco Itaú Uruguay S.A.
Montevideo
         
VENEZUELA   Citibank, N.A.
Avenida Casanova
Centro Comercial El Recreo
Torre Norte, Piso 19
Caracas 1050
VENEZUELA
  Citibank, N.A.
Caracas

 

** J.P. Morgan affiliate Page 10 of 11 Correspondent banks are listed for information only.
 
AGENT AND CASH NETWORK (CUSTODY & FUND SERVICES)  

 

Last Updated November 14, 2014

 

MARKET   SUBCUSTODIAN   CASH CORRESPONDENT BANK
         
VIETNAM   HSBC Bank (Vietnam) Ltd.
Centre Point
106 Nguyen Van Troi Street
Phu Nhuan District
Ho Chi Minh City
VIETNAM
  HSBC Bank (Vietnam) Ltd.
Ho Chi Minh City
         
*WAEMU - BENIN,
BURKINA FASO,
GUINEA-BISSAU, IVORY
COAST, MALI, NIGER,
SENEGAL, TOGO*
  Standard Chartered Bank Cote d’Ivoire SA
23 Boulevard de la Republique 1
01 B.P. 1141
Abidjan 17
IVORY COAST
  Standard Chartered Bank Cote d’Ivoire SA
Abidjan
         
*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION*
 
ZAMBIA   Standard Chartered Bank Zambia Plc
Standard Chartered House
Cairo Road
P.O. Box 32238
Lusaka 10101
ZAMBIA
  Standard Chartered Bank Zambia Plc
Lusaka
         
*ZIMBABWE*   Stanbic Bank Zimbabwe Limited
Stanbic Centre, 3rd Floor
59 Samora Machel Avenue
Harare
ZIMBABWE
  Stanbic Bank Zimbabwe Limited
Harare
         
*RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION*

 

This document is for information only and its contents are subject to change. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with J.P. Morgan. Neither this document nor any of its contents may be disclosed to any third party or used for any other purpose without the proper written consent of J.P. Morgan. J.P. Morgan has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby.

 

Global Custody

 

** J.P. Morgan affiliate Page 11 of 11 Correspondent banks are listed for information only.
 

SCHEDULE 2

 

Form of Board Resolution

 

  To: JPMorgan Chase Bank, N.A.

 

 

December 4, 2014

 

We hereby certify that the following is a true copy of the minutes of the Board of Directors of ETFS Trust* (the “ Company ”) which was duly called and held on December 2, 2014 and at which a duly qualified quorum was present throughout and entitled to vote.

 

VOTED: That J.P. Morgan be, and hereby is, appointed to serve as custodian for the Trust and the Initial Series under the terms and conditions set forth in the Custody Agreement.

 

VOTED: That the Custody Agreement, in substantially the form presented to the Board at this meeting, with such modifications as the Trust’s officers and counsel may deem necessary or desirable be, and hereby is, approved.

 

VOTED: That J.P. Morgan be, and hereby is, authorized to use the Federal Reserve/Treasury Book-Entry System for United States and federal agency securities and any securities depositary or book-entry system maintained by a clearing agency registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 (collectively, the “Book-Entry System”) on a continuous and on-going basis until properly instructed under the Custody Agreement, as may be amended from time to time, to the contrary: (i) to deposit in the Book-Entry System all securities of the Trust eligible for deposit therein and (ii) to utilize the Book-Entry System to the extent feasible in connection with J.P. Morgan’s performance of its duties under the Custody Agreement including without limitation, settlements and purchases of sales of securities by the Trust and deliveries and returns of securities collateral in connection with borrowing, all in conformity with Rule 17f-4 under the 194 Act.

 

VOTED: That the arrangements set forth in the Custody Agreement, pursuant to which J.P. Morgan, as custodian for the securities of the Trust’s investment portfolios, may deposit securities in clearing agencies registered with the SEC which acts as Securities Depositories and Treasury Book-Entry System be, and they hereby are, approved.

 

VOTED: That the Board hereby determines that, based upon representations made and information provided to it by J.P. Morgan, it is reasonable to rely on J.P. Morgan to perform the “Delegated Responsibilities” (as defined below) in accordance with Rules 17f-5 and 17f-7 and the [Custody Agreement].

 

VOTED: That J.P. Morgan be, and hereby is, appointed as Foreign Custody Manager, as defined in Rule 17f-5 under the 1940 Act, to perform the responsibilities in the Custody Agreement, including but not limited to: (a) determining that “eligible foreign custodians” will hold the Trust’s assets in the exercise of reasonable care, based on the standards applicable to custodians in the relevant market, after considering all factors relevant to the safekeeping of the Trust’s assets; (b) ensuring that the Trust’s arrangements with eligible foreign custodians are governed by written contracts; (c) placing the Trust’s assets with foreign custodians; (d) monitoring the Trust’s foreign custody arrangements with foreign custodians; (e) notifying the Trust regarding certain events; and (f) providing written

______________________

 

* Name of Company in full.

 

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reports to the Board in accordance with Rule 17f-5 and the Custody Agreement (the “Delegated Responsibilities”).

 

VOTED: That J.P. Morgan’s appointment as the Board’s delegate and Foreign Custody Manager be, and hereby is, subject to J.P. Morgan’s confirmation of its willingness to so act and its agreement to exercise the reasonable care, prudence, and diligence a person having responsibility for the safekeeping of the assets of an investment company registered under the 1940 Act would exercise in performing the Delegated Responsibilities and subject to the execution of the Custody Agreement.

 

VOTED: That J.P. Morgan be, and hereby is, directed to provide the Board and the Trust’s investment advisers such analysis as required by Rule 17f-7 and as they reasonably request regarding the safekeeping of the Trust’s assets with an “eligible securities depository” as defined in that rule.

 

VOTED: That the Trust be, and hereby is, authorized and empowered to make, execute, verify, and file any and all other documents and instruments and to take any all steps or actions necessary or advisable in connection with the foreign custody arrangement presented at this meeting in order to carry out the intent and purpose of the foregoing resolutions.

 

VOTED: That the proper officers of the Trust be, and hereby severally are, authorized, directed and empowered to execute and deliver the Custody Agreement on behalf of the Trust.

 

  ............................................................................Director  
   
  /s/ Benoit Autier              
  ............................................................................Secretary  

 

 

 

SCHEDULE 3

 

J.P. Morgan Worldwide Securities Services Custody Restricted Markets Schedule

 

J.P. Morgan Investor Services Global Custody Restricted Markets Schedule

 

The following table identifies certain markets that J.P. Morgan has determined to be restricted markets and provides summary information about the nature of the restrictions applicable in each. J.P. Morgan reserves the right to update this Schedule from time to time upon notice to Customer.

 

Market Restrictions
Costa Rica If J.P. Morgan’s Costa Rican Subcustodian exits the market or becomes an unacceptable provider of subcustody services, J.P. Morgan may cease to provide custody services with respect to Securities that are safekept in Costa Rica. Although J.P. Morgan will work with customers to mitigate the impact of any decision to exit the market, it may not be practicable to give significant advance notice of the exit.
Iceland

Until further notice from J.P. Morgan, no deposits of Icelandic currency will be held in the Customer’s Cash Account except for the proceeds of sales of Securities safekept in Iceland (“Icelandic Securities”) or where income and corporate action proceeds are paid in local currency.

 

Until further notice from J.P. Morgan, any credit of Icelandic currency to the Customer’s Cash Account with J.P. Morgan will be conditional and subject to reversal by J.P. Morgan upon notice to Customer except to the extent that the funds are able to be applied at Customer’s Instruction to the purchase of Icelandic Securities or J.P. Morgan is able to repatriate the funds from J.P. Morgan’s Icelandic Subcustodian via a foreign exchange transaction (upon Instruction received from Customer). In this regard, Customer will be entitled to no more than Customer’s pro rata share of any recoveries that J.P. Morgan is able to obtain, as reasonably determined by J.P. Morgan.

Malawi

Local currency will be held in one or more separate cash accounts that J.P. Morgan opens for the benefit of its customers with
J.P. Morgan’s Malawi Subcustodian.

 

Due to unclear standards in the Malawi market with respect to the completion and submission of corporate action elections,
J.P. Morgan will be subject to a “reasonable efforts” standard of care with respect to any Corporate Action related to Securities safekept in Malawi (“Malawi Securities”).

 

If J.P. Morgan’s Malawi Subcustodian exits the market or becomes an unacceptable provider of subcustody services, J.P. Morgan may cease to provide custody services with respect to Malawi Securities. Although J.P. Morgan will work with customers to mitigate the impact of any decision to exit the market, it may not be practicable to give significant advance notice of the exit.

Palestinian Territories Until further notice from J.P. Morgan, any credit of U.S. Dollars or Jordanian Dinars to the Customer’s Cash Account with J.P. Morgan applied at Customer’s Instruction to the purchase or sale of Securities safekept in the Palestinian Territories will be conditional and subject to reversal by J.P. Morgan upon notice to Customer except to the extent that the funds are able to be repatriated or J.P. Morgan is able to repatriate the funds from J.P. Morgan’s Subcustodian in the Palestinian Territories via a foreign exchange transaction (upon Instruction received from Customer). In this regard, Customer will be entitled to no more than Customer’s

 

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Market Restrictions
 

pro rata share of any recoveries that J.P. Morgan is able to obtain, as reasonably determined by J.P. Morgan.

 

Clients acknowledge that, due to the political uncertainties and ongoing development, issues may arise in the Palestinian Territories in connection with any of the services which the Palestinian Subcustodian is providing under our subcustodian agreement with them. As a result, J.P. Morgan wishes to highlight that there could be disruption in services, and that these disruptions or limitations in service would be considered as force majeure.

Tanzania

Local currency will be held in one or more separate cash accounts that J.P. Morgan opens for the benefit of its customers with J.P. Morgan’s Tanzanian Subcustodian.

 

Due to the unclear standards in the Tanzanian market with respect to the completion and submission of corporate action elections, J.P. Morgan will be subject to a “reasonable efforts” standard of care with respect to any Corporate Action related to Securities safekept in Tanzania (“Tanzanian Securities”).

 

If J.P. Morgan’s Tanzanian Subcustodian exits the market or becomes an unacceptable provider of subcustody services, J.P. Morgan may cease to provide custody services with respect to Tanzanian Securities. Although J.P. Morgan will work with customers to mitigate the impact of any decision to exit the market, it may not be practicable to give significant advance notice of the exit.

Ukraine (for Ukrainian Equities only)

Customer should refer to the current version of the applicable J.P. Morgan’s Ukraine briefing memo regarding the account structure and corporate action nuances of the Ukrainian market.

 

For client opening accounts in Ukraine and unincorporated client types in particular, due to unclear standards in the Ukrainian market with respect to the completion and submission of corporate action elections, J.P. Morgan will be subject to a “reasonable efforts” standard of care with respect to any Corporate Action related to equity Securities safekept in Ukraine.

West African Economic and Monetary Union (“WAEMU”)

Local currency will be held in one or more separate cash accounts that J.P. Morgan opens for the benefit of its customers with J.P. Morgan’s WAEMU Subcustodian.

 

If J.P. Morgan’s WAEMU Subcustodian exits the market or becomes an unacceptable provider of subcustody services, or if market conditions otherwise deteriorate within one or more of the member states of WAEMU, J.P. Morgan may cease to provide custody services with respect to Securities issued in member states of WAEMU that are settled and safekept at Dépositaire Central/Banque de Règlement S.A. Although J.P. Morgan will work with customers to mitigate the impact of any decision to exit the market, it may not be practicable to give significant advance notice of the exit.

Zimbabwe

Until further notice from J.P. Morgan, any credit of U.S. Dollars to the Customer’s Cash Account with J.P. Morgan applied at Customer’s Instruction to the purchase or sale of Securities safekept in Zimbabwe (the “Zimbabwe Securities”) will be conditional and subject to reversal by J.P. Morgan upon notice to Customer except to the extent that the funds are able to be repatriated or J.P. Morgan is able to repatriate the funds from J.P. Morgan’s Zimbabwean Subcustodian via a foreign exchange transaction (upon Instruction received from Customer). In this regard, Customer will be entitled to no more than Customer’s pro rata share of any recoveries that J.P. Morgan is able to obtain, as reasonably determined by J.P. Morgan.

 

If J.P. Morgan’s Zimbabwean Subcustodian exits the market or becomes an unacceptable

 

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Market Restrictions
  provider of subcustody services, or if market conditions otherwise deteriorate, J.P. Morgan may cease to provide custody services with respect to Zimbabwe Securities. Although J.P. Morgan will work with customers to mitigate the impact of any decision to exit the market, it may not be practicable to give significant advance notice of the exit.

 

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SCHEDULE 4

ETFS Trust - List of Funds

 

1.  ETFS Zacks Earnings Large-Cap U.S. Index Fund

 

2.  ETFS Zacks Earnings Small-Cap U.S. Index Fund

 

3.  ETFS Diversified Factor US Large Cap Index Fund

 

4.  ETFS Diversified Factor Developed Europe Index Fund

 

Global Custody

 

ANNEX A

 

Electronic Access

 

1.     J.P. Morgan may permit the Customer and its Authorized Persons to access certain electronic systems and applications (collectively, the “Products”) and to access or receive electronically Data (as defined below) in connection with the Agreement. J.P. Morgan may, from time to time, introduce new features to the Products or otherwise modify or delete existing features of the Products in its sole discretion. J.P. Morgan shall endeavor to give the Customer reasonable notice of its termination or suspension of access to the Products, but may do so immediately if J.P. Morgan determines, in its sole discretion, that providing access to the Products would violate Applicable Law or that the security or integrity of the Products is at risk. Access to the Products shall be subject to the Security Procedures.

 

2.     In consideration of the fees paid by the Customer to J.P. Morgan and subject to any applicable software license addendum in relation to J.P. Morgan-owned or sublicensed software provided for a particular application and Applicable Law, J.P. Morgan grants to the Customer a non-exclusive, non-transferable, limited and revocable license to use the Products and the information and data made available through the Products or transferred electronically (the “Data”) for the Customer’s internal business use only. The Customer may download the Data and print out hard copies for its reference, provided that it does not remove any copyright or other notices contained therein. The license granted herein will permit use by the Customer’s Authorized Person, provided that such use shall be in compliance with the Agreement, including this Annex. The Customer acknowledges that elements of the Data, including prices, corporate action information, and reference data, may have been licensed by J.P. Morgan from third parties and that any use of such Data beyond that authorized by the foregoing license, may require the permission of one or more third parties in addition to J.P. Morgan.

 

3.     The Customer acknowledges that there are security, corruption, transaction error and access availability risks associated with using open networks such as the internet, and the Customer hereby expressly assumes such risks. The Customer is solely responsible for obtaining, maintaining and operating all software (including antivirus software, anti-spyware software, and other internet security software) and personnel necessary for the Customer to access and use the Products. All such software must be interoperable with J.P. Morgan’s software. Each of the Customer and J.P. Morgan shall be responsible for the proper functioning, maintenance and security of its own systems, services, software and other equipment.

 

4.      In cases where J.P. Morgan’s web site is unexpectedly down or otherwise unavailable, J.P. Morgan shall, absent a force majeure event, provide other appropriate means for the Customer or its Authorized Persons to instruct J.P. Morgan or obtain reports from J.P. Morgan. J.P. Morgan shall not be liable for any Liabilities arising out of the Customer’s use of, access to or inability to use the Products via J.P. Morgan’s web site in the absence of J.P. Morgan’s gross negligence or willful misconduct.

 

5.     Use of the Products may be monitored, tracked, and recorded. In using the Products, the Customer hereby expressly consents to such monitoring, tracking, and recording. Individuals and organizations should have no expectation of privacy unless local law, regulation, or contract provides otherwise. J.P. Morgan shall own all right, title and interest in the data reflecting the Customer usage of the Products or J.P. Morgan’s web site (including, but not limited to, general usage data and aggregated transaction data). J.P. Morgan may use and sublicense data obtained by it regarding the Customer’s use of the Products or J.P. Morgan’s website, as long as J.P. Morgan does not disclose to others that the Customer was the source of such data or the details of individual transactions effected using the Products or web site.

 

6.     The Customer shall not knowingly use the Products to transmit (i) any virus, worm, or destructive element or any programs or data that may be reasonably expected to interfere with or disrupt the Products or servers connected to the Products; (ii) material that violates the rights of another, including but not limited to the intellectual property rights of another; and (iii) “junk mail”, “spam”, “chain letters” or unsolicited mass distribution of e-mail.

 

Global Custody

 

7.     The Customer shall promptly and accurately designate in writing to J.P. Morgan the geographic location of its users upon written request. The Customer further represents and warrants to J.P. Morgan that the Customer shall not access the service from any jurisdiction which J.P. Morgan informs the Customer or where the Customer has actual knowledge that the service is not authorized for use due to local regulations or laws, including applicable software export rules and regulations. Prior to submitting any document which designates the persons authorized to act on the Customer’s behalf, the Customer shall obtain from each individual referred to in such document all necessary consents to enable J.P. Morgan to process the data set out therein for the purposes of providing the Products.

 

8.     The Customer will be subject to and shall comply with all applicable laws, rules and regulations concerning restricting collection, use, disclosure, processing and free movement of the Data (collectively, the “Privacy Regulations”). The Privacy Regulations may include, as applicable, the Federal “Privacy of Consumer Financial Information” Regulation (12 CFR Part 30), as amended from time to time, issued pursuant to Section 504 of the Gramm-Leach-Bliley Act of 1999 (15 U.S.C. §6801, et seq.), the Health and Insurance Portability and Accountability Act of 1996 (42 U.S.C. §1320d), The Data Protection Act 1998 and Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to processing of personal data and the free movement of such data.

 

9.     The Customer shall be responsible for the compliance of its Authorized Persons with the terms of the Agreement, including this Annex.

 

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APPENDIX 1

 

  Information Regarding Country Risk
     
1. To aid Customer in its determinations regarding Country Risk, J.P. Morgan shall furnish annually, and upon the initial placing of Financial Assets and cash into a country, the following information:

 

    A. Opinions of local counsel concerning:

 

      i. Whether applicable foreign law would restrict the access of Customer’s independent public accountants to books and records kept by an Eligible Foreign Custodian located in that country which pertain to the Customer’s account.
         
      ii. Whether applicable foreign law would restrict Customer’s ability to recover its Financial Assets and cash in the event of the bankruptcy of an Eligible Foreign Custodian located in that country.
         
      iii. Whether applicable foreign law would restrict Customer’s ability to recover Financial Assets that are lost while under the control of an Eligible Foreign Custodian located in the country.
         
      iv. Whether applicable foreign law would restrict the Customer’s right as foreign investors to convert Customer’s cash or cash equivalents into U.S. dollars which have not yet been invested in securities.
         
    B. A market profile with respect to the following topics:
       
      (i) securities regulatory environment, (ii) foreign ownership restrictions, (iii) foreign exchange, (iv) securities settlement and registration, (v) taxation, and (vi) securities depositories (including depository risk assessment), if any.
       
  2. To aid Customer in monitoring Country Risk, J.P. Morgan shall furnish the following additional information:
       
      NewsFlashes, including with respect to changes in the information in market profiles

 

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APPENDIX 2 Last Updated April 01, 2014

 

SECURITIES DEPOSITORIES

 

ARGENTINA   CVSA   Equity, Corporate Debt, Government Debt
    (Caja de Valores S.A.)    
         
AUSTRALIA   ASX Settlement   Equity
    (ASX Settlement Pty Limited)    
         
    Austraclear   Corporate Debt, Government Debt
         
    (Austraclear Limited)    
         
AUSTRIA   OeKB   Equity, Corporate Debt, Government Debt
    (Oesterreichische Kontrollbank AG)    
         
BAHRAIN   CSD   Equity, Corporate Debt
    (Bahrain Bourse - Settlement and Central Depository)    
         
BANGLADESH   CDBL   Equity, Corporate Debt
    (Central Depository Bangladesh Limited)    
         
BELGIUM   Euroclear Belgium   Equity, Corporate Debt
    (Euroclear Belgium SA/NV)    
         
    NBB    
         
    (The National Bank of Belgium)   Corporate Debt, Government Debt
         
BERMUDA   BSD   Equity, Corporate Debt, Government Debt
    (Bermuda Stock Exchange - Bermuda Securities Depository)    
         
BOTSWANA   BoB   Government Debt
    (Bank of Botswana)    
         
    CSDB    
         
    (Central Securities Depository of Botswana Ltd)   Equity, Corporate Debt
         
BRAZIL   BM&FBOVESPA   Equity
    (BM&FBOVESPA S.A. - Bolsa de Valores Mercadorias e Futuros - Central Depository)   Corporate Debt
         
    CETIP    
         
    (Central de Custódia e Liquidação Financeira de Títulos Privados)    
         
    SELIC   Government Debt
         
    (Banco Central do Brasil - Sistema Especial de Liquidacao e Custodia)    
         
BULGARIA   CDAD   Equity, Corporate Debt
    (Central Depository AD)    
         
    BNB    
         
    (Bulgarian National Bank)   Government Debt
         
CANADA   CDS   Equity, Corporate Debt, Government Debt
    (CDS Clearing and Depository Services Inc.)    

 

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SECURITIES DEPOSITORIES

 

Last Updated April 01, 2014

 

MARKET   DEPOSITORY   INSTRUMENTS
         
CHILE   DCV

(Depósito Central de Valores S.A.)
  Equity, Corporate Debt, Government Debt
         
CHINA A-SHARE   CSDCC

(China Securities Depository and Clearing Corporation Limited)
  Equity, Corporate Debt, Government Debt
         
CHINA B-SHARE   CSDCC

(China Securities Depository and Clearing Corporation Limited)
  Equity
         
COLOMBIA   DCV

(Banco de la Républica de Colombia - Depósito Central de Valores)
  Government Debt
 
DECEVAL

(Depósito Centralizado de Valores de Colombia S.A.)
  Equity, Corporate Debt, Government Debt
         
COSTA RICA   CEVAL

(Central de Valores de la Bolsa Nacional de Valores,

S.A.)
  Equity, Corporate Debt, Government Debt
         
CROATIA   SKDD

(Središnje klirinško depozitarno društvo d.d.)
  Equity, Corporate Debt, Government Debt
         
CYPRUS   CDCR

(Cyprus Stock Exchange - Central Depository and Central Registry)
  Equity, Corporate Debt, Government Debt
         
CZECH REPUBLIC   CNB

(Ceska národní banka)
  Short-Term Corporate Debt, Short-Term Government Debt
 
CDCP

(Centrální depozitár cenných papíru, a.s.)
  Equity, Long-Term Corporate Debt, Long-Term Government Debt
         
DENMARK   VP

(VP Securities A/S)
  Equity, Corporate Debt, Government Debt
         
EGYPT   MCDR

(Misr for Central Clearing, Depository and Registry)
  Equity, Corporate Debt, Treasury Bonds
 
CBE

(Central Bank of Egypt)
  Treasury Bills
         
ESTONIA   ECSD

(Eesti Väärtpaberikeskus AS)
  Equity, Corporate Debt, Government Debt
         
FINLAND   Euroclear Finland

(Euroclear Finland Oy)
  Equity, Corporate Debt, Government Debt
         
FRANCE   Euroclear France

(Euroclear France SA)
  Equity, Corporate Debt, Government Debt
         
GERMANY   CBF

(Clearstream Banking AG)
  Equity, Corporate Debt, Government Debt

 

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SECURITIES DEPOSITORIES

 

Last Updated April 01, 2014

 

MARKET   DEPOSITORY   INSTRUMENTS
         
GHANA   CSD

(Central Securities Depository (GH) Ltd.)
  Equity, Corporate Debt, Government Debt
         
GREECE   BoG

(Bank of Greece)
  Government Debt
       
  HCSD

(Hellenic Central Securities Depository)
  Equity, Corporate Debt
         
HONG KONG   HKSCC

(Hong Kong Securities Clearing Company Limited)
  Equity, Corporate Debt, Government Debt
       
  CMU

(Hong Kong Monetary Authority - Central Moneymarkets Unit)
  Corporate Debt, Government Debt
         
HUNGARY   KELER

(Központi Elszámolóház és Értéktár (Budapest) Zrt.)
  Equity, Corporate Debt, Government Debt
         
ICELAND   ISD

(Verðbréfaskráning Íslands hf.)
  Equity, Corporate Debt, Government Debt
         
INDIA   NSDL

(National Securities Depository Limited)
  Equity, Corporate Debt
       
  CDSL

(Central Depository Services (India) Limited)
  Equity, Corporate Debt
       
  RBI

(Reserve Bank of India)
  Government Debt
         
INDONESIA   KSEI

(PT Kustodian Sentral Efek Indonesia)
  Equity, Corporate Debt, Government Debt*
(*acts as sub-registry)
       
  Bl

(Bank Indonesia)
  Government Debt
         
INTERNATIONAL
SECURITIES
MARKET
  Euroclear Bank

(Euroclear Bank SA/NV)
  Internationally Traded Debt, Equity
       
  CBL

(Clearstream Banking S.A.)
  Internationally Traded Debt, Equity
         
IRELAND   EUI

(Euroclear UK & Ireland Limited)
  Equity, Corporate Debt
         
ISRAEL   TASE-CH

(Tel Aviv Stock Exchange Clearing House Ltd)
  Equity, Corporate Debt, Government Debt
         
ITALY   Monte Titoli

(Monte Titoli S.p.A.)
  Equity, Corporate Debt, Government Debt

 

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SECURITIES DEPOSITORIES

 

Last Updated April 01, 2014

 

MARKET   DEPOSITORY   INSTRUMENTS
         
JAPAN   JASDEC

(Japan Securities Depository Center, Incorporated)
  Equity, Corporate Debt
       
  BOJ

(Bank of Japan)
  Government Debt
         
JORDAN   SDC

(Securities Depository Center)
  Equity, Corporate Debt
         
KAZAKHSTAN   KACD

(Central Securities Depository Joint-Stock Company)
  Equity, Corporate Debt, Government Debt
         
KENYA   CBCD

(Central Bank of Kenya - Central Depository System)
  Government Debt
       
  CDSC

(Central Depository and Settlement Corporation Limited)
  Equity, Corporate Debt
         
KUWAIT   KCC

(The Kuwait Clearing Company S.A.K.)
  Equity, Corporate Debt
         
LATVIA   LCD

(Latvian Central Depository)
  Equity, Corporate Debt, Government Debt
         
LEBANON   BDL

(Banque du Liban)
  Government Debt
       
  MIDCLEAR

(Custodian and Clearing Center of Financial Instruments for Lebanon and the Middle East S.A.L.)
  Equity, Corporate Debt
         
LITHUANIA   CSDL

(Central Securities Depository of Lithuania)
  Equity, Corporate Debt, Government Debt
         
LUXEMBOURG   CBL

(Clearstream Banking S.A.)
  Equity, Corporate Debt, Government Debt
         
MALAYSIA   Bursa Depository

(Bursa Malaysia Depository Sdn Bhd)
  Equity, Corporate Debt
       
  BNM

(Bank Negara Malaysia)
  Government Debt
         
MAURITIUS   CDS

(Central Depository & Settlement Co. Ltd)
  Equity, Corporate Debt
         
    BOM

(Bank of Mauritius)
  Government Debt
         
MEXICO   Indeval

(S.D. Indeval S.A. de C.V.)
  Equity, Corporate Debt, Government Debt

 

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SECURITIES DEPOSITORIES

 

 Last Updated April 01, 2014

 

MARKET   DEPOSITORY   INSTRUMENTS
         
MOROCCO   Maroclear

(Maroclear)
  Equity, Corporate Debt, Government Debt
         
         
NETHERLANDS   Euroclear Nederland

(Euroclear Nederland)
  Equity, Corporate Debt, Government Debt
         
         
NEW ZEALAND   NZCSD

(New Zealand Central Securities Depository Limited)
  Equity, Corporate Debt, Government Debt
         
         
NIGERIA   CSCS

(Central Securities Clearing System Plc)
  Equity, Corporate Debt
         
    CBN

(Central Bank of Nigeria)
  Government Debt
         
         
NORWAY   VPS

(Verdipapirsentralen ASA)
  Equity, Corporate Debt, Government Debt
         
         
OMAN   MCD

(Muscat Clearing and Depository Co. (S.A.O.C))
  Equity, Corporate Debt, Government Debt
         
         
PAKISTAN   SBP

(State Bank of Pakistan)
  Government Debt
         
    CDC

(Central Depository Company of Pakistan Limited)
  Equity, Corporate Debt
         
         
PALESTINIAN TERRITORIES   CDS

(Palestine Exchange - Clearing, Depository and Settlement Center)
  Equity
         
         
PERU   CAVALI

(CAVALI S.A. I.C.L.V.)
  Equity, Corporate Debt, Government Debt
         
         
PHILIPPINES   PDTC

(Philippine Depository and Trust Corporation)
  Equity, Corporate Debt
         
    RoSS

(Registry of Scripless Securities)
  Government Debt
         
POLAND   NDS

(Krajowy Depozyt Papierów Wartosciowych S.A.)
  Equity, Long-Term Government Debt
         
    RPW

(National Bank of Poland - Registry of Securities)
  Short-Term Government Debt
         
PORTUGAL   INTERBOLSA

(Sociedade Gestora de Sistemas de Liquidação e de Sistemas Centralizados de Valores Mobiliários, S.A.)
  Equity, Corporate Debt, Government Debt
         
         
QATAR   QCSD

(Qatar Central Securities Depository)
  Equity, Government Debt

 

                 Global Custody

 
SECURITIES DEPOSITORIES  

 

  Last Updated April 01, 2014

 

MARKET   DEPOSITORY   INSTRUMENTS
         
ROMANIA   CD S.A.

(Central Depository S.A.)
  Equity, Corporate Debt
         
    NBR

(National Bank of Romania)
  Government Debt
         
         
RUSSIA   NSD

(National Settlement Depository)
  Equity, Corporate Debt, Government Debt
         
         
SAUDI ARABIA   Tadawul

(The Saudi Stock Exchange (Tadawul) Company Securities Depository Center)
  Equity, Corporate Debt
         
    SAMA

(Saudi Arabian Monetary Agency)
  Government Debt
         
         
SERBIA   CSD

(Central Securities Depository and Clearing House)
  Equity, Corporate Debt, Government Debt
         
         
SINGAPORE   CDP

(The Central Depository (Pte) Limited)
  Equity, Corporate Debt
         
    MAS

(Monetary Authority of Singapore)
  Government Debt
         
         
SLOVAK REPUBLIC   CDCP

(Centrálny depozitár cenných papierov SR, a.s.)
  Equity, Corporate Debt, Government Debt
         
         
SLOVENIA   KDD

(Centralna klirinško depotna družba d.d.)
  Equity, Corporate Debt, Government Debt
         
         
SOUTH AFRICA   Strate Ltd

(Strate - Central Securities Depository)
  Equity, Corporate Debt, Government Debt
         
         
SOUTH KOREA   KSD

(Korea Securities Depository)
  Equity, Corporate Debt, Government Debt
         
         
SPAIN   IBERCLEAR

(Sociedad de Sistemas)
  Equity, Corporate Debt, Government Debt
         
         
SRI LANKA   CDS

(Central Depository Systems (Pvt.) Ltd.)
  Equity, Corporate Debt
         
    LankaSecure

(LankaSecure)
  Government Debt
         
         
SWEDEN   Euroclear Sweden

(Euroclear Sweden AB)
  Equity, Corporate Debt, Government Debt
         
         
SWITZERLAND   SIS

(SIX SIS Ltd)
  Equity, Corporate Debt, Government Debt
         

 

                 Global Custody

 
SECURITIES DEPOSITORIES

 

Last Updated April 01, 2014

 

MARKET   DEPOSITORY   INSTRUMENTS
         
TAIWAN   TDCC

(Taiwan Depository and Clearing Corporation)
  Equity, Corporate Debt
 
CBC

(Central Bank of the Republic of China (Taiwan))
 
Government Debt
         
TANZANIA   CDS

(Dar es Salaam Stock Exchange Central Depository System)
  Equity, Corporate Debt
         
THAILAND   TSD

(Thailand Securities Depository Company Limited)
  Equity, Corporate Debt, Government Debt
         
TRINIDAD AND TOBAGO   TTCD

(Trinidad and Tobago Central Depository Limited)
  Equity, Corporate Debt, Government Debt
         
TUNISIA   STICODEVAM

(Société Tunisienne Interprofessionnelle pour la Compensation et le Dépôt des Valeurs Mobilières)
  Equity, Corporate Debt, Government Debt
         
TURKEY   CBRT

(Türkiye Cumhuriyet Merkez Bankasi A.S.)
  Government Debt
   
CRA

(Merkezi Kayit Kurulusu A.S.)
 
Equity, Corporate Debt, Government Debt
         
UGANDA   CDS

(Bank of Uganda - Central Depository System)
  Government Debt
   
SCD

(Uganda Securities Exchange - Securities Central Depository)
 
Equity, Corporate Debt
         
UKRAINE   NDU

(National Depository of Ukraine)
  Equity, Corporate Debt
         
UNITED ARAB EMIRATES - ADX   ADX

(Abu Dhabi Securities Exchange)
  Equity, Corporate Debt, Government Debt
         
UNITED ARAB EMIRATES - DFM   DFM

(Dubai Financial Market)
  Equity, Corporate Debt, Government Debt
         
UNITED ARAB EMIRATES - NASDAQ DUBAI   NASDAQ Dubai

(NASDAQ Dubai Limited)
  Corporate Debt
         
UNITED KINGDOM   EUI

(Euroclear UK & Ireland Limited)
  Equity, Corporate Debt, Government Debt
         
UNITED STATES   FRB

(Federal Reserve Bank)
  Government Debt, Mortgage Backed Securities
   
DTC

(Depository Trust Company)
 
Equity, Corporate Debt

 

                 Global Custody

 
SECURITIES DEPOSITORIES

 

Last Updated April 01, 2014

 

MARKET   DEPOSITORY   INSTRUMENTS
         
URUGUAY   BCU

(Banco Central del Uruguay)
  Government Debt
         
VENEZUELA   CVV

(Caja Venezolana de Valores, S.A.)

BCV

(Banco Central de Venezuela)
  Equity, Corporate Debt



Government Debt
         
VIETNAM   VSD

(Vietnam Securities Depository)
  Equity, Corporate Debt, Government Debt
         
WAEMU - BENIN BURKINA FASO, GUINEA-BISSAU,
IVORY COAST, MALI, NIGER, SENEGAL, TOGO
  DC/BR

(Le Dépositaire Central / Banque de Règlement)
  Equity, Corporate Debt, Government Debt
         
ZAMBIA   LuSE CSD

(Lusaka Stock Exchange Central Securities
Depository)


BoZ

(Bank of Zambia)
  Equity, Corporate Debt




Government Treasury Bills
         
ZIMBABWE   Chengetedzai Depository Company

(Chengetedzai Depository Company)
   

 

This document is for information only and its contents are subject to change. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with J.P. Morgan. Neither this document nor any of its contents may be disclosed to any third party or used for any other purpose without the proper written consent of J.P. Morgan. J.P. Morgan has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby.

 

                 Global Custody

 

Exhibit 99.(h)(1)

 

 

 

 

THIS AGREEMENT IS TO BE ONLY USED FOR THE PROVISION OF
ADMINISTRATION SERVICES TO A UNITED STATES EXCHANGE-TRADED FUND

 

 

 

 

 

 

 

 

 

 

 
 

 

TABLE OF CONTENTS

 

SECTION  
1. INTENTION OF THE PARTIES; DEFINITIONS 2
1.1 Intention of the Parties. 2
1.2 Definitions; Interpretation. 2
2. WHAT J.P. MORGAN IS REQUIRED TO DO 5
2.1 The Services. 5
2.2 No Duty to Monitor Compliance. 5
2.3 No Responsibility for Tax Returns. 5
2.4 Storage of Records. 6
2.5 Compliance with Laws and Regulations. 6
2.6 Change Control. 6
3. INSTRUCTIONS 7
3.1 Acting on Instructions; Unclear Instructions. 7
3.2 Verification and Security Procedures. 7
3.3 Instructions Contrary To Applicable Law/Market Practice. 7
3.4 Cut-Off Times. 7
3.5 Electronic Access. 8
4. FEES AND EXPENSES OWING TO J.P. MORGAN 8
4.1 Fees and Expenses. 8
5. ADDITIONAL PROVISIONS 8
5.1 Representations of the Customer and J.P. Morgan. 8
5.2 The Customer to Provide Certain Information to J.P. Morgan. 9
5.3 Information Used to Provide the Service. 9
6. WHERE J.P. MORGAN IS LIABLE TO THE CUSTOMER OR THE FUNDS 9
6.1 Standard of Care; Liability. 9
6.2 Force Majeure. 10
6.3 J.P. Morgan May Consult with Counsel. 10
6.4 Limitations of J.P. Morgan’s Liability. 10
7. TERM AND TERMINATION 11
7.1 Term and Termination. 11
7.2 Other Grounds for Termination. 12
7.3 Consequences of Termination. 12
7.4 Transition following Termination. 12
8. MISCELLANEOUS 13
8.1 Notices. 13
8.2 Successors and Assigns. 13
8.3 Entire Agreement. 13
8.4 Insurance. 13
8.5 Governing Law and Jurisdiction. 13
8.6 Severability; Waiver; and Survival. 14
8.7 Confidentiality. 14
8.8 Use of J.P. Morgan’s Name. 15
8.9 Delegation. 15
8.10 Third Party Rights. 15
8.11 Counterparts. 15
APPENDIX A NET ASSET VALUE ERROR CORRECTION POLICY AND PROCEDURES 20
SCHEDULE     2 FUND ADMINISTRATION SERVICES 21
SCHEDULE     3 REMUNERATION 25
ANNEX A Electronic Access 26
 

 

ADMINISTRATION AGREEMENT

 

This Agreement, dated January 06, 2015, is between ETFS TRUST, a Delaware statutory trust, whose principal place of business is at 48 Wall Street, 11th Floor, New York, NY 10005 (the “Customer”) and JPMORGAN CHASE BANK, N. A. with a place of business at 383 Madison Avenue, New York, NY 10179. (“J.P. Morgan”).

 

1. Intention of the Parties; Definitions
   
  1.1 Intention of the Parties.
       
    (a) J.P. Morgan is a national association formed under the laws of the United States.
       
    (b) The Customer is an open-end management investment company whose Funds are registered under the Investment Company Act of 1940, with the purpose of investment of its assets in certain types of securities and instruments, as more fully described in the each Fund’s Registration Statement, as amended from time to time.
       
    (c) The Customer has requested J.P. Morgan to provide Accounting and NAV Calculation Services and Fund Administration Services to the Funds, which J.P. Morgan has agreed to do subject to the terms and conditions appearing in this Agreement and the Schedules. J.P. Morgan will be responsible for the performance of only those duties set forth in this Agreement.
       
    (d) The terms and conditions of this Agreement are applicable only to the services which are specified in this Agreement. Other services are subject to separate terms and conditions, which J.P. Morgan will make available to the Customer upon request.
       
  1.2 Definitions; Interpretation.
       
    (a) As used in this Agreement and the Schedules and Appendices to this Agreement, the following terms have the meaning hereinafter stated.
       
      “Accounting and NAV Calculation Services” means the services described in Schedule 1.
       
      “Advisers Act” means the Investment Advisers Act of 1940, as amended.
       
      “Affiliate” means an entity controlling, controlled by, or under common control with, J.P. Morgan or Customer, as the case may be,
       
      “Applicable Law” means any applicable statute, including the Investment Company Act of 1940, as amended.(the “1940 Act”), the Advisers Act, the Securities Act of 1933, as amended (“1933 Act”) and the Securities Exchange Act of 1934, as amended, (“1934 Act”) as well as any applicable statute, treaty, rule, regulation or common law and any applicable decree, injunction, judgment, order, formal interpretation or ruling issued by a court or governmental entity.
 

 

“Articles” means the Declaration of Trust, By-Laws and other organizational documents of the Customer, as amended from time to time.

 

“Authorized Person” means any person who has been designated by the Customer (or by any agent designated by the Customer) to act on behalf of Customer or the Funds under this Agreement. Such persons will continue to be Authorized Persons until such time as J.P. Morgan receives, and has had reasonable time to act upon, Instructions from the Customer (or its agent) that any such person is no longer an Authorized Person.

 

“Board” means the board of trustees of the Customer.

 

“Change” has the meaning given in Section 2.6.

 

“Change Control” means the process set out in Section 2.6.

 

“Change Request” has the meaning given in Section 2.6.

 

“Confidential Information” means and includes all non-public information concerning the Customer and/or the Funds which J.P. Morgan receives in the course of providing services under this Agreement. Nevertheless, the term Confidential Information shall not include information which is or becomes available to the general public by means other than J.P. Morgan’s breach of the terms of this Agreement or information which J.P. Morgan obtains on a non-confidential basis from a person who is not known to be subject to any obligation of confidence to any person with respect to that information.

 

“Distributor” means any entity or structure, the purpose of which is to make the shares of the Customer available to the public (e.g., broker-dealers; fund of funds; wrap accounts).

 

“Fees” means the payments described in Article 4, to be made by the Customer to J.P. Morgan for the Services.

 

“Fund Administration Services” means the services described in Schedule 2.

 

“Fund(s) ” means shares of beneficial interest in the Customer that are divided into a separate series, with each series of the Customer corresponding to a distinct part of the assets and liabilities of the Customer, with such features as described in the Registration Statement.

 

“Instruction” means an instruction that has been verified in accordance with a Security Procedure or, if no Security Procedure is applicable, which J.P. Morgan believes in good faith to have been given by an Authorized Person.

 

“Investment Adviser” means any person or entity appointed as investment adviser or manager of any of the Funds, in accordance with the Registration Statement.

 

“J.P. Morgan Indemnitees” means J.P. Morgan and its affiliates and nominees, and their respective directors, officers, employees and agents.

 

“Liabilities” means any liabilities, losses, claims, costs, damages,

 

 

penalties, fines, obligations, or expenses of any kind whatsoever (including, without limitation, reasonable attorneys’, accountants’, consultants’ or experts’ fees and disbursements).

 

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

 

“Prospectus” means the prospectus of the applicable Fund as supplemented, updated or amended from time to time.

 

“Registration Statement” means the registration statement on Form N-1A of the applicable Fund, filed under the 1933 Act and the 1940 Act, as amended or supplemented, updated or amended from time to time.

 

“SAI” means the Statement of Additional Information of the Funds as supplemented, updated or amended from time to time.

 

“SEC” means the United States Securities and Exchange Commission.

 

“Security Procedure” means any security procedure to be followed by Customer upon the issuance of an Instruction and/or by J.P. Morgan upon the receipt of an Instruction, so as to enable J.P. Morgan to verify that such Instruction is authorized, as set forth in operating procedures documentation in effect from time to time between the parties with respect to the services set forth in this Agreement, or as otherwise agreed in writing by the parties. A Security Procedure may, without limitation, involve the use of algorithms, codes, passwords, encryption or telephone call backs and may be updated by J.P. Morgan from time to time upon notice to the Customer. Customer acknowledges that Security Procedures are designed to verify the authenticity of, and not detect errors in, Instructions. For the avoidance of doubt, the parties agree that a SWIFT message issued in the name of Customer through any third party utility agreed upon by the parties as being a method for providing Instructions and authenticated in accordance with that utility’s customary procedures, shall be deemed to be an authorized Instruction..

 

“Service Commencement Date” means the first date on which J.P. Morgan is entitled to receive fees under this Agreement.

 

“Services” means the Accounting and NAV Calculation Services, and Fund Administration Services.

 

“Shares” means the shares issued by the Customer.

 

“Shareholder” means a holder of Shares.

 

    (b) Headings are for reference and convenience only and are not intended to affect interpretation.
       
    (c) References to Articles and Sections are to Articles and Sections of this Agreement and references to sub-sections and paragraphs are to sub-sections of the Sections and paragraphs of the sub-sections in which they appear.
       
    (d) Unless the context requires otherwise, references in this Agreement to “persons” shall include legal as well as natural persons; references importing the singular shall include the plural (and vice versa); use of the generic masculine pronoun shall include the feminine; use of
 

 

     

the term “including” shall be deemed to mean “including but not limited to;” and references to appendices and numbered sections shall be to such addenda and provisions herein; all such addenda are hereby incorporated in this Agreement by reference.

   
2. What J.P. Morgan is Required to Do
   
  2.1 The Services.
     
    (a) The Customer hereby appoints J.P. Morgan to act as administrator of and to provide the Services with respect to each of the Funds and J.P. Morgan agrees to act as administrator of and to provide the Services with respect to the Funds (subject to any limitations notified by the Customer to J.P. Morgan in writing and subject to any requirements or restrictions imposed on the performance of such functions by any statutory provisions for the time being in force), until this Agreement is terminated as hereinafter provided.
       
    (b) The Customer shall not permit the Registration Statement to be amended in any way inconsistent with the terms and conditions of the Agreement.
       
    (c) J.P. Morgan shall act as agent of the Customer and/or the Funds solely with respect to the duties of J.P. Morgan described in this Agreement.
       
    (d) The Customer acknowledges that J.P. Morgan is not providing any legal, tax or investment advice in providing the Services.
       
  2.2 No Duty to Monitor Compliance.
     
    Each party hereto acknowledges that the duty of J.P. Morgan in its capacity as the provider of any of the Services shall not constitute a duty to monitor the compliance of any other party hereto or their delegates or any other person whatsoever (other than J.P. Morgan or any of its Affiliates, agents or sub-contractors) with any restriction or guideline imposed on any of the Funds or the Investment Adviser by the Registration Statement and any other document, or by law or regulation or otherwise with regard to any of the Funds or the Investment Adviser, except as expressly set forth in this Agreement and further, that the duties of J.P. Morgan in its capacity as the provider of any of the Services, shall not extend to enforcing compliance of any of the Funds, the Investment Adviser, their respective delegates or any other person whatsoever (other than J.P. Morgan or any of its Affiliates, agents or sub-contractors) with any such restrictions or guidelines.
       
  2.3 No Responsibility for Tax Returns.
     
    Notwithstanding anything herein to the contrary, while J.P. Morgan shall provide the Customer with information regarding taxable events in the United States in relation to the Customer and/or the Funds, J.P. Morgan is not responsible for preparing or filing any tax reports or returns on behalf of the Shareholders or the
 

 

    Funds except as expressly set forth in this Agreement.
       
  2.4 Storage of Records.
     
    J.P. Morgan is authorized to maintain all accounts, registers, corporate books and other documents on magnetic tape or disc, or on any other mechanical or electronic system; provided that they are capable of being reproduced in legible form in accordance with Applicable Law. Where any Authorized Person, including any Fund’s auditor, wishes to inspect such documents maintained by J.P. Morgan, J.P. Morgan shall provide legible documents, for the discharge of the Fund’s and its auditors’ legal and regulatory duties. The applicable Funds shall be responsible for the payment of any research and copying costs associated with any such request, in accordance with J.P. Morgan’s customary practices.
     
  2.5 Compliance with Laws and Regulations.
     
    J.P. Morgan will comply with Applicable Law in the United States with respect to the provision of the Services. The Customer undertakes to comply (and to cause the Funds to comply) with Applicable Law in the United States and in each state in which the Customer conducts business, to the extent that compliance with such Applicable Law is relevant to the provision or receipt of the Services or the marketing of the Funds.
     
  2.6 Change Control.
     
    (a) If either party wishes to propose any amendment or modification to, or variation of, the Services (including the scope or details of the Services) (a “Change”) then it shall notify the other party of that fact by sending a request (a “Change Request”) to the party, specifying in as much detail as is reasonably practicable the nature of the Change. J.P. Morgan shall maintain a log of all Change Requests.
       
    (b) Promptly following the receipt of a Change Request the parties shall agree whether to implement the Change Request, whether the Fees should be modified in light of the Change, and the basis upon which J.P. Morgan will be compensated for implementing the Change Request.
       
    (c) If a change to Applicable Law requires a Change, the parties shall follow the Change Control processes set forth in this Section 2.6. J.P. Morgan shall bear its own costs with respect to implementing such a Change Request except that:
       
      (i) J.P. Morgan shall be entitled to charge the Customer for any changes to software that have been developed or customized for the Customer; and
         
      (ii) J.P. Morgan shall be entitled to charge the Customer for any Changes required as a result of the change in Applicable Law affecting the Customer and/or any of its Funds in a materially different way than it affects J.P. Morgan’s other customers, or which the Customer wishes J.P. Morgan to implement in a way different from what J.P. Morgan reasonably intends to implement for its other customers.
 

 

      If the change in Applicable Law results in a Change, or an increase in J.P. Morgan’s risk associated with provision of the Services, J.P. Morgan shall be entitled to make an appropriate increase in the Fees.
       
3. Instructions
   
  3.1 Acting on Instructions; Unclear Instructions.
     
    (a) The Customer authorizes J.P. Morgan to accept, rely upon and/or act upon any Instructions received by it without inquiry. The Customer will indemnify the J.P. Morgan Indemnitees against, and hold each of them harmless from, any Liabilities that may be imposed on, incurred by, or asserted against the J.P. Morgan Indemnitees as a result of any action or omission taken in accordance with any Instruction unless the Liabilities result from an act of negligence, fraud or willful misconduct on the part of a J.P. Morgan Indemnitee with respect to the manner in which such Instructions are followed.
       
    (b) J.P. Morgan shall promptly notify an Authorized Person or Shareholder, as applicable, if J.P. Morgan determines that an Instruction does not contain all information reasonably necessary for J.P. Morgan to carry out the Instruction. J.P. Morgan may decline to act upon an Instruction if it does not receive clarification or confirmation satisfactory to it. J.P. Morgan will not be liable for any loss arising from any reasonable delay in carrying out any such Instruction while it seeks such missing information, clarification or confirmation or in declining to act upon any Instruction for which it does not receive clarification satisfactory to it.
       
  3.2 Verification and Security Procedures.
     
    (a) J.P. Morgan and the Customer shall comply with any applicable Security Procedures with respect to the delivery or authentication of Instructions and shall ensure that any codes, passwords or similar devices are reasonably safeguarded.
       
    (b) Either party to this Agreement may record any of its telephone communications.
       
  3.3 Instructions Contrary To Applicable Law/Market Practice.
     
    J.P. Morgan need not act upon Instructions which it reasonably believes to be contrary to Applicable Law or market practice, but J.P. Morgan will be under no duty to investigate whether any Instructions comply with Applicable Law or market practice. In the event J.P. Morgan does not act upon such Instructions, J.P. Morgan will notify Customer and will do so in a timely manner where reasonably practicable.
     
  3.4 Cut-Off Times.
     
    J.P. Morgan has established cut-off times for receipt of certain Instructions, which will be made available to the Customer. If J.P. Morgan receives an
 

 

    Instruction (other than Instructions relating to a Share transaction, which shall be processed by J.P. Morgan in accordance with the Registration Statement) after its established cut-off time, J.P. Morgan will attempt to act upon the Instruction on the day requested if J.P. Morgan deems it practicable to do so or otherwise as soon as practicable after that day.
     
  3.5 Electronic Access.
     
    Access by the Customer to certain applications or products of J.P. Morgan via J.P. Morgan’s web site or otherwise shall be governed by this Agreement and the terms and conditions set forth in Annex A.
     
4. Fees and Expenses Owing to J.P. Morgan
   
  4.1 Fees and Expenses.
     
    (a) The Customer will pay J.P. Morgan for the Services under this Agreement the fees as set forth in Schedule 3 hereto, or as otherwise agreed upon in writing between the Customer and J.P. Morgan from time to time.
       
    (b) In addition to the fees provided for above, the Customer shall be responsible for the payment of all the reasonable fees and disbursements of J.P. Morgan in connection with the establishment, and ongoing business of the Customer and/or any Fund, all governmental or similar fees, charges, taxes, duties and imposts levied in or by any relevant authority in the United States on or in respect of the Customer and/or any Fund which are incurred by J.P. Morgan, and any other customary or extraordinary expenses. The Customer shall reimburse J.P. Morgan for any of the foregoing and for all reasonable out-of-pocket expenses including without limitation telephone, postage and stationery and expenses of a similar nature as J.P. Morgan may incur in the execution of its duties under this Agreement and including the costs and expenses, by the Customer’s request or with the Customer’s agreement, incurred by J.P. Morgan and its agents in determining the value of assets in connection with its duty as the calculator of the Net Asset Value of the Funds or any Shares and in connection with the performance of its duties pursuant to this Agreement.
       
    (c) Invoices will be payable within thirty (30) days of the date of the invoice. If the Customer disputes an invoice, it shall nevertheless pay on or before the date that payment is due such portion of the invoice that is not subject to a bona fide dispute. Without prejudice to J.P. Morgan’s other rights, J.P. Morgan reserves the right to charge interest on overdue amounts from the due date until actual payment at such rate as J.P. Morgan customarily charges for similar overdue amounts.
       
5. Additional Provisions
   
  5.1 Representations of the Customer and J.P. Morgan.
     
    (a) The Customer represents and warrants that (i) assuming execution and
 

 

      delivery of this Agreement by J.P. Morgan, this Agreement is the Customer’s legal, valid and binding obligation, enforceable against Customer in accordance with its terms, (ii) it has full power and authority to enter into and has taken all necessary corporate action to authorize the execution of this Agreement, and (iii) it has not relied on any oral or written representation made by J.P. Morgan or any person on its behalf, and acknowledges that this Agreement sets out to the fullest extent the duties of J.P. Morgan.
       
    (b) J.P. Morgan represents and warrants that (i) assuming execution and delivery of this Agreement by the Customer, this Agreement is J.P. Morgan’s legal, valid and binding obligation, enforceable against J.P. Morgan in accordance with its terms and (ii) it has full power and authority to enter into and has taken all necessary corporate action to authorize the execution of this Agreement.
       
  5.2 The Customer to Provide Certain Information to J.P. Morgan.
     
    Upon request, the Customer will promptly provide to J.P. Morgan such information about itself and its financial status as J.P. Morgan may reasonably request, including the Articles and its current audited and unaudited financial statements, its Registration Statement and any contracts, regulatory documents or opinions from a lawyer or accountant that relate to the Services described in this Agreement.
     
  5.3 Information Used to Provide the Service.
     
    The Customer agrees with J.P. Morgan that any information the Customer or the Investment Adviser provides to J.P. Morgan pursuant to this Agreement shall be complete and accurate to enable J.P. Morgan to perform its responsibilities pursuant to this Agreement.
     
6. Where J.P. Morgan is Liable to the Customer or the Funds
   
  6.1 Standard of Care; Liability.
     
    (a) J.P. Morgan will use reasonable care in performing its obligations under this Agreement. J.P. Morgan will not be responsible for any loss or damage suffered by the Customer or the Funds with respect to any matter as to which J.P. Morgan has satisfied its obligation of reasonable care unless the same results from an act of negligence, fraud or willful misconduct on the part of J.P. Morgan.
       
    (b) J.P. Morgan will be liable for the Customer’s and/or any Fund’s direct damages to the extent they result from J.P. Morgan’s fraud, negligence, or willful misconduct in performing its duties as set out in this Agreement. Nevertheless, under no circumstances will J.P. Morgan be liable for any indirect, incidental, consequential or special damages (including, without limitation, lost profits or business) of any form incurred by any person or entity, whether or not foreseeable and regardless of the type of action in which such a claim may be brought, resulting from J.P. Morgan’s performance under this Agreement, or J.P. Morgan’s role as a service
 

 

      provider to the Customer.
       
    (c) The Customer will indemnify the J.P. Morgan Indemnitees against, and hold them harmless from, any Liabilities that may be imposed on, incurred by or asserted against any of the J.P. Morgan Indemnitees in connection with or arising out of J.P. Morgan’s performance under this Agreement, provided the J.P. Morgan Indemnitees have not acted with negligence or engaged in fraud or willful misconduct in connection with the Liabilities in question.
       
  6.2 Force Majeure.
     
    J.P. Morgan will maintain and update from time to time business continuation and disaster recovery procedures with respect to its global business that it determines from time to time meet reasonable commercial standards. To the extent permitted by Applicable Law, J.P. Morgan will have no liability, however, for any damage, loss, expense or liability of any nature that the Customer or any of the Funds may suffer or incur, caused by an act of God, fire, flood, civil or labor disturbance, war, terrorism, act of any governmental authority or other act or threat of any authority (de jure or de facto), legal constraint, fraud or forgery (other than on the part of J.P. Morgan or its employees), malfunction of equipment or software (except where such malfunction is primarily and directly attributable to J.P. Morgan’s negligence in maintaining the equipment or software), failure of or the effect of rules or operations of any external funds transfer system, inability to obtain or interruption of external communications facilities, or any cause beyond the reasonable control of J.P. Morgan.
     
  6.3 J.P. Morgan May Consult with Counsel.
     
    J.P. Morgan will be entitled to rely on, and may act upon the advice of professional advisors in relation to matters of law, regulation or market practice (which may be the professional advisors of the Customer or the Funds), and shall not be liable to Customer under this Agreement for any action taken or omitted pursuant to such advice provided that J.P. Morgan has acted with reasonable care.
     
  6.4 Limitations of J.P. Morgan’s Liability.
     
    (a) J.P. Morgan may rely on information provided to it by or on behalf of the Funds, or which was prepared or maintained by the Customer or any third party on behalf of the Funds, in the course of discharging its duties under this Agreement. J.P. Morgan shall not be liable to any person for any Liabilities suffered by any person as a result of J.P. Morgan: (i) having relied upon the authority, accuracy, truth or completeness of information including, without limitation, information supplied to J.P. Morgan by the Customer or by the Investment Adviser or any third party which is not a subcontractor of J.P. Morgan, including but not limited to, information in relation to trades in respect of the Funds or expenses of the Funds; (ii) having relied upon the authority, accuracy, truth and completeness of information furnished to J.P. Morgan by any pricing services, data services, or provider of other market information or information concerning securities held by the Funds.
 

 

  (b) J.P. Morgan shall not be liable for any error in data that is transitioned to J.P. Morgan at the time it begins to provide the Services with respect to the Funds provided however that J.P. Morgan:
       
    (i) shall use reasonable efforts to mitigate any Losses arising as a result of any such error of which it is aware; and
       
    (ii) shall notify the Customer as soon as practicable after becoming aware of the error.
       
    J.P. Morgan shall be entitled to reasonable compensation, at its customary hourly rates, for the remediation efforts needed to correct any such error in data.
     
  (c) J.P. Morgan shall not be liable for any Losses resulting from a failure by any person (other than an Affiliate or subcontractor of J.P. Morgan) to provide J.P. Morgan with any information or notice that is reasonably necessary for the provision of the Services provided however that the Losses do not result from an act of negligence, fraud or willful misconduct on the part of the J.P. Morgan Indemnitees. J.P. Morgan shall use reasonable efforts to find alternative sources of information in the event of any such failure. In the event of any such failure that may affect the performance of the Services, J.P. Morgan shall promptly notify the Customer.
     
  (d) J.P. Morgan shall not be liable for any Liabilities whatsoever incurred or suffered by any party hereto, whether on their own account or for the account of the Funds, as a result of the failure of the Customer or its agents, officers or employees to comply with the laws or regulations of any jurisdiction in which Shares are offered.
     
  (e) J.P. Morgan’s responsibilities with respect to the correction of an error in calculating the net asset value of any Fund shall be subject to the NAV correction policy and procedures attached to this Agreement as Appendix A to Schedule 1 of this Agreement.
     
  (f) The Customer agrees that the accounting reports provided by J.P. Morgan, as well as any share class or other similar reports, are to enable the Customer to fulfill its statutory reporting and investor subscription/redemption obligations, and are not for investment, treasury or hedging purposes. Accordingly, notwithstanding any other provision in this Agreement, the Customer agrees that J.P. Morgan shall have no liability whatsoever for any Liabilities incurred by the Customer as result of use of the accounting reports for investment, treasury or hedging purposes, including, but not limited to, for the purpose of currency overlay transactions.

 

7. Term and Termination
   
  7.1 Term and Termination.

 

This Agreement shall be in effect for an initial term of three years from the Services Commencement Date (the “Initial Term”). The Agreement will automatically renew for additional one year periods effective from the first

 

 

anniversary of the date of the end of the Initial Term of this Agreement, unless and until a valid termination notice is given by the Customer or J.P. Morgan at least one hundred and twenty 120 days prior to the end of the applicable term.

 

  7.2 Other Grounds for Termination.
       
    (a) In the event of the termination of the custody agreement or the agency agreement between J.P. Morgan and the Customer, J.P. Morgan may terminate this Agreement in whole or in part and cease to provide the Services simultaneously with the transition of the assets of the respective Funds to a successor custodian. In the event that any such termination occurs prior to the end of the Initial Term, the Customer shall pay J.P. Morgan an early termination fee in an amount equal to six (6) times the average monthly Fee paid by Customer during the preceding six (6) months (an “Early Termination Fee”), unless the Customer’s termination of the custody agreement was for material breach.
       
    (b) Either party may terminate this Agreement immediately upon written notice to the other party following the occurrence of any of the following:

 

(i)        the other party being declared bankrupt, entering into a composition with creditors, obtaining a suspension of payment, being put under court controlled management or being the subject of a similar measure;

 

(ii)        a relevant federal or state authority withdrawing its authorization of either party; or

 

(iii)        the other party committing any material breach of this Agreement and failing to remedy such breach (if capable of remedy) within thirty (30) days of being given written notice of the material breach, unless the parties agree to extend the period to remedy the breach.

 

  7.3 Consequences of Termination.

 

Termination of this Agreement under the provisions of this Article 7 will be without prejudice to the performance of any party’s obligations under this Agreement with respect to all outstanding transactions at the date of termination.

 

  7.4 Transition following Termination.

 

As soon as reasonably practicable following its resignation or termination of appointment becoming effective and subject to payment of any amount owing to J.P. Morgan under this Agreement, J.P. Morgan agrees to transfer such records and related supporting documentation as are held by it under this Agreement, to any replacement provider of the Services or to such other person as the Customer may direct. Except as otherwise provided in Section 7.2, J.P. Morgan will provide the Services until a replacement administrator is in place subject to the terms and conditions of this Agreement (including Article 4). J.P. Morgan will also provide reasonable assistance to its successor, for such transfer, subject to the payment of such reasonable expenses and charges as J.P. Morgan customarily charges for such

 

 

assistance. The Customer undertakes to use its best efforts to appoint a new administrative service provider as soon as possible.

 

8. Miscellaneous

 

  8.1 Notices.
     
    Notices required under this Agreement shall be sent or served by registered mail, overnight delivery services, such as Federal Express (FedEx) or United Parcel Service (UPS), etc., courier services or hand delivery to the address of the respective parties as set out on the first page of this Agreement, unless notice of a new address is given to the other party in writing. Notice will not be deemed to be given unless it has been received.
     
  8.2 Successors and Assigns.
     
    This Agreement will be binding on each of the parties hereto and their respective successors and permitted assigns, but the parties agree that neither party can assign its rights and obligations under this Agreement without the prior written consent of the other party, which consent will not be unreasonably withheld or delayed; except J.P. Morgan may assign this Agreement without Customer’s consent to (a) any Affiliate or subsidiary of J.P. Morgan or (b) in connection with a merger, reorganization, stock sale or sale of all or substantially all of J.P. Morgan’s fund servicing business.
     
  8.3 Entire Agreement.
     
    This Agreement, including the Schedules, Appendices and Annexes, sets out the entire Agreement between the parties in connection with the subject matter, and this Agreement supersedes any other agreement, statement, or representation relating to the Services under this Agreement, whether oral or written. Amendments must be in writing and signed by both parties.
     
  8.4 Insurance.
     
    The Customer acknowledges that J.P. Morgan will not be required to maintain any insurance coverage specifically for the benefit of the Customer or the Funds. J.P. Morgan will, however, provide summary information of its own general insurance coverage, to the Customer upon written request.
     
  8.5 Governing Law and Jurisdiction.
     
    This Agreement will be construed, regulated and administered under the laws of the United States or State of New York, as applicable, without regard to New York’s principles regarding conflict of laws, except that the foregoing shall not reduce any statutory right to choose New York law or forum. The United States District Court for the Southern District of New York will have the sole and exclusive jurisdiction over any lawsuit or other judicial proceeding relating to or arising from this Agreement. If that court lacks federal subject matter jurisdiction, the Supreme Court of the State of New York, New York County will have sole and exclusive jurisdiction. Either of these courts will have the proper
 

 

venue for any such lawsuit or judicial proceeding, and the parties waive any objection to venue or their convenience as a forum. The parties agree to submit to the jurisdiction of any of the courts specified and to accept service of process to vest personal jurisdiction over them in any of these courts. The parties further hereby knowingly, voluntarily and intentionally waive, to the fullest extent permitted by Applicable Law, any right to a trial by jury with respect to any such lawsuit or judicial proceeding arising or relating to this Agreement or the transactions contemplated hereby.

 

  8.6 Severability; Waiver; and Survival.

 

(a)        If one or more provisions of this Agreement are held invalid, illegal or unenforceable in any respect on the basis of any particular circumstances or in any jurisdiction, the validity, legality and enforceability of such provision or provisions under other circumstances or in other jurisdictions and of the remaining provisions will not in any way be affected or impaired.

 

(b)        Except as otherwise provided herein, no failure or delay on the part of either party in exercising any power or right under this Agreement operates as a waiver, nor does any single or partial exercise of any power or right preclude any other or further exercise, or the exercise of any other power or right. No waiver by a party of any provision of this Agreement, or waiver of any breach or default, is effective unless it is in writing and signed by the party against whom the waiver is to be enforced.

 

(c)        The parties’ rights, protections, and remedies under this Agreement shall survive its termination.

 

  8.7 Confidentiality.

 

(a)        Subject to Section 8.7(b), J.P. Morgan will hold all Confidential Information in confidence and will not disclose any Confidential Information except as may be required by Applicable Law, a regulator with jurisdiction over J.P. Morgan’s or Funds business, or with the consent of the Customer.

 

(b)        The Customer authorizes J.P. Morgan to disclose Confidential Information to:

 

(i)        any service providers and/or vendors to the Funds that J.P. Morgan believes are reasonably required by such person to provide the relevant services;

 

(ii)         its professional advisers, auditors or public accountants;

 

(iii)        its Affiliates; and

 

(iv)         any revenue authority or any governmental entity.

 

  (c) Except as otherwise required by Applicable Law or as needed to enforce the terms of this Agreement, the parties shall hold the terms and conditions of this Agreement, including, without limitation, any commercial terms, in confidence.
 

 

  8.8 Use of J.P. Morgan’s Name.
     
    The Customer agrees not to use (or permit the use of) J.P. Morgan’s name in any document, publication or publicity material relating to the Customer or the Funds, including but not limited to notices, sales literature, stationery, advertisements, etc., without the prior consent of J.P. Morgan (which consent shall not be unreasonably withheld), provided that no prior consent is needed if the document in which J.P. Morgan’s name is used merely states that J.P. Morgan is acting as administrator to the Funds.
     
  8.9 Delegation.
     
    J.P. Morgan may delegate to a reputable agent any of its functions herein. However, J.P. Morgan will remain responsible to the Funds for any such delegation. To the extent reasonably practicable, J.P. Morgan will consult with the Customer before it implements the delegation of a material portion of the Services.
     
  8.10 Third Party Rights.
     
    A person who is not a party to this Agreement shall have no right to enforce any term of this Agreement.
     
  8.11 Counterparts.
     
    This Agreement may be executed in several counterparts each of which will be deemed to be an original and together will constitute one and the same agreement.

 

AS WITNESS the hand of the duly authorized officers of the parties hereto:

 

ETFS TRUST   JPMORGAN CHASE BANK, N. A.
     
By:  /s/ Benoit Autier   By: /s/ Josh Jacobs
         
Name: Benoit Autier   Name: Josh Jacobs
Title: President   Title: Vice President JPMorgan
Date: January 6, 2015   Date: January 6, 2015
 

 

SCHEDULE 1

 

Accounting and NAV Calculation Services

 

A. Definitions
     
  1. Definitions.

 

As used in this Agreement and the Schedules and Appendices to this Agreement, the following terms have the meaning hereinafter stated:

 

“Accounting Records” means the official books and records which are maintained by J.P. Morgan with respect of the Funds in accordance with Applicable Law.

 

“Administrator” the entity appointed as the administrator of the Customer and/or Funds under this Agreement.

 

“Basket” means the in-kind deposit of a designated portfolio of cash, equity or debt securities required to be delivered for a Creation Unit.

 

“Business Day” means a day on which the New York Stock Exchange is open for Business.

 

“Cash Component” means the balancing cash due with each creation or redemption of a Creation Unit, i.e., the difference between the aggregate value of the securities in a Basket and the total value of the Creation Unit.

 

“Creation Unit” means a bundle of shares created or redeemed on a continuous basis in a large, specified number at net asset value.

 

“Custodian” means the entity appointed as the custodian of the Funds, as notified by the Customer to J.P. Morgan in writing.

 

“Daily” means, in relation to an activity, that it is repeated on each Business Day.

 

“NAV” means, in relation to any of the Funds, the net asset value per Share for that Fund.

 

“NAV Error” has the meaning given in Appendix A.

 

“Order Taker” means the entity appointed as order taker of the Funds, as notified by the Customer to J.P. Morgan in writing.

 

“Portfolio Composition File” (or “PCF” ) means the securities, share quantities, and or cash that would be required to effect a Creation or Redemption on the next trading day by an Authorized Participant.

 

“Transfer Agent” means J.P. Morgan acting in the capacity as transfer agent for the Customer.

 

“Valuation File” (or “VF” ) means the procedures to be followed by J.P. Morgan with respect to valuation of the Funds’ securities, as agreed by the parties.

 

 

  2. Interpretation.

 

Capitalized terms which are defined in the main body of this Agreement shall be defined as provided in the main body unless otherwise defined in this Schedule.

 

B. Fund Accounting
     
  1. Maintenance of Accounting Records.

 

  (a) J.P. Morgan shall maintain the following Accounting Records in accordance with U.S. generally accepted accounting principles:

 

  (i) journals containing an itemized Daily record of all purchases and sales of securities, all receipts and disbursements of cash and all other debits and credits;
     
  (ii) general and auxiliary ledgers reflecting all asset, liability, reserve, capital, income and expense accounts, including interest accrued and interest received;
     
  (iii) separate ledger accounts; and
     
  (iv) a monthly trial balance of all ledger accounts (except shareholder accounts).

 

(b)        J.P. Morgan shall update the Accounting Records to reflect completed Share transactions as notified to it by the Order Taker on a total aggregate basis.

 

  2. Distributions.

 

  (a) Daily Distributing Funds: J.P. Morgan will compute each Fund’s net income and capital gains, dividend payables, dividend factors and agreed upon rates and yields.
     
  (b) Non-Daily Dividend Funds: J.P. Morgan will record Fund distributions as notified to it by the Funds’ Administrator.

 

  3. Assistance to Auditors.

 

J.P. Morgan shall provide reasonable cooperation and assistance to the auditors of the Funds, including without limitation by providing copies of extracts of the Accounting Records and other documentation which is maintained by J.P. Morgan on behalf of the Funds as reasonably required by such auditors to carry out their functions. The Customer and/or the Investment Adviser shall coordinate all requests for assistance by auditors.

 

C. Fund Valuations
     
  1. NAV Calculation and Reporting.

 

  (a) J.P. Morgan shall perform NAV calculations in accordance with:
 

 

  (i) the Prospectus;
     
  (ii) the 1940 Act;
     
  (iii) Valuation Procedures; and
     
  (iv) Instructions which are consistent with J.P. Morgan’s operating model,

 

provided that, in the cases of (iii) and (iv), they are consistent with (i) and (ii).

 

(b)        J.P. Morgan shall perform the following NAV calculation functions Daily, unless otherwise agreed with the Customer:

 

  (i) recording all security transactions including appropriate gains and losses from the sale of Fund securities applying dual sell selection methodology such that highest “book” cost applied to market trades and lowest “book” cost applied to in-kind redemption trades;
     
  (ii) recording each Fund’s (or class’) capital share activities based upon Share Transactions received by the Order Taker;
     
  (iii) recording interest income, amortization/accretion income and dividend income;
     
  (iv) accruing Fund (or class) expenses according to instructions received from the Funds’ Administrator;
     
  (v) recording all corporate actions affecting securities held by each Fund;
     
  (vi) determining the outstanding receivables and payables for all (1) security trades, (2) Share transactions; and (3) income and expense accounts; and
     
  (vii) obtaining security prices from independent pricing services, or if such quotes are unavailable, obtaining such prices from the Funds’ Investment Adviser or its designee, as approved by the Board.
     
  (viii) sending the daily PCF to the Customer as directed.
     
  (ix) calculating the Cash Component of the PCF and transmitting it as directed by the Customer.

 

  (c) J.P. Morgan shall report confirmed NAV calculations to

 

  (i) the Investment Adviser;
     
  (ii) the Order Taker; and
     
  (iii) such third parties as agreed with the Customer.

 

  2. NAV Errors.

 

Subject to Applicable Law and notwithstanding additional duties of J.P. Morgan as furthermore described in Appendix A to this Schedule:

 

  (a) J.P. Morgan shall report all NAV Errors to the Customer promptly upon discovery.
 

 

  (b) The Customer shall ensure that all errors in NAV calculations identified by it, or by the Investment Adviser, are reported to J.P. Morgan as soon as reasonably practicable following discovery.
     
  (c) J.P. Morgan shall correct NAV Errors as and when required by Appendix A to this Schedule.

 

D. Reconciliations of Securities Positions and Cash and/or Currency Balances

 

  1 J.P. Morgan shall reconcile its records of securities positions and cash and/or currency balances of the relevant Fund to the records of the relevant Custodian, and shall perform similar reconciliations to the relevant source with respect to other material investment assets or liabilities. Such reconciliations shall be conducted at the frequency as agreed with the Customer in the case of cash and/or currency holdings, securities and other investment assets or liabilities.
     
  2 In cases where an Affiliate of J.P. Morgan is not the appointed Custodian for a Fund, the Customer shall ensure that the Custodian shall provide J.P. Morgan with timely, accurate and complete records of securities position and cash and/or currency balances to J.P. Morgan for each Fund. The Customer also shall ensure that the relevant source shall provide J.P. Morgan with timely, accurate and complete records of any other material investment assets or liabilities for each Fund.

 

E. Standard Reporting

 

J.P. Morgan shall make available a standard set of reports as agreed with the Customer.

 

F. Services Requiring Separate Arrangements

 

  1. Non-Standard Services and Reports.

 

Additional services and special reports are available by arrangement between the Customer and J.P. Morgan under the terms and conditions of this Agreement (other than adjustments in compensation as may be agreed). The non-standard services and special reports will be subject to the Change Control processes set forth in Section 2.6.

 

  2. Messaging/Communication.

 

Unless otherwise agreed in accordance with the Change Control process set forth in Section 2.6, all information delivered to J.P. Morgan (including but not limited to trade flows and reconciliation reports) shall be via J.P. Morgan’s standard means of electronic communication.

 

 

APPENDIX A

Net Asset Value Error Correction Policy and Procedures

 

1. As used in this Agreement and the Schedules and Appendices to this Agreement, the following terms have the meaning hereinafter stated:

 

“NAV Error” is defined as one or more errors in the computation of net asset value which, when considered cumulatively, result in a difference between the originally computed NAV calculation and the corrected NAV calculation of at least $0.010 per share. This computation is based upon the actual difference and is not based upon the rounding of the NAV calculation to the nearest cent per share.

 

The term “responsible person” means a person who, by virtue of negligence, fraud, or willful misconduct, caused or contributed to an NAV Error.

 

2. (a)        In the event that a NAV Error results in a computation error greater than $0.01, then any party receiving an overpayment as a result of the NAV Error shall be responsible to reimburse the payee for such excess amounts. The Customer will be responsible for obtaining any reimbursements due in accordance with this Agreement from the responsible person or persons.

 

  (b) In cases where J.P. Morgan is not the responsible person with regard to a NAV Error, J.P. Morgan shall be entitled to reasonable compensation for the work it performs with respect to the remediation of the NAV Error.
     
  (c) In cases where a NAV Error has occurred, the Customer, upon JPMorgan’s request, will instruct the Transfer Agent to reprocess each Authorized Participant’s Creation and/or Redemption transactions occurring during the NAV Error period by adjusting only the corresponding dollar amounts associated with the transactions, at the expense of the responsible person or persons. If the Transfer Agent does not agree to reprocess transactions resulting from a NAV Error for which JPMorgan is a responsible person, JPMorgan’s liability will be limited to the dollar amount it would have been liable for had the reprocessing occurred.
 

 

SCHEDULE    2

Fund Administration Services

 

A. Portfolio Compliance Service.

 

  1. Subject to the timely availability of accurate data, J.P. Morgan will perform testing of the Fund’s portfolio compliance:

 

(i)        on a daily basis with respect to such investment restrictions and other regulatory requirements as are agreed in writing by the Customer and J.P. Morgan.

 

(ii)        on a quarterly basis with respect to the requirements of Section 851 of the Internal Revenue Code and applicable Treasury Regulations for qualification as a regulated investment company; and

 

    will report its findings to the Customer from time to time as agreed between the parties (the “Portfolio Compliance Service” ).
     
  2. J.P. Morgan is providing the Portfolio Compliance Service as a reporting service to the Customer to assist it in the oversight of the Funds and is not acting in a fiduciary capacity for the Funds. Accordingly, J.P. Morgan shall have no liability for any Liabilities (including investment losses) incurred by the Customer or any Fund resulting from the reliance by the Customer (or any other person) on the accuracy or completeness of the Portfolio Compliance Service.

 

B. Financial Reporting Services.

 

J.P. Morgan will prepare the reports and filings below for the review and approval by the Customer’s officers and will file such documents with the SEC upon receipt of approval from the Customer’s officers.

 

  1. Semi-Annual and Annual Reports.
     
    J.P. Morgan will prepare financial information for the Funds’ semi-annual reports, annual reports and financial statements for routine prospectus updates.
     
  2. 24f-2 Notices.
     
    J.P. Morgan will prepare the annual Rule 24f-2 Notice.
     
  3. Form N-Q.
     
    J.P. Morgan will prepare Form N-Q on a quarterly basis.
     
  4. Form N-SAR.
     
    J.P. Morgan will prepare Form N-SAR on a semi-annual basis.
     
  5. Form N-CSR.
     
    J.P. Morgan will compile information for Form N-CSR on a semi-annual basis.
 

 

  6. Additional Services.
     
    The following services are available by arrangement between the Customer and J.P. Morgan (and subject to additional fees): pro forma statements and in-house type-setting and publishing.

 

C. Tax Services
   
  J.P. Morgan will provide the following tax services, subject to the review and approval of the Customer, the Investment Adviser and/or the Funds’ auditors.

 

  1. Preparation of Certain Documents:

 

  (i) J.P. Morgan shall prepare the following for review and approval by the Customer:
     
  (ii) Fiscal and excise tax provisions in accordance with the Internal Revenue Code and applicable rules and regulations;
     
  (iii) Federal (Form 1120-RIC), state income tax return for state of incorporation (or additional states as agreed, subject to additional fees) and excise tax returns (Form 8613) (including filings by extended due dates) and file;
     
  (iv) Year-end re-characterizations, such as return of capital, foreign tax credit, qualified dividend income and tax exempt percentages for Form 1099- DIV;
     
  (v) Provide support for all applicable data required for year-end shareholder reporting requirements, such as income by state, income by country, treasury income;
     
  (vi) Calculation of income/capital gain distributions (in compliance with income/excise tax distribution requirements) in accordance with the Internal Revenue Code and any applicable rules and regulations;
     
  (vii) All items regarding liquidations or mergers, including completion of the final tax provisions, returns and calculations of all tax attributes.

 

  2. Financial Statement Support:
     
    J.P. Morgan will support the Funds’ financial statement process by preparing and reviewing the following:

 

(i)        Return of Capital Statement of Position (ROC SOP) disclosure.

 

(ii)        Tax Footnote disclosure that involves tax cost of investments, ROC SOP reclassification, tax character of distributions (comparative table – prior year and current year), distributable earnings, capital loss carry forward (and if applicable, post October loss.

 

(iii)        60 day notice information required by the Tax Code for foreign tax credit, long-term capital gain designation, tax exempt income, dividend received deduction, qualified dividend income, qualified interest income, and qualified short-term gain.

 

 

  3. Additional Services.
     
    The following services are available by arrangement between the Customer and J.P. Morgan (and subject to additional fees): REMIC OID calculations, accelerated fiscal or excise tax reporting, additional wash sales processing and analysis (to be performed by GainsKeeper), Passive Foreign Investment Company (“PFIC”) identification services (to be performed by Ernst & Young’s PFIC analyzer product, pursuant to a contractual engagement by Customer with Ernst & Young), mutually agreed upon-tax consulting, assistance with Internal Revenue audits or audits conducted by state taxing authorities, assist and test for ownership charges (based upon mutually agreed upon procedures) and determine personal holding company status, as deemed necessary.

 

D. Regulatory Services
   
  J.P. Morgan will perform the following services subject to the review and approval of the Customer and its legal counsel.

 

  1. Board Materials.
     
    J.P. Morgan shall prepare for review by the Customer and its legal counsel a production schedule, notice, agenda and all routine Board materials, including Board memoranda and resolutions for regular quarterly Board meetings and distribute the materials to all necessary parties. An officer of J.P. Morgan will attend the Board meetings and draft the minutes thereof for review by the Customer and its legal counsel. J.P. Morgan shall maintain the minutes of all meetings in the corporate records of the Funds.
     
  2. Calendars.
     
    J.P. Morgan shall maintain an annual calendar of Board and Committee meetings and all required SEC filings.

 

E. General Administration Services
     
  1. Board Materials.
     
    J.P. Morgan will prepare or compile Fund performance and expense information, financial reports, and compliance data and information for inclusion in the regular quarterly Board meeting materials.
     
  2. Dividend Distributions.
     
    J.P. Morgan will calculate dividend distributions in accordance with the Funds’ distribution policies and assist the Investment Adviser in making final determinations of distribution amounts.
     
  3. Expense Accruals.
     
    J.P. Morgan will prepare Fund or class expense projections, establish accruals and review on a periodic basis, including expenses based on a percentage of average daily net assets (e.g., management, advisory and administrative fees) and expenses based on actual charges annualized and accrued daily (e.g. audit fees,
 

 

    registration fees, directors’ fees).
     
  4. Expense Payments.
     
    Upon Instruction by the Customer’s officer, J.P. Morgan will arrange for the payment of each Fund’s (or class’) expenses.
     
  5. Reports.
     
    J.P. Morgan will report Fund performance to outside statistical service providers as instructed by the Investment Adviser.
     
  6. Chief Compliance Officer Support.
     
    J.P. Morgan will provide annual representation letters in connection with Customer’s obligations under Rule 38a-1 under the 1940 Act and liaise with the Funds’ Chief Compliance Officer as necessary.
     
  7. SEC Examinations.
     
    J.P. Morgan will provide support and coordinate communications and data collection of records and documents held by J.P. Morgan on the Funds’ behalf, with respect to routine SEC regulatory examinations of the Funds.
     
  8. Non-Executive Officers.
     
    J.P. Morgan will furnish appropriate non-executive officers for the Customer, such as assistant treasurers and secretaries.
 

 

SCHEDULE    3

 

Remuneration

 

As agreed in the fee proposal dated January 5, 2015.

 

 

ANNEX A

 

Electronic Access

 

1. J.P. Morgan may permit the Customer and its Authorized Persons to access certain electronic systems, applications and Data (as defined below) in connection with the Agreement (collectively, the “Products”). J.P. Morgan may, from time to time, introduce new features to the Products or otherwise modify or delete existing features of the Products in its sole discretion. J.P. Morgan shall endeavor to give the Customer reasonable notice of its termination or suspension of access to the Products, but may do so immediately if J.P. Morgan determines, in its sole discretion, that providing access to the Products would violate Applicable Law or that the security or integrity of the Products is at risk. Access to the Products shall be subject to the Security Procedures
   
2. In consideration of the fees paid by the Customer to J.P. Morgan and subject to any applicable software license addendum in relation to J.P. Morgan-owned or sublicensed software provided for a particular application and Applicable Law, J.P. Morgan grants to the Customer a non-exclusive, non-transferable, limited and revocable license to use the Products and the information and data made available through the Products (the “Data”) for the Customer’s internal business use only. The Customer may download the Data and print out hard copies for its reference, provided that it does not remove any copyright or other notices contained therein. The license granted herein will permit use by Customer’s Authorized Person, provided that such use shall be in compliance with the Agreement, including this Annex.
   
3. The Customer acknowledges that there are security, corruption, transaction error and access availability risks associated with using open networks such as the internet, and the Customer hereby expressly assumes such risks. The Customer is solely responsible for obtaining, maintaining and operating all software (including antivirus software, anti-spyware software, and other internet security software) and personnel necessary for the Customer to access and use the Products. All such software must be interoperable with J.P. Morgan’s software. Each of the Customer and J.P. Morgan shall be responsible for the proper functioning, maintenance and security of its own systems, services, software and other equipment.
   
4. In cases where J.P. Morgan’s web site is unexpectedly down or otherwise unavailable, J.P. Morgan shall, absent a force majeure event, provide other appropriate means for the Customer or its Authorized Persons to instruct J.P. Morgan or obtain reports from J.P. Morgan. J.P. Morgan shall not be liable for any Liabilities arising out of Customer’s use of, access to or inability to use the Products via J.P. Morgan’s web site in the absence of J.P. Morgan’s gross negligence or willful misconduct.
   
5. Use of the Products may be monitored, tracked, and recorded. In using the Products, the Customer hereby expressly consents to such monitoring, tracking, and recording. Individuals and organizations should have no expectation of privacy unless local law, regulation, or contract provides otherwise. J.P. Morgan shall own all right, title and interest in the data reflecting Customer usage of the Products or J.P. Morgan’s web site (including, but not limited to, general usage data and aggregated transaction data). J.P. Morgan may use and sublicense data obtained by it regarding the Customer’s use of the Products or J.P. Morgan’s website, as long as J.P. Morgan does not disclose to others that the Customer was the source of such data or the details of individual transactions effected using the Products or web site.
 

 

6. The Customer shall not knowingly use the Products to transmit (i) any virus, worm, or destructive element or any programs or data that may be reasonably expected to interfere with or disrupt the Products or servers connected to the Products; (ii) material that violates the rights of another, including but not limited to the intellectual property rights of another; and (iii) “junk mail”, “spam”, “chain letters” or unsolicited mass distribution of e-mail.
   
7. The Customer shall promptly and accurately designate in writing to J.P. Morgan the geographic location of its users upon written request. The Customer further represents and warrants to J.P. Morgan that the Customer shall not access the service from any jurisdiction which J.P. Morgan informs the Customer or where the Customer has actual knowledge that the service is not authorized for use due to local regulations or laws, including applicable software export rules and regulations. Prior to submitting any document which designates the persons authorized to act on the Customer’s behalf, the Customer shall obtain from each individual referred to in such document all necessary consents to enable J.P. Morgan to process the data set out therein for the purposes of providing the Products.
   
8. The Customer will be subject to and shall comply with all applicable laws, rules and regulations concerning restricting collection, use, disclosure, processing and free movement of the Data (collectively, the “Privacy Regulations”). The Privacy Regulations may include, as applicable, the Federal “Privacy of Consumer Financial Information” Regulation (12 CFR Part 30), as amended from time to time, issued pursuant to Section 504 of the Gramm-Leach-Bliley Act of 1999 (15 U.S.C. §6801, et seq.), the Health and Insurance Portability and Accountability Act of 1996 (42 U.S.C. §1320d), The Data Protection Act 1998 and Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to processing of personal data and the free movement of such data.
   
9. The Customer shall be responsible for the compliance of its Authorized Persons with the terms of the Agreement, including this Annex.
 

 

SCHEDULE         4

 

ETFS Trust - List of Funds

 

ETFS Zacks Earnings Large-Cap U.S. Index Fund

 

ETFS Zacks Earnings Small-Cap U.S. Index Fund

 

ETFS Diversified Factor US Large Cap Index Fund

 

ETFS Diversified Factor Developed Europe Index Fund

 

Exhibit 99(h)(2)

 

 

THIS AGREEMENT IS TO BE ONLY USED FOR THE PROVISION OF AGENCY SERVICES TO A UNITED STATES EXCHANGE-TRADED FUND

 

 

 

 

AGENCY SERVICES AGREEMENT

 

THIS AGENCY SERVICES AGREEMENT made as of the 4th day of December, 2014 by and between ETFS TRUST , a Delaware statutory trust and registered investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), on behalf of its ETF Series (defined below) with offices at 48 Wall Street, 11th Floor, New York, NY 10005 (the “Trust”) and JPMORGAN CHASE BANK, N.A. a national banking association with a place of business at 383 Madison Avenue, New York, New York 10179 (“J.P. Morgan”).

 

PREMISE

 

J.P. Morgan, in its capacity as custodian of the Trust has been engaged to provide custody services to the Trust and its various portfolios pursuant to the terms of a Global Custody Agreement dated as of December 4, 2014 (the “Custody Agreement”). The Trust intends to issue in respect of its portfolios listed on Exhibit A hereto (each a “Fund” or an “ ETF Series”) an exchange-traded class of shares known as “ ETF 1 Shares” for each ETF Series. The ETF Shares shall be created in bundles called “Creation Units.” The Trust, on behalf of the ETF Series, shall create and redeem ETF Shares of each ETF Series only in Creation Units principally in kind for portfolio securities of the particular ETF Series (“Deposit Securities”), as more fully described in the current prospectus and statement of additional information of the Trust, included in its registration statement on Form N-1A, No. 811-22986; and as authorized under the Order of Exemption dated November 19, 2014 of the Securities and Exchange Commission, Investment Company Act Release No. 31340; File No. 812-14271. Only brokers or dealers that are “Authorized Participants” and that have entered into an Authorized Participant Agreement with the Distributor, acting on behalf of the Trust, shall be authorized to create and redeem ETF Shares in Creation Units from the Trust. The Trust wishes to engage J.P. Morgan to perform certain services on behalf of the Trust with respect to the creation and redemption of ETF Shares, as the Trust’s agent, namely: to provide transfer agent services for ETF Shares of each ETF Series; to act as Index Receipt Agent (as such term is defined in the rules of the National Securities Clearing Corporation) with respect to the settlement of trade orders with Authorized Participants; and to provide custody services under the terms of the Custody Agreement, as supplemented hereby, for the settlement of Creation Units against Deposit Securities and/or cash that shall be delivered by Authorized Participants in exchange for ETF Shares and the redemption of ETF Shares in Creation Unit size against the delivery of Redemption Securities and/or cash of each ETF Series.

 

 

1 ETF” is being shown in this document until the Trust has identified a trade name for its exchange traded fund product.

 

 

 

NOW THEREFORE , in consideration of the promises and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the Trust and J.P. Morgan agree as follows:

 

1. DEFINITIONS. The following terms as used in this Agreement shall have the meanings as set forth below:

 

Agreement: means this Agency Services Agreement.

 

Applicable Law: means any applicable statute, including the 1940 Act, the Advisers Act, the Securities Act of 1933, as amended (the “1933 Act”) and the Securities Exchange Act of 1934, as amended, (the “1934 Act”) as well as any applicable statute, treaty, rule, regulation or common law and any applicable decree, injunction, judgment, order, formal interpretation or ruling issued by a court or governmental entity.

 

Authorized Participant: a broker or dealer that is a DTC participant and that has executed an Authorized Participant Agreement with the Distributor for the creation and redemption of Creation Units.

 

Authorized Participant Agreement: the agreement between the Distributor, on behalf of the Trust, and a broker or dealer that is a DTC Participant governing the creation and redemption of Creation Units.

 

Authorized Person: means any person who has been designated by written notice from the Trust (or by any agent designated by the Trust, including, without limitation, an Investment Adviser), to act on behalf of Trust hereunder. Such persons will continue to be Authorized Persons until such time as J.P. Morgan receives Instructions from the Trust (or its agent) that any such person is no longer an Authorized Person.

 

Balancing Amount: means an amount of cash equal to the difference between the net asset value of a Creation Unit and the market value of the Deposit Securities (in the case of an creation) or the market value of the Redemption Securities (in the case of a redemption). For the creation of Creation Units, if the Balancing Amount is a positive number, then it will be an amount that is payable to the ETF Series by the Authorized Participant and if the Balancing Amount is a negative number, then it will be an amount that is payable by the ETF Series to the Authorized Participant. For redemptions of Creation Units, if the Balancing Amount is a positive number, then it will be an amount that is payable by the ETF Series to the Authorized Participant and if the Balancing Amount is a negative number, then it will be an amount that is payable to the ETF Series by the Authorized Participant.

 

Cash Component: means an amount of cash consisting of the Balancing Amount and a Transaction Fee.

 

 

 

Clearing Process: means CNS (defined below), the NSCC clearing and settlement process for the creation and redemption of Creation Units for cash and/or securities in kind.

 

CNS: means the Continuous Net Settlement System of NSCC.

 

Creation Deposit: means the consideration for the creation of a Creation Unit consisting of Deposit Securities and the Balancing Amount.

 

Creation Unit: means a large block of a specified number of ETF Shares that makes up one unit of the ETF Series, as specified in the ETF Series’ prospectus. A Creation Unit is the minimum number of ETF Shares that may be created or redeemed at any one time.

 

Custodian: means J.P. Morgan acting in the capacity as securities custodian for the Trust.

 

Deposit Securities: means with respect to each business day the designated basket of cash and/or securities that will generally be tendered to an ETF Series by an Authorized Participant to create one or more Creation Units of that Fund’s ETF Shares.

 

Distributor: means the party identified as distributor in the Trust prospectus that may sign the Authorized Participant Agreement on behalf of the Trust.

 

DTC: means The Depository Trust Company, a limited purpose trust company organized under the law of the State of New York.

 

DTC Participant: means a “participant” as such term is defined in the rules of DTC.

 

DTC Participant Account: means an “account” as such term is defined in the rules of DTC.

 

ETF Series : means the series of the Trust that are listed on Exhibit A hereto, as amended from time to time.

 

ETF Shares: means the shares of each ETF Series.

 

Fund Administrator : means the entity appointed to provide fund administration services to the Funds, as notified by the Trust to J.P. Morgan in writing.

 

Index Receipt Agent: means J.P. Morgan acting in the capacity as “index receipt agent,” as such term is defined in the rules of NSCC, for the Trust.

 

Instructions: means instructions which: (i) contain all necessary information required by J.P. Morgan to enable J.P. Morgan to carry out the Instructions; (ii) are

 

 

 

received by J.P. Morgan in accordance with the prevailing Security Procedures; and (iii) J.P. Morgan believes in good faith have been given by an Authorized Person or are transmitted with proper testing or authentication pursuant to terms and conditions which J.P. Morgan may specify.

 

Investment Adviser: means any person or entity appointed as investment adviser or manager of any of the Funds, in accordance with the Registration Statement.

 

J.P. Morgan Indemnitees ” means J.P. Morgan, and its nominees, directors, officers, employees and agents.

 

Liabilities: means any liabilities, losses, claims, costs, damages, penalties, fines, obligations, or expenses of any kind whatsoever (including, without limitation, reasonable attorneys’, accountants’, consultants’ or experts’ fees and disbursements).

 

NSCC: National Securities Clearing Corporation, a clearing agency that is registered with the SEC.

 

Order Taker: means the entity appointed as order taker of the Funds, as notified by the Trust to J.P. Morgan in writing.

 

Outside the Clearing Process: means processing creation and redemption orders concerning Creation Units and Deposit Securities and Redemption Securities for settlement exclusively through DTC or, when the settlement is not DTC eligible, as a window delivery to the offices of the Custodian.

 

Redemption Securities: means the designated basket of cash and/or securities provided by the Trust to an Authorized Participant redeeming a Creation Unit. On any given day, the Redemption Securities may or may not be identical to the Deposit Securities.

 

SEC: means the United States Securities and Exchange Commission

 

Security Procedure: means any security procedure to be followed by Trust upon the creation of an Instruction and/or by J.P. Morgan upon the receipt of an Instruction, so as to enable J.P. Morgan to verify that such Instruction is authorized, as set forth in operating procedures documentation in effect from time to time between the parties with respect to the services set forth in this Agreement, or as otherwise agreed in writing by the parties. A Security Procedure may, without limitation, involve the use of algorithms, codes, passwords, encryption or telephone call backs and may be updated by J.P. Morgan from time to time upon notice to the Trust. Trust acknowledges that Security Procedures are designed to verify the authenticity of, and not detect errors in, Instructions. For the avoidance of doubt, the parties agree that a SWIFT message issued in the name of Trust through any third party utility agreed upon by the parties as being a method for providing Instructions and authenticated in accordance with that utility’s customary procedures, shall be deemed to be an authorized Instruction.

 

 

 

Shareholder: means DTC or its nominee. A single global certificate for each ETF Series will be created in the name of DTC or its nominee. DTC or its nominee shall be the sole registered holder of ETF Shares of each ETF Series.

 

Transaction Fee: means a transaction fee imposed by the Trust and payable by the Authorized Participant in connection with the creation or redemption of Creation Units.

 

Transfer Agent: means J.P. Morgan acting in the capacity as transfer agent for the ETF Shares of each ETF Series of the Trust.

 

2. APPOINTMENT . The Trust hereby appoints J.P. Morgan to provide services for the Trust, as described hereinafter, subject to the supervision of the Board of Trustees of the Trust (the “Board”), on the terms set forth in this Agreement. J.P. Morgan accepts such appointment and agrees to furnish the services herein set forth in return for the compensation as provided in Section 6 of this Agreement.

 

3. REPRESENTATIONS AND WARRANTIES .

 

(a) J.P. Morgan represents and warrants to the Trust that:

 

(i) J.P. Morgan is a national bank duly organized and existing as a banking association under the laws of the United States;

 

(ii) J.P. Morgan is duly qualified to carry on its business in the State of New York;

 

(iii) J.P. Morgan is empowered under Applicable Laws and by its charter and by-laws to enter into and perform the services described in this Agreement;

 

(iv) J.P. Morgan is a transfer agent registered with the SEC.

 

(v) all requisite corporate action has been taken to authorize J.P. Morgan to enter into and perform this Agreement;

 

(vi) J.P. Morgan has, and shall continue to have, access to the facilities, personnel and equipment required to fully perform its duties and obligations hereunder;

 

(vii) no legal or administrative proceedings have been instituted or threatened against J.P. Morgan which would impair J.P. Morgan’s ability to perform its duties and obligations under this Agreement; and

 

 

 

(viii) J.P. Morgan’s entrance into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of J.P. Morgan or any law or regulation applicable to J.P. Morgan;

 

(b) The Trust represents and warrants to J.P. Morgan that:

 

(i) the Trust is duly organized and existing and in good standing under the laws of the State of Delaware;

 

(ii) the Trust is empowered under Applicable Laws and by its charter document and by-laws to enter into and perform this Agreement;

 

(iii) all requisite proceedings have been taken to authorize the Trust to enter into and perform this Agreement;

 

(iv) the Trust is an open-end management investment company properly registered under the 1940 Act;

 

(v) a registration statement under the 1933 Act and the 1940 Act on Form N-1A (the “Registration Statement”) has been filed and shall be effective and shall remain effective during the term of this Agreement, and all necessary filings under the laws of the states shall have been made and shall be current during the term of this Agreement;

 

(vi) no legal or administrative proceedings have been instituted or threatened which would impair the Trust’s ability to perform its duties and obligations under this Agreement, other than as described in the Trust’s registration statement;

 

(vii) the Trust’s Registration Statement complies in all material respects with the 1933 Act and the 1940 Act and none of the Trust’s prospectuses and/or statements of additional information, and any amendments and supplements thereto (such prospectuses and statement of additional information, as in effect and as amended and supplemented from time to time (herein called the “Prospectus”) contain any untrue statement of material fact or omit to state a material fact necessary to make the statements therein not misleading; and

 

(viii) the Trust’s entrance into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Trust or any law or regulation applicable to it.

 

4. DELIVERY OF DOCUMENTS.

 

The Trust shall promptly furnish to J.P. Morgan such copies, properly certified or authenticated, of contracts, documents and other related information that J.P. Morgan

 

 

 

may request or require to properly discharge its duties. Such documents may include but are not limited to the following:

 

(i) Resolutions of the Board authorizing the appointment of J.P. Morgan to provide certain services to the Trust;

 

(ii) the Trust’s charter documents;

 

(iii) the Trust’s by-laws;

 

(iv) the Trust’s Notification of Registration on Form N-8A under the 1940 Act as filed with the SEC;

 

(v) the Trust’s Registration Statement, as filed with the SEC;

 

(vi) the Trust’s final application for an Order of Exemption with respect to the ETF Series and ETF Shares, and the Order of Exemption of the SEC granting the relief requested in the application.

 

(vii) opinions of counsel regarding the Trust’s securities creation and auditors’ reports;

 

(viii) the Trust’s Prospectus relating to all funds, series, portfolios and classes, as applicable;

 

(ix) the Trust’s annual and semi-annual reports for the current year and annually while this Agreement is in effect; and

 

(x) such other agreements as the Trust may enter into from time to time including securities lending agreements, futures and commodities account agreements, brokerage agreements and options agreements.

 

5. SERVICES PROVIDED.

 

J.P. Morgan shall provide the following services subject to the control, direction and supervision of the Board and its designated agents and in compliance with the objectives, policies and limitations set forth in the Trust’s Registration Statement, charter document and by-laws; Applicable Laws and regulations; and all resolutions and policies implemented by the Board:

 

(i) Transfer Agency Services described in Schedule A to this Agreement;

 

(ii) Index Receipt Agent Services described in Schedule B to this Agreement, and

 

 

 

(iii) such other services in connection with ETF Shares as the parties may mutually agree in writing.

 

6. FEES AND EXPENSES.

 

(a) As compensation for the services rendered to the Trust pursuant to this Agreement the Trust shall pay J.P. Morgan the fees as may be agreed upon in writing from time to time, together with J.P. Morgan’s reasonable out-of-pocket or incidental expenses, including, but not limited to, reasonable legal fees. All fees and expenses are to be billed monthly (unless another period is agreed upon) and shall be due and payable upon receipt of the invoice. Upon any termination of the provision of services under this Agreement before the end of any month, the fee for the part of the month before such termination shall be prorated according to the proportion which such part bears to the full monthly period and shall be payable upon the date of such termination.

 

(b) J.P. Morgan shall render, after the close of each month in which services have been furnished, a statement reflecting all of the fees and expenses for such month (or other agreed upon billing period). Fees and expenses remaining unpaid after thirty (30) days from the date of receipt of the statement shall bear interest, from the date of the statement to the date of repayment to J.P. Morgan by the Trust, at the Federal Funds Rate + 200 basis points and all costs and expenses of effecting collection of any such sums, including reasonable attorney’s fees, shall be paid by the Trust to J.P. Morgan.

 

(c) In the event that the Trust is more than sixty (60) days delinquent in payments of monthly billings in connection with this Agreement (with the exception of specific amounts which may be contested in good faith by the Trust), this Agreement may be terminated by J.P. Morgan upon thirty (30) days’ written notice to the Trust. The Trust must notify J.P. Morgan in writing of any disputed amounts within thirty (30) days of its receipt of the billing for such amounts. Amounts disputed in good faith are not due and payable while they are being investigated.

 

7. INSTRUCTIONS.

 

(a) The Trust authorizes J.P. Morgan to accept and act upon any Instructions received by it without inquiry. The Trust will indemnify J.P. Morgan Indemnitees against, and hold each of them harmless from, any Liabilities that may be imposed on, incurred by, or asserted against J.P. Morgan Indemnitees as a result of any action or omission taken in accordance with any Instructions or other directions upon which J.P. Morgan is authorized to rely under the terms of this Agreement unless the Liabilities result from an act of negligence, fraud or willful misconduct on the part of a J.P. Morgan Indemnity with respect to the manner in which such Instructions are followed.

 

(b) Unless otherwise expressly provided, all Instructions shall continue in full force and effect until canceled or suspended.

 

 

 

(c) J.P. Morgan may (in its sole discretion and without affecting any part of this Section 7) seek clarification or confirmation of an Instruction from an Authorized Person and may decline to act upon the Instruction if it does not receive clarification or confirmation satisfactory to it. J.P. Morgan shall not be liable for any loss arising from any delay while it seeks such clarification or confirmation.

 

8. LIMITATIONS OF LIABILITY AND INDEMNIFICATION.

 

(a) J.P. Morgan shall use reasonable care in performing its duties under this Agreement. In the absence of negligence, fraud or willful misconduct, J.P. Morgan shall not be in violation of this Agreement with respect to any matter as to which it has satisfied its duty of reasonable care.

 

(b) J.P. Morgan shall be liable to the Trust for its direct damages, excluding attorneys’ fees, to the extent they result from J.P. Morgan’s negligence, bad faith or willful misconduct in performing its duties as set out in this Agreement. Nevertheless, under no circumstances shall J.P. Morgan be liable for any indirect, special or consequential damages (including, without limitation, lost profits) of any form, whether or not foreseeable and regardless of the type of action in which such a claim may be brought.

 

(c) Without limiting subsections (a) and (b) above, J.P. Morgan shall not be responsible for, and, in the absence of negligence, fraud or willful misconduct, the Trust shall indemnify and hold J.P. Morgan, its officers, employees and agents harmless from and against, any and all Liabilities, incurred by J.P. Morgan, any of its officers, employees or agents, or the Trust’s agents in the performance of its/their duties hereunder, including but not limited to those arising out of or attributable to:

 

(i) any and all actions of J.P. Morgan or its officers, employees or agents required to be taken pursuant to this Agreement;

 

(ii) the reasonable reliance on or use by J.P. Morgan or its officers, employees or agents of information, records, or documents which are received by J.P. Morgan or its officers, employees or agents and furnished to it or them by or on behalf of the Trust, and which have been prepared or maintained by the Trust or any third party on behalf of the Trust;

 

(iii) the Trust’s refusal or failure to comply with the terms of this Agreement or the Trust’s lack of good faith, or its actions, or lack thereof, involving negligence or willful misconduct;

 

(iv) the breach of any representation or warranty of the Trust hereunder;

 

(v) the taping or other form of recording of telephone conversations or other forms of electronic communications with the Trust, its agents or any investor or reliance by J.P. Morgan on telephone or other electronic

 

 

 

Instructions of any person acting on behalf of the Trust or an investor for which telephone or other electronic services have been authorized;

 

(vi) the reliance by J.P. Morgan, its officers, employees or agents on any share certificates which are reasonably believed to bear the proper manual or facsimile signature of an Authorized Person of the Trust;

 

(vii) any delays, inaccuracies, errors in or omissions from information or data provided to J.P. Morgan by data, corporate action or pricing services, depositories or clearing systems, or securities brokers or dealers;

 

(viii) the offer or sale of ETF Shares by the Trust in violation of any requirement under the Federal securities laws or regulations or the securities laws or regulations of any state, or in violation of any stop order or other determination or ruling by any Federal agency or any state agency with respect to the offer or sale of such ETF Shares in such state (1) resulting from activities, actions, or omissions by the Trust or its other service providers and agents, or (2) existing or arising out of activities, actions or omissions by or on behalf of the Trust prior to the effective date of this Agreement;

 

(ix) any failure of the Trust’s registration statement to comply with the 1933 Act and the 1940 Act and any other Applicable Laws, or any untrue statement of a material fact or omission of a material fact necessary to make any statement therein not misleading in the Trust’s Prospectus;

 

(x) the actions taken by the Trust, the Distributor or by the Trust’s investment advisers in compliance with applicable securities, tax, commodities and other laws, rules and regulations, or the failure to so comply; and

 

(xi) all actions, omissions, or errors caused by third parties to whom J.P. Morgan or the Trust have assigned any rights and/or delegated any duties under this Agreement at the request of or as required by the Trust or the Distributor, or by the Trust’s investment advisers, administrator or sponsor.

 

Notwithstanding subsections (a) above, J.P. Morgan shall have no duty or obligation of reasonable care with respect to any of the activities described in clauses (viii), (ix) (x) or (xi) of this subsection (c).

 

(d) The Trust shall defend J.P. Morgan or, at Trust’s option, settle any claim, demand or cause of action, whether groundless or otherwise, that ETF Shares or any of the services provided herein for the Trust infringes on, violates or misappropriates any patent, copyright, trademark, trade secret or any other proprietary right, and shall indemnify and hold harmless J.P. Morgan, its officers, employees and agents against all Liabilities, including court and settlement costs incurred by J.P. Morgan or any of them as a result of or relating to such claim, demand or cause of action (“Third Party Claim”).

 

 

 

J.P. Morgan shall notify the Trust in writing of any such Third Party Claim, and give the Trust all reasonably necessary information and assistance to defend or settle such Third Party Claim. J.P. Morgan may participate in the defense or settlement of the Third Party Claim.

 

(e) This Section 8 shall survive the termination of this Agreement, regardless of the party that terminated the Agreement or the reason therefor.

 

9. TERM AND TERMINATION. This Agreement shall become effective on the date first herein-above written. The Agreement may be modified or amended from time to time by mutual agreement between the parties hereto. In the event of the termination of the Custody Agreement between J.P. Morgan and the Trust, J.P. Morgan may terminate this Agreement in whole or in part simultaneously with the transition of the assets to a successor custodian. Subject to the foregoing, this Agreement shall continue in effect until terminated by either party on at least 120 days prior written notice to the other party. The terminating party in its notice to the other party shall specify the date of termination. Upon termination of this Agreement, the Trust shall pay to J.P. Morgan such compensation and any reasonable out-of-pocket or other reimbursable expenses which may become due or payable under the terms of this Agreement as of the date of termination or after the date that the provision of services ceases, whichever is later.

 

10. NOTICES . Any notice required or permitted hereunder shall be in writing and shall be deemed effective on the date of personal delivery (by private messenger, courier service or otherwise) or upon confirmed receipt of telex or facsimile, whichever occurs first, or upon receipt if by mail to the parties at the following address (or such other address as a party may specify by notice to the other):

 

  If to the Trust: ETFS Trust  
       
    48 Wall Street, 11th Floor,
    New York, NY 10005
    Attention: Benoit Autier
    Telephone: 212-918-4955
       
  If to J.P. Morgan in its capacity as Transfer Agent to:
       
    JPMorgan Chase Bank
    14201 North Dallas Parkway
    Dallas, TX 75254
    Attention: Dan Nkurlu
    Telephone: 469-477-5105
       
  If to J.P. Morgan in its capacity as Index Receipt Agent to:
 

 

 

  JPMorgan Chase Bank
  500 Stanton Christiana Rd.
  Newark, DE 19713
  Attention: John Novelli
  Telephone: 302-552-6106

 

If to J.P. Morgan in its capacity as Custodian , as provided for in the Custody Agreement.

 

11. WAIVER. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver nor shall it deprive such party of the right thereafter to insist upon strict adherence to that term or any term of this Agreement. Any waiver must be in writing signed by the waiving party.

 

12. FORCE MAJEURE . J.P. Morgan shall maintain and update from time to time business continuation and disaster recovery procedures with respect to its Transfer Agent, Index Receipt Agent and domestic custody business that it determines from time to time meet reasonable commercial standards. J.P. Morgan shall have no liability, however, for any damage, loss or expense of any nature that the Trust may suffer or incur, caused by an act of God, fire, flood, civil or labor disturbance, war, act of any governmental authority or other act or threat of any authority (de jure or de facto), legal constraint, fraud or forgery (except to the extent that such fraud or forgery is attributed to J.P. Morgan or to J.P. Morgan’s employees), malfunction of equipment or software (except to the extent such malfunction is primarily attributable to J.P. Morgan’s negligence in maintaining the equipment or software), failure of or the effect of rules or operations of any external funds transfer system, inability to obtain or interruption of external communications facilities, or any cause beyond the reasonable control of J.P. Morgan (including without limitation, the non-availability of appropriate foreign exchange).

 

13. AMENDMENTS. This Agreement may be modified or amended from time to time by mutual written agreement between the parties. No provision of this Agreement may be changed, discharged, or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, discharge or termination is sought.

 

14. ASSIGNMENT; DELEGATION. J.P. Morgan may not assign this Agreement and its rights and obligations hereunder without the prior written consent of the Trust, except that any corporation or banking association into which J.P. Morgan may be merged or with which J.P. Morgan may be consolidated, or any corporation or banking association resulting from any merger or consolidation to which J.P. Morgan shall be a party, or any corporation or banking association succeeding to J.P. Morgan’s corporate custody business, shall succeed to all J.P. Morgan’s rights, obligations and immunities hereunder without the execution or filing of any consent or further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding.

 

 

 

J.P. Morgan may delegate to a reputable agent any of its functions herein. However, J.P. Morgan will remain responsible to the Trust for any such delegation. To the extent reasonably practicable, J.P. Morgan will consult with the Trust before it implements the delegation of a material portion of the services provided under this Agreement.

 

15. SEVERABILITY. If any provision of this Agreement is invalid or unenforceable, the balance of the Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance it shall nevertheless remain applicable to all other persons and circumstances.

 

16. GOVERNING LAW AND JURISDICTION. This Agreement shall be construed, regulated, and administered under the laws of the United States or State of New York, as applicable, without regard to New York’s principles regarding conflict of laws. The United States District Court for the Southern District of New York shall have the sole and exclusive jurisdiction over any lawsuit or other judicial proceeding relating to or arising from this Agreement. If that court lacks federal subject matter jurisdiction, the Supreme Court of the State of New York, New York County shall have sole and exclusive jurisdiction. Either of these courts shall have proper venue for any such lawsuit or judicial proceeding, and the parties waive any objection to venue or their convenience as a forum. The parties agree to submit to the jurisdiction of either of the courts specified and to accept service of process to vest personal jurisdiction over them in such courts. The parties further hereby knowingly, voluntarily and intentionally waive, to the fullest extent permitted by Applicable Law, any right to a trial by jury with respect to any such lawsuit or judicial proceeding arising or relating to this Agreement or the transactions contemplated hereby.

 

17. USE OF J.P. MORGAN’S NAME. The Trust shall not use J.P. Morgan’s name in any offering material, shareholder report, advertisement or other material relating to the Trust, other than for the purpose of merely identifying and describing the functions of J.P. Morgan hereunder, in a manner not approved by J.P. Morgan in writing prior to such use; provided, however, that J.P. Morgan shall consent to all uses of its name required by the SEC, any state securities commission, or any federal or state regulatory authority; and provided, further, that in no case shall such approval be unreasonably withheld.

 

18. Confidentiality.

 

(a) Subject to Section 18.7(b), J.P. Morgan will hold all Confidential Information in confidence and will not disclose any Confidential Information except as may be required by Applicable Law, a regulator with jurisdiction over J.P. Morgan’s or Funds business, or with the consent of the Trust.

 

(b) The Trust authorizes J.P. Morgan to disclose Confidential Information to: any service providers and/or vendors to the Funds that J.P. Morgan believes is reasonably required by such person to provide the relevant services;

 

 

 

(i) its professional advisers, auditors or public accountants;

 

(ii) its Affiliates; and

 

(iii) any revenue authority or any governmental entity.

 

(c) Except as otherwise required by Applicable Law or as needed to enforce the terms of this Agreement, the parties shall hold the terms and conditions of this Agreement, including, without limitation, any commercial terms, in confidence.

 

19. COUNTERPARTS. This Agreement may be executed in counterparts each of which shall be an original and together shall constitute one and the same agreement.

 

20. HEADINGS. Headings are for convenience only and are not intended to affect interpretation. References to sections are to sections of this Agreement and references to sub-sections and paragraphs are to sub-sections of the sections and paragraphs of the sub-sections in which they appear.

 

21. ENTIRE AGREEMENT. This Agreement, including the Schedules and Exhibits, and also including the Custody Agreement to the extent custody services are provided in conjunction with Index Receipt Agent services for ETF Shares, sets out the entire Agreement between the parties in connection with the subject matter, and this Agreement supersedes any other agreement, statement, or representation relating to the services provided herein for ETF Shares, whether oral or written.

 

 

 

IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed by their officers designated below as of the date first written above.

 

ETFS TRUST  

JPMORGAN CHASE BANK, N. A.

         
By:  /s/ Benoit Autier   By:  /s/ Christopher Gordner
     
Name: Benoit Autier   Name: Christopher Gordner
Title: President   Title: Vice President
Date: December 4, 2014   Date: December 11, 2014
 

 

 

AGENCY SERVICES AGREEMENT

 

SCHEDULE A

 

TRANSFER AGENCY SERVICES

FOR ETF SERIES

 

Following are the transfer agent services that shall be provided by J.P. Morgan for the Trust in its capacity as Transfer Agent for each ETF Series.

 

A. Creation and Redemption of ETF Shares of each ETF Series.

 

1. Pursuant to such creation orders that Index Receipt Agent shall receive from the Trust or its agent, Transfer Agent shall register the appropriate number of book entry only ETF Shares in the name of DTC or its nominee as the sole shareholder (the “Shareholder”) for each ETF Series and deliver the shares of the applicable ETF Series in Creation Units on the business day next following the trade date (T+1) to the DTC Participant Account of the Custodian for settlement. It is understood and agreed that J.P. Morgan, in its capacity as Transfer Agent, Index Receipt Agent or Custodian, shall not be responsible for determining whether any order, if accepted, shall result in the depositor of the Creation Deposit owning or appearing to own eighty percent (80%) or more of the outstanding ETF Shares of such ETF Series.

 

2. Pursuant to such redemption orders that Index Receipt Agent shall receive from the Distributor on behalf of the Trust or other designated agent of the Trust, Transfer Agent shall redeem the appropriate number of ETF Shares of the applicable ETF Series in Creation Units that are delivered to the designated DTC Participant Account of Custodian for redemption and debit such shares from the account of the Shareholder on the register of the applicable ETF Series.

 

3. Transfer Agent shall issue ETF Shares of the applicable ETF Series in Creation Units for settlement with purchasers through DTC as the purchaser is authorized to receive. Beneficial ownership of ETF Shares shall be shown on the records of DTC and DTC Participants and not on any records maintained by the Transfer Agent. In issuing ETF Shares of the applicable ETF Series through DTC to a purchaser, Transfer Agent shall be entitled to rely upon the latest Instructions that are received from the Distributor, Trust or its agent by the Index Receipt Agent (as set forth in Schedule B, Section A. Subsection 3(b) of this Agreement) concerning the creation and delivery of such shares for settlement.

 

4. Transfer Agent shall not create any ETF Shares for a particular ETF Series where it has received an Instruction from the Trust or written notification

 

 

 

from any federal or state authority that the sale of the ETF Shares of such ETF Series has been suspended or discontinued, and Transfer Agent shall be entitled to rely upon such Instructions or written notification.

 

5. Upon the creation of ETF Shares of any ETF Series as provided herein, Transfer Agent shall not be responsible for the payment of any original create or other taxes, if any, required to be paid by the Trust in connection with such creation.

 

6. ETF Shares of any ETF Series may be redeemed in accordance with the procedures set forth in the Prospectus of the Trust and in the Authorized Participant Agreement and J.P. Morgan shall duly process all redemption requests.

 

B. Payment of Dividends and Distributions on ETF Shares of each ETF Series.

 

1. J.P. Morgan shall prepare and make payments for dividends and distributions declared by the Trust on behalf of the ETF Series.

 

2. The Trust or its designated agent shall promptly notify both the Custodian and the Transfer Agent of the declaration of any dividend or distribution in respect of each ETF Series. The Trust shall furnish to J.P. Morgan a statement signed by an Authorized Person: (i) indicating that dividends have been declared on a specific periodic basis and Instructions specifying the date of the declaration of such dividend or distribution, the date of payment thereof, the record date as of which the Shareholder shall be entitled to payment, the total amount payable to the Shareholder and the total amount payable to J.P. Morgan as Transfer Agent on the payment date; or (ii) setting forth the date of the declaration of any dividend or distribution by ETF Series, the date of payment thereof, the record date as of which the Shareholder is entitled to payment, and the amount payable per share to the Shareholder as of that date and the total amount payable to Transfer Agent on the payment date. The Trust’s Board of Trustees shall approve the Authorized Persons to provide such information to J.P. Morgan.

 

3. Upon its receipt from the Trust of the information set forth in Subsection 2 immediately above, the Fund Administrator, based upon the amount of ETF Shares outstanding on its books and records, shall calculate the total dollar amount of the dividend or distribution on each ETF Series and notify the Trust of this amount. The Trust shall verify this total dollar amount as calculated by the Fund Administrator. Provided the Trust is in agreement with the Fund Administrator, the Trust shall instruct the Custodian to place in a dividend disbursing account maintained by the Transfer Agent funds equal to the total cash amount of the dividend or distribution to be paid out in respect of each ETF Series. Should Custodian determine that it does not have sufficient cash in the Custody Account to pay the total amount of the dividend or distribution to the Transfer Agent, Custodian shall advise the Trust and the Trust shall either adjust

 

 

 

the rate of the dividend or distribution or provide additional cash to Custodian for credit to the dividend disbursing account maintained by Transfer Agent. The Transfer Agent shall credit such dividend or distribution to the account of the Shareholder.

 

4. Should Transfer Agent not receive from Custodian sufficient cash to make payment as provided in the immediately preceding Subsection, Transfer Agent or Custodian shall notify the Trust, and Transfer Agent shall withhold payment to the Shareholder until sufficient cash is provided to J.P. Morgan and J.P. Morgan shall not be liable for any claim arising out of such withholding.

 

C. Recordkeeping.

 

1. J.P. Morgan shall create and maintain such records in accordance with laws, rules and regulations applicable to J.P. Morgan as a registered transfer agent. All records shall be available for inspection and use by the Trust. J.P. Morgan shall maintain such records for at least six years or for such other period as J.P. Morgan and the Trust may mutually agree.

 

2. Upon reasonable notice by the Trust, J.P. Morgan shall make available during regular business hours all records and other data created and maintained by J.P. Morgan as Transfer Agent for reasonable audit and inspection by the Trust, or any person retained by the Trust.

 

3. J.P. Morgan shall record the creation of ETF Shares of each ETF Series and maintain, pursuant to Rule 17Ad-10(e) under the 1934 Act, a record of the total number of ETF Shares of each ETF Series that are authorized, based upon data provided to J.P. Morgan by the Trust or the ETF Series, issued and outstanding. Also, J.P. Morgan shall provide the Trust on a regular basis with the total number of ETF Shares authorized, issued and outstanding in respect of each ETF Series but shall not be responsible for, when recording the creation of ETF Shares, monitoring the creation of such shares or compliance with any laws relating to the validity of the creation or the legality of the sale of such shares.

 

D. Establish Procedures.

 

Procedures applicable to the transfer agent services to be performed hereunder may be established from time to time by agreement between the Trust and J.P. Morgan. J.P. Morgan shall have the right to utilize any shareholder accounting and record-keeping systems that, in its opinion, enables it to perform any services to be performed hereunder.

 

 

 

AGENCY SERVICES AGREEMENT

 

SCHEDULE B

 

INDEX RECEIPT AGENT SERVICES

AND RELATED CUSTODY SERVICES FOR ETF SERIES

 

Following are the Index Receipt Agent services that shall be provided by J.P. Morgan for the Trust in respect of each Fund and their respective ETF Series. J.P. Morgan shall perform these services as Index Receipt Agent in conjunction with the custody services that are currently provided by J.P. Morgan, as Custodian, to each Fund under the terms of the Custody Agreement. J.P. Morgan shall be entitled to all the protective provisions in the Custody Agreement in respect of its duties and its performance as Index Receipt Agent and Custodian for the settlement of creations and redemptions of Creation Units of each ETF Series. If there are any inconsistencies between the terms of the Custody Agreement and the terms herein with respect to processing, clearance and the settlement of creation and redemption orders for ETF Shares of each ETF Series the terms herein shall govern.

 

A. Index Receipt Agent Services.

 

1. J.P. Morgan, with the assistance of the Trust, shall make application to NSCC to be the Index Receipt Agent on behalf of the Trust and each ETF Series for the processing, clearance and the settlement of creation and redemption orders for ETF Shares of each ETF Series and Creation Deposits through the facilities of NSCC and DTC. The foregoing shall only apply to US domestic ETFs that maintain DTC eligible baskets of securities. US domestic ETFs that maintain non-DTC eligible baskets of securities and US domiciled global ETFs will be processed via proprietary ETF servicing modules. However, J.P. Morgan shall continue to deliver the Portfolio Composition Files to the NSCC for further dissemination to market participants.

 

2. The Distributor, on behalf of the Trust, shall enter into an Authorized Participant Agreement with each Authorized Participant, which shall be delivered to J.P. Morgan and which J.P. Morgan, in its capacity as Index Receipt Agent, shall acknowledge.

 

3. In connection with the procedures that may be established from time to time between J.P. Morgan and the Trust on behalf of each ETF Series for the processing, clearance and settlement of the creation and redemption of Creation Units through the Clearing Process, J.P. Morgan shall:

 

 

 

(a) (i) receive from the Investment Adviser daily, a computer generated file that is in form and substance acceptable to NSCC containing a list of the Deposit Securities (if applicable) for each ETF Series, (ii) receive from the Order Taker daily, a computer generated file that is in form and substance acceptable to NSCC containing the Balancing Amount and the Transaction Fee for each ETF Series and (iii) transmit both files as received from the Investment Adviser and Order Taker to NSCC;

 

(b) receive from the Distributor on each trade date a computer generated file that is in form and substance acceptable to NSCC and that contains creation orders from Authorized Participants that have been received and accepted by the Distributor on behalf of the Trust and each ETF Series, for the creation of Creation Units against delivery of Deposit Securities and a Cash Component; transmit the file of creation orders as received from the Distributor to NSCC; receive back from NSCC the file of creation orders enhanced with NSCC generated prices for the Deposit Securities contained in the file and deliver the enhanced file to Custodian for settlement; and, pursuant to such creation orders, instruct the Transfer Agent to create the appropriate number of ETF Shares of the applicable ETF Series for deposit to the Custodian’s DTC Participant Account;

 

(c) receive from the Distributor on each trade date a computer generated file that is in form and substance acceptable to NSCC and that contains redemption orders from Authorized Participants that have been received and accepted by the Distributor on behalf of the Trust for each Fund; transmit the file of redemption orders as received from the Distributor to NSCC; receive back from NSCC the file of redemption orders enhanced with NSCC generated prices for the Redemption Securities that are in the file and deliver the enhanced file to Custodian for settlement; and, pursuant to such redemption orders, instruct the Transfer Agent to redeem the appropriate number of ETF Shares of the applicable ETF Series in Creation Units and reduce the account of the Shareholder accordingly; and

 

(d) at the appropriate times, cause to be paid over to Authorized Participants Balancing Amounts on the creation or redemption of Creation Units, as instructed by the Distributor or the Trust on behalf of each ETF Series.

 

4. The Trust understands and agrees that all risk associated with the processing, clearance and settlement of the creation and redemption of ETF Shares, Deposit Securities and Redemption Securities and cash through the Clearing Process shall be that of the Trust and each ETF Series irrespective of whether in effecting such creations and redemptions for the Trust on behalf of each ETF Series through the Clearing Process, J.P. Morgan, as a member of NSCC, is acting as principal or as agent; and, in respect hereof, the Trust and each ETF Series, shall be bound by all the rules and procedures of NSCC and DTC as though it were the member or participant of such clearing and settlement systems.

 

 

 

B. Outside the Clearing Process.

 

1. The following transactions shall be handled Outside the Clearing Process:

 

(i) any creation or redemption of Creation Units that the Trust, its Distributor or another authorized agent shall instruct J.P. Morgan to settle Outside the Clearing Process;

 

(ii) any security create that is part of a Creation Deposit or redemption of Creation Units and that according to NSCC rules is deemed to be ineligible for the Clearing Process, including securities that are not eligible to be settled through DTC; and

 

(iii) cash redemptions.

 

2. All such transactions shall be effected by J.P. Morgan on a delivery versus payment and receive versus payment basis through DTC and according to DTC’s rules, and the Trust or the ETF Series shall provide to J.P. Morgan the information and terms that are necessary to settle each transaction, including the cash value of each security settlement, unless the Trust’s or the ETF Series Instruction is that delivery is to be made free of payment; provided, however, that any security that is not DTC eligible shall be settled as a window delivery pursuant to street practice. All such transactions shall be effected by J.P. Morgan as Custodian and subject to the terms of the Custody Agreement. US fixed income securities that are not DTC eligible will be settled free of payment via the Fed or similar US clearing structure. Foreign equity and fixed income securities will be settled locally free of payment where permitted in such market.

 

3. (a) The Trust recognizes that fails to receive may occur from time to time with respect to one or more of the security creates in a basket of Deposit Securities settled outside the Clearing Process, including but not exclusive to non-DTC eligible domestic ETFs, US-domiciled global fixed income ETFs and US-domiciled global equity ETFs. The Trust acknowledges and agrees that, whenever a fail to receive shall occur on a settlement date, J.P. Morgan will make available to the Trust a report that details such fails to receive and their value. The Trust will in turn instruct the necessary parties about the required collateral that will be delivered to J.P. Morgan by an Authorized Participant. J.P. Morgan will maintain a separate account that will be used for receipt of such collateral. Any collateral shall be in the form of US dollars and will be held by J.P. Morgan subject to the terms of the Custody Agreement.

 

(b) In the event an Authorized Participant has submitted a Creation Order for an ETF Series outside the clearing process, but is unable to transfer all or part of the Deposit Securities to J.P. Morgan at or prior to the required time, the Distributor or its agent will nonetheless accept the creation order if it is otherwise acceptable in form and substance, and rely on an undertaking by such Authorized Participant to deliver the missing Deposit Securities as soon as possible, which

 

 

 

undertaking shall be secured by such Authorized Participant’s delivery and maintenance of collateral having a percentage value as specified by that Trust, provided that the Trust shall in no event specify a collateral value less than 105% of the value of the missing Deposit Securities. J.P. Morgan will calculate the requisite collateral level on each business day, using (i) prices and foreign exchange rates as furnished to J.P. Morgan by the Fund Administrator on behalf of the Trust and (ii) the collateral value specified by the Trust. The amount of required collateral may change from time to time and will be notified to the Trust by J.P. Morgan.

 

C. Settlement of Cash Component.

 

Any Cash Component to a particular transaction shall be handled over the funds transfer wire (Fedwire) or as part of J.P. Morgan’s overall daily net cash settlement at DTC.

 

D. Creation Deposits through the Clearing Process: Allocation of Fails; Posting of Accounts.

 

1. The Trust recognizes that fails to receive (including partial fails) may occur from time to time with respect to one or more of the security creates in a basket of Deposit Securities settled through the Clearing Process. The Trust acknowledges and agrees that, whenever a fail to receive shall occur on a settlement date, J.P. Morgan shall book to a single control account maintained for all funds for which J.P. Morgan provides Index Receipt Agent services (the “Control Account”), the quantity of the security that it failed to receive (each such fail a “short receive position”) and the cash value of that short position that it receives from NSCC (and that NSCC, pursuant to its rules, marks to market daily) pending settlement. J.P. Morgan shall not post to any ETF Series account any cash that it receives from NSCC on a short receive position pending settlement.

 

2. J.P. Morgan shall make available to the Trust a daily listing of all short receive positions that are in the Control Account and that relate to any ETF Series. J.P. Morgan will allocate daily, on a pro-rata or other basis deemed by it to be fair and equitable, short receive positions in the same security that is common to the securities accounts of such ETF Series and to the securities accounts of such other funds for which J.P. Morgan is acting as Index Receipt Agent. The Trust agrees that any such allocation shall be conclusive on the Trust and the affected ETF Series. When the Deposit Securities that are subject of the short receive positions are received by J.P. Morgan, they will be credited by J.P. Morgan on a FIFO basis to the custody accounts of the applicable funds. J.P. Morgan shall not process a securities transaction in a security having a short receive position in the Control Account to the extent the Trust does not have a sufficient quantity of that security in its ETF Series accounts with J.P. Morgan to settle the transaction. Custodian shall post Deposit Securities to the applicable

 

 

 

ETF Series custody accounts on a contractual settlement basis pursuant to the terms of the Custody Agreement.

 

3. Should a short receive position in a security remain in the Control Account for two (2) or more NSCC business days, J.P. Morgan may elect to exercise NSCC’s buy-in rules with respect to that short position. If an ETF Series needs to sell a short security in its account, the Trust may request that J.P. Morgan exercise a buy-in of the short security under applicable NSCC rules.

 

E. Redemptions through the Clearing Process: Delivery Fails; Posting of Cash.

 

1. The Trust recognizes that on the redemption of Creation Units of an ETF Series through the Clearing Process J.P. Morgan, on behalf of the applicable ETF Series, is obligated to deliver to NSCC on the settlement date the required type and amount of Redemption Securities to redeem the Creation Units of the applicable ETF Series. It shall be the responsibility of the Trust and each ETF Series to maintain in the custody account the required type and amount of Redemption Securities for the redemption of Creation Units of each ETF Series. Should the custody account of an ETF Series for any reason ( for example, through the Trust’s participation in a securities lending program on behalf of the ETF Series) have a short position in respect of any of the securities creates comprising the basket of Redemption Securities (a “short delivery position”) with the result that, on settlement date, J.P. Morgan is unable to deliver a sufficient quantity of the Redemption Securities to NSCC, the Trust acknowledges that J.P. Morgan shall be obligated under NSCC’s rules to fund the short delivery position with cash pending delivery of the quantity of securities needed to cover the short delivery position. J.P. Morgan shall be entitled to charge to the account of the applicable ETF Series the amount of cash needed to cover the short delivery position. In the event that J.P. Morgan advances its own funds to cover an ETF Series short delivery position, J.P. Morgan, in its discretion, may charge the applicable EFT Series interest on the amount of the advance at the rate that J.P. Morgan charges for advances of a similar nature to similar customers of J.P. Morgan, unless J.P. Morgan and the Trust have mutually agreed in writing upon another rate.

 

2. In the event that J.P. Morgan shall have advanced its own funds to cover a short delivery position at NSCC for an ETF Series, J.P. Morgan shall have, to the extent of the amount of the advance, a security interest in the securities that remain in the ETF Series custody account and J.P. Morgan shall have all the rights and remedies of a secured party under the New York Uniform Commercial Code. Nothing herein or in the Custody Agreement shall be construed to mandate that J.P. Morgan, acting as Index Receipt Agent for the Trust and each ETF Series, effect redemptions of Creation Units where J.P. Morgan, acting in good faith, believes that it may not be repaid an advance by the Trust or the ETF Series or otherwise not receive from the ETF Series delivery of the Redemption Securities that are the subject of a short delivery position.

 

 

 

F. Establish Procedures.

 

The Trust and J.P. Morgan, from time to time, may establish written procedures for the processing and settlement and related activities effected for ETF Shares of each ETF Series through the Clearing Process and Outside the Clearing Process.
 

 

 

AGENCY SERVICES AGREEMENT

 

EXHIBIT A

 

LIST OF ETF SERIES

 

1. ETFS Zacks Earnings Large-Cap U.S. Index Fund
   
2. ETFS Zacks Earnings Small-Cap U.S. Index Fund
   
3 ETFS Diversified Factor US Large Cap Index Fund
   
4 ETFS Diversified Factor Developed Europe Index Fund
 

Morgan, Lewis & Bockius llp
2020 K Street, NW
Washington, DC  20006
Tel.  +1.202.373.6000
Fax: +1.202.373.6001
www.morganlewis.com

 

January 7, 2015

 

ETFS Trust

48 Wall Street

New York, NY 10005

 

Re: ETFS Trust

 

Ladies and Gentlemen:

 

We have acted as counsel to ETFS Trust, a Delaware statutory trust (the “Trust”), in connection with Pre-Effective Amendment Number 2 to the Trust’s Registration Statement on Form N-1A to be filed with the Securities and Exchange Commission (the “Commission”) on or about January 7, 2015 (the “Registration Statement”), with respect to the issuance of shares of beneficial interest (the “Shares”) of the ETFS Zacks Earnings Large-Cap US Index Fund, ETFS Zacks Earnings Small-Cap US Index Fund, ETFS Diversified-Factor U.S. Large Cap Index Fund and ETFS Diversified-Factor Developed Europe Index Fund (the “Funds”), each a separate series of the Trust. You have requested that we deliver this opinion to you in connection with the Trust’s filing of the Registration Statement.

 

In connection with the furnishing of this opinion, we have examined the following documents:

 

(a) A certificate of the Secretary of State of the State of Delaware, dated as of a recent date, as to the existence of the Trust;
     
(b) A copy, certified by the Secretary of State of the State of Delaware, of the Trust’s Certificate of Trust dated January 9, 2014 filed with the Secretary of State (the “Certificate of Trust”);
     
(c) A certificate executed by the Secretary of the Trust, certifying as to, and attaching copies of, the Trust’s Declaration of Trust (the “Declaration”), the Trust’s By-Laws (the “By-Laws”), and the resolutions adopted by the Trustees of the Trust authorizing the issuance of the Shares of the Funds (the “Resolutions”); and
     
(d) A printer’s proof of the Registration Statement.

 

In such examination, we have assumed the genuineness of all signatures, the conformity to the originals of all of the documents reviewed by us as copies, including conformed copies, the authenticity and completeness of all original documents reviewed by us in original or copy form and the legal competence of each individual executing any document.  We have assumed that the Registration Statement as filed with the Commission will be in substantially the form of the proof referred to in paragraph (d) above.  We have also assumed for the purposes of this opinion that the Declaration, the Certificate of Trust and the Resolutions will not have been amended, modified or withdrawn and will be in full force and effect on the date of issuance of such Shares.

 

Almaty  Astana  Beijing  Boston  Brussels  Chicago  Dallas  Dubai  Frankfurt  Harrisburg  Hartford  Houston  London  Los Angeles  Miami  Moscow
New York  Orange County  Paris  Philadelphia  Pittsburgh  Princeton  San Francisco  Santa Monica  Silicon Valley  Tokyo  Washington  Wilmington

 
 

 

This opinion is based entirely on our review of the documents listed above and such other documents as we have deemed necessary or appropriate for the purposes of this opinion and such investigation of law as we have deemed necessary or appropriate.  We have made no other review or investigation of any kind whatsoever, and we have assumed, without independent inquiry, the accuracy of the information set forth in such documents.

 

This opinion is limited solely to the Delaware Statutory Trust Act to the extent that the same may apply to or govern the transactions referred to herein, and we express no opinion with respect to the laws of any other jurisdiction or to any other laws of the State of Delaware.  Further, we express no opinion as to any state or federal securities laws, including the securities laws of the State of Delaware.  No opinion is given herein as to the choice of law or internal substantive rules of law which any tribunal may apply to such transaction.  In addition, to the extent that the Declaration or the By-Laws refer to, incorporate or require compliance with, the Investment Company Act of 1940, as amended (the “1940 Act”), or any other law or regulation applicable to the Trust, except for the Delaware Statutory Trust Act, we have assumed compliance by the Trust with the 1940 Act and such other laws and regulations.

 

We understand that all of the foregoing assumptions and limitations are acceptable to you.

 

Based upon and subject to the foregoing, it is our opinion that the Shares, when issued and sold in accordance with the Declaration and the Registration Statement, will be validly issued, fully paid, and nonassessable by the Trust.

 

This opinion is given as of the date hereof and we assume no obligation to update this opinion to reflect any changes in law or any other facts or circumstances which may hereafter come to our attention.  We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In rendering this opinion and giving this consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Commission thereunder.

 

Very truly yours,

 

/s/ Morgan, Lewis & Bockius LLP  
Morgan, Lewis & Bockius LLP  
2

 

Exhibit 99.(j)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Pre-Effective Amendment No. 2 to Registration Statement No. 333-198170 on Form N-1A of our report dated January 7, 2015, relating to the financial statement of ETFS Zacks Earnings Small-Cap U.S. Index Fund, a portfolio of ETFS Trust, appearing in the Statement of Additional Information, which is part of this Registration Statement. We also consent to the reference to us under the heading “Independent Registered Public Accounting Firm,” in such Statement of Additional Information.

/s/ Deloitte & Touche LLP

 

Princeton, New Jersey

January 7, 2015

 

 


Exhibit 99.(m)

 

DISTRIBUTION AND SERVICE PLAN

 

This Distribution and Service Plan (the “Plan”) has been adopted, on the following terms and conditions, by the Board of Trustees (the “Trustees”) of ETFS Trust (the “Trust”), a registered, open-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), pursuant to Rule l2b-1 under the 1940 Act and is effective with respect to the shares of beneficial interest (“Shares”) of each series of the Trust identified in Exhibit A hereto (each, a “Fund” and together the “Funds”). In adopting this Plan, the Trustees have determined that there is a reasonable likelihood that adoption of the Plan will benefit each such Fund and its shareholders.

 

The Trust has entered into a Distribution Agreement with Alps Distributors, Inc. (the “Distributor”), pursuant to which the Distributor will act as the distributor with respect to the creation and distribution of Creation Unit aggregations of Shares (the “Creation Units”) of the Funds as described in the Trust’s registration statement under the 1940 Act and under the Securities Act of 1933, as amended (the “Registration Statement”). Capitalized terms not otherwise defined herein have the meanings assigned thereto in the Registration Statement.

 

1.            Payments . (a) Subject to the limitations of applicable law and regulations, each Fund is authorized to compensate the Distributor up to a maximum amount of 0.25% per annum of each Fund’s average daily net assets to finance any activity primarily intended to result in the sale of Creation Units of each Fund or for providing or arranging for others to provide shareholder services and for the maintenance of shareholder accounts. Such activities may include, but are not limited to: (i) delivering copies of the Funds’ then current reports, prospectuses, notices, and similar materials, to prospective purchasers of Creation Units; (ii) marketing and promotional services, including advertising; (iii) paying the costs of and compensating others, including Authorized Participants with whom the Distributor has entered into written Authorized Participant Agreements, for performing shareholder servicing on behalf of the Funds; (iv) compensating certain Authorized Participants for providing assistance in distributing the Creation Units of the Funds, including the travel and communication expenses and salaries and/or commissions of sales personnel in connection with the distribution of the Creation Units of the Funds; (v) payments to financial institutions and intermediaries such as banks, savings and loan associations, insurance companies and investment counselors, broker-dealers, mutual fund supermarkets and the affiliates and subsidiaries of the Trust’s service providers as compensation for services or reimbursement of expenses incurred in connection with distribution assistance; (vi) facilitating communications with beneficial owners of Shares, including the cost of providing (or paying others to provide) services to beneficial owners of shares, including, but not limited to, assistance in answering inquiries related to Shareholder accounts, and (vi) such other services and obligations as are set forth in the Distribution Agreement. Upon the approval of the Board of Trustees, including the Trustees that are not “interested persons” (as defined in the 1940 Act) and who have no direct or indirect financial interest in the operation of this Plan or in any agreements related to this Plan, of payment of fees under this Plan, the fee is accrued daily in a manner specified in the Trust’s Declaration of Trust and the Funds’ current prospectus, and paid monthly. The payment of fees to the Distributor is subject to compliance by the Distributor with the terms of the Distribution Agreement. In addition, pursuant to this Plan, ETF Securities Advisors LLC (the “Adviser”) or the Distributor may make payments from time to time from their own resources, which may include any management fee or any distribution fee received from the Trust, and past profits, for any of the foregoing purposes. Such payments will not increase the amount which the Funds are required to pay to the Adviser or the Distributor for any fiscal year under the Advisory Agreement or Distribution Agreement in effect for that year.

 

(b)           The Distributor may use all or any portion of the amount received pursuant to this Plan to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services, pursuant to agreements with the Distributor, or to pay any of the expenses associated with other activities authorized under paragraph 1(a) hereof.

 

2.            Written Agreements . All written agreements relating to this Plan entered into between either the Funds or the Distributor and Authorized Participants or other organizations must be in a form satisfactory to the Trustees.

 

3.            Effective Date . This Plan shall become effective with respect to each Fund upon approval by a vote of both a majority of the Trustees and a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on this Plan.

 

4.            Term . This Plan shall, unless terminated as hereinafter provided, remain in effect with respect to a Fund for one year from its effective date and shall continue thereafter, provided that its continuance is specifically approved at least annually by a vote of both a majority of the Trustees and a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on this Plan.

 

5.            Amendment . This Plan may be amended at any time by the Trustees, provided that (a) any amendment to increase materially the amount to be spent for the services provided for in paragraph 1(a) hereof shall be effective only upon approval by a vote of a majority of the outstanding voting securities (as such term is defined in the 1940 Act) of a Fund, and (b) any material amendment of this Plan shall be effective only upon approval by a vote of both a majority of the Trustees and a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on such amendment.

 

6.            Termination . This Plan may be terminated at any time, without payment of any penalty, by vote of a majority of the Independent Trustees, or by vote of a majority of the outstanding voting securities (as such term is defined in the 1940 Act) of a Fund. In the event of termination or non-continuance of this Plan, the Trust may reimburse any expense which it incurred prior to such termination or non-continuance, provided that such reimbursement is specifically approved by both a majority of the Trustees and a majority of the Independent Trustees.

 

7.            Assignment . Except as otherwise provided in the 1940 Act, this Plan will not be terminated by an assignment; however, an assignment will terminate any agreement under the Plan involving any such assignment upon not more than sixty (60) days’ written notice to the other party to the agreement.

 

8.            Reports . While this Plan is in effect, the Distributor shall provide to the Trustees, and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to the Plan and the purposes for which such expenditures were made.

 

9.            Records . The Trust shall preserve copies of this Plan, each agreement related hereto and each report referred to herein for a period of at least six (6) years from the date of the Plan, agreement and report, the first two (2) years in an easily accessible place.

 

10.            Independent Trustees . While this Plan is in effect, the selection and nomination of Independent Trustees shall be committed to the discretion of the Trustees who are not “interested persons” of the Trust (as defined in the 1940 Act).

 

11.            Severability . If any provision of the Plan shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Plan shall not be affected thereby.

 

Adopted: December 2, 2014

 

Exhibit A

 

ETFS Zacks Earnings Large-Cap U.S. Index Fund

 

ETFS Zacks Earnings Small-Cap U.S. Index Fund

 

ETFS Diversified-Factor U.S. Large Cap Index Fund

 

ETFS Diversified-Factor Developed Europe Index Fund

 

Exhibit 99.(p)(1)

 

ETFS TRUST

 

CODE OF ETHICS
Adopted Pursuant to Rule 17j-1

 

While affirming its confidence in the integrity and good faith of all of its officers and trustees, ETFS Trust (the “Trust”), recognizes that the knowledge of present or future portfolio transactions and, in certain instances, the power to influence portfolio transactions which may be possessed by certain of its officers, employees and trustees could place such individuals, if they engage in personal transactions in securities which are eligible for investment by the Trust, in a position where their personal interest may conflict with that of the Trust.

 

In view of the foregoing and the prohibitions of Rule 17j-1(b) under the Investment Company Act of 1940, as amended (the “1940 Act”), the Trust has determined to adopt this Code of Ethics (the “Code”) to specify and prohibit certain types of transactions deemed to create conflicts of interest (or at least the potential for or the appearance of such conflicts), and to establish reporting requirements and enforcement procedures.

 

I. Statement of General Principles.

 

In recognition of the Trust and confidence placed in the Trust by its shareholders, and to give effect to the Trust’s belief that its operations should be directed to the benefit of its shareholders, the Trust hereby adopts the following general principles to guide the actions of its trustees, officers and employees.

 

(1) The interests of the Trust’s shareholders are paramount, and all of the Trust’s personnel must conduct themselves and their operations to give maximum effect to this tenet by assiduously placing the interests of the shareholders before their own.
   
(2) All personal transactions in securities by the Trust’s personnel must be accomplished so as to avoid even the appearance of a conflict of interest on the part of such personnel with the interests of the Trust and its shareholders.
   
(3) All of the Trust’s personnel must avoid actions or activities that allow (or appear to allow) a person to profit or benefit from his or her position with respect to the Trust, or that otherwise bring into question the person’s independence or judgment.
   
II. Definitions.
   
(1) “Access Person” shall mean (i) each trustee or officer of the Trust or its investment adviser or sub-advisers, (ii) each employee of the Trust or its investment adviser or sub-advisers (or of any company in a control relationship to the Trust) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by the Trust or any series thereof (each a “Fund”), or whose functions relate to the making of any recommendations with respect to such purchases or sales, (iii) any natural person in a control relationship to the Trust or its
 
  investment adviser or sub-advisers who obtains information concerning recommendations made to or by the Trust with respect to the purchase or sale of a security by any Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; (iv) each director, officer or general partner of any principal underwriter for the Trust, but only where such person in the ordinary course either makes, participates in, or obtains information regarding the purchase or sale of securities by the Fund(s), or whose functions relate to the making of recommendations regarding securities to the Fund(s); and (v) any natural person in a control relationship with a Fund or any of the Funds’ advisers or sub-advisers who obtain information concerning recommendations made to the Funds with regard to the purchase or sale of a security.
   
(2) “Beneficial ownership” of a security is to be determined in the same manner as it is for purposes of Section 16 of the Securities Exchange Act of 1934, as amended. This means that a person should generally consider himself the beneficial owner of any securities in which he has a direct or indirect pecuniary interest. In addition, a person should consider himself the beneficial owner of securities held by his spouse, his minor children, a relative who shares his home, or other persons by reason of any contract, arrangement, understanding or relationship that provides him with sole or shared voting or investment power.
   
(3) “Control” shall have the same meaning as that set forth in Section 2(a)(9) of the 1940 Act. Section 2(a)(9) provides that “control” means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. Ownership of 25% or more of a company’s outstanding voting securities is presumed to give the holder thereof control over the company. Such presumption may be countered by the facts and circumstances of a given situation.
   
(4) “Independent Trustee” means a trustee of the Trust who is not an “interested person” of the Trust within the meaning of Section 2(a)(19) of the 1940 Act.
   
(5) “Initial Public Offering” (“IPO”) means an offering of Securities registered under the Securities Act of 1933, as amended (the “1933 Act”) the issuer of which, immediately before registration, was not subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
   
(6) “Portfolio Manager” means an individual who is involved in making the purchase or sale decisions of securities for a Fund.
   
(7) “Private Placement” means an offering that is exempt from registration under the 1933 Act pursuant to Section 4(2) or Section 4(6) of the Securities Act of 1933 or pursuant to Rules 504, 505 or 506 under the 1933 Act.
   
(8) “Special Purpose Investment Personnel” means each Access Person who, in connection with his or her regular functions (including, where appropriate, attendance at meetings of the Board of Trustees (the “Board” or “Trustees”) of the Trust and other meetings at
 
  which the official business of the Trust or any Fund thereof is discussed or carried on), obtains contemporaneous information regarding the purchase or sale of a security by a Fund. Special Purpose Investment Personnel shall occupy this status only with respect to those securities as to which he or she obtains such contemporaneous information.
   
(9) “Purchase or sale of a security” includes, among other things, the writing of an option to purchase or sell a security.
   
(10) “Review Officer” means the officer of the Trust or the adviser designated from time to time to receive and review reports of purchases and sales by Access Persons. It is recognized that a different Review Officer may be designated with respect to the Trust and the adviser and sub-adviser.
   
(11) “Security” shall have the same meaning as that set forth in Section 2(a)(36) of the 1940 Act, except that it shall not include direct obligations of the Government of the United States, bankers’ acceptances, bank certificates of deposit, commercial paper, shares issued by registered, open-end mutual funds (other than Exchange-Traded Funds) and high quality short-term debt instruments, including repurchase agreements.
   
(12) A Security “held or to be acquired” by the Trust or any Fund means (A) any Security which, within the most recent fifteen days, (i) is or has been held by the Trust or any Fund thereof, or (ii) is being or has been considered by a Fund’s investment adviser or sub-adviser for purchase by a Fund; (B) and any option to purchase or sell and any Security convertible into or exchangeable for any Security described in (A) above.
   
(13) A Security is “being purchased or sold” by the Trust from the time when a purchase or sale program has been communicated to the person who places the buy and sell orders for the Trust until the time when such program has been fully completed or terminated.
   
III. Prohibited Purchases and Sales of Securities.
   
(1) No Access Person shall, in connection with the purchase or sale, directly or indirectly, by such person of a Security held or to be acquired by any Fund of the Trust:

 

  (A) employ any device, scheme or artifice to defraud such Fund;
     
  (B) make to such Fund any untrue statement of a material fact or omit to state to such Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
     
  (C) engage in any act, practice or course of business which would operate as a fraud or deceit upon such Fund; or
     
  (D) engage in any manipulative practice with respect to Fund.
 
(2) No Portfolio Manager may purchase or sell, directly or indirectly, any Security as to which such person is a Portfolio Manager in which he had (or by reason of such transaction acquires) any Beneficial Ownership at any time within 7 calendar days before or after the time that the same (or a related) Security is being purchased or sold by any Fund.
   
(3) No Special Purpose Investment Personnel may profit in the purchase and sale, or sale and purchase of a Security as to which he or she is a Special Purpose Investment Personnel within 60 days of acquiring Beneficial Ownership of that Security.
   
IV. Additional Restrictions and Requirements
   
(1) Pre-approval of Private Placements – Investment Personnel must obtain approval from the Review Officer before acquiring beneficial ownership of any securities offered in connection with an IPO or a Private Placement.
   
(2) Investment Personnel may not purchase Initial Public Offerings (IPO’s)
   
(3) No Access Person shall accept or receive any gift of more than de minimis value from any person or entity that does business with or on behalf of the Trust.
   
(4) Each Access Person (other than the Trustees who are not “interested persons” of the Trust as defined in the 1940 Act, the  “Independent Trustees” and those Trustees and officers who are not currently affiliated with or employed by the Trust’s investment adviser, sub-adviser or principal underwriter) who is not required to provide such information under the terms of a code of ethics described in Section VII hereof must provide to the Review Officer a complete listing of all securities owned by such person as of the end of a calendar quarter. The initial listing must be submitted no later than 10 days of the date upon which such person first becomes an Access Person of the Trust, and each update thereafter must be provided no later than 30 days after the start of the subsequent year.
   
V. Reporting Obligations.
   
(1) Each Access Person (other than the Trust’s Independent Trustees) shall report all transactions in Securities in which the person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership. Reports shall be filed with the Review Officer quarterly. The Review Officer shall submit confidential quarterly reports with respect to his or her own personal securities transactions to an officer designated to receive his or her reports (“Alternate Review Officer”), who shall act in all respects in the manner prescribed herein for the Review Officer.
   
(2) Every report shall be made not later than 30 days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information:
 
  (A) The date of the transaction, the title and the number of shares or the principal amount of each security involved;
     
  (B) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
     
  (C) The price at which the transaction was effected;
     
  (D) The name of the broker, dealer or bank with or through whom the transaction was effected; and
     
  (E) The date the report was submitted by the Access Person.

 

(3) In the event no reportable transactions occurred during the quarter, the report should be so noted and returned signed and dated.
   
(4) An Access Person who would otherwise be required to report his or her transactions under this Code shall not be required to file reports pursuant to this Section V where such person is required to file reports pursuant to a code of ethics described in Section VII, hereof.
   
(5) An Independent Trustee shall report transactions in Securities only if such Independent Trustee knew at the time of the transaction or, in the ordinary course of fulfilling his or her official duties as a trustee, should have known, that during the 15 day period immediately preceding or following the date of the transaction, such security was purchased or sold, or was being considered for purchase or sale, by the Trust. (The “should have known” standard implies no duty of inquiry, does not presume there should have been any deduction or extrapolation from discussions or memoranda dealing with tactics to be employed meeting a Fund’s investment objectives, or that any knowledge is to be imputed because of prior knowledge of the Fund’s portfolio holdings, market considerations, or the Fund’s investment policies, objectives and restrictions.)
   
(6) Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he has any direct or indirect beneficial ownership in the security to which the report relates.
   
(7) Each Independent Trustee shall report the name of any publicly-owned company (or any company anticipating a public offering of its equity securities) and the total number of its shares beneficially owned by him or her if such total ownership is more than 1/2 of 1% of the company’s outstanding shares. Such report shall be made promptly after the date on which the Trustee’s ownership interest equaled or exceeded 1/2 of 1%.
   
VI. Review and Enforcement.
   
(1) The Review Officer shall compare all reported personal securities transactions with completed portfolio transactions of the Trust and a list of securities being considered for
 
  purchase or sale by the Trust’s investment adviser and sub-adviser to determine whether a violation of this Code may have occurred. Before making any determination that a violation has been committed by any person, the Review Officer shall give such person an opportunity to supply additional explanatory material.
   
(2) If the Review Officer determines that a violation of this Code may have occurred, he shall submit his written determination, together with the confidential monthly report and any additional explanatory material provided by the individual, to the President of the Trust and outside counsel, who shall make an independent determination as to whether a violation has occurred.
   
(3) If the President and outside counsel find that a violation has occurred, the President shall impose upon the individual such sanctions as he or she deems appropriate and shall report the violation and the sanction imposed to the Board of the Trust.
   
(4) No person shall participate in a determination of whether he has committed a violation of the Code or of the imposition of any sanction against himself. If a securities transaction of the President is under consideration, any Vice President shall act in all respects in the manner prescribed herein for the President.
   
VII. Codes of Ethics of Investment Advisers and Principal Underwriters.
   
Each investment adviser to the Trust (including, any sub-adviser), and principal underwriter (where applicable) of the Trust shall:
   
(1) Submit to the Board of the Trust a copy of its code of ethics adopted pursuant to Rule 17j-1 under the 1940 Act;
   
(2) Promptly report to the Review Officer of the Trust in writing any material amendments to such code of ethics;
   
(3) Promptly furnish to the Review Officer of the Trust, upon request, copies of any reports made pursuant to such code of ethics by any person who is an Access Person as to the Trust; and
   
(4) Shall immediately furnish to the Trust, without request, all material information regarding any violation of such code of ethics by any person who is an Access Person as to the Trust.
   
VIII. Annual Written Report to the Board.
   
At least once a year, the Review Officer will provide the Board a written report that includes:
   
(1) Issues Arising Under the Codes of Ethics - the Report will describe any issue(s) that arose during the previous year under the Trust’s Code or the codes of ethics of the
 
  investment adviser, sub-adviser or principal underwriter, including any material violations, and any resulting sanction(s).
   
(2) Certification - the Report will certify to the Board that the Trust has adopted measures reasonably necessary to prevent its personnel from violating the Code currently and in the future. The report will also include certifications from the Trust’s investment adviser, sub-adviser and principal underwriter.
   
IX. Records.
   
The Trust shall maintain records in the manner and to the extent set forth below, which records may be maintained under the conditions described in Rule 31a-2 under the 1940 Act and shall be available for examination by representatives of the U.S. Securities and Exchange Commission.
   
(1) A copy of this Code and any other code which is, or at any time within the past five years has been, in effect shall be preserved in an easily accessible place;
   
(2) A record of any violation of this Code and of any action taken as a result of such violation shall be preserved in an easily accessible place for a period of not less than five years following the end of the fiscal year in which the violation occurs;
   
(3) A copy of each report made by an Access Person pursuant to this Code shall be preserved for a period of not less than five years from the end of the fiscal year in which it is made, the first two years in an easily accessible place; and
   
(4) A list of all persons who are, or within the past five years have been, required to make reports pursuant to this Code shall be maintained in an easily accessible place.
   
(5) A copy of each annual report to the Board will be maintained for at least five years from the end of the fiscal year in which it is made, the first two years in an easily accessible place; and
   
(6) A record of any decision, and the reasons supporting the decision, to approve the acquisition of Securities in an IPO or a Private Placement, shall be preserved for at least five years after the end of the fiscal year in which the approval is granted.
   
X. Miscellaneous
   
(1) Confidentiality. All reports of securities transactions and any other information filed with the Trust pursuant to this Code shall be treated as confidential.
   
(2) Interpretation of Provisions. The Board may from time to time adopt such interpretations of this Code as it deems appropriate.
 
(3) Periodic Review and Reporting. The President of the Trust shall report to the Board at least annually as to the operation of this Code and shall address in any such report the need (if any) for further changes or modifications to this Code.
 

Exhibit 99.(p)(2)

 

Code of Ethics

 

This Code of Ethics (“Code”) is adopted in compliance with the requirements of U.S. securities laws applicable to registered investment advisers. Registered investment advisers are required by Rule 204A-1 under the Investment Advisers Act of 1940, as amended (“Advisers Act”), to adopt a code of ethics which, among other things, sets forth the standards of business conduct required of their supervised persons and requires those supervised persons to comply with the federal securities laws.

 

Standards of Business Conduct

 

ETFSA seeks to foster a reputation for integrity and professionalism. That reputation is a vital business asset. The confidence and trust placed in us by our clients is something we value and endeavor to protect. To further that goal, we have adopted this Code and implemented policies and procedures to prevent fraudulent, deceptive and manipulative practices and to ensure compliance with the Federal Securities Laws and the fiduciary duties owed to our clients.

 

We are fiduciaries and as such, we have affirmative duties of care, honesty, loyalty and good faith to act in the best interests of our clients. Our Clients’ interests are paramount and come before our personal interests. Our Access Persons and Supervised Persons, as those terms are defined in this Code, are also expected to behave as fiduciaries with respect to our clients. This means that each must render disinterested advice, protect client assets (including nonpublic information about a client or a client account) and act always in the best interest of our clients. We must also strive to identify and avoid conflicts of interest, however such conflicts may arise.

 

Access Persons and Supervised Persons of ETFSA and must not:

 

· employ any device, scheme or artifice to defraud a client;

 

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

 

· engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon a client;

 

· engage in any manipulative practice with respect to a client;

 

· use their positions, or any investment opportunities presented by virtue of their positions, to personal advantage or to the detriment of a client; or

 

· conduct personal trading activities in contravention of this Code or applicable legal principles or in such a manner as may be inconsistent with the duties owed to clients as a fiduciary.

 

To ensure compliance with these restrictions and the Federal Securities Laws, as defined in this Code, we have adopted, and agreed to be governed by, the provisions of this Code. However, Access Persons and Supervised Persons are expected to comply not merely with the “letter of the law,” but also with the spirit of the law, this Code, and ETFSA’s Investment Adviser Compliance Manual.

 

Should you have any doubt as to whether this Code applies to you, you should contact Adam Rezak, the Chief Compliance Officer (“CCO”).

 

1. Definitions

 

As used in the Code, the following terms have the following meanings:

 

1.1. Access Persons include (i) any Supervised Person who (a) has access to nonpublic information regarding any Client’s purchase or sale of securities; or (b) is involved in making securities recommendations to clients or has access to such recommendations that are nonpublic and (ii) any other person who the CCO determines to be an Access Person.
 
The CCO will inform all Access Persons of their status as such and will maintain a list of Access Persons on Appendix A.

 

1.2. Beneficial Ownership generally means having a direct or indirect pecuniary interest in a security and is legally defined to be beneficial ownership as used in Rule 16a-1(a)(2) under Section 16 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). However, transactions or holdings reports required by Section 5 of this Code may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the security or securities to which the report relates.

 

1.3. Federal Securities Laws means: (i) the Securities Act of 1933, as amended (“Securities Act”); (ii) Exchange Act; (iii) the Sarbanes-Oxley Act of 2002; (iv) the 1940 Act, (v) the Advisers Act; (vi) title V of the Gramm-Leach-Bliley Act; (vii) any rules adopted by the SEC under the foregoing statutes; (viii) the Bank Secrecy Act, as it applies to funds and investment advisers; and (ix) any rules adopted under relevant provisions of the Bank Secrecy Act by the SEC or the Department of the Treasury.

 

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

 

1.5. Limited Offering means an offering that is exempt from registration under Securities Act Sections 4(2) or 4(6), or pursuant to Securities Act Rules 504, 505 or 506. Limited Offerings include, without limitation, offerings of securities issued by the private funds advised by ETFSA.

 

1.6. Purchase or Sale of a Security includes, among other things, the writing of an option to purchase or sell a security.

 

1.7. Reportable Security means any security as defined in Advisers Act Section 202(a)(18) and Company Act Section 2(a)(36) except (i) direct obligations of the Government of the United States; (ii) bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; (iii) shares issued by money market funds; (iv) shares issued by open-end funds other than Reportable Funds; and (v) shares issued by unit investment trusts that are invested exclusively in one or more open-end funds, none of which are Reportable Funds.

 

1.8. Security Held by a Client means any Reportable Security which is currently held by a client. This definition also includes any option to purchase or sell, and any security convertible into or exchangeable for, a Reportable Security.

 

2. Pre-Approval Requirements for Access Persons

 

2.1. IPO and Limited Offering Restrictions . Access Persons may not acquire any securities issued as part of an IPO or a Limited Offering, absent prior approval in writing from the CCO. Any such approval will take into account, among other factors, whether the investment opportunity should be reserved for a client and whether the investment opportunity is being offered to the person because of his or her position with ETFSA.

 

2.2. Transactions in Securities Held by a Client . Access Persons may not engage in a transaction in any Security held by a Client, absent the approval of the CCO. In considering an Access Person’s request to engage in a transaction involving a Security held by a Client, the CCO shall consider, among other factors, whether the sale of the Reportable Security may negatively impact the market value of the Securities held by a Client and whether the transaction is otherwise consistent with the Code.
 
2.3. 30 Day Holding Period . Absent the prior written consent of the CCO, no Access Person may sell a Reportable Security within 30 days of acquiring the Reportable Security.

 

2.4. Prohibition on Self Pre-clearance or Approval . No Access Person shall pre-clear his own trades, review his own reports or approve his own exemptions from this Code. When such actions are to be undertaken with respect to the CCO, Benoit Autier will perform such actions as are required of the CCO by this Code.

 

3. Additional Requirements

 

3.1. Fair Treatment . Access Persons must avoid taking any action which would favor one client or group of clients over another, in violation of our fiduciary duties and applicable law. Access Persons must comply with relevant provisions of our compliance manuals designed to detect, prevent or mitigate such conflicts.

 

3.2. Service as Outside Director, Trustee or Executor . Access Persons shall not serve on the boards of directors of publicly traded companies, or in any similar capacity, absent the prior approval of such service by the CCO following the receipt of a written request for such approval. In the event such a request is approved, “Chinese Wall” procedures may be utilized to avoid potential conflicts of interest. Other than by virtue of their position with the firm or with respect to a family member, no Access Person may serve as a trustee, executor or fiduciary. Similarly, Access Persons may not serve on a creditor’s committee. In appropriate circumstances the CCO may grant exemptions from this provision.

 

4. Required Reports

 

4.1. Initial and Annual Holdings Reports. Each Access Person must submit to the CCO a report: (i) not later than ten (10) days after becoming an Access Person, reflecting the Access Person’s Reportable Securities as of a date not more than 45 days prior to becoming an Access Person; and (ii) annually, on a date selected by the CCO, as of a date not more than 45 days prior to the date the report was submitted.

 

4.2. Holdings reports must contain the following information:

 

  (a) the title and type of security and as applicable, the exchange ticker symbol or CUSIP number, number of shares, and principal amount of each Reportable Security in which the Access Person has any direct or indirect Beneficial Ownership;

 

(b) the name of any broker, dealer or bank with which the Access Person maintains an account in which any securities are held for the Access Person’s direct or indirect benefit. (Note that even those accounts which hold only non-Reportable Securities, must be included); and

 

(c) the date the Access Person submits the report.

 

4.3. Quarterly Transaction Reports. Within 30 days after the end of each calendar quarter, each Access Person must submit a report to the CCO covering all transactions in Reportable Securities during the preceding calendar quarter other than those excepted from the reporting requirements.

 

4.4. Quarterly Transaction Reports must contain the following information:

 

(a) the date of the transaction, the title and as applicable, the exchange ticker symbol or CUSIP number, interest rate and maturity date, number of shares, and principal amount of each Reportable Security involved;
 
  (b) the nature of the transaction ( i.e. , purchase, sale or any other type of acquisition or disposition);

 

(c) the price of the security at which the transaction was effected;

 

(d) the name of the broker, dealer or bank with or through which the transaction was effected; and

 

(e) the date the Access Person submits the report.

 

4.5. Exceptions to Reporting Requirements . The reporting requirements of this section apply to all transactions in Reportable Securities other than:

 

(a) transactions with respect to securities held in accounts over which the Access Person has no direct or indirect influence or control; and

 

(b) transactions effected pursuant to an automatic investment plan (i.e., any program in which regular periodic purchases or withdrawals are made automatically in or from investment accounts in accordance with a predetermined schedule and allocation, including, but not limited to, any dividend reinvestment plan (“DRIP”).

 

4.6. Duplicate Statements and Confirms . In order to satisfy the reporting requirements of this Section, each Access Person, with respect to each brokerage account in which such Access Person has any direct or indirect beneficial interest, must arrange to have his/her broker mail all brokerage statements, confirmations, and other periodic reports directly to the CCO at the same time they are mailed or furnished to such Access Person. To the extent that a duplicate brokerage statement lacks some of the information otherwise required to be reported, the missing information must be submitted as a supplement to the statement or confirmation.

 

5. Code Notification and Access Person Certifications

 

The CCO shall provide notice to all Access Persons of their status under this Code, and shall deliver a copy of the Code to each Access Person annually. Additionally, each Access Person will be provided a copy of any Code amendments. After reading the Code or amendment, each Supervised Person shall make the certification contained in Exhibit A. Annual certifications are due within ten (10) days after the end of each calendar year. Certifications with respect to amendments to the Code must be returned to the CCO within a reasonably prompt time. To the extent that any Code-related training sessions or seminars are held, the CCO shall keep records of such sessions and the Access Persons attending.

 

6. Review of Required Code Reports

 

6.1. Reports required to be submitted pursuant to the Code will be reviewed by the CCO or a designee on a periodic basis.

 

6.2. Any material violation or potential material violation of the Code must be promptly reported to the CCO. The CCO will investigate any such violation or potential violation and determine the nature and severity of the violation. All violations will be handled on a case-by-case basis in a manner deemed appropriate by the CCO. In each case of a violation, the CCO must determine what actions, if any, are required to cure the violation and prevent future violations.

 

6.3. The CCO will keep a written record of all investigations in connection with any Code violations, including any action taken as a result of the violation.

 

6.4. Sanctions for violations of the Code may include: verbal or written warnings and censures, monetary sanctions, disgorgement, suspension or dismissal. Where a particular Client has been
 
harmed by the violative action, disgorgement may be paid directly to the client; otherwise, monetary sanctions shall be paid to an appropriate charity determined by the CCO.

 

7. Recordkeeping and Review

 

ETFSA will maintain records (which shall be available for examination by the SEC staff) in accordance with its Policy Regarding Recordkeeping , and specifically shall maintain:

 

(i) a copy of this Code of Ethics and any other preceding code of ethics that, at any time within the past 5 years, has been in effect in an easily accessible place;

 

(ii) a record of any Code of Ethics violation and of any sanctions imposed for a period of not less than 5 years following the end of the fiscal year in which the violation occurred, the first 2 years in an easily accessible place;

 

(iii) a copy of each report made by an Access Person under this Code of Ethics for a period of not less than 5 years from the end of the fiscal year in which it is made, the first 2 years in an easily accessible place;

 

(iv) a record of all persons who are, or within the past 5 years have been, required to submit reports under this Code of Ethics, or who are or were responsible for reviewing these reports for a period of at least 5 years after the end of the fiscal year in which the report was submitted, the first 2 years in an easily accessible place; and

 

(v) a record of any decision, and the reasons supporting the decision, to approve the acquisition by an Access Person of Securities acquired in an Initial Public Offering or Limited Offering, for a period of at least 5 years after the end of the fiscal year in which the approval is granted, the first 2 years in an easily accessible place.

 

To the extent appropriate and permissible, the CCO may choose to keep such records electronically.

 

The CCO shall review this Code and its operation annually and may determine to make amendments to the Code as a result of that review. Non-material amendments to this Code should be made no more frequently than annually. Material amendments to the Code may be made at any time.

 

8. Reporting Violations

 

Any Access Person who believes that a violation of this Code has taken place must promptly report that violation to the CCO or to the CCO’s designee. To the extent that such reports are provided to a designee, the designee shall provide periodic updates to the CCO with respect to violations reported. Access Persons may make these reports anonymously and no adverse action shall be taken against an Access Person making such a report in good faith.

 

9. Waivers .

 

The CCO may grant waivers of any substantive restriction in appropriate circumstances ( e.g ., personal hardship) and will maintain records necessary to justify such waivers.

 

10. Confidentiality

 

All reports of securities transactions and other information filed pursuant to this Code of Ethics shall be treated as confidential to the extent permitted by law.

 

11. Gifts, rebates, contributions or other payments

 

ETFSA will take reasonable steps to ensure that neither it nor its Supervised Persons offer or give, or solicit or accept, in the course of business, any inducements which may lead to conflicts of interest between ETFSA and its Clients. Supervised Persons generally may not solicit gifts or gratuities nor give inducements, except in accordance with this Code of Ethics. The term “inducements” means gifts, entertainment and similar benefits which are offered to or given by Supervised Persons. Gifts of nominal value or those that are customary in the industry such as meals or entertainment may be appropriate. Any form of a loan by a Supervised Person to a Client or by a Client to a Supervised Person is not allowed. A relaxation of, or exemption from, these procedures may only be granted by the CCO.

 

Discretion must be used in accepting gifts, including invitations for dinners, entertainment, golf outings, sporting events, theater, etc. No Access Person may accept any gift or preferential treatment (except meals and entertainment valued at less than $100) from any person or entity that: (i) does business with ETFSA; (ii) is or may appear to be connected with any present or future business dealings between ETFSA and such person or entity; or (iii) may create or appear to create a conflict of interest. Similarly, no Access Person should offer any gifts that could be viewed as influencing the decision making or otherwise could be considered as creating a conflict of interest on the part of the recipient.

 

12. Outside Employment or Other Activities

 

Supervised Persons are generally prohibited from being employed or compensated by any other entity, serving on the board of directors of any publicly traded companies, and similar conduct except with the prior authorization of the CCO. Any employment or other outside activity by a Supervised Person may result in possible conflicts of interests for the Supervised Person or for ETFSA and therefore must be reviewed and approved by the CCO. Outside activities, which must be reviewed and approved, include the following:

 

(1) being employed or compensated by any other entity;
(2) engaging in any other business including part-time, evening or weekend employment; or
(3) serving as an officer, director, partner, etc . , in any other entity.

 

Written approval for any of the above activities is to be obtained by a Supervised Person before undertaking any such activity so that a determination may be made that the activities do not interfere with any of the Supervised Person’s responsibilities and any conflicts of interests which may be created by such activities may be addressed. Supervised Persons seeking approval shall provide the following information to the CCO: (1) the name and address of the outside business organization; (2) a description of the business of the organization; (3) compensation, if any, to be received; (4) a description of the activities to be performed; and (5) the amount of time per month that will be spent on the outside activity. Because ETFSA encourages involvement in charitable, nonpublic organization, civic and trade association activities, these outside activities will generally be approved unless a clear conflict of interest exists. Supervised Persons must update annually any requests for approval of an outside activity.

 

Records of requests for approval along with the reasons such requests were granted or denied are maintained by the CCO.

 

 

Enforcement of this Code of Ethics

 

CCO’s Duties and Responsibilities

 

The CCO shall be primarily responsible for administering and enforcing the provisions of this Code of Ethics. The CCO shall:

 
(i) maintain a current list of all Access Persons;

 

(ii) supervise, implement and enforce the terms of this Code of Ethics;

 

(iii) (a) provide each Access Person with a current copy of this Code of Ethics and any amendments thereto, (b) notify each person who becomes an Access Person of the reporting requirements and other obligations under this Code of Ethics at the time such person becomes an Access Person, and (c) require each Access Person to provide a signed Certificate of Compliance for the Code of Ethics and Insider Trading Policy;

 

(iv) maintain a list of all Securities which ETF Securities Advisors LLC recommends, holds, or is purchasing or selling, or intends to recommend purchase or sell on behalf of its Clients;

 

(v) determine whether any particular Personal Securities Transactions should be exempted pursuant to the provisions this Code of Ethics;

 

(vi) maintain files of statements and other information to be reviewed for the purpose of monitoring compliance with this Code of Ethics, which information shall be kept confidential, except as required to enforce this Code of Ethics, or to participate in any investigation concerning violations of applicable law;

 

(vii) review all Holdings Reports required to be provided by each Access Person pursuant to this Code of Ethics: (a) for each new Access Person, to determine if any conflict of interest or other violation of this Code of Ethics results from such person becoming an Access Person; and (b) for all Access Persons, to determine whether a violation of this Code of Ethics has occurred;

 

(viii) review on a quarterly basis all Securities reported on the Quarterly Transaction Reports required to be provided by each Access Person pursuant to this Code of Ethics for such calendar quarter to determine whether a Code of Ethics violation may have occurred;

 

(ix) review any other statements, records and reports required by this Code of Ethics; and

 

(x) review on a periodic basis and update as necessary, this Code of Ethics.

 

Violations of this Code of Ethics

 

If the CCO determines that a violation of this Code of Ethics has occurred, the CCO shall prepare a record of explanatory material regarding such violation and shall immediately take remedial or corrective action. The CCO shall monitor his own Securities holdings and transactions in accordance with the reporting requirements set forth in this Policy.

 

If the CCO finds that a Supervised Person has violated this Code of Ethics, the CCO will impose upon such Supervised Person sanctions that the CCO deems appropriate in view of the facts and circumstances. Sanctions with respect to any Supervised Person (other than a principal) may include written warning, suspension or termination of employment, a letter of censure and/or restitution of an amount equal to the difference between the price paid or received by the offending Supervised Person. In addition, ETFSA reserves the right to require the offending Supervised Person to reverse, cancel or freeze, at the Supervised Person’s expense, any transaction or position in a specific Security if ETFSA believes the transaction or position violates this Code of Ethics and/or ETFSA’s general fiduciary duty to its Clients, or otherwise appears improper.

 

All violations of this Code of Ethics must be immediately reported to the CCO.

 

Appendix A: Reference Page

 

Relevant Personnel

 

Title Name(s)
Access Persons Benoit Autier, Adam Rezak
Supervised Persons (other
than Access Persons)
None currently
CCO Adam Rezak
 

EXHIBIT A

 

 

Certification of Receipt and Compliance of Code of Ethics

 

This form must be completed by each Supervised Person
within 10 days of becoming a Supervised Person;
within 10 days after the end of each calendar year thereafter; and
upon receipt of any amendment to the Code.

 

I hereby acknowledge receipt of ETF Securities Advisors LLC’s current Code of Ethics (the “Code”), including any applicable amendments. I hereby certify that I (i) recently have read/re-read the Code (including any amendments thereto); (ii) understand the Code; and (iii) recognize that I am subject to its provisions. I also hereby certify that I have complied with and will continue to comply with the requirements of the Code and that I have disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the Code.

 

Name:    
  (Please print or type clearly)  
     
Signature:    
     
Date:    
 

Exhibit 99.(p)(3)

 

VTL Associates, LLC

 

Index Management Solutions, LLC

 

RevenueShares ETF Trust

 

 

 

CODE OF ETHICS

 

 

 

 

 

 

 

 

 

 

Effective: October 12, 2007; as amended February 23, 2011, May 30, 2012 and
August 21, 2013

 

Introduction

 

Pursuant to rules established by the U.S. Securities and Exchange Commission (the “SEC”), it is unlawful for certain persons of VTL Associates, LLC (the “Adviser”), Index Management Solutions, LLC (the “Sub-adviser”), and the RevenueShares ETF Trust (the “Trust”), in connection with the purchase or sale by such persons of securities held or to be acquired by a client account:

 

  1. To employee any device, scheme or artifice to defraud;
  2. To make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading;
  3. To engage in any act, practice or course of business that operates or would operate as a fraud or deceit; or
  4. To engage in any manipulative practice.

 

The SEC’s rules also require investment advisers and registered investment companies to adopt a written code of ethics containing provisions reasonably necessary to prevent certain persons from engaging in acts in violation of the above standard.

 

Consistent with the SEC’s rules, the Adviser, Sub-adviser, and the Trust have adopted this Code of Ethics (the “Code”). The Code sets forth detailed policies and procedures that Covered Persons (as defined below) of the Adviser, Sub-adviser, and Trust must follow in regard to their personal investing activities. All Covered Persons are required to comply with the Code as a condition of continued employment.

 

The Code is intended to serve as the minimum standard of conduct for persons having access to information regarding the purchase and sale of portfolio securities by the Trust, or other registered investment companies for which the Adviser or Sub-adviser serves as adviser or sub-adviser, as well as the Adviser’s and Sub-adviser’s separate accounts and other advisory clients (collectively, the “Advisory Clients”). Each employee must avoid any activity or relationship that may reflect unfavorably on the Adviser, Sub-adviser or the Trust as a result of a possible conflict of interest, the appearance of such a conflict, the improper use of confidential information or the appearance of any impropriety.

 

This Code is designed to detect and prevent conflicts of interest between the Adviser’s, Sub-adviser’s, and the Trust’s employees, officers, partners, members and trustees/directors (as applicable) and the Advisory Clients, which includes the Trust, that may arise due to personal investing activities. The Adviser and Sub-adviser has also established separate procedures designed to detect and prevent insider trading, which are included in the Adviser’s and Sub-adviser’s Compliance Manual and which should be read together with this Code.

 

Personal investing activities of Covered Persons may create conflicts of interests that may compromise fiduciary duties to Advisory Clients. As a result, Covered Persons must avoid any transaction that involves, or even appears to involve, a conflict of interest, diversion of an Advisory Client investment opportunity or other impropriety with respect to dealing with an Advisory Client or acting on behalf of an Advisory Client.

 

As fiduciaries, Covered Persons must at all times comply with the following principles:

1
Client Interests Come First. Covered Persons must scrupulously avoid serving their own personal interests ahead of the interests of Advisory Clients. If a Covered Person puts his/her own personal interests ahead of an Advisory Client’s, or violates the law in any way, he/she will be subject to disciplinary action, even if he/she is in technical compliance with the Code.

 

Avoid Taking Advantage. Covered Persons may not make personal investment decisions based on their knowledge of Advisory Client holdings or transactions. The most common example of this is “front running,” or knowingly engaging in a personal transaction ahead of an Advisory Client with the expectation that the Advisory Client’s transaction will cause a favorable move in the market. This prohibition applies whether a Covered Person’s transaction is in the same direction as the transaction placed on behalf of an Advisory Client (for example, two purchases) or the opposite direction (a purchase and sale).

 

If you are uncertain whether a real or apparent conflict exists in any particular situation, you should consult with the chief compliance officer (“CCO”) for the Adviser, Sub-adviser, or the Trust immediately.

 

The Code sets forth detailed policies and procedures that Covered Persons (as defined below) of the Adviser, Sub-adviser, and the Trust must follow in regard to their personal investing activities. All Covered Persons are required to comply with the Code as a condition of continued employment.

 

1. Who is subject to the Code ?

 

1.1. Covered Persons . For the purposes of this Code, Covered Person is defined as:

 

1.1.1. Each employee, officer, partner or member (as applicable) of the Adviser, Sub-adviser, or the Trust:

 

who, in connection with his or her regular functions or duties, makes, participates in or obtains information regarding, the purchase or sale of securities covered by this Code, or whose functions relate to the making of any recommendations with respect to such purchases or sales (for the purposes of this Code, a Covered Person does not include persons employed by a subsidiary of Foreside Financial Group, LLC (including Foreside Compliance Services, LLC and Foreside Management Services, LLC), and BNY Mellon who are subject to securities transaction reporting requirements of their employer’s Code of Ethics, if that Code of Ethics complies with Rule 17j-1 under the Act and has been approved by the Board of Trustees of the Trust);

 

1.1.2. Each Trustee of the Trust, except that :

 

Trustees who are not “interested persons” as defined under the Investment Company Act of 1940 (the “Independent
2

Trustees”) are only subject to Section 6.4 (Quarterly Transaction Reports) of this Code;

 

Trustees who are “interested persons” as defined under the Investment Company Act of 1940, but who are not an employee, officer, partner or member (as applicable) of the Adviser or Sub-adviser (such Trustees to be referred to as “Non-Adviser Trustees”, are only subject to Section 6.4 (Quarterly Transaction Reports) of this Code; and

 

1.1.3. Each natural person in a control 1 relationship to the Trust or the Adviser who obtains information concerning recommendations made to the Trust with regard to the purchase or sale of securities covered by this Code.

 

2. What Types of Investments are subject to the Code ?

 

This Code requires that information about a Covered Person’s investments in certain securities be reported to the Adviser, Sub-adviser or Trust CCO.

 

For purposes of this Code, the term “ Reportable Security ” means any interest or instrument commonly known as a security, whether in the nature of debt or equity, including any: (i) option, (ii) futures contract; (iii) shares of registered closed-end funds; (iv) shares of registered open-end investment companies (i.e., mutual funds) that are advised by the Adviser or Sub-adviser (including those held in retirement accounts and that are not money market funds) and shares of exchange traded funds; (v) warrant; (vi) note; (vii) stock; (viii) treasury stock; (ix) bond; (x) debenture; (xi) evidence of indebtedness; (xii) certificate of interest; or (xiii) any participation in, or right to subscribe to or purchase, any such interest or instrument.

 

3. What Types of Investments are not subject to the Code .

 

This Code does not require information about the following types of securities:

 

  direct obligations of the U.S. government;
  bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements;
  shares of money market funds;
  shares issued by open-end investment companies other than registered investment companies for which the Adviser or Sub-adviser serves as an adviser or sub-adviser or exchange traded funds; or
  shares issued by unit investment trusts that are invested exclusively in one or more open-end investment companies, none of which are registered investment companies for which the Adviser or Sub-adviser serves as an adviser or sub-adviser or are exchange traded funds.

 

4. What Types of Accounts are subject to the Code ?

 

  4.1. Covered Accounts

 

 

1 Control means the power to exercise a controlling influence over the management or policies of the Adviser or Trust, unless such power is solely the result of an official position with the Adviser or the Trust.

3

Covered Account ” includes any securities account, whether held at a broker/dealer, transfer agent, investment advisory firm or other financial services firm, in which a Covered Person has a beneficial interest or over which a Covered Person has investment discretion or other control or influence. 2 A Covered Account includes the accounts of immediate family members. 3 Restrictions placed on transactions executed within a Covered Account also pertain to investments held outside of an account of which a Covered Person has physical control, such as a stock certificate. 4

 

  4.2. Joint Accounts

 

Covered Persons of the Adviser or Sub-adviser are prohibited from entering into a joint account with any Advisory Client.

 

5. What are the Restrictions on Trading ?

 

5.1. Pre-clearance Requirements

 

Covered Persons must obtain prior written approval before acquiring a direct or indirect beneficial ownership (through purchase or otherwise) of: (i) a Reportable Security, (ii) a security in an initial public offering (“IPO”), or (iii) a security in a limited offering (generally meaning a private placement, such as a hedge fund or private equity fund).

 

See Appendix A for the pre-clearance form to be used to obtain permission to make investments in Reportable Securities and Appendix B for the pre-clearance form to be used to obtain permission to make investments in private placements or IPOs.

 

5.2. Lockout Period

 

Covered Persons may not purchase or sell a Reportable Security within seven calendar days prior to, or within seven days after, the Trust or an Advisory Client trades in such Reportable Security; except that , a Covered Person may sell a Reportable Security within seven calendar days after the Trust or Advisory Client executed a sales transaction in that same Reportable Security if the Trust or other Advisory Client no longer have a position in such Reportable Security.

 

Any profits realized by a Covered Person in contravention of this subsection must be disgorged.

 

6. Reporting and Certification Requirements

 

6.1. Initial Holdings Report and Certification

 

Within 10 days after a Covered Person commences employment, he/she must certify in writing that he/she has received the Code, has read and understands the Code, that he/she will comply with its requirements, and that he/she has disclosed or reported all personal investments and accounts required to be disclosed or reported. (Please see Appendices C and D for the

 

 

2 Beneficial interest in an account includes any direct or indirect financial interest in an account.

3 Immediate family includes your spouse, children and/or stepchildren and other relatives who live with you if you contribute to their financial support.

4 Covered Accounts also include accounts for which a Covered Person has power of attorney, serves as executor, trustee or custodian, and corporate or investment club accounts.

4

required certifications and disclosure). Information disclosed may be no more than 45 days old at the time of disclosure. Covered Persons are only required to report holdings in Reportable Securities as defined in Section 2 of this Code.

 

The Adviser or Sub-adviser CCO will arrange to receive directly from the executing broker/dealer, bank or other third-party institution duplicate copies of trade confirmations for each transaction and periodic account statements for each Covered Account.

 

Accounts over which Covered Persons have no control. Covered Persons are not required to report securities held in accounts over which the Covered Person has no direct or indirect influence or control. However, Covered Persons are required to include in initial and annual holdings reports the name of any broker/dealer or bank with which the Covered Person has an account in which any securities are held for his/her direct or indirect benefit.

 

When Duplicate Confirmations or Statements Are Not Available. You may wish to engage in a transaction for which no confirmation can be delivered to the Adviser or Sub-adviser CCO (e.g., transactions involving certain types of derivatives). These types of transactions require the prior written approval of the Adviser or Sub-adviser CCO and will involve additional reporting requirements.

 

6.2. Ongoing Reporting Regarding Covered Accounts

 

Covered Persons must notify the Adviser or Sub-adviser CCO within 10 business days from the time any Covered Account is opened and immediately upon making or being notified of a change in ownership or account number. The notification must be submitted in writing to the Adviser or Sub-adviser CCO and include the broker name, name of the account, the date the account was opened, account number (if new account) or, if the account number changed, the old number and new number and the effective date of the change.

 

6.3. Quarterly Transactions Report for Covered Persons (other than Independent Trustees or Non-Adviser Trustees)

 

All Covered Persons shall submit to the Adviser or Sub-adviser CCO, within 30 business days after quarter end, a report of all reportable transactions during the previous quarter. The report shall state the title and number of shares, the principal amount of the security involved, the interest rate and maturity date if applicable, the date and nature of the transaction, the price at which the transaction was effected and the name of the broker, dealer or bank with or through whom the transaction was effected. The report shall also include the date it was submitted by the Covered Person. Covered Persons who have reported reportable transactions through duplicate copies of broker confirmations and statements are not required to file a quarterly report, if the confirmation and statement is received no later than 30 days after the end of the applicable quarter.

 

Covered Persons are not required to submit quarterly transaction reports with respect to regular periodic purchases or sales that are made automatically to or from an investment account in accordance with a pre-determined schedule or allocation (e.g., an automatic investment plan or dividend reinvestment plan).

 

6.4. Quarterly Transactions Report for Independent Trustees and Non-Adviser Trustees
5

Independent Trustees and Non-Adviser Trustees must file a Quarterly Transactions Report with the Trust CCO only if the Trustee knew, or in the ordinary course of fulfilling his/her official duties as a Trustee of the Trust should have known, that during the 15 days immediately before or after the date of a securities transaction in the Trustee’s Covered Accounts that: (i) the security was purchased or sold by the Trust; or (ii) the Trust or its Adviser or Sub-adviser considered purchasing or selling the security for the Trust. Independent Trustees and Non-Adviser Trustees must file these reports within 30 days of the end of the calendar quarter in which the trade occurred.

 

  6.5. Annual Certification for Covered Persons

 

Annually, Covered Persons must certify that they have read and understand the Code, that they have complied with its requirements during the preceding year, and that they have disclosed or reported all personal transactions/holdings required to be disclosed or reported. Covered Persons must also disclose all personal investments and accounts on an annual basis. Please see Appendices C and D for the required certifications and disclosure. Information disclosed must be current as of a date no more than 45 days before the report is submitted. The annual certification must be submitted to the Adviser or Sub-Adviser CCO within 30 days of the calendar year end.

 

Covered Persons are only required to submit an annual holdings report relating to Reportable Securities as defined in Section 2 of this Code.

 

Covered Persons are not required to report securities held in accounts over which the Covered Person has no direct or indirect influence or control. However, Covered Persons are required to include the name of any broker/dealer or bank with which the Covered Person has an account in which any securities are held for his/her direct or indirect benefit.

 

7. Code Provisions Applicable Only to Trust Service Providers

 

7.1 Service Provider Code of Ethics

 

The provisions of Foreside Financial Group, LLC (subsidiaries of which include Foreside Compliance Services, LLC and Foreside Management Services, LLC) and BNY Mellon (collectively, the “Service Providers”) Codes of Ethics are hereby adopted as the Code of Ethics of the Trust to the extent they are applicable to the respective employees of that Service Provider that also serve as officers of the Trust (a “Service Provider Employee”). A violation of a Service Provider’s Code of Ethics by such an employee of a Service Provider shall also constitute a violation of this Code. Any amendment or revision of a Service Provider’s Code of Ethics shall be deemed to be an amendment or revision of Section 7 of this Code, and any such amendment or revision shall be promptly furnished to the Board of Trustees of the Trust.

 

7.2 Reports

 

Service Provider Employees shall file the reports required by their respective employer’s Code of Ethics. Such filings shall be deemed to be filings with the Trust under this Code, and shall at all times be available to the Trust.

 

8. Administration and Enforcement

 

8.1. Determination of Persons covered by Code
6

The CCO for the Adviser and the Sub-adviser will determine who is covered by this Code and will provide each such person with a copy of the Code and any amendments thereto. Covered Persons must acknowledge in writing receipt of any such amendments.

 

8.2. Review of Personal Trading Information

 

All information regarding a Covered Person’s personal investment transactions, including the reports required by Section 6, will be reviewed by the Adviser or Sub-adviser CCO. All such information may also be available for inspection by the Trust’s Board of Trustees. By signing the acknowledgement attached to this document, each Covered Person acknowledges that the Adviser or Sub-adviser CCO shall be permitted to obtain and review information, including account statements and trade confirmations, from brokerage firms, retirement plan administrators and other financial intermediaries, relating to the securities held by the Covered Person.

 

8.3. Annual Review/Report

 

The Adviser or Sub-adviser CCO will review the Code at least annually in light of legal and business developments and experience in implementing the Code. The Adviser or Sub-adviser CCO will provide an annual report to the Trust’s Board of Trustees that: (i) describes issues that arose during the previous year under the Code, including, but not limited to, information about material Code violations and sanctions imposed in response to those material violations; (ii) recommends changes in existing restrictions or procedures based on the experience implementing the Code, evolving industry practices or developments in applicable laws or regulations; (iii) and certifies to the Board that procedures have been adopted that are designed to prevent Covered Persons from violating the Code.

 

8.4. Reporting Violations

 

Upon discovering a violation of this Code, a Covered Person shall immediately report such violation to the Adviser or Sub-adviser CCO and the Adviser or Sub-adviser CCO will be responsible for investigating such violations.

 

8.5. Sanctions and Remedies

 

If the Adviser or Sub-adviser CCO determines that a Covered Person has violated the Code, she may impose sanctions and other appropriate actions, including issuing a letter of education, suspending or limiting personal trading activities, imposing a fine, recommending a suspension or termination of employment of a Covered Person employed by the Adviser, Sub-adviser or the Trust and/or informing regulators if the situation warrants. As part of any sanction, the Adviser or Sub-adviser CCO may require the violator to reverse the trade(s) in question and forfeit any profit or absorb any loss from the trade. Any money forfeited pursuant to this section will be donated to a charity selected by the Adviser or Sub-adviser CCO.

 

8.6. Exemption Procedures

 

The Adviser or Sub-adviser CCO may grant exemptions from the requirements in this Code in appropriate circumstances. The Adviser or Sub-adviser CCO shall consider such exemptions upon written request by a Covered Person stating the basis for requested relief. The Adviser or Sub-adviser CCO’s decision is within his or her sole discretion.

 

8.7. Recordkeeping Requirements
7

The Adviser or Sub-adviser CCO shall maintain records in the manner and to the extent set forth below, which records shall be available for appropriate examination by representatives of the SEC.

 

8.7.1 A copy of this Code and any other code of ethics that is, or at any time within the past five years was in effect, must be maintained in an easily accessible place.

 

8.7.2 A record of any violation of this Code, and of any action taken as a result of the violation, must be maintained in an easily accessible place for at least five years after the end of the fiscal year in which the violation occurs.

 

8.7.3 A record of all written acknowledgments pursuant to Section 8.1 of this Code for each person who is currently, or within the past five years was, a supervised person of the Adviser or Sub-adviser.

 

8.7.4 A copy of each report made pursuant to this Code by an Access Person, including any information provided in lieu of the reports, must be maintained for at least five years after the end of the fiscal year in which the report is made or the information is provided, the first two years in an easily accessible place.

 

8.7.5 A record of all persons, currently or within the past five years, who are or were required to make reports pursuant to this Code, or who are or were responsible for reviewing these reports, must be maintained in an easily accessible place.

 

8.7.6 A copy of each report required by Section 8.3 of this Code must be maintained for at least five years after the end of the fiscal year in which it is made, the first two years in an easily accessible place.

 

8.7.7 A record of any decision, and the reasons supporting the decision, to approve the acquisition by investment personnel of securities under Section 5.1 of this Code, for at least five years after the end of the fiscal year in which the approval is granted.

 

8.8. Questions and Exceptions

 

Any questions regarding this Code should be discussed with the Adviser or Sub-adviser CCO.

8

Appendix A

 

Reportable Securities Pre-Clearance Request Form

 

TO: Adviser or Sub-adviser Chief Compliance Officer

 

FROM:    
     
DATE:    

 

As provided in section 5.1 of the Code of Ethics, if a Covered Person wants to purchase or sell a Reportable Security he/she must complete this form and obtain the required approvals prior to investing. A Covered Person may not purchase or sell such security until he/she receives written permission from the Adviser or Sub-adviser Chief Compliance Officer (i.e., an approval e-mail). Oral discussions do not constitute approval under any circumstances.

 

INVESTMENT INFORMATION:

 

1. Name of Issuer and Ticker Symbol: ___________________

 

2. Purchase or Sale: ________________________________________________________

 

3. Principal amount of transaction: ____________ # of shares/units: __________

 

4. Equity or debt? __________

 

To the best of my knowledge, the information provided above is accurate and I am not predicating this transaction on the basis of having obtained any material non-public information.

 

I will notify the Adviser or Sub-adviser Chief Compliance Officer immediately of any material changes to the information provided above.

 

Name:    

(Please Print)

 

Signature:    

 

Date:  
 

Appendix B

 

IPO and Limited Offering Pre-Clearance Request Form

 

TO: Adviser or Sub-adviser Chief Compliance Officer

 

FROM:

 

DATE:

 

As provided in section 5.1 of the Code of Ethics, if a Covered Person wants to participate in an IPO of a security, a private placement or a limited partnership, he/she must complete this form and obtain the required approvals prior to investing. A Covered Person may not participate in any IPO, private placement or limited partnership until he/she receives written permission from the Adviser or Sub-adviser Chief Compliance Officer. Oral discussions do not constitute approval under any circumstances.

 

INVESTMENT INFORMATION:

 

1. Name of proposed investment: ________________________________________ Date of investment: __________________________________

 

2. Nature of investment: ______________________________________________________________________________________________

 

3. Amount to be invested: _______________________ # of shares: _____________________ % ownership: ________________________

 

4. Describe terms of investment:

 

Equity or debt? __________________________ Open-ended or specific maturity date? _________________________________________

 

Further investment contemplated? _______________________________ Amount? ____________________

 

5. Was this investment offered to you due to your affiliation with the Adviser or the Trust? _______________________________________________________________________________________________________________

 

6. Do you have a position as officer of the company or other duties in connection with the investment? __________________________________________________________________________________________________________________________

 

7. Do you give investment advice to the company or any affiliate of the company? If so, please describe:_______________________________________

___________________________________________________________________________________________________________________________

 

8. Are you informed or consulted about investments made by the company?

 

Describe:

___________________________________________________________________________________________________________________________

 

9. How frequently will you receive statements/communications regarding the investment?

 

___________________________________________________________________________________________________________________________

 

10. Is the company privately/publicly held?

 

___________________________________________________________________________________________________________________________

 

11. If privately held, are you aware of any plan to bring the company public?

 

___________________________________________________________________________________________________________________________

 

12. Have you informed the company that you are a “restricted person” in the event of an IPO of securities?

 

________

 

13. Describe any connection(s) between the investment and the Adviser or the Trust:

 

___________________________________________________________________________________________________________________________

 

14. To your knowledge, are there any clients of the Adviser for whom this is an appropriate investment?

 

___________________________________________________________________________________________________________________________

 

___________________________________________________________________________________________________________________________

 

15. Describe any client connections to this investment:

 

___________________________________________________________________________________________________________________________

 

16. Are you aware of any conflict between your duties at the Adviser or Trust and this investment?

 

___________________________________________________________________________________________________________________________

 

Please attach any relevant reports/statements you can provide which describe this investment.

 

To the best of my knowledge, the information provided above is accurate. I will notify the Adviser or Sub-adviser Chief Compliance Officer immediately of any material changes to the information provided above.

 

Name:    

(Please Print)

 

Signature:    

 

Date:  
 

Appendix C

 

COVERED PERSON ACKNOWLEDGMENT

 

I hereby acknowledge receipt of a copy of the Code of Ethics (the “Code”) for VTL Associates, LLC (the “Adviser”), Index Management Solutions, LLC (the “Sub-adviser”), and RevenueShares ETF Trust (the “Trust”), which I have read and understand fully. I agree to comply fully with all provisions of the Code, during the period of my employment with the Adviser or the Trust, to the extent that such provisions apply to me. I further understand and acknowledge that any violation of the Code, including engaging in a prohibited transaction or the failure to file reports, may subject me to disciplinary action including, potentially, termination of employment.

 

I hereby represent to the Adviser, Sub-adviser, and the Trust that the information that I have provided, as required by this Code, is a true, accurate, and complete list of all of my brokerage and trading accounts, and private placement holdings, specifying in reasonable detail all such accounts, with whom they are held, and the holdings and other investments, direct or indirect, of such accounts. I further agree that I will promptly, but in any event, within ten days, give written notice to the Chief Compliance Officer for the Adviser or Sub-adviser of any changes to the information that I have provided so that such information is at all times true, accurate, and complete. I further agree to provide monthly securities transactions confirmations and statements (or on a quarterly basis when monthly statements and confirmations are unavailable) to the Adviser of Sub-adviser, as applicable.

 

I have fully read the Code. I agree to be bound by the terms and conditions outlined in it.

 

     
Signed   Dated
     
     
Name    
 

Appendix D

 

INITIAL AND ANNUAL DISCLOSURE FORM FOR COVERED PERSONS

 

PART I – DISCLOSURE OF EMPLOYEE ACCOUNTS

 

o I do not maintain any Covered Accounts as defined in the Code of Ethics for VTL Associates, LLC, Index Management Solutions, LLC, and RevenueShares ETF Trust.

 

Below is a list of all my Covered Accounts as defined in the Code. Check all that apply as to the Account Type.

o (a) Direct Brokerage Account

· (1) I have full investment discretion on the account
· (2) I have full investment discretion on the account which I am managing for another person
· (3) I do not have investment discretion on the account (Investment discretion is 100% exercised by a broker, financial adviser, etc.)

o (b) Trust Account

o (c) Employee Stock Plan (“ESOP”), 401(k) Plans, private placement or similar product that cannot be transferred to a brokerage account

o (d) Other (Please explain: _________________________________________________________________________________________)

 

Name and address of Financial
Institution (broker-dealer, bank, ESOP,
401(k) plan sponsors, etc.)

Account Name (indicate if any of the
accounts are individually or jointly held )

 

Account
Type
(a,b,c,d)
Account Number
       
       
       
       
       

 

PART II – DISCLOSURE OF COVERED SECURITIES HOLDINGS

o I do not maintain, have a financial interest, or influence/control the activities of any securities.

Below is a list of all personal securities holdings for which I have direct or indirect beneficial ownership.

o I ndicate by checking this box if you have already provided a copy of your most recent statement (not more than 45 days old) for each account listed below

 

Security (Include full name of issuer) and exchange ticker symbol (or Cussip Number) # of Shares and Principal Amount
   
   
   
   
   
   
   
   
   
   

 

This report (i) excludes transactions with respect to which I had no direct or indirect influence or control; and (ii) excludes other transactions not required to be reported.

 

Signature: 
 
  Print Name:
 
  Date:
 
 
 

Appendix E

 

QUARTERLY TRANSACTION REPORT FOR COVERED PERSONS

 

Below is a list of all transactions in Reportable Securities during the past quarter in which the undersigned had any direct or indirect beneficial interest.

 

Date of
Transactions
Security and
exchange
ticker symbol
(or Cussip
Number)
Nature of
Transaction
(e.g.,
Purchase
or Sale)
Number of
Shares and
Principal
Amount
Price at
which
transaction
was
effected
Name of
broker/dealer
effecting
transaction
           
           
           
           
           
           
           
           

 

This report (i) excludes transactions with respect to which I had no direct or indirect influence or control and (ii) excludes other transactions not required to be reported.

 

Signature: 
 
  Print Name:
 
  Date:
 
 
 

Exhibit 99.(p)(4)

 

 
ALPS Code of Ethics  

 

ALPS
Code of Ethics

 

Dated: May 1, 2010

Amended Last: September 30, 2013

1
 
ALPS Code of Ethics  

 

Table of Contents

 

Introduction 3
Applicability 4
General Standards of Business Conduct 8
Conflicts of Interest 8
Protecting Confidential Information 8
Insider Trading and Tipping 9
Excess Trading 9
Front Running 9
Gifts and Entertainment 9
Service on a Board of Directors/Outside Business Activities 10
Political Contributions 10
Personal Securities Transactions – Restrictions & Reporting Requirements 12
Access Persons 12
Investment Persons 15
Sanctions 19
Reporting Forms 23
Appendix A– Gift Disclosure Form 24
Appendix B – Broker/Dealers with Electronic Feeds 25
Appendix C – Broker/Dealer Duplicate Statement/Confirmation Request Letter 26
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ALPS Code of Ethics

Introduction

 

This Code of Ethics (“Code”) has been adopted by ALPS Holdings, Inc. and applies to its subsidiaries and affiliates (collectively referred to herein as “ALPS”). The Code is designed to comply with Rule 204A-1 under the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 17j-1 under the Investment Company Act of 1940 (the “1940 Act”). By adopting and adhering to a code that meets the applicable requirements under the Advisers Act and 1940 Act, it is intended that ALPS employees who are deemed to be Access Persons and/or Investment Persons, will not also be subject to duplicative reporting requirements under various other codes for Fund Companies for which they may serve as an officer or are otherwise deemed to be an Access Person. However, all such persons should check with each company’s Compliance or Legal representatives to confirm their status.

 

ALPS and its employees are subject to certain laws and regulations governing personal securities trading. This Code also sets forth procedures and limitations which govern personal securities transactions. Employees who are also registered with the Financial Industry Regulatory Authority (“FINRA”) as a Registered Representative may have additional requirements and/or restrictions in addition to those described herein. Those Registered Representatives should consult their Written Supervisory Procedures for additional requirements.

 

ALPS and its employees are prohibited from engaging in fraudulent, deceptive or manipulative conduct.  The Code is designed to reinforce ALPS’ reputation for integrity by avoiding even the appearance of impropriety in the conduct of our business. This Code was developed to promote the highest standards of behavior and ensure compliance with applicable laws.

 

Employees are required to report any known violations of the Code to the Chief Compliance Officer (“CCO”). This includes violations that come to your attention that may have been inadvertent and/or violations that other employees may have committed. There may be additional provisions for reporting violations that are covered under the firm’s Whistle Blower Policy and employees should make themselves familiar with this policy or consult with the firm’s CCO.

 

Employees should be aware that they may be held personally liable for any improper or illegal acts committed during their course of employment, and that “ignorance of the law” is not a defense. All ALPS employees are expected to read the Code carefully and observe and adhere to its guidance at all times. Failure to comply with the provisions of the Code may result in serious sanctions including, but not limited to: disgorgement of profits, dismissal, substantial personal liability and referral to law enforcement agencies or other regulatory agencies. Employees should also understand that a material breach of the provisions of the Code may constitute grounds for disciplinary action, including termination of employment with ALPS.

 

The provisions of the Code are not all-inclusive.  Rather, they are intended as a guide for employees of ALPS in their conduct.  In those situations where an employee may be uncertain as to the intent or purpose of the Code, he/she is advised to consult with the CCO.  The CCO may grant exceptions to certain provisions contained in the Code, only in those situations when it is clear beyond dispute that the interests of our Clients will not be adversely affected or compromised.  All questions arising in connection with personal securities trading should be resolved in favor of the Client, even at the expense of the interests of employees.

 

The CCO will periodically report to senior management/board of directors of ALPS and the respective fund boards where ALPS serves in the capacity of investment adviser and/or distributor to document compliance or non-compliance with this Code. Each employee is responsible for knowing their responsibilities under the Code. Employees should retain a copy of the Code in their records for future reference. Any questions regarding the Code should be directed to the CCO.

3
 
ALPS Code of Ethics

 

Applicability

 

ALPS Employees

 

This Code is applicable to all ALPS employees. This includes full-time, part-time, benefited and non-benefited, officers, directors, exempt and non-exempt personnel. Additionally, each new employee’s offer letter will include a copy of the Code of Ethics and a statement advising the individual that he/she will be subject to the Code of Ethics if he/she accepts the offer of employment. Employees with access to certain information (as determined by their job position or as so designated by the CCO) may also be deemed to be “Access Persons” or “Investment Persons.” Each such distinction has specific restrictions, limitations, reporting requirements and other policies and procedures that apply to persons defined as such. All ALPS employees have an obligation to promptly notify the Compliance Department if there is a change to their duties, responsibilities or title which affects their reporting status under the code.

 

Family Members and Related Parties

 

The Code applies to the accounts of applicable employees, his/her spouse or domestic partner, his/her minor children, his/her adult children living at home, and any relative, person or entity for whom the employee directs the investments. Joint account holders will also be included if an ALPS employee is one of the joint account holders (Please refer to the definition of an “account”).

 

Contractors and Consultants

 

ALPS contractor/consultant/temporary employee contracts may include the Code as an addendum, and each contractor/consultant/temporary employee may be required to sign an acknowledgement that he/she has read the Code and will abide by it. Certain sections, such as those pertaining to the pre-clearance and reporting provisions, may be excepted.

4
 
ALPS Code of Ethics

Definitions

 

Access Person - “Access Person” shall mean any Director, Trustee, Officer, Partner, Investment Person, or Employee of ALPS Holdings Inc. or its affiliates, who:

 

· has access to non-public information regarding any Clients’ Securities Transactions, or non-public information regarding the portfolio holdings of any fund(s) of a Client or any ALPS fund(s) or fund(s) of an affiliate;
· is involved in making Securities Transactions recommendations to Clients, or has access to such recommendations that are non-public;
· in connection with his or her regular functions or duties, makes, participates in or obtains information regarding a Fund’s Securities Transactions or whose functions relate to the making of any recommendations with respect to a Fund Securities Transactions;
· obtains information regarding a Fund’s Securities Transactions or whose functions relate to the making of any recommendations with respect to a Fund’s Securities Transactions;
· any other person designated by the CCO or the Ethics Committee has having access to non-public information.

 

Account - “Account” shall mean any accounts of any employee which includes accounts of the employee’s immediate family members (any relative by blood or marriage) living in the employee’s household, and any account in which he or she has a direct or indirect beneficial interest, such as trusts and custodial accounts or other accounts in which the employee has a beneficial interest or exercises investment discretion.

 

Automatic Investment Plan - “Automatic Investment Plan” means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined scheduled and allocation. An Automatic Investment Plan includes a dividend reinvestment plan.

 

Beneficial Ownership - For purposes of the Code, “Beneficial Ownership” shall be interpreted in the same manner as it would be in Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (“Exchange Act”) in determining whether a person is subject to the provisions of Section 16 under the Exchange Act and the rules and regulations there under. Generally speaking, beneficial ownership encompasses those situations where the beneficial owner has the right to enjoy some economic benefits which are substantially equivalent to ownership regardless of who is the registered owner. This would include, but is not limited to:

 

· securities which a person holds for his or her own benefit either in bearer form, registered in his or her own name or otherwise, regardless of whether the securities are owned individually or jointly;
· securities held in the name of a member of his or her immediate family sharing the same household;
· securities held by a trustee, executor, administrator, custodian or broker;
· securities owned by a general partnership of which the person is a member or a limited partnership of which such person is a general partner;
· securities held by a corporation which can be regarded as a personal holding company of a person; and
· securities recently purchased by a person and awaiting transfer into his or her name.

 

Chief Compliance Officer (“CCO”) - The CCO shall be a person so designated by ALPS. Currently, the CCO is Bradley Swenson .

 

Client – The term “Client” shall include all closed-end mutual funds, open-end mutual funds, exchange traded funds (“ETFs”), unit investment trusts (“UITs”) of any investment company or any unregistered fund (e.g. hedge fund) who has a business relationship with ALPS and/or for whom ALPS performs a business service. Please refer to the Compliance Department Intranet Web Page for a current listing of Clients.

5
 
ALPS Code of Ethics

 

Client Mutual Funds – The term “Client Mutual Funds” as used within this Code, refers to any funds (open-end, closed-end, ETFs, UITs) that ALPS has a business relationship with and/or for whom ALPS performs a business service. Please refer to the Compliance Department Intranet Web Page for a current listing of Client Mutual Funds.

 

Covered Associate – “Covered Associate” shall mean any employee that is required to comply with the provisions under Rule 206(4)-5 of the Advisers Act as well as the Political Contributions Policy within ALPS Advisors, Inc.’s Compliance Program. A person is generally considered to be a covered associate for these purposes:

 

· if he or she is a President, managing director, VP in charge of a business unit and any other employee who performs a policy-making function of ALPS Advisors, Inc. (“AAI”);
· if he or she is an employee who solicits a government entity for AAI and such employee’s direct or indirect supervisor;
· a political action committee controlled by AAI or by any of AAI’s covered associates; or
· any other AAI employee so designated by the CCO.

 

Covered Securities – For purposes of the Code, “Covered Securities” will include all Securities (as defined below). In addition, “Covered Securities” will also include all Client Mutual Funds (as defined above) or any equivalents in local non-US jurisdictions, single stock futures and both the U.S. Securities and Exchange Commission (“SEC”), and Commodity Futures Trading Commission (“CFTC”) regulated futures.

 

For the purposes of the Code, non-Client open-end mutual funds will not be considered as “Covered Securities.”

 

Employee “Employee” shall include all employees of ALPS Holdings, Inc. and its affiliates, including directors, officers, partners of AAI (or other persons occupying similar status), any temporary worker, contractor, or independent contractor if so designated by the CCO or the Ethics Committee.

 

Fund Transactions – For purposes of the Code, “Fund Transactions” refers to any transactions of the Fund itself. It does not include “Securities Transactions” of the Fund (Securities Transactions are defined below).

 

Investment Persons – “Investment Person” shall mean any Access Person (within ALPS) who makes investment decisions for AAI or Clients, who provides investment related information or advice to portfolio managers, or helps to execute and/or implement a portfolio manager’s decisions. This typically includes for example, portfolio managers, portfolio assistants, traders, and securities analysts.

 

Registered Representative – The term “Registered Representative” as used within this Code, refers to a person who holds a securities license, and is actively registered, with FINRA.

 

Securities – For purposes of the Code, “Security” shall have the meaning set forth in Section 2(a)(36) of the 1940 Act. This definition of “Security” includes, but is not limited to: any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificates of interest or participation in any profit-sharing agreement, any put, call, straddle, option or privilege on any Security or on any group or index of Securities, or any put, call, straddle, option or privilege entered into on a national securities exchange relating to foreign currency. Further, for the purpose of the Code, “Security” shall include any commodity contracts as defined in Section 2(a)(1)(A) of the Commodity Exchange Act. This definition includes but is not limited to futures contracts on equity indices.

 

“Security” shall not include direct obligations of the government of the United States or any other sovereign country or supra-national agency, bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements, variable and fixed insurance products.

6
 
ALPS Code of Ethics

Securities Transactions – The term “Securities Transactions” as used within this Code typically refers to the purchase and/or sale of Securities, (as defined herein), by the Fund(s).

7
 
ALPS Code of Ethics

 

General Standards of Business Conduct

 

All employees are subject to, and expected to abide by the General Standards of Business Conduct. The following activities are prohibited. Persons who violate any prohibition may be required to disgorge any profits realized in connection with such violation to a charitable organization selected by the Ethics Committee and may be subject to other sanctions imposed by the Ethics Committee, as outlined in the Penalty Guidelines.

 

No employee may cause ALPS or a Client to take action, or to fail to take action, for personal benefit, rather than to benefit ALPS or such Client. For example, a person would violate this Code by causing a Client to purchase securities owned by the Access Person for the purpose of supporting or increasing the price of that security or by causing a Client to refrain from selling securities in an attempt to protect a personal investment, such as an option on that security.

 

Employees may not use knowledge of Fund Transactions or Securities Transactions made or contemplated by ALPS or Clients to profit, or cause others to profit, by the market effect of such transactions.

 

Employees have an obligation to safeguard material non-public information regarding ALPS and its Clients. Accordingly, employees may not disclose current Fund Transactions or Securities Transactions made or contemplated or any other non-public information to anyone outside of ALPS, without approval from the CCO or the Ethics Committee.

 

Employees may not engage in fraudulent conduct in connection with the purchase or sale of securities, including without limitation:

 

· Employing any device, scheme or artifice to defraud;
· Making any untrue statement of material fact or omitting to state to a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, misleading;
· Engaging in any act, practice or course of business which operates or would operate as a fraud or deceit;
· Engaging in any manipulative practice; and
· Investing in derivatives to evade the restrictions of this Code. Accordingly, individuals may not use derivatives to take positions in securities that would be otherwise prohibited by the Code if the positions were taken directly.

 

Conflicts of Interest

 

Employees may not act on behalf of ALPS in any transaction involving other persons or organizations with whom they may have any financial or any other connection without prior approval from the CCO. It is the responsibility of each employee to avoid participation in such situations or, if avoidance is not possible, to deal with any conflicts in a fair and ethical manner. If personal interest might affect an employee’s ability to represent ALPS as they would in an unbiased “arms length” transaction, the employee should remove them self from the transaction.

 

Protecting Confidential Information

 

Employees may receive information about ALPS, its Clients and other parties that, for various reasons, should be treated as confidential. All employees are expected to strictly comply with measures necessary to preserve the confidentiality of the information. Refer to ALPS Corporate Security Policy, Technology Resources Acceptable Use Policy, and Identity Theft Prevention Program for additional information.

8
 
ALPS Code of Ethics

Insider Trading and Tipping

 

The misuse of material nonpublic information, or inside information, constitutes a fraud under the securities laws of the United States and many other countries. Fraudulent misuse of inside information includes buying or selling securities while in possession of material nonpublic information for an employee or employee-related account, a proprietary account or for the account of any Client. Fraudulent misuse of inside information also includes disclosing or tipping such information to someone else who then trades on it, or using such information as a basis for recommending the purchase or sale of a security. Information is material when it has market significance and there is a likelihood that a reasonable investor would consider the information important in deciding whether to buy or sell the securities of the company involved. It is nonpublic if it has not been broadly disseminated.

 

In no event, may any employee who receives inside information use that information to trade or recommend securities affected by such information for personal benefit, the benefit of ALPS or any affiliate or the benefit of a third party. More specifically:

 

· No employee may, while in possession of inside information affecting a security, purchase or sell such security for the account of such employee, a Client or any other person or entity;
· No employee may disclose inside information to any person outside of ALPS. However, discussions with legal counsel and disclosures authorized by ALPS or the Client in furtherance of a related project or transaction are permitted; and
· No employee may recommend or direct the purchase from or sale of a security to anyone while in the possession of inside information, however obtained.

 

Excess Trading

 

While active personal trading may not in and of itself raise issues under applicable laws and regulations, we believe that a very high volume of personal trading can be time consuming and can increase the possibility of actual or apparent conflicts with portfolio transactions. Accordingly, an unusually high level of personal trading activity is strongly discouraged and may be monitored by the Compliance Department to the extent appropriate for the category of person, and a pattern of excessive trading may lead to the taking of appropriate action under the Code.

 

Front Running

 

Employees may not engage in “front running,” that is, the purchase or sale of securities for their own accounts on the basis of their knowledge of a Fund’s trading positions or plans. Trading activity will be monitored by Compliance Department to the extent appropriate for the category of person.

 

Gifts and Entertainment

 

All employees are required to follow the standards below regarding the receipt of or the giving of gifts and entertainment with respect to Clients:

 

· Employees should avoid any excessive or disreputable entertainment that would reflect unfavorably on ALPS or its Clients;
9
 
ALPS Code of Ethics
· Employees may not offer or accept cash or its equivalent as a gift;
· Employees may recognize that promotional gifts such as those that bear the logo of a company’s name or that routinely are made available to the general public are generally acceptable business gifts (and are not required to be reported unless the estimated value exceeds $250);
· Employees must fully, fairly and accurately account on the books and records of ALPS for any expense associated with a gift or entertainment;
· Employees may not accept any gift or bequest under a will or trust from a Client of ALPS; and
· Employees who are also registered with FINRA as a Registered Representative may have additional requirements and/or restrictions that are different than these policies. These polices do not override any requirements of FINRA.

 

For purposes of the Code, the gifts and entertainment limit will be $250.00 or the local equivalent. In order for an employee to accept a gift or entertainment above the limit, he/she must obtain written approval from the CCO. A copy of the Gift Disclosure Form may be found under Appendix A of this Code.

 

Service on a Board of Directors/Outside Business Activities

 

All employees are required to comply with the following provisions:

 

· Employees are to avoid any business activity, outside employment or professional service that competes with ALPS or conflicts with the interests of ALPS or its Clients.
· An employee is required to obtain the approval from the CCO before becoming a director, officer, partner or sole proprietor of a “for profit” organization. The request for approval should disclose the name of the organization, the nature of the business, whether any conflicts of interest could reasonably result from the association, whether fees, income or other compensation will be earned and whether there are any relationships between the organization and ALPS.
· Employees may not accept any personal fiduciary appointments such as administrator, executor or trustee other than those arising from family or other close personal relationships.
· Employees may not use ALPS resources, including computers, software, proprietary information, letterhead and other property in connection with any employment or other activity outside ALPS.
· Employees must disclose to the Compliance Department a conflict of interest or the appearance of a conflict with ALPS or Clients and discuss how to control the risk.

 

When completing the Annual Certification acknowledging receipt and understanding of the Code of Ethics, employees may be asked to disclose all outside affiliations. Any director/trustee positions with public companies or companies likely to become public are prohibited without prior written approval of the CCO.

 

Political Contributions

 

All political activities of employees must be kept separate from employment and expenses may not be charged to ALPS. Employees may not use ALPS facilities for political campaign purposes.

 

All employees who are deemed Covered Associates are required to comply with the provisions under Rule 206(4)-5 of the Advisers Act as well as the Political Contributions Policy within AAI’s Compliance Program. A person is generally considered to be a Covered Associate for these purposes:

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ALPS Code of Ethics
· if he or she is a President, managing director, VP in charge of a business unit and any other employee who performs a policy-making function of AAI;
· if he or she is an employee who solicits a government entity for AAI and such employee’s direct or indirect supervisor;
· a political action committee controlled by AAI or by any of AAI’s Covered Associates; or
· any other AAI employee so designated by the CCO.

 

Spouses and household family members of each Covered Associate are also subject to the provisions under Rule 206(4)-5.

 

Covered Associates are prohibited from making political contributions on behalf of AAI or individually in their capacity as a covered associate unless their contribution is within the de minimis exception. The de minimis exception permits contributions according to the following guidelines:

 

· Up to $350 per candidate per election cycle, to incumbents or candidates for whom they are eligible to vote
· Up to $150 per candidate per election cycle, to other incumbents or candidates

 

Covered Associates will be required to obtain a pre-approval for all political contributions, including but not limited to those noted above.

 

On a quarterly basis, the CCO or designee will request a reporting of political contributions during the previous quarter by all Covered Associates. The reporting should include contributions by spouses, household family members and all contributions by other parties (lawyers, affiliated companies, acquaintances, etc…) directed by the Covered Associate. The report should include the individual or election committee receiving the contribution, the office for which the individual is running, the current elected office held, if any, the dollar amount of the contribution or value of the donated item and whether or not the Covered Associate is eligible to vote for the candidate. The Covered Associate report must be completed within 30 days of each quarter end so that if an inadvertent political contribution (of $350.00 or less) has been made to an official for whom the Covered Associate is not entitled to vote, the contributor may be required to request the return of the contribution in order to avoid the two year compensation ban against AAI.

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ALPS Code of Ethics

 

Personal Securities Transactions – Restrictions & Reporting
Requirements

 

Access Persons

 

Trading Restrictions

 

Initial Public Offering (“IPO”) - Access Persons are prohibited from acquiring securities through an allocation by the underwriter of an initial public offering (“IPO”). There may be certain exceptions for a situation with prior written disclosure to and written approval from the CCO, could acquire shares in an IPO of his/her employer.

 

Limited or Private Offerings - Access Persons are prohibited from purchasing securities in a private offering unless the purchase is approved in writing by the CCO. Private placements include certain co-operative investments in real estate, commingled investment vehicles such as hedge funds, and investments in family owned businesses. Time-shares and cooperative investments in real estate used as a primary or secondary residence are not considered to be private placements.

 

Investment Clubs - Access Persons are prohibited from participating in investment clubs unless such membership is approved in writing by the CCO.

 

Client Mutual Funds - Access Persons investing in any “Client Mutual Funds” are subject to a sixty (60) calendar day holding period. The current list of Client Mutual Funds is maintained on the Compliance Department’s Intranet Web Page. Money market or short-term income funds are exempt from these requirements.

 

Excess Trading - While active personal trading may not in and of itself raise issues under applicable laws and regulations, we believe that a very high volume of personal trading can be time consuming and can increase the possibility of actual or apparent conflicts with portfolio transactions. Accordingly, an unusually high level of personal trading activity is strongly discouraged and may be monitored by the Compliance Department to the extent appropriate for the category of person, and a pattern of excessive trading may lead to the taking of appropriate action under the Code.

 

Front Running - Access Persons may not engage in “front running,” that is, the purchase or sale of securities for their own accounts on the basis of their knowledge of a Fund’s trading positions or plans.

 

Material Nonpublic Information - Access Persons possessing material nonpublic information regarding any issuer of securities must refrain from purchasing or selling securities of that issuer until the information becomes public or is no longer considered material.

 

Reporting Requirements

 

Access Persons are subject to the following Initial, Quarterly and Annual Reporting requirements unless specifically exempted by Rule 204A-1 or 17j-1.

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ALPS Code of Ethics

All Covered Securities are subject to the reporting requirements of the Code. The following securities are exempt from the reporting requirements:

 

· Direct Obligations of any sovereign government or supra-national agency;
· Bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements;
· Investments in dividend reinvestment plans;
· Variable and fixed insurance products; and
· Non-Client open-end mutual funds.

 

IRC 401(k) plans are also exempt from the reporting requirements except if held in self-directed brokerage accounts. Access Persons must report holdings of or transactions in Employee Stock Ownership Programs (“ESOPs”) or pension or retirement plans if they have a direct or indirect Beneficial Ownership interest in any Covered Securities held by the plan.

 

  a. Initial Holdings Reports for Access Persons
     
    Within ten (10) calendar days of being designated as, or determined to be, an Access Person (which may be upon hire), each such person must provide the Compliance Department with a statement of all Covered Securities holdings and brokerage accounts. More specifically, each such person must provide the following information:
     
  · The title, number of shares and principal amount of each Covered Security in which the employee had any direct or indirect Beneficial Ownership when the person became an employee;
  · The name of any broker, dealer or bank with whom the employee maintained an account in which any securities were held for the direct or indirect benefit of the employee as of the date the person became an employee; and
  · The date the report is submitted by the employee.
     
  b. Duplicate Statements
     
    Upon employment and for any accounts opened during employment, an Access Person must instruct his/her broker-dealer, trust account manager or other entity through which he/she has a securities trading account to send transaction activity information directly to the ALPS Compliance Department.  If an account is held with an entity that does not supply electronic feeds to ALPS, the Access Person must instruct the entity to supply periodic statements (no less frequent then quarterly).  Please refer to Appendix B for a list of firms that are currently set up to supply information electronically to ALPS.
     
    This applies to all accounts in which an Access Persons has direct or indirect Beneficial Ownership. A sample letter with the Compliance address is located under Appendix C of this Code.
     
  c. Quarterly Transaction Reports
     
    Each Access Person is required to submit quarterly his/her Quarterly Securities Report within thirty (30) calendar days of each calendar quarter end to the Compliance Department. If no transactions were executed or if transactions were exempt from reporting, this should be noted on the quarterly report.
     
    Specific information to be provided includes:
     
    1. With respect to any Securities Transaction* during the quarter in a Covered Security in which any employee had any direct or indirect beneficial ownership:
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ALPS Code of Ethics
· The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Security involved;
· The nature of the transaction, (i.e., purchase, sale, or other type of acquisition or disposition);
· The price of the Security at which the transaction was effected;
· The name of the broker, dealer or bank with or through which transaction was effected; and
· The date that the report is submitted by the employee.

 

* Transactions effected pursuant to an Automatic Investment Plan need not be reported in the Quarterly Securities Report but holdings in Covered Securities are subject to the annual holdings reporting requirement discussed below.

 

2. With respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person:

 

· The name of the broker, dealer, or bank with whom the employee established the account;
· The date the account was established; and
· The date the report is submitted by the employee.

 

  d. Annual Holdings Reports

 

Each Access Person is required to submit annually (i.e., once each and every calendar year) a list of applicable holdings, which is current as of a date no more than forty five (45) calendar days before the report is submitted. In addition, each employee is required to certify annually that he/she has reviewed and understands the provisions of the Code.

 

Specific information to be provided includes:

 

· The title, number of shares and principal amount of each Covered Security in which the employee had any direct or indirect beneficial ownership;
· The name of any broker, dealer or bank with whom the employee maintains an account in which any securities are held for the direct or indirect benefit of the employee; and
· The date that the report is submitted by the employee.
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ALPS Code of Ethics

 

Investment Persons

 

Trading Restrictions

 

Initial Public Offering (“IPO”) - Investment Persons are prohibited from acquiring securities through an allocation by the underwriter of an initial public offering (“IPO”). There may be certain exceptions for a situation with prior written disclosure to and written approval from the CCO, could acquire shares in an IPO of his/her employer.

 

Limited or Private Offerings - Investment Persons are prohibited from purchasing securities in a private offering unless the purchase is approved in writing by the CCO. Private placements include certain co-operative investments in real estate, commingled investment vehicles such as hedge funds, and investments in family owned businesses. Time-shares and cooperative investments in real estate used as a primary or secondary residence are not considered to be private placements.

 

Investment Clubs - Investment Persons are prohibited from participating in investment clubs unless such membership is approved in writing by the CCO.

 

Options - Investment Persons are prohibited from buying or selling options on Covered Securities. There is an exception for persons who have received options from a prior employer. In those instances, the exercising or selling of options received from the prior employer is subject to the pre-clearance and reporting requirements of this Code.

 

Client Mutual Funds - Investment Persons investing in “Client Mutual Funds” are subject to a sixty (60) calendar day holding period. The current list of Client Mutual Funds is maintained on the Compliance Department’s Intranet Web Page. These funds are also subject to reporting requirements and pre-clearance requirements of this Code. Pre-clearance requirements may be waived for purchases through an automated and systematic account such as a company 401k plan. Money market and short-term income funds are exempt from these requirements.

 

Short-Term Trading - Investment Persons are prohibited from the purchase and sale or sale and purchase of the same Covered Securities within thirty (30) calendar days. Client Mutual Funds are subject to a sixty (60) calendar day holding period.

 

Blackout Period – Blackout periods may be determined and established by the CCO. Any such periods will be communicated to all affected persons as necessary.

 

Excess Trading - While active personal trading may not in and of itself raise issues under applicable laws and regulations, we believe that a very high volume of personal trading can be time consuming and can increase the possibility of actual or apparent conflicts with portfolio transactions. Accordingly, an unusually high level of personal trading activity is strongly discouraged and may be monitored by the Compliance Department to the extent appropriate for the category of person, and a pattern of excessive trading may lead to the taking of appropriate action under the Code.

 

Front Running - Investment Persons may not engage in “front running,” that is, the purchase or sale of securities for their own accounts on the basis of their knowledge of a Fund’s trading positions or plans.

 

Material Nonpublic Information – Investment Persons possessing material nonpublic information regarding any issuer of securities must refrain from purchasing or selling securities of that issuer until the information becomes public or is no longer considered material.

 

Shorting of Securities - Investment Persons may not engage in the practice of short selling securities.

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ALPS Code of Ethics

 

Pre-Clearance

 

Unless the investment transaction is exempted from pre-clearance requirements all Investment Persons must request and receive pre-clearance prior to engaging in the purchase or sale of a Covered Security.

 

Pre-clearance approval is only good until midnight local time of the day after approval is obtained. “Good-till-Cancelled” orders are not permitted. “Limit” orders must receive pre-clearance every day the order is open.

 

As there could be many reasons for pre-clearance being granted or denied, Investment Persons should not infer from the pre-clearance response anything regarding the security for which pre-clearance was requested.

 

Exempted Securities/Transactions

 

Pre-clearance by Investment Persons is not required for the following transactions:

 

· Transactions that meet the de minimis exception (defined below);
· Transactions made in an account where the employee, pursuant to a valid legal instrument, has given full investment discretion to an unaffiliated/unrelated third party;
· Purchases or sales of direct obligations of the government of the United States or other sovereign government or supra-national agency, high quality short-term debt instruments, bankers acceptances, certificates of deposit (“CDs”), commercial paper, repurchase agreements.
· Automatic investments in programs where the investment decisions are non-discretionary after the initial selections by the account owner (although the initial selection requires pre-clearance);
· Investments in dividend reinvestment plans;
· Exercised rights, warrants or tender offers;
· General obligation municipal bonds, transactions in Employee Stock Ownership Programs (“ESOPs), and Share Builder and similar services;
· Securities received via a gift or inheritance; and
· Non-Client open-end mutual funds.

 

De Minimis Exception

 

A “de minimis transaction” is a personal trade that meets the following conditions: (a) less than 1,000 shares and (b) is made with no knowledge that a Client Mutual Fund have purchased or sold the Covered Security, or the Client Mutual Fund or its investment adviser considered purchasing or selling the Covered Security. Transactions effected pursuant to the de minimis exception remain subject to reporting requirements of the Code.

 

Serving on a Board of Directors

 

Investment Personnel may not serve on the board of directors of a publicly traded company without prior written authorization from the Ethics Committee. No such service shall be approved without a finding by the Ethics Committee that the board service would be consistent with the interests of Clients. If board service is authorized by the Ethics Committee, in some instances, it may be required that the Investment Personnel serving as a Director may be isolated from making investment decisions with respect to the company involved through the use of “Chinese Walls” or other procedures.

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ALPS Code of Ethics

 

Reporting Requirements

 

Investment Persons are subject to the following Initial, Quarterly and Annual Reporting requirements unless specifically exempted by Rule 204A-1 or 17j-1.

 

All Covered Securities are subject to the reporting requirements of the Code. The following securities are exempt from the reporting requirements:

 

· Direct Obligations of any sovereign government or supra-national agency;
· Bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements;
· Investments in dividend reinvestment plans;
· Variable and fixed insurance products; and
· Non-Client open-end mutual funds.

 

IRC 401(k) plans are also exempt from the reporting requirements except if held in self-directed brokerage accounts. Investment Persons must report holdings of or transactions in ESOPs or pension or retirement plans if they have a direct or indirect Beneficial Ownership interest in any Covered Securities held by the plan.

 

Additionally, securities received via a gift or inheritance are required to be reported, but are not subject to the pre-clearance requirements of the Code.

 

a. Initial Holdings Reports for Investment

 

Within ten (10) calendar days of being designated as, or determined to be, an Investment Person (which may be upon hire), each such person must provide the Compliance Department with a statement of all Covered Securities holdings and brokerage accounts. More specifically, each such person must provide the following information:

 

· The title, number of shares and principal amount of each Covered Security in which the employee had any direct or indirect Beneficial Ownership when the person became an employee;
· The name of any broker, dealer or bank with whom the employee maintained an account in which any securities were held for the direct or indirect benefit of the employee as of the date the person became an employee; and
· The date the report is submitted by the employee.

 

b. Duplicate Statements

 

Upon ALPS employment and for any accounts opened during employment, an Investment Person must instruct his/her broker-dealer, trust account manager or other entity through which he/she has a securities trading account to send transaction activity information directly to our Compliance Department. If an account is held with an entity that does not supply electronic feeds to ALPS, the Access Person must instruct the entity to supply periodic statements (no less frequent then quarterly) to the Compliance Department. Please refer to Appendix B for a list of firms that are currently set up to supply information electronically to ALPS.

 

This applies to all accounts in which an employee has direct or indirect Beneficial Ownership. A sample letter with the Compliance address is located under Appendix C of this Code.

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ALPS Code of Ethics

 

c. Quarterly Transaction Reports

 

Each Investment Person is required to submit quarterly his/her Quarterly Securities Report within thirty (30) calendar days of each calendar quarter end to the Compliance Department. If no transactions were executed or if transactions were exempt from reporting, this should be noted on the quarterly report.

 

Specific information to be provided includes:

 

1. With respect to any Securities Transaction* during the quarter in a Covered Security in which any employee had any direct or indirect beneficial ownership:

 

· The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Security involved;
· The nature of the transaction, (i.e., purchase, sale, or other type of acquisition or disposition);
· The price of the Security at which the transaction was effected;
· The name of the broker, dealer or bank with or through which transaction was effected; and
· The date that the report is submitted by the employee.

 

*Transactions effected pursuant to an Automatic Investment Plan need not be reported in the Quarterly Securities Report but holdings in Covered Securities are subject to the annual holdings reporting requirement discussed below.

 

2. With respect to any account established by the employee in which any securities were held during the quarter for the direct or indirect benefit of the employee:

 

· The name of the broker, dealer, or bank with whom the employee established the account;
· The date the account was established; and
· The date the report is submitted by the employee.

 

d. Annual Holdings Reports

 

Each Investment Person is required to submit annually (i.e., once each and every calendar year) a list of applicable holdings, which is current as of a date no more than forty five (45) calendar days before the report is submitted. In addition, each employee is required to certify annually that he/she has reviewed and understands the provisions of the Code.

 

Specific information to be provided includes:

 

· The title, number of shares and principal amount of each Covered Security in which the employee had any direct or indirect beneficial ownership;
· The name of any broker, dealer or bank with whom the employee maintains an account in which any securities are held for the direct or indirect benefit of the employee; and
· The date that the report is submitted by the employee.
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ALPS Code of Ethics

 

Sanctions

 

Upon discovering a violation of this Code by an employee or his/her family member or related party, the CCO may impose such sanctions as he/she deems appropriate, including, among other things, the following:

 

· A letter of censure to the violator;
· A monetary fine levied on the violator;
· Suspension of the employment of the violator;
· Termination of the employment of the violator;
· Civil referral to the SEC or other civil regulatory authorities determined by ALPS; or
· Criminal referral – determined by ALPS.

 

Examples of possible sanctions include, but are not limited to:

 

· A verbal warning, warning letter, with a copy to the employee’s direct report, for a first time pre-clearance or reporting violation;
· Monetary fines and disgorgement of profits when an employee profits on the purchase of a security he/she should not have purchased or redeemed; and
· Recommendation for suspension or termination if an employee is a serial violator of the Code.

 

Appeals Process

 

If an employee decides to appeal a sanction, he/she should contact the CCO who will refer the issue to the Ethics Committee for their review and consideration.

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ALPS Code of Ethics

 

Compliance and Supervisory Procedures

 

The CCO or his designee is responsible for implementing supervisory and compliance review procedures. Supervisory procedures can be divided into two classifications: prevention of violations and detection of violations. Compliance review procedures include preparation of special and annual reports, record maintenance and review and confidentiality preservation.

 

Prevention of Violations

 

To prevent violations of the Rules, the CCO or his/her designee should, in addition to enforcing the procedures outlined in the Rules:

 

1. Review and update the procedures as necessary, at least once annually, including but not limited to a review of the Code by the CCO, the Ethics Committee and/or counsel;
2. Answer questions regarding the Code;
3. Request from all persons upon commencement of services, and annually thereafter, any applicable forms and reports as required by the procedures;
4. Identify all Access Persons and Investment Persons, and notify them of their responsibilities and reporting requirements;
5. With such assistance from the Human Resources Department as may be appropriate, maintain a continuing education program consisting of the following:

 

· Orienting employees who are new to ALPS and the Rules; and
· Further educating employees by distributing memos or other materials that maybe issued by outside organizations such as the Investment Company Institute which discuss the issue of insider trading and other issues raised by the Rules.

 

Detection of Violations

 

To detect violations of these procedures, the CCO, or designee, should, in addition to enforcing the policies, implement procedures to review holding and transaction reports, forms and statements relative to applicable restrictions, as provided under the Code.

 

Compliance Procedures

 

Reports of Potential Deviations or Violations

 

Upon learning of a potential deviation from or violation of the policies, the CCO shall either present the information at the next regular meeting of the Ethics Committee or conduct a special meeting. The Ethics Committee shall thereafter take such action as it deems appropriate (see Penalty Guidelines).

 

Annual Reports

 

The CCO shall prepare a written report to the Ethics Committee and Senior Management at least annually. The written report shall include any certification required by Rule 17j-1. This report shall set forth the following information:

 

· Copies of the Code, as revised, including a summary of any changes made since the last report;
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ALPS Code of Ethics
· Identification of any material issues including material violations requiring significant remedial action since the last report;
· Identification of any material conflicts arising since the last report; and
· Recommendations, if any, regarding changes in existing restrictions or procedures based upon experience under these Rules, e volving industry practices, or developments in applicable laws or regulations.

 

Records

 

Compliance Department shall maintain the following records:

 

· A copy of this Code and any amendment thereof which is or at any time within the past five years has been in effect;
· A record of any violation of this Code, or any amendment thereof, and any action taken as a result of such violation;
· Files for personal securities account statements, all reports and other forms submitted by employees pursuant to these Rules and any other pertinent information;
· A list of all persons who are, or have been, required to submit reports pursuant to this Code;
· A list of persons who are, or within the last five years have been responsible for, reviewing transaction and holdings reports; and
· A copy of each report produced pursuant to this Code.

 

Inspection

 

The records and reports maintained by the Compliance Department pursuant to the Rules shall at all times be available for inspection, without prior notice, by any member of the Ethics Committee.

 

Confidentiality

 

All procedures, reports and records monitored, prepared or maintained pursuant to this Code shall be considered confidential and proprietary to ALPS and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than to members of the Ethics Committee or the Compliance Department, as requested.

 

The Ethics Committee

 

The purpose of this section is to describe the Ethics Committee. The Ethics Committee was created to provide an effective mechanism for monitoring compliance with the standards and procedures contained in the Rules and to take appropriate action at such times as violations or potential violations are discovered.

 

Membership of the Ethics Committee

 

The Committee consists of Bradley Swenson, Chief Compliance Officer, Allyson Wolfram, Human Resources Director, Jeremy May, President of ALPS Fund Services, Inc. and Tom Carter, President of ALPS Advisors, Inc., ALPS Portfolio Solutions, Inc. and ALPS Distributors, Inc.

 

The Chief Compliance Officer currently serves as the Chairman of the Committee. The composition of the Committee may be changed from time-to-time and the Committee may seek input of other employees concerning matters related to this Code as they deem appropriate.

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ALPS Code of Ethics

 

Committee Meetings

 

The Committee shall meet approximately every six months, or as often as necessary, to review operation of this Code and to consider technical deviations from operational procedures, inadvertent oversights or any other potential violation of the Rules. Deviations alternatively may be addressed by including them in the employee’s personnel records maintained by ALPS. Committee meetings are primarily intended for consideration of the general operation of the compliance procedures as well as for substantive or serious departures from the standards and procedures in the Rules.

 

Other persons may attend a Committee meeting, at the discretion of the Committee, as the Committee shall deem appropriate. Any individual whose conduct has given rise to the meeting may also be called upon, but shall not have the right, to appear before the Committee. It is not required that minutes of Committee meetings be maintained; in lieu of minutes the Committee may issue a report describing any action taken. The report shall be included in the confidential file maintained by the CCO with respect to the particular employee whose conduct has been the subject of the meeting.

 

If a Committee member has committed, or is the subject of, a violation, he or she shall not be considered a voting member of the Committee or be involved in the review or decisions of the Committee with respect to his or her activities, or sanctions.

 

Special Discretion

 

The Committee shall have the authority by unanimous action to exempt any person or class of persons or transaction or class of transactions from all or a portion of the Rules, provided that:

 

· The Committee determines, on advice of counsel, that the particular application of all or a portion of the Code is not legally required;
· The Committee determines that the likelihood of any abuse of the Code by such exempted person(s) or as a result of such exempted transaction is remote;
· The terms or conditions upon which any such exemption is granted is evidenced in writing; and
· The exempted person(s) agrees to execute and deliver to the CCO, at least annually, a signed Acknowledgment Form, which Acknowledgment shall, by operation of this provision, describe such exemptions and the terms and conditions upon which it was granted.

 

The Committee shall also have the authority by unanimous action to impose such additional requirements or restrictions as it, in its sole discretion, determines appropriate or necessary, as outlined in the Penalty Guidelines.

 

Any exemption, and any additional requirement or restriction, may be withdrawn by the Committee at any time (such withdrawal action is not required to be unanimous).

22
 
ALPS Code of Ethics

 

Reporting Forms

23
 
ALPS Code of Ethics

 

Appendix A– Gift Disclosure Form

 

ALPS Gift Disclosure Form
Name of ALPS Employee  
Gift Description  
Received or Given  
From or To Whom  
Estimated Value of Gift  
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ALPS Code of Ethics

 

Appendix B – Broker/Dealers with Electronic Feeds

 

· Charles Schwab

 

· Scottrade

 

· TD Ameritrade

 

· E- Trade

 

· Merrill Lynch

 

· Morgan Stanley

 

· Fidelity

 

· Firm H - TBD
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ALPS Code of Ethics

 

Appendix C – Broker/Dealer Duplicate Statement/Confirmation Request Letter

 

Date:

 

Your Broker

Street Address

City, State Zip Code:

 

Re: Your Name
   
  Your account number or S.S. number

 

Dear Sir or Madam:

 

Please be advised that I’m an employee of ALPS Holdings, Inc. (“ALPS”). Pursuant to ALPS Code of Ethics, I am requesting that a duplicate copy of my account statement(s) be sent to the attention of:

 

ALPS Holdings, Inc.

Attn: Compliance Department

P.O. Box 328

Denver, Colorado 80201

 

Thank you for your cooperation.

 

Sincerely,

 

Your Name

26

Exhibit 99.(q)

 

ETFS TRUST

 

FORM OF POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee of ETFS Trust (the “Trust”), a statutory trust organized under the laws of the State of Delaware, hereby constitutes and appoints Benoit Autier and Adam Rezak, and each of them singly, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, to sign for him and in his name, place and stead, and in the capacity indicated below, to sign any and all Registration Statements and all amendments thereto relating to the offering of the Trust’s shares under the provisions of the Investment Company Act of 1940, as amended and/or the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as of the date set forth below.

 

  /s/ Joe Roxburgh  
  Name: Joe Roxburgh  
  Title: Treasurer  
  Date: December 2, 2014  
 

ETFS TRUST

 

FORM OF POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee of ETFS Trust (the “Trust”), a statutory trust organized under the laws of the State of Delaware, hereby constitutes and appoints Benoit Autier and Adam Rezak, and each of them singly, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, to sign for him and in his name, place and stead, and in the capacity indicated below, to sign any and all Registration Statements and all amendments thereto relating to the offering of the Trust’s shares under the provisions of the Investment Company Act of 1940, as amended and/or the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as of the date set forth below.

 

  /s/ Stephen O’Grady  
  Name: Stephen O’Grady  
  Title: Trustee  
  Date: December 2, 2014  
 

ETFS TRUST

 

FORM OF POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee of ETFS Trust (the “Trust”), a statutory trust organized under the laws of the State of Delaware, hereby constitutes and appoints Benoit Autier and Adam Rezak, and each of them singly, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, to sign for him and in his name, place and stead, and in the capacity indicated below, to sign any and all Registration Statements and all amendments thereto relating to the offering of the Trust’s shares under the provisions of the Investment Company Act of 1940, as amended and/or the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as of the date set forth below.

 

  /s/ M. William Thomas  
  Name: M. William Thomas  
  Title: Trustee  
  Date: December 2, 2014  
 

ETFS TRUST

 

FORM OF POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee of ETFS Trust (the “Trust”), a statutory trust organized under the laws of the State of Delaware, hereby constitutes and appoints Benoit Autier and Adam Rezak, and each of them singly, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, to sign for him and in his name, place and stead, and in the capacity indicated below, to sign any and all Registration Statements and all amendments thereto relating to the offering of the Trust’s shares under the provisions of the Investment Company Act of 1940, as amended and/or the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as of the date set forth below.

 

  /s/ Graham Tuckwell  
  Name: Graham Tuckwell  
  Title: Trustee  
  Date: December 2, 2014