AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 2009
File No. 333-156529
File No.: 811-22263
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
þ
PRE-EFFECTIVE AMENDMENT NO. 1
þ
POST-EFFECTIVE AMENDMENT NO. __
o
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
þ
AMENDMENT NO. 1
þ
FAITHSHARES TRUST
(Exact Name of Registrant as Specified in Charter)
3555 Northwest 58th Street
Suite 410
Okalahoma City, Oklahoma 73112
(Address of Principal Executive Offices, Zip Code)
(405) 813-6338
(Registrants Telephone Number, including Area Code )
Thompson S. Phillips, Jr.
J. Garrett Stevens
FaithShares Trust
3555 Northwest 58th Street
Suite 410
Oklahoma City, Oklahoma 73112
(Name and Address of Agent for Service)
Copy to:
W. John McGuire
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave, NW
Washington, DC 20004
It is proposed that this filing will become effective (check appropriate box):
o
Immediately upon filing pursuant to paragraph (b)
o
On (date) pursuant to paragraph (b)
o
60 days after filing pursuant to paragraph (a)(1)
o
On (date) pursuant to paragraph (a)(1)
o
75 days after filing pursuant to paragraph (a)(2)
o
On (date) pursuant to paragraph (a)(2) of Rule 485.
þ
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.
FaithShares Trust
Prospectus
[
2009]
FaithShares Baptist Values Fund [ FZB: NYSE Arca]
FaithShares Catholic Values Fund [ FCV: NYSE Arca]
FaithShares Christian Values Fund [ FOC: NYSE Arca]
FaithShares Lutheran Values Fund [ FKL: NYSE Arca]
FaithShares Methodist Values Fund [ FMV: NYSE Arca]
FaithShares Trust (the Trust) is a registered investment company offering shares
of exchange traded funds (the Funds) that will be listed, subject to notice of issuance, on the
NYSE Arca, Inc. (NYSE Arca). Fund shares are not individually redeemable by the Funds but will
trade on the NYSE Arca in individual share lots.
Neither the Securities and Exchange Commission nor any state securities commissions has approved or
disapproved of these securities or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
The information in this prospectus is not complete and may be changed. We may not sell securities
until the registration statement filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
About This Prospectus
The FaithShares Baptist Values Fund, the FaithShares Catholic Values Fund, the FaithShares
Christian Values Fund, the FaithShares Lutheran Values Fund and the FaithShares Methodist Values
Fund (each a Fund and collectively, the Funds) are each a separate series of FaithShares Trust
(the Trust). This prospectus gives you important information on the Funds that you should know
before investing. Please read this prospectus and keep it for future reference.
This prospectus has been arranged into different sections so that you can easily review this
important information. For detailed information about each Fund, please see:
2
FaithShares Baptist Values Fund
(the Fund)
Investment Objective
The Funds investment objective is to track the performance, before fees and expenses, of the
FaithShares Baptist Values Index, a custom index by FTSE/KLD. The Fund may change its investment
objective without shareholder approval.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
|
|
|
|
|
Annual Fund Operating Expenses (expenses that you pay each year as a
|
|
|
|
|
percentage of the value of your investment)
|
|
|
|
|
Management Fee
|
|
|
0.87
|
%
|
Distribution and Service (12b-1) Fees
|
|
|
0.00
|
%
|
Other Expenses
1
|
|
|
0.00
|
%
|
Total Annual Fund Operating Expenses
|
|
|
0.87
|
%
|
|
|
|
1
|
|
Other Expenses are based on estimated amounts for the current fiscal year.
|
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other exchange traded funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell 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 Funds operating expenses remain the same. This Example
does not include the brokerage commissions that investors may pay on their purchases and sales of
Fund shares. Although your actual costs may be higher or lower, based on these assumptions your
cost would be:
|
|
|
1 year
|
|
3 years
|
$91.35
|
|
$282.92
|
Portfolio Turnover
The Fund is new, therefore, it does not have a historical portfolio turnover rate.
Principal Investment Strategies
The Fund employs a passive management investment strategy designed to track the total return
performance of the FaithShares Baptist Values Index, a custom index by FTSE/KLD (the BV Index or
Index). The BV Index is designed to measure the performance of U.S. large capitalization
companies that are in accordance with the guidelines for social screening
3
recommended by the General Board of American Baptist Churches. The BV Index has a zero-tolerance
policy for companies involved in gambling, defense, tobacco, alcohol, pornography, and/or abortion.
As of June 18, 2009, the BV Index was comprised of 100 equally weighted securities.
FaithShares Advisors, LLC (the Adviser) will normally invest at least 80% of the Funds total
assets in securities that comprise the BV Index or in securities that the Adviser has determined
have economic characteristics that are substantially identical to the economic characteristics of
the securities that comprise the BV Index. This is a non-fundamental policy that may be changed
upon 60 days prior written notice to shareholders. The Fund generally will invest in all of the
securities comprising the BV Index in proportion to the weightings in the BV Index although, under
various circumstances where it may not be possible or practicable to purchase all of the securities
in the BV Index, the Adviser may utilize a sampling methodology. Sampling means that the Adviser
uses quantitative analysis to select securities that represent a sample of the securities in the BV
Index that have a similar investment profile as the BV Index in terms of key risk factors,
performance attributes and other characteristics. The Fund may also invest its other assets in
securities not included in the BV Index, but which the Adviser believes will help the Fund track
the BV Index, as well as in certain futures, options, swap contracts and other derivatives, cash
and cash equivalents or money market instruments, such as repurchase agreements and money market
funds. The Fund will generally concentrate its investments (
i.e.,
hold 25% or more of its total
assets) in a particular industry or sector to approximately the same extent that the BV Index is so
concentrated.
Principal Risks
As with all exchange traded funds, a shareholder is subject to the risk that his or her investment
could lose money. The principal risks affecting shareholders investments in the Fund are set
forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by
the FDIC or any government agency.
Index Risk
: Unlike many investment companies, the Fund is not actively managed. Therefore, the
Fund would not sell an equity security because the securitys issuer was in financial trouble
unless that security is removed from the Index. The Fund may not perform the same as its Index due
to tracking error.
Market Risk
: An investment in the Fund involves risks similar to those of investing in any fund of
equity securities, such as market fluctuations caused by such factors as economic and political
developments, changes in interest rates and perceived trends in stock prices. You should anticipate
that the value of the shares will decline, more or less, in correlation with any decline in value
of the Index. The values of equity securities could decline generally or could underperform other
investments.
Large Cap Risk
: Returns on investments in stocks of large companies could trail the returns on
investments in stocks of smaller and mid-sized companies.
4
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
that the Advisers security selection process, which is subject to a number of constraints, may not
produce the intended results.
Non-Diversified Risk
: The Fund is non-diversified and, as a result, may have greater exposure to
volatility than other funds. Because a non-diversified fund may invest a larger percentage of its
assets in securities of a single issuer than that of a diversified fund, the performance of that
issuer can have a substantial impact on the Funds share price. The Fund intends to maintain the
required level of diversification so as to qualify as a regulated investment company or RIC for
purposes of the Internal Revenue Code of 1986, as amended (the Code). Compliance with
diversification requirements of the Code could limit the investment flexibility of the Fund.
Concentration Risk
: The Funds assets will generally be concentrated in an industry or group of
industries to the extent that the Index concentrates in a particular industry or group of
industries. By concentrating its assets in a single industry or group of industries, the Fund is
subject to the risk that economic, political or other conditions that have a negative effect on
that industry or group of industries will negatively impact the Fund to a greater extent than if
the Funds assets were invested in a wider variety of industries.
Derivatives Risk
: A derivative is a financial contract, the value of which depends on, or is
derived from, the value of a financial asset (such as a stock, bond or currency), a physical asset
(such as gold) or a market index (such as the S&P 500 Index). The Fund may invest in stock index
futures contracts and other derivatives. Compared to conventional securities, derivatives can be
more sensitive to changes in interest rates or to sudden fluctuations in market prices and thus the
Funds losses may be greater if it invests in derivatives than if it invests only in conventional
securities.
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Index for a number of reasons. For example, the Fund incurs a number of operating
expenses not applicable to the Index, and also incurs costs in buying and selling securities,
especially when rebalancing the Funds securities holdings to reflect changes in the composition of
the Index, or representative sample of the Index. The Fund may not be fully invested at times,
either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet
redemptions and pay expenses. If the Fund utilizes a sampling approach, and/or invests in futures
or other derivative positions, its return may not correlate as well with the return on the Index,
as would be the case if the Fund purchased all of the securities in the Index.
Performance Information
The Fund has not completed a full calendar year of operations and therefore has no performance
information.
5
Investment Adviser
FaithShares Advisors, LLC serves as the investment adviser to the Fund.
Portfolio Managers
J. Garrett Stevens, CEO, and Thompson S. Phillips, Jr., President, are the Funds portfolio
managers and have managed the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page ___of the prospectus.
6
FaithShares Catholic Values Fund
(the Fund)
Investment Objective
The Funds investment objective is to track the performance, before fees and expenses, of the
FaithShares Catholic Values Index, a custom index by FTSE/KLD. The Fund may change its investment
objective without shareholder approval.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
|
|
|
|
|
Annual Fund Operating Expenses (expenses that you pay each year as a
|
|
|
|
|
percentage of the value of your investment)
|
|
|
|
|
Management Fee
|
|
|
0.87
|
%
|
Distribution and Service (12b-1) Fees
|
|
|
0.00
|
%
|
Other Expenses
1
|
|
|
0.00
|
%
|
Total Annual Fund Operating Expenses
|
|
|
0.87
|
%
|
|
|
|
1
|
|
Other Expenses are based on estimated amounts for the current fiscal year.
|
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other exchange traded funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell 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 Funds operating expenses remain the same. This Example
does not include the brokerage commissions that investors may pay on their purchases and sales of
Fund shares. Although your actual costs may be higher or lower, based on these assumptions your
cost would be:
|
|
|
|
|
1 year
|
|
3 years
|
$91.35
|
|
$
|
282.92
|
|
Portfolio Turnover
The Fund is new, therefore, it does not have a historical portfolio turnover rate.
Principal Investment Strategies
The Fund employs a passive management investment strategy designed to track the total return
performance of the FaithShares Catholic Values Index, a custom index by FTSE/KLD (the CV Index or
Index). The CV Index is designed to measure the performance of U.S. large capitalization
companies that operate in accordance with the U.S. Conference of Catholic
7
Bishops Socially Responsible Investment Guidelines. Companies considered for inclusion in the CV
Index are evaluated based on their Catholic Values, which cover the following areas: respecting
human life; promoting human dignity; reducing arms production; pursuing economic justice;
protecting the environment; and encouraging corporate responsibility. As of June 18, 2009, the CV
Index was comprised of 100 equally weighted securities.
FaithShares Advisors, LLC (the Adviser) will normally invest at least 80% of the Funds total
assets in securities that comprise the CV Index or in securities that the Adviser has determined
have economic characteristics that are substantially identical to the economic characteristics of
the securities that comprise the CV Index. This is a non-fundamental policy that may be changed
upon 60 days prior written notice to shareholders. The Fund generally will invest in all of the
securities comprising the CV Index in proportion to the weightings in the CV Index although, under
various circumstances where it may not be possible or practicable to purchase all of the securities
in the CV Index, the Adviser may utilize a sampling methodology. Sampling means that the Adviser
uses quantitative analysis to select securities that represent a sample of the securities in the CV
Index that have a similar investment profile as the CV Index in terms of key risk factors,
performance attributes and other characteristics. The Fund may also invest its other assets in
securities not included in the CV Index, but which the Adviser believes will help the Fund track
the CV Index, as well as in certain futures, options, swap contracts and other derivatives, cash
and cash equivalents or money market instruments, such as repurchase agreements and money market
funds. The Fund will generally concentrate its investments (
i.e.,
hold 25% or more of its total
assets) in a particular industry or sector to approximately the same extent that the CV Index is so
concentrated.
Principal Risks
As with all exchange traded funds, a shareholder is subject to the risk that his or her investment
could lose money. The principal risks affecting shareholders investments in the Fund are set
forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by
the FDIC or any government agency.
Index Risk
: Unlike many investment companies, the Fund is not actively managed. Therefore, the
Fund would not sell an equity security because the securitys issuer was in financial trouble
unless that security is removed from the Index. The Fund may not perform the same as its Index due
to tracking error.
Market Risk
: An investment in the Fund involves risks similar to those of investing in any fund of
equity securities, such as market fluctuations caused by such factors as economic and political
developments, changes in interest rates and perceived trends in stock prices. You should anticipate
that the value of the shares will decline, more or less, in correlation with any decline in value
of the Index. The values of equity securities could decline generally or could underperform other
investments.
Large Cap Risk
: Returns on investments in stocks of large companies could trail the returns on
investments in stocks of smaller and mid-sized companies.
8
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
that the Advisers security selection process, which is subject to a number of constraints, may not
produce the intended results.
Non-Diversified Risk
: The Fund is non-diversified and, as a result, may have greater exposure to
volatility than other funds. Because a non-diversified fund may invest a larger percentage of its
assets in securities of a single issuer than that of a diversified fund, the performance of that
issuer can have a substantial impact on the Funds share price. The Fund intends to maintain the
required level of diversification so as to qualify as a regulated investment company or RIC for
purposes of the Internal Revenue Code of 1986, as amended (the Code). Compliance with
diversification requirements of the Code could limit the investment flexibility of the Fund.
Concentration Risk
: The Funds assets will generally be concentrated in an industry or group of
industries to the extent that the Index concentrates in a particular industry or group of
industries. By concentrating its assets in a single industry or group of industries, the Fund is
subject to the risk that economic, political or other conditions that have a negative effect on
that industry or group of industries will negatively impact the Fund to a greater extent than if
the Funds assets were invested in a wider variety of industries.
Derivatives Risk
: A derivative is a financial contract, the value of which depends on, or is
derived from, the value of a financial asset (such as a stock, bond or currency), a physical asset
(such as gold) or a market index (such as the S&P 500 Index). The Fund may invest in stock index
futures contracts and other derivatives. Compared to conventional securities, derivatives can be
more sensitive to changes in interest rates or to sudden fluctuations in market prices and thus the
Funds losses may be greater if it invests in derivatives than if it invests only in conventional
securities.
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Index for a number of reasons. For example, the Fund incurs a number of operating
expenses not applicable to the Index, and also incurs costs in buying and selling securities,
especially when rebalancing the Funds securities holdings to reflect changes in the composition of
the Index, or representative sample of the Index. The Fund may not be fully invested at times,
either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet
redemptions and pay expenses. If the Fund utilizes a sampling approach, and/or invests in futures
or other derivative positions, its return may not correlate as well with the return on the Index,
as would be the case if the Fund purchased all of the securities in the Index.
Performance Information
The Fund has not completed a full calendar year of operations and therefore has no performance
information.
Investment Adviser
FaithShares Advisors, LLC serves as the investment adviser to the Fund.
9
Portfolio Managers
J. Garrett Stevens, CEO, and Thompson S. Phillips, Jr., President, are the Funds portfolio
managers and have managed the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page ___of the prospectus.
10
FaithShares Christian Values Fund
(the Fund)
Investment Objective
The Funds investment objective is to track the performance, before fees and expenses, of the
FaithShares Christian Values Index, a custom index by FTSE/KLD. The Fund may change its investment
objective without shareholder approval.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
|
|
|
|
|
Annual Fund Operating Expenses (expenses that you pay each year as a
|
|
|
|
|
percentage of the value of your investment)
|
|
|
|
|
Management Fee
|
|
|
0.87
|
%
|
Distribution and Service (12b-1) Fees
|
|
|
0.00
|
%
|
Other Expenses
1
|
|
|
0.00
|
%
|
Total Annual Fund Operating Expenses
|
|
|
0.87
|
%
|
|
|
|
1
|
|
Other Expenses are based on estimated amounts for the current fiscal year.
|
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other exchange traded funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell 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 Funds operating expenses remain the same. This Example
does not include the brokerage commissions that investors may pay on their purchases and sales of
Fund shares. Although your actual costs may be higher or lower, based on these assumptions your
cost would be:
|
|
|
|
|
1 year
|
|
3 years
|
$91.35
|
|
$
|
282.92
|
|
Portfolio Turnover
The Fund is new, therefore, it does not have a historical portfolio turnover rate.
Principal Investment Strategies
The Fund employs a passive management investment strategy designed to track the total return
performance of the FaithShares Christian Values Index, a custom index by FTSE/KLD (the CHV Index
or Index). The CHV Index is designed to measure the performance of U.S. large capitalization
companies screened based on the best practices of faith-based investing
11
drawn from the guidelines of various Christian denominations. The CHV Index excludes companies
involved in gambling, anti-personnel landmines, tobacco, alcohol, pornography, abortion, and/or
stem cells. As of June 18, 2009, the CHV Index was comprised of 100 equally weighted securities.
FaithShares Advisors, LLC (the Adviser) will normally invest at least 80% of the Funds total
assets in securities that comprise the CHV Index or in securities that the Adviser has determined
have economic characteristics that are substantially identical to the economic characteristics of
the securities that comprise the CHV Index. This is a non-fundamental policy that may be changed
upon 60 days prior written notice to shareholders. The Fund generally will invest in all of the
securities comprising the CHV Index in proportion to the weightings in the CHV Index although,
under various circumstances where it may not be possible or practicable to purchase all of the
securities in the CHV Index, the Adviser may utilize a sampling methodology. Sampling means that
the Adviser uses quantitative analysis to select securities that represent a sample of the
securities in the CHV Index that have a similar investment profile as the CHV Index in terms of key
risk factors, performance attributes and other characteristics. The Fund may also invest its other
assets in securities not included in the CHV Index, but which the Adviser believes will help the
Fund track the CHV Index, as well as in certain futures, options, swap contracts and other
derivatives, cash and cash equivalents or money market instruments, such as repurchase agreements
and money market funds. The Fund will generally concentrate its investments (
i.e.,
hold 25% or more
of its total assets) in a particular industry or sector to approximately the same extent that the
CHV Index is so concentrated.
Principal Risks
As with all exchange traded funds, a shareholder is subject to the risk that his or her investment
could lose money. The principal risks affecting shareholders investments in the Fund are set
forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by
the FDIC or any government agency.
Index Risk
: Unlike many investment companies, the Fund is not actively managed. Therefore, the
Fund would not sell an equity security because the securitys issuer was in financial trouble
unless that security is removed from the Index. The Fund may not perform the same as its Index due
to tracking error.
Market Risk
: An investment in the Fund involves risks similar to those of investing in any fund of
equity securities, such as market fluctuations caused by such factors as economic and political
developments, changes in interest rates and perceived trends in stock prices. You should anticipate
that the value of the shares will decline, more or less, in correlation with any decline in value
of the Index. The values of equity securities could decline generally or could underperform other
investments.
Large Cap Risk
: Returns on investments in stocks of large companies could trail the returns on
investments in stocks of smaller and mid-sized companies.
12
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
that the Advisers security selection process, which is subject to a number of constraints, may not
produce the intended results.
Non-Diversified Risk
: The Fund is non-diversified and, as a result, may have greater exposure to
volatility than other funds. Because a non-diversified fund may invest a larger percentage of its
assets in securities of a single issuer than that of a diversified fund, the performance of that
issuer can have a substantial impact on the Funds share price. The Fund intends to maintain the
required level of diversification so as to qualify as a regulated investment company or RIC for
purposes of the Internal Revenue Code of 1986, as amended (the Code). Compliance with
diversification requirements of the Code could limit the investment flexibility of the Fund.
Concentration Risk
: The Funds assets will generally be concentrated in an industry or group of
industries to the extent that the Index concentrates in a particular industry or group of
industries. By concentrating its assets in a single industry or group of industries, the Fund is
subject to the risk that economic, political or other conditions that have a negative effect on
that industry or group of industries will negatively impact the Fund to a greater extent than if
the Funds assets were invested in a wider variety of industries.
Derivatives Risk
: A derivative is a financial contract, the value of which depends on, or is
derived from, the value of a financial asset (such as a stock, bond or currency), a physical asset
(such as gold) or a market index (such as the S&P 500 Index). The Fund may invest in stock index
futures contracts and other derivatives. Compared to conventional securities, derivatives can be
more sensitive to changes in interest rates or to sudden fluctuations in market prices and thus the
Funds losses may be greater if it invests in derivatives than if it invests only in conventional
securities.
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Index for a number of reasons. For example, the Fund incurs a number of operating
expenses not applicable to the Index, and also incurs costs in buying and selling securities,
especially when rebalancing the Funds securities holdings to reflect changes in the composition of
the Index, or representative sample of the Index. The Fund may not be fully invested at times,
either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet
redemptions and pay expenses. If the Fund utilizes a sampling approach, and/or invests in futures
or other derivative positions, its return may not correlate as well with the return on the Index,
as would be the case if the Fund purchased all of the securities in the Index.
Performance Information
The Fund has not completed a full calendar year of operations and therefore has no performance
information.
13
Investment Adviser
FaithShares Advisors, LLC serves as the investment adviser to the Fund.
Portfolio Managers
J. Garrett Stevens, CEO, and Thompson S. Phillips, Jr., President, are the Funds portfolio
managers and have managed the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page
___ of the prospectus.
14
FaithShares Lutheran Values Fund
(the Fund)
Investment Objective
The Funds investment objective is to track the performance, before fees and expenses, of the
FaithShares Lutheran Values Index, a custom index by FTSE/KLD. The Fund may change its investment
objective without shareholder approval.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
|
|
|
|
|
Annual Fund Operating Expenses (expenses that you pay each year as a
|
|
|
|
|
percentage of the value of your investment)
|
|
|
|
|
Management Fee
|
|
|
0.87
|
%
|
Distribution and Service (12b-1) Fees
|
|
|
0.00
|
%
|
Other Expenses
1
|
|
|
0.00
|
%
|
Total Annual Fund Operating Expenses
|
|
|
0.87
|
%
|
|
|
|
1
|
|
Other Expenses are based on estimated amounts for the current fiscal year.
|
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other exchange traded funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell 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 Funds operating expenses remain the same. This Example
does not include the brokerage commissions that investors may pay on their purchases and sales of
Fund shares. Although your actual costs may be higher or lower, based on these assumptions your
cost would be:
|
|
|
|
|
1 year
|
|
3 years
|
$91.35
|
|
$
|
282.92
|
|
Portfolio Turnover
The Fund is new, therefore, it does not have a historical portfolio turnover rate.
Principal Investment Strategies
The Fund employs a passive management investment strategy designed to track the total return
performance of the FaithShares Lutheran Values Index, a custom index by FTSE/KLD (the LV
15
Index or Index). The LV Index is designed to measure the performance of U.S. large
capitalization companies that operate in accordance with the guidelines for social investing and
shareholder advocacy recommended by the Evangelical Lutheran Church in America Board of Pensions.
The LV Index avoids companies involved in certain harmful products and services, nuclear military
weaponry, and hazardous environmental impact. As of June 18, 2009, the LV Index was comprised of
100 equally weighted securities.
FaithShares Advisors, LLC (the Adviser) will normally invest at least 80% of the Funds total
assets in securities that comprise the LV Index or in securities that the Adviser has determined
have economic characteristics that are substantially identical to the economic characteristics of
the securities that comprise the LV Index. This is a non-fundamental policy that may be changed
upon 60 days prior written notice to shareholders. The Fund generally will invest in all of the
securities comprising the LV Index in proportion to the weightings in the LV Index although, under
various circumstances where it may not be possible or practicable to purchase all of the securities
in the LV Index, the Adviser may utilize a sampling methodology. Sampling means that the Adviser
uses quantitative analysis to select securities that represent a sample of the securities in the LV
Index that have a similar investment profile as the LV Index in terms of key risk factors,
performance attributes and other characteristics. The Fund may also invest its other assets in
securities not included in the LV Index, but which the Adviser believes will help the Fund track
the LV Index, as well as in certain futures, options, swap contracts and other derivatives, cash
and cash equivalents or money market instruments, such as repurchase agreements and money market
funds. The Fund will generally concentrate its investments (
i.e.,
hold 25% or more of its total
assets) in a particular industry or sector to approximately the same extent that the LV Index is so
concentrated.
Principal Risks
As with all exchange traded funds, a shareholder is subject to the risk that his or her investment
could lose money. The principal risks affecting shareholders investments in the Fund are set
forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by
the FDIC or any government agency.
Index Risk
: Unlike many investment companies, the Fund is not actively managed. Therefore, the
Fund would not sell an equity security because the securitys issuer was in financial trouble
unless that security is removed from the Index. The Fund may not perform the same as its Index due
to tracking error.
Market Risk
: An investment in the Fund involves risks similar to those of investing in any fund of
equity securities, such as market fluctuations caused by such factors as economic and political
developments, changes in interest rates and perceived trends in stock prices. You should anticipate
that the value of the shares will decline, more or less, in correlation with any decline in value
of the Index. The values of equity securities could decline generally or could underperform other
investments.
Large Cap Risk
: Returns on investments in stocks of large companies could trail the returns on
investments in stocks of smaller and mid-sized companies.
16
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
that the Advisers security selection process, which is subject to a number of constraints, may not
produce the intended results.
Non-Diversified Risk
: The Fund is non-diversified and, as a result, may have greater exposure to
volatility than other funds. Because a non-diversified fund may invest a larger percentage of its
assets in securities of a single issuer than that of a diversified fund, the performance of that
issuer can have a substantial impact on the Funds share price. The Fund intends to maintain the
required level of diversification so as to qualify as a regulated investment company or RIC for
purposes of the Internal Revenue Code of 1986, as amended (the Code). Compliance with
diversification requirements of the Code could limit the investment flexibility of the Fund.
Concentration Risk
: The Funds assets will generally be concentrated in an industry or group of
industries to the extent that the Index concentrates in a particular industry or group of
industries. By concentrating its assets in a single industry or group of industries, the Fund is
subject to the risk that economic, political or other conditions that have a negative effect on
that industry or group of industries will negatively impact the Fund to a greater extent than if
the Funds assets were invested in a wider variety of industries.
Derivatives Risk
: A derivative is a financial contract, the value of which depends on, or is
derived from, the value of a financial asset (such as a stock, bond or currency), a physical asset
(such as gold) or a market index (such as the S&P 500 Index). The Fund may invest in stock index
futures contracts and other derivatives. Compared to conventional securities, derivatives can be
more sensitive to changes in interest rates or to sudden fluctuations in market prices and thus the
Funds losses may be greater if it invests in derivatives than if it invests only in conventional
securities.
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Index for a number of reasons. For example, the Fund incurs a number of operating
expenses not applicable to the Index, and also incurs costs in buying and selling securities,
especially when rebalancing the Funds securities holdings to reflect changes in the composition of
the Index, or representative sample of the Index. The Fund may not be fully invested at times,
either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet
redemptions and pay expenses. If the Fund utilizes a sampling approach, and/or invests in futures
or other derivative positions, its return may not correlate as well with the return on the Index,
as would be the case if the Fund purchased all of the securities in the Index.
Performance Information
The Fund has not completed a full calendar year of operations and therefore has no performance
information.
17
Investment Adviser
FaithShares Advisors, LLC serves as the investment adviser to the Fund.
Portfolio Managers
J. Garrett Stevens, CEO, and Thompson S. Phillips, Jr., President, are the Funds portfolio
managers and have managed the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page
___ of the prospectus.
18
FaithShares Methodist Values Fund
(the Fund)
Investment Objective
The Funds investment objective is to track the performance, before fees and expenses, of the
FaithShares Methodist Values Index, a custom index by FTSE/KLD. The Fund may change its investment
objective without shareholder approval.
Fees and Expenses
|
|
|
|
|
Annual Fund Operating Expenses (expenses that you pay each year as a
|
|
|
|
|
percentage of the value of your investment)
|
|
|
|
|
Management Fee
|
|
|
0.87
|
%
|
Distribution and Service (12b-1) Fees
|
|
|
0.00
|
%
|
Other Expenses
1
|
|
|
0.00
|
%
|
Total Annual Fund Operating Expenses
|
|
|
0.87
|
%
|
|
|
|
1
|
|
Other Expenses are based on estimated amounts for the current fiscal year.
|
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other exchange traded funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell 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 Funds operating expenses remain the same. This Example
does not include the brokerage commissions that investors may pay on their purchases and sales of
Fund shares. Although your actual costs may be higher or lower, based on these assumptions your
cost would be:
|
|
|
|
|
1 year
|
|
3 years
|
$91.35
|
|
$
|
282.92
|
|
Portfolio Turnover
The Fund is new, therefore, it does not have a historical portfolio turnover rate.
Principal Investment Strategies
The Fund employs a passive management investment strategy designed to track the total return
performance of the FaithShares Methodist Values Index, a custom index by FTSE/KLD (the MV Index
or Index). The MV Index is designed to measure the performance of U.S. large capitalization
companies that operate in accordance with The Social Principles of the United Methodist Church.
Companies considered for inclusion in the MV Index are evaluated based on their Methodist Values,
which cover the following areas: the natural world; the nurturing
19
community; the social community; the economic community; the political community; and the world
community. As of June 18, 2009, the MV Index was comprised of 100 equally weighted securities.
FaithShares Advisors, LLC (the Adviser) will normally invest at least 80% of the Funds total
assets in securities that comprise the MV Index or in securities that the Adviser has determined
have economic characteristics that are substantially identical to the economic characteristics of
the securities that comprise the MV Index. This is a non-fundamental policy that may be changed
upon 60 days prior written notice to shareholders. The Fund generally will invest in all of the
securities comprising the MV Index in proportion to the weightings in the MV Index although, under
various circumstances where it may not be possible or practicable to purchase all of the securities
in the MV Index, the Adviser may utilize a sampling methodology. Sampling means that the Adviser
uses quantitative analysis to select securities that represent a sample of the securities in the MV
Index that have a similar investment profile as the MV Index in terms of key risk factors,
performance attributes and other characteristics. The Fund may also invest its other assets in
securities not included in the MV Index, but which the Adviser believes will help the Fund track
the MV Index, as well as in certain futures, options, swap contracts and other derivatives, cash
and cash equivalents or money market instruments, such as repurchase agreements and money market
funds. The Fund will generally concentrate its investments (
i.e.,
hold 25% or more of its total
assets) in a particular industry or sector to approximately the same extent that the MV Index is so
concentrated.
Principal Risks
As with all exchange traded funds, a shareholder is subject to the risk that his or her investment
could lose money. The principal risks affecting shareholders investments in the Fund are set
forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by
the FDIC or any government agency.
Index Risk
: Unlike many investment companies, the Fund is not actively managed. Therefore, the
Fund would not sell an equity security because the securitys issuer was in financial trouble
unless that security is removed from the Index. The Fund may not perform the same as its Index due
to tracking error.
Market Risk
: An investment in the Fund involves risks similar to those of investing in any fund of
equity securities, such as market fluctuations caused by such factors as economic and political
developments, changes in interest rates and perceived trends in stock prices. You should anticipate
that the value of the shares will decline, more or less, in correlation with any decline in value
of the Index. The values of equity securities could decline generally or could underperform other
investments.
Large Cap Risk
: Returns on investments in stocks of large companies could trail the returns on
investments in stocks of smaller and mid-sized companies.
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
20
that the Advisers security selection process, which is subject to a number of constraints, may not
produce the intended results.
Non-Diversified Risk
: The Fund is non-diversified and, as a result, may have greater exposure to
volatility than other funds. Because a non-diversified fund may invest a larger percentage of its
assets in securities of a single issuer than that of a diversified fund, the performance of that
issuer can have a substantial impact on the Funds share price. The Fund intends to maintain the
required level of diversification so as to qualify as a regulated investment company or RIC for
purposes of the Internal Revenue Code of 1986, as amended (the Code). Compliance with
diversification requirements of the Code could limit the investment flexibility of the Fund.
Concentration Risk
: The Funds assets will generally be concentrated in an industry or group of
industries to the extent that the Index concentrates in a particular industry or group of
industries. By concentrating its assets in a single industry or group of industries, the Fund is
subject to the risk that economic, political or other conditions that have a negative effect on
that industry or group of industries will negatively impact the Fund to a greater extent than if
the Funds assets were invested in a wider variety of industries.
Derivatives Risk
: A derivative is a financial contract, the value of which depends on, or is
derived from, the value of a financial asset (such as a stock, bond or currency), a physical asset
(such as gold) or a market index (such as the S&P 500 Index). The Fund may invest in stock index
futures contracts and other derivatives. Compared to conventional securities, derivatives can be
more sensitive to changes in interest rates or to sudden fluctuations in market prices and thus the
Funds losses may be greater if it invests in derivatives than if it invests only in conventional
securities.
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Index for a number of reasons. For example, the Fund incurs a number of operating
expenses not applicable to the Index, and also incurs costs in buying and selling securities,
especially when rebalancing the Funds securities holdings to reflect changes in the composition of
the Index, or representative sample of the Index. The Fund may not be fully invested at times,
either as a result of cash flows into the Fund or reserves of cash held by the Fund to meet
redemptions and pay expenses. If the Fund utilizes a sampling approach, and/or invests in futures
or other derivative positions, its return may not correlate as well with the return on the Index,
as would be the case if the Fund purchased all of the securities in the Index.
Performance Information
The Fund has not completed a full calendar year of operations and therefore has no performance
information.
Investment Adviser
FaithShares Advisors, LLC serves as the investment adviser to the Fund.
21
Portfolio Managers
J. Garrett Stevens, CEO, and Thompson S. Phillips, Jr., President, are the Funds portfolio
managers and have managed the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page
___ of the prospectus.
22
Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation
Purchase and Sale of Fund Shares
Individual shares may only be purchased and sold on a national securities exchange through a
broker-dealer. You can purchase and sell individual shares of the Funds throughout the trading day
like any publicly traded security. Each Funds shares will be listed, subject to notice of
issuance, on the NYSE Arca. The price of a Funds shares is based on market price, and because
exchange-traded fund shares trade at market prices rather than net
asset value (NAV), shares may trade at a price
greater than NAV (premium) or less than NAV (discount). Each Fund issues and redeems shares on a
continuous basis, at NAV, only in blocks of 50,000 shares (Creation Units),
principally in-kind for securities included in the relevant Index
. Except when aggregated in
Creation Units, the Funds shares are not redeemable securities.
Tax Information
The distributions made by the Funds are taxable, and will be taxed as ordinary income or capital
gains.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Funds through a broker-dealer or other financial intermediary (such
as a bank), the Funds and their related companies may pay the intermediary for the sale of Fund
shares and related services. These payments may create a conflict of interest by influencing the
broker-dealer or other intermediary and your salesperson to recommend the Fund over another
investment. Ask your salesperson or visit your financial intermediarys web site for more
information.
23
Additional Index Information
The Indexes were developed by FTSE/KLD Research and Analytics, Inc. and licensed to FaithShares
Trust for use in exchange-traded funds and related ETF options products. Each Index is
equal-weighted and designed to represent the large-cap U.S. equity market available to various
religious investors. The eligible universe for each Index is the KLD Large Cap Social Index
(LCSI). The LCSI is a diversified and comprehensive representation of the U.S. large cap equity
market available to investors seeking to integrate environmental, social and governance (ESG)
criteria into their investment strategies. The objective of each Index is to include the largest
companies, as determined by float-adjusted market capitalization, in certain industries so as to
match the industry diversification of the 400 largest U.S. equities at the time of the annual LCSI
reconstitution. The industries considered for inclusion in the Indexes are: oil and gas; consumer
goods; telecommunications; technology; basic materials; health care; utilities; industrials;
consumer services; and financials. Each Index reconstitutes annually to coincide with the
reconstitution of the LCSI. Companies are added to an Index at the time of the annual
reconstitution. Companies may be removed from an Index at any time due to corporate actions,
concerns about financial quality or deteriorating ESG or Specific Faith Performance Standards. The
specific religious investing guidelines of each Index are discussed below.
Disclaimer
The Indexes are trademarks of FTSE/KLD Indexes and have been licensed for use for certain purposes
by the Trust. The Indexes only relationship to the Trust is FTSE/KLDs licensing to the Trust of
certain FTSE/KLD trademarks, the underlying indexes, trade name, and of the data supplied by
FTSE/KLD Indexes which is determined, composed, and calculated by FTSE/KLD without regard to the
Trust, the Adviser, this product, or any investor. FTSE/KLD Indexes and the Fund shares are not
sponsored, endorsed, sold, or promoted by FTSE/KLD. FTSE/KLD makes no warranty or representation,
regarding the advisability of purchasing, holding or trading this product or investing in
securities generally or in the Funds particularly or the ability of any data supplied by FTSE/KLD
to track general stock market performance. The Trust has no obligation to take the needs of the
Adviser or the shareholders of the Funds into consideration in determining, composing or
calculating the data supplied by FTSE/KLD. FTSE/KLD is not responsible for and has not participated
in the determination of the prices of the common shares of the Funds or the timing of the issuance
or sale of such common shares. FTSE/KLD has no obligation or liability in connection with the
administration, marketing or trading of Fund shares.
Additional Investment Strategies
Each Fund, using an indexing investment approach, seeks to track as closely as possible (i.e.,
obtain a high level of correlation), before fees and expenses, the performance of its respective
Index. A number of factors may affect a Funds ability to achieve a high correlation with its
Index, including the degree to which a Fund utilizes a sampling methodology. There can be no
guarantee that a Fund will achieve a high degree of correlation.
The Adviser may sell securities that are represented in an Index or purchase securities not yet
represented in an Index, in anticipation of their removal from or addition to an Index. There may
24
also be instances in which the Adviser may choose to overweight securities in an Index, purchase or
sell securities not in an Index which the Adviser believes are appropriate to substitute for
certain securities in that Funds Index or utilize various combinations of other available
investment techniques in seeking to track an Index. Each Fund will not take defensive positions.
Portfolio Turnover
Each 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 a Funds performance.
Each Funds portfolio turnover rate is not expected to exceed 10% of the average value of its
portfolio.
Additional Risks
Trading Issues.
Although Fund shares are listed for trading on the NYSE Arca, there can be no
assurance that an active trading market for such shares will develop or be maintained. Trading in
Fund shares may be halted due to market conditions or for reasons that, in the view of the NYSE
Arca, make trading in shares inadvisable. In addition, trading in shares is subject to trading
halts caused by extraordinary market volatility pursuant to NYSE Arca circuit breaker rules.
There can be no assurance that the requirements of the NYSE Arca necessary to maintain the listing
of any Fund will continue to be met or will remain unchanged or that the shares will trade with any
volume, or at all.
Fluctuation of Net Asset Value.
The net asset value of the Fund shares will generally fluctuate
with changes in the market value of a Funds securities holdings. The market prices of shares will
generally fluctuate in accordance with changes in a Funds net asset value and supply and demand of
shares on the NYSE Arca. It cannot be predicted whether Fund shares will trade below, at or above
their net asset value. Price differences may be due, in large part, to the fact that supply and
demand forces at work in the secondary trading market for shares will be closely related to, but
not identical to, the same forces influencing the prices of the securities of an Index trading
individually or in the aggregate at any point in time. The market prices of Fund shares may deviate
significantly from the net asset value of the shares during periods of market volatility. However,
given that shares can be created and redeemed in Creation Units (unlike shares of many closed-end
funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their
net asset value), the Adviser believes that large discounts or premiums to the net asset value of
Shares should not be sustained. While the creation/redemption feature is designed to make it likely
that Fund shares normally will trade close to a Funds net asset value, disruptions to creations
and redemptions may result in trading prices that differ significantly from such Funds net asset
value. If an investor purchases Fund shares at a time when the market price is at a premium to the
net asset value of the shares or sells at a time when the market price is at a discount to the net
asset value of the shares, then the investor may sustain losses.
25
Costs of Buying or Selling Shares.
Investors buying or selling Fund 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 shares. In addition, secondary market
investors will also incur the cost of the difference between the price that an investor is willing
to pay for shares (the bid price) and the price at which an investor is willing to sell shares
(the ask price). This difference in bid and ask prices is often referred to as the spread or
bid/ask spread. The bid/ask spread varies over time for shares based on trading volume and market
liquidity, and is generally lower if a Funds shares have more trading volume and market liquidity
and higher if a Funds shares have little trading volume and market liquidity. Further, increased
market volatility may cause increased bid/ask spreads. Due to the costs of buying or selling
shares, including bid/ask spreads, frequent trading of shares may significantly reduce investment
results and an investment in shares may not be advisable for investors who anticipate regularly
making small investments.
Portfolio Holdings
A description of the Funds policies and procedures with respect to the disclosure of the Funds
portfolio securities is available in the Funds Statement of Additional Information.
Fund Management
FaithShares Advisors, LLC, an Oklahoma limited liability company, formed in 2009, is located at
3555 Northwest 58th Street, Suite 410, Oklahoma City, Oklahoma, 73112. The Adviser is majority
owned by its managing member, FaithShares Investment Management, LLC, an Oklahoma limited liability
company whose members are Thompson S. Phillips, Jr. and J. Garrett Stevens. The Adviser serves as
investment adviser to the Funds with overall responsibility for the general management and
administration of the Funds, subject to the supervision of the Trusts Board of Trustees. Pursuant
to an investment advisory agreement, the Adviser is responsible for arranging, transfer agency,
custody, fund administration, and all other non-distribution related services for the Funds to
operate. The Adviser is also responsible for employing any sampling strategy for the Funds.
For the services it provides to the Funds, the Adviser receives a fee, which is calculated daily
and paid monthly at the following rates: 0.87% of the combined daily net assets of the Funds on the
first $1.5 billion, 0.75% on the next $1 billion and 0.65% exceeding $2.5 billion. The Adviser
pays all expenses of each Fund other than the management fee, distribution fees pursuant to the
Funds Distribution and Service Plan, if any, brokerage expenses, taxes, interest, fees and
expenses of the Independent Trustees (including any Trustees counsel fees), litigation expenses,
acquired fund fees and expenses and other extraordinary expenses. Therefore, other expenses of the
Fund are expected to be less than 0.01%. The Adviser intends to donate 10% of the net income it
derives from each Fund to a charitable organization selected by such Fund, and whose mission is
aligned with the moral and social beliefs of the faith represented by the Fund.
26
A discussion regarding the basis for the Boards approval of the investment advisory agreement with
the Adviser will be available in the Funds
, 20___ [Annual/Semi-Annual] Report to
Shareholders.
Portfolio Managers
J. Garrett Stevens and Thompson S. Phillips, Jr. (the Portfolio Managers), are employees of the
Adviser and are primarily responsible for the day-to-day management of the Funds. The Portfolio
Managers are responsible for various functions related to portfolio management, including, but not
limited to, investing cash inflows, implementing investment strategy, researching and reviewing
investment strategy, and overseeing members of his portfolio management team with more limited
responsibilities.
Mr. Stevens founded the Adviser with Mr. Phillips in 2009 and has over 8 years of investment
experience. Prior to founding the Adviser, Mr. Stevens worked with Mr. Phillips at Phillips
Capital Advisors and T.S. Phillips Investments, Inc. Mr. Stevens also formed his own Registered
Investment Advisory firm, Capitalist Asset Management in 2005. Mr. Stevens has been an investment
consultant for various faith-based and secular institutions since 2001. Mr. Stevens is a graduate
of Oklahoma State University.
Mr. Phillips founded the Adviser with Mr. Stevens in 2009 and has over 32 years of investment
experience. Prior to founding the Adviser, Mr. Phillips has owned and operated a separate
Registered Investment Advisory firm, Phillips Capital Advisors and a Broker Dealer, T.S. Phillips
Investments, Inc. in Oklahoma City since 1990 and 2004 respectively that currently has 18
investment advisors. Mr. Phillips has been an investment consultant for various faith-based and
secular institutions since 1990. Mr. Phillips is a graduate of The College of William & Mary.
The Statement of Additional Information provides additional information about the Portfolio
Managers compensation, other accounts managed, and ownership of Fund shares.
Buying and Selling the Funds
Fund shares are listed for secondary trading on the NYSE Arca. When you buy or sell a Funds
shares on the secondary market, you will pay or receive the market price. You may incur customary
brokerage commissions and charges and may pay some or all of the spread between the bid and the
offered price in the secondary market on each leg of a round trip (purchase and sale) transaction.
The shares will trade on the NYSE Arca at prices that may differ to varying degrees from the daily
NAV of the shares. The NYSE Arca is generally open Monday through Friday and is closed weekends
and the following holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The value of each Funds portfolio securities is based on market prices of the securities, which
generally means a valuation obtained from an exchange or other market (or based on a price
quotation or other equivalent indication of the value supplied by an exchange or other market) or
27
a valuation obtained from an independent pricing service. If a securitys market price is not
readily available or does not otherwise accurately reflect the fair value of the security, the
security will be valued by another method that the Board believes will better reflect fair value in
accordance with the Trusts valuation policies and procedures. Fair value pricing may be used in a
variety of circumstances, including but not limited to, situations when the value of a security in
a Funds portfolio has been materially affected by events occurring after the close of the market
on which the security is principally traded but prior to the close of the NYSE Arca (such as in the
case of a corporate action or other news that may materially affect the price of a security) or
trading in a security has been suspended or halted. Accordingly, a Funds net asset value may
reflect certain portfolio securities fair values rather than their market prices.
Fair value pricing involves subjective judgments and it is possible that a fair value determination
for a security will materially differ from the value that could be realized upon the sale of the
security. In addition, fair value pricing could result in a difference between the prices used to
calculate a Funds net asset value and the prices used by the Funds benchmark Index. This may
result in a difference between the Funds performance and the performance of the Funds benchmark
Index.
Frequent Purchases and Redemptions of Fund Shares
Unlike frequent trading of shares of a traditional open-end mutual funds (
i.e.
, not
exchange-traded) shares, frequent trading of shares of the Funds on the secondary market does not
disrupt portfolio management, increase the Funds trading costs, lead to realization of
capitalization gains, or otherwise harm the Funds shareholders because these trades do not involve
the Funds directly. Certain institutional investors are authorized to purchase and redeem a Funds
shares directly with the Fund. Because these trades are effected in-kind (
i.e.
, for securities, and
not for cash), they do not cause any of the harmful effects noted above that may result from
frequent cash trades. Moreover, each Fund imposes transaction fees on in-kind purchases and
redemptions of Creation Units to cover the custodial and other costs incurred by the Fund in
effecting in-kind trades. These fees increase if an investor substitutes cash in part or in whole
for Creation Units, reflecting the fact that the Funds trading costs increase in those
circumstances. For these reasons, the Board of Trustees has determined that it is not necessary to
adopt policies and procedures to detect and deter frequent trading and market-timing in shares of
the Funds.
Other Considerations
Distribution and Service Plan
. The Fund has adopted a Distribution and Service Plan in accordance
with Rule 12b-1 under the 1940 Act pursuant to which the payments of up to 0.25% of each Funds
average daily net assets may be made for the sale and distribution of
its Fund shares. However,
the Board of Trustees has determined that no payments pursuant to the Distribution and Service Plan
will be made for at least the next twelve (12) months of operation. Thereafter, 12b-1 fees may
only be imposed after approval by the Board of Trustees. Any forgone 12b-1 fees during the next 12
months will not be recoverable during any subsequent period. Because these fees would be paid out
of each Funds assets on an on-going basis, if payments are made in the future, these fees will
increase the cost of your investment and may cost you more than paying other types of sales
charges.
28
Dividends, Distributions and Taxes
Fund Distributions
Each Fund pays out dividends from its net investment income to investors at least quarterly. The
Fund distributes any net capital gains, if any, annually.
Dividend Reinvestment Service
Brokers may make available to their customers who own a Funds shares the DTC book-entry dividend
reinvestment service. If this service is available and used, dividend distributions of both income
and capital gains will automatically be reinvested in additional whole shares of that Fund. Without
this service, investors would receive their distributions in cash. In order to achieve the maximum
total return on their investments, investors are encouraged to use the dividend reinvestment
service. To determine whether the dividend reinvestment service is available and whether there is a
commission or other charge for using this service, consult your broker. Brokers may require a
Funds shareholders to adhere to specific procedures and timetables. If this service is available
and used, dividend distributions of both income and realized gains will be automatically reinvested
in additional whole shares of the Fund purchased in the secondary market.
Tax Information
The following is a summary of some important tax issues that affect the Funds and their
shareholders. The summary is based on current tax laws, which may be changed by legislative,
judicial or administrative action. You should not consider this summary to be a detailed
explanation of the tax treatment of the Funds, or the tax consequences of an investment in the
Funds. More information about taxes is located in the SAI. You are urged to consult your tax
adviser regarding specific questions as to federal, state and local income taxes.
Tax Status of Each Fund
Each Fund is treated as a separate entity for federal tax purposes, and intends to qualify for the
special tax treatment afforded to regulated investment companies under the Code. As long as a Fund
qualifies as a regulated investment company, it pays no federal income tax on the earnings it
distributes to shareholders.
Tax Status of Distributions
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Each Fund will distribute substantially all of its net investment income, quarterly, and
net capital gains income, annually.
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The income dividends and short-term capital gains distributions you receive from the
Funds will be taxed as either ordinary income or qualified dividend income. Dividends that
are qualified dividend income are eligible for the reduced maximum rate to
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29
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individuals of 15% (lower rates apply to individuals in lower tax brackets) to the extent
that the Fund receives qualified dividend income.
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Any long-term capital gains distributions you receive from a Fund are taxable as
long-term capital gains regardless of how long you have owned your shares. Long-term
capital gains are currently taxed at a maximum rate of 15%.
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Absent further legislation, the maximum 15% tax rate on qualified dividend income and
long-term capital gains will cease to apply to taxable years beginning after December 31,
2010.
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Dividends and distributions are generally taxable to you whether you receive them in
cash or in additional shares.
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Corporate shareholders may be entitled to a dividends-received deduction for the portion
of dividends they receive that are attributable to dividends received by a Fund from U.S.
corporations, subject to certain limitations.
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Long-term capital gains distributions will result from gains on the sale or exchange of
capital assets held by a Fund for more than one year.
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Distributions paid in January but declared by a Fund in October, November or December of
the previous year may be taxable to you in the previous year.
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A Fund will inform you of the amount of your ordinary income dividends, qualified
dividend income, and long-term capital gain distributions shortly after the close of each
calendar year.
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If you hold your shares in a tax-qualified retirement account, you generally will not be
subject to federal taxation on Fund distributions until you begin receiving distributions
from your retirement account. You should consult your tax adviser regarding the tax rules
that apply to your retirement account.
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Tax Status of Share Transactions.
Each sale, exchange, or redemption of Fund shares may be a taxable event to you. For tax purposes,
an exchange of Fund shares for shares of a different Fund of the Trust is treated the same as a
sale. Currently, 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
short-term gain or loss, except that any capital loss on the sale of shares held for six months or
less is treated as long-term capital loss to the extent the capital gain dividends were paid with
respect to such shares. You should consider the tax consequences of any redemption or exchange
before making such a request, especially with respect to redemptions if you invest in the Funds
through a tax-qualified retirement plan.
30
Non-U.S. Investors.
If you are not a citizen or permanent resident of the United States, a Funds
ordinary income dividends will generally be subject to a 30% U.S. withholding tax, unless a lower
treaty rate applies or unless such income is effectively connected with a U.S. trade or business. A
Fund may, under certain circumstances, designate all or a portion of a dividend as an
interest-related dividend that if received by a nonresident alien or foreign entity generally
would be exempt from the 30% U.S. withholding tax, provided that certain other requirements are
met. A Fund may also, under certain circumstances, designate all or a portion of a dividend as a
short-term capital gain dividend which if received by a nonresident alien or foreign entity
generally would be exempt from the 30% U.S. withholding tax, unless the foreign person is a
nonresident alien individual present in the United States for a period or periods aggregating 183
days or more during the taxable year. The provisions contained in the legislation relating to
dividends to foreign persons would apply to dividends with respect to taxable years of a Fund
beginning after December 31, 2004 and before January 1, 2010.
Taxes on Exchange-Listed Share Sales.
Currently, any capital gain or loss realized upon a sale of
shares is generally treated as long-term capital gain or loss if the shares have been held for more
than one year and as short-term capital gain or loss if the shares have been held for one year or
less, except that any capital loss on the sale of shares held for six months or less is treated as
long-term capital loss to the extent that capital gain dividends were paid with respect to such
shares.
Backup Withholding.
A Fund will be required in certain cases to withhold at applicable withholding
rates and remit to the United States Treasury the amount withheld on amounts payable to any
shareholder who (1) has provided the Fund either an incorrect tax identification number or no
number at all, (2) who is subject to backup withholding by the Internal Revenue Service for failure
to properly report payments of interest or dividends, (3) who 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 foregoing discussion summarizes some of the consequences under current federal tax law of an
investment in the Funds. It is not a substitute for personal tax advice. Consult your personal tax
advisor about the potential tax consequences of an investment in the Funds under all applicable tax
laws.
Additional Information
When available, information regarding the number of days each Funds market price was at a discount
or a premium to its NAV for the most recently completed fiscal year and the most recently completed
calendar quarters since that year, will be provided, free of charge, on the Funds web site at
www.faithshares.com
.
31
FAITHSHARES Trust
3555 Northwest 58 th Street, Suite 410
Oklahoma City, Oklahoma 73112
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS
Additional information about a Funds investments will be available in the Funds annual and
semi-annual reports to shareholders. In a Funds annual reports, you will find a discussion of the
market conditions and investment strategies that significantly affected the Funds performance
during its last fiscal year. The annual and semi-annual reports will be incorporated by reference
into this prospectus.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Funds. The SAI is incorporated by reference
into, and is thus legally a part of, this Prospectus.
FOR MORE INFORMATION
To request a free copy of the latest annual or semi-annual report, when available, the SAI or to
request additional information about a Fund or to make other inquiries, please contact us as
follows:
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Call:
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(call collect) 405-778-8377
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Monday through Friday
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8:30 a.m. to 4:30 p.m. (Central Time)
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Write:
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FaithShares Trust
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3555 Northwest 58th Street, Suite 410
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Oklahoma City, Oklahoma 73112
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Visit:
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www.faithshares.com
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INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION
You can review and copy information about the Funds (including the SAI) at the SECs Public
Reference Room in Washington, DC. To find out more about this public service, call the SEC at
1-202-551-8090. Reports and other information about the Funds are also available in the EDGAR
Database on the SECs Internet site at http://www.sec.gov, or you can receive copies of this
information, after paying a duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission,
100 F Street, N.E., Washington, DC 20549-0102.
The Trusts Investment Company Act file number: 811-
32
The information in the Statement of Additional Information is not complete and may be changed.
We may not sell these securities until the registration statement filed with the Securities
Exchange Commission is effective. This Statement of Additional Information is not an offer to sell
these securities and the Trust is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
STATEMENT OF ADDITIONAL INFORMATION
FAITHSHARES BAPTIST VALUES FUND (FZB; NYSE ARCA)
FAITHSHARES CATHOLIC VALUES FUND (FCV; NYSE ARCA)
FAITHSHARES CHRISTIAN VALUES FUND (FOC; NYSE ARCA)
FAITHSHARES LUTHERAN VALUES FUND (FKL; NYSE ARCA)
FAITHSHARES METHODIST VALUES FUND (FMV; NYSE ARCA)
each, a series of FAITHSHARES TRUST (the Trust)
___, 2009
Investment Adviser:
FaithShares Advisors, LLC
This Statement of Additional Information (SAI) is not a prospectus. With respect to each of the
Trusts series, the SAI should be read in conjunction with the prospectus, dated
___,
2009, as it may be revised from time to time (the Prospectus). Capitalized terms used herein that
are not defined have the same meaning as in the Prospectus, unless otherwise noted. A copy of the
Prospectus may be obtained without charge, by writing the Funds Distributor, SEI Investments
Distribution Co, One Freedom Valley Drive, Oaks, PA 19456, by visiting the Trusts website at
www.faithshares.com
or by calling collect 405-778-8377.
TABLE OF CONTENTS
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32
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EXHIBIT A PROXY VOTING POLICIES AND PROCEDURES
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A-1
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ii
GENERAL INFORMATION ABOUT TRUST
The Trust is an open-end management investment company consisting of multiple investment series
(each a Fund and collectively the Funds). The Trust was organized as a Delaware statutory
trust on July 17, 2009. The Trust is registered with the SEC under the Investment Company Act of
1940, as amended, (the 1940 Act) as an open-end management investment company and the offering of
each Funds shares (Shares) is registered under the Securities Act of 1933, as amended (the
Securities Act). The investment objective of each Fund is to track the performance, before fees
and expenses, of a specified market index (each, an Index and collectively, the Indexes).
FaithShares Advisors, LLC (the Adviser) manages each Fund.
Each Fund offers and issues Shares at their net asset value only in aggregations of a specified
number of Shares (each, a Creation Unit). Each Fund generally offers and issues Shares in
exchange for a basket of securities included in its Index (Deposit Securities) together with the
deposit of a specified cash payment (Cash Component). The Trust reserves the right to permit or
require the substitution of a cash in lieu amount (Deposit Cash) to be added to the Cash
Component to replace any Deposit Security. The Shares will be listed on the NYSE Arca (NYSE Arca
or the Exchange), subject to notice of issuance. The Shares will trade on the Exchange at market
prices. These prices may differ from the Shares net asset values. The Shares are also redeemable
only in Creation Unit aggregations, and generally in exchange for portfolio securities and a
specified cash payment. A Creation Unit of each Fund consists of 50,000 Shares.
Shares may be issued in advance of receipt of Deposit Securities subject to various conditions
including a requirement to maintain on deposit with the Trust cash at least equal to a specified
percentage of the market value of the missing Deposit Securities as set forth in the Participant
Agreement (as defined below). The Trust may impose a transaction fee for each creation or
redemption. In all cases, such fees will be limited in accordance with the requirements of the
Securities and Exchange Commission (the SEC) applicable to management investment companies
offering redeemable securities. In addition to the fixed Creation or Redemption Transaction Fee,
an additional transaction fee of up to five times the fixed Creation or Redemption Transaction Fee
may apply.
ADDITIONAL INDEX INFORMATION
The FaithShares Custom Index series was developed by FTSE/KLD Research and Analytics, Inc.
(FTSE/KLD or the Index Administrator). Each Index is equal weighted and designed to represent
the large-cap U.S. equity market available to religious investors.
Eligible Universe
The eligible universe inclusion in the Indexes is the securities included in the KLD Large Cap
Social Index (LCSI). The LCSI is a diversified and comprehensive representation of the U.S. large
cap equity market available to investors seeking to integrate environmental, social and governance
(ESG) criteria into their investment strategies. The LCSI holds the largest companies with the
highest ESG rankings in the following industries: oil and gas; consumer goods; telecommunications;
technology; basic materials; health care; utilities; industrials; consumer services; and
financials.
The LCSI draws from the 400 largest U.S. equities in the industries listed above as determined by
float-adjusted market capitalization on the relevant determination date or closest business day of
each year. For purposes of inclusion in the LCSI, U.S. equities include companies that have U.S.
headquarters and are listed on the NYSE or NASDAQ. Companies listed on NASDAQ OTC Bulletin Board,
NYSE Arca Exchange, or NASDAQ Pink Sheets are not eligible. Companies with non-U.S. incorporation
tax or regulatory purposes are evaluated on a case-by-case basis. Companies with U.S. headquarters
and incorporation in the following countries generally are eligible: Cayman Islands; Bahamas;
Bermuda; Panama and Puerto Rico. Preferred stocks, limited or other types of partnerships, royalty
trusts, and closed-end funds are not eligible for inclusion in the LCSI.
1
Index Construction
Each Index is constructed as follows: FTSE/KLD evaluates the ESG performance of the 400 largest
U.S. equities in the industries listed above based on an ESG ratings framework. The companies in
each industry peer group are ranked according to ESG performance. FTSE/KLD then selects the
companies with the highest ranked ESG performance, targeting 65% of the market capitalization of
each industry. These companies make up the LCSI. The specific faith performance standards of each
Index are then applied to the LCSI. Each Index is constructed to include approximately 100
companies that meet the specific faith performance standards, have the highest ESG scores, and
match the industry diversification and weighting of the S&P 500 Composite Stock Price Index (S&P
500 Index).
Each Index reconstitutes annually to coincide with the reconstitution of the LCSI. Companies can
generally only be added to an Index at reconstitution. Companies may be removed at any time during
the year due to certain corporate actions, deteriorating financial quality or failure to meet the
specific faith performance standards.
Index Performance History
Each Funds performance will, over time, aim to track its respective Index and will be compared to
a relevant third party benchmark. The following tables and chart compare the annual and average
annual performance of each Funds Index versus the performance of the S&P 500 Index. While the
commencement date for each Funds Index was June 22, 2009, FTSE/KLD has provided back-tested
performance information for purposes of this comparison beginning as of January 1, 2005.
The back-tested performance information shown below is not the performance of any Fund and is not
an indication of how any Fund would have performed in the past or will perform in the future.
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For year ended
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YTD
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December 31,
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2005
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2006
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2007
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2008
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6/30/2009
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Baptist Values Index
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16.39
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%
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19.31
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%
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21.96
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%
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(31.29
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)%
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9.64
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%
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Catholic Values Index
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18.05
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%
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18.16
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%
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22.99
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%
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(33.29
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)%
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9.04
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%
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Christian Values Index
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17.37
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%
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16.74
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%
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21.05
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%
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(31.44
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)%
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8.18
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%
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Lutheran Values Index
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16.29
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%
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18.50
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%
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21.48
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%
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(31.17
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)%
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7.94
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%
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Methodist Values Index
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17.10
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%
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19.67
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%
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21.65
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%
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(32.07
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)%
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10.80
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%
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S&P 500 Index
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5.43
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%
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15.80
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%
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5.49
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%
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(37.00
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)%
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3.16
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%
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[bar chart to be inserted]
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Average Annual Percentage Change in Index Values
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For the period ended June 30, 2009
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One Year
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Three Years
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Five Years
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Baptist Values Index
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(21.75
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0.77
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%
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7.53
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%
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Catholic Values Index
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(23.82
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(0.14
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7.11
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%
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Christian Values Index
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(22.27
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(0.04
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6.89
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%
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Lutheran Values Index
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(22.69
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0.19
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%
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7.00
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%
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Methodist Values Index
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(21.79
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0.74
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%
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7.61
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S&P 500 Index
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(26.21
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(8.22
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(2.24
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)%
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All estimated daily historical closing prices prior to the commencement date for each Funds Index
(i.e., [insert date]) are based on back-testing (i.e., calculations of how the index might have
performed in the past if it had existed). Back-tested
2
performance information is purely
hypothetical and is solely for informational purposes. Back-tested performance does not represent
actual performance, and should not be interpreted as an indication of actual performance. Past
performance is not indicative of future results. Index performance is not the same as fund
performance as it does not reflect management and other fees.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES, POLICIES AND RELATED RISKS
Each Funds investment objectives and principal investment strategies are described in the
prospectus. The following information supplements, and should be read in conjunction with, the
prospectus. For a description of certain permitted investments, see Description of Permitted
Investments in this SAI.
DIVERSIFICATION
Each Fund is classified as a non-diversified investment company under the 1940 Act. A
non-diversified classification means that a Fund is not limited by the 1940 Act with regard to
the percentage of its assets that may be invested in the securities of a single issuer. This means
that a Fund may invest a greater portion of its assets in the securities of a single issuer than a
diversified fund. The securities of a particular issuer may constitute a greater portion of an
Index of each Fund and, therefore, the securities may constitute a greater portion of the Funds
portfolio. This may have an adverse effect on a Funds performance or subject a Funds shares to
greater price volatility than more diversified investment companies.
Although each Fund is non-diversified for purposes of the 1940 Act, each Fund intends to maintain
the required level of diversification and otherwise conduct its operations so as to qualify as a
regulated investment company for purposes of the Internal Revenue Code of 1986, as amended (the
Code), and to relieve each Fund of any liability for federal income tax to the extent that its
earnings are distributed to shareholders. Compliance with the diversification requirements of the
Code may severely limit the investment flexibility of a Fund and may make it less likely that a
Fund will meet its investment objectives.
CONCENTRATION
Each Fund may concentrate its investments in a particular industry or group of industries, as
described in the Prospectus. The securities of issuers in particular industries may dominate the
benchmark Index of a Fund and consequently the Funds investment portfolio. This may adversely
affect a Funds performance or subject its Shares to greater price volatility than that experienced
by less concentrated investment companies.
In pursuing its objective, each Fund may hold the securities of a single issuer in an amount
exceeding 10% of the market value of the outstanding securities of the issuer, subject to
restrictions imposed by the Code. In particular, as a Funds size grows and its assets increase,
it will be more likely to hold more than 10% of the securities of a single issuer if the issuer has
a relatively small public float as compared to other components in its benchmark Index.
DESCRIPTION OF PERMITTED INVESTMENTS
The following are descriptions of the permitted investments and investment practices and the
associated risk factors. The Funds will only invest in any of the following instruments or engage
in any of the following investment practices if such investment or activity is consistent with a
Funds investment objective and permitted by the Funds stated investment policies.
EQUITY SECURITIES
Equity securities represent ownership interests in a company and include common stocks, preferred
stocks, warrants to acquire common stock, and securities convertible into common stock.
Investments in equity securities 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 Funds invest
will cause the net asset value of the Funds to fluctuate. The Funds purchase equity securities
traded in the United States on registered exchanges or the over-the-counter market.
3
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements with commercial banks, brokers or dealers to generate
income from its excess cash balances and to invest securities lending cash collateral. A repurchase
agreement is an agreement under which a Fund acquires a financial instrument (e.g., a security
issued by the U.S. government or an agency thereof, a bankers acceptance or a certificate of
deposit) from a seller, subject to resale to the seller at an agreed upon price and date (normally,
the next Business Day). A repurchase agreement may be considered a loan collateralized by
securities. The resale price reflects an agreed upon interest rate effective for the period the
instrument is held by a Fund and is unrelated to the interest rate on the underlying instrument.
In these repurchase agreement transactions, the securities acquired by a Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the repurchase agreement
and are held by the Custodian until repurchased. No more than an aggregate of 15% of a Funds net
assets will be invested in illiquid securities, including repurchase agreements having maturities
longer than seven days and securities subject to legal or contractual restrictions on resale, or
for which there are no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if the other party to the
agreement defaults on its obligation to repurchase the underlying security at a time when the value
of the security has declined, a Fund may incur a loss upon disposition of the security. If the
other party to the agreement becomes insolvent and subject to liquidation or reorganization under
the U.S. Bankruptcy Code or other laws, a court may determine that the underlying security is
collateral for a loan by a Fund not within the control of the Fund and, therefore, the Fund may not
be able to substantiate its interest in the underlying security and may be deemed an unsecured
creditor of the other party to the agreement.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities include U.S. Treasury securities, which are backed
by the full faith and credit of the U.S. Treasury and which differ only in their interest rates,
maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less;
U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally
have initial maturities of greater than ten years. Certain U.S. government securities are issued
or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited
to, obligations of U.S. government agencies or instrumentalities such as Fannie Mae, the Government
National Mortgage Association (Ginnie Mae), the Small Business Administration, the Federal Farm
Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central
Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the
Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit
Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National
Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including,
for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of
the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those
securities issued by Fannie Mae, are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the federal agency, while other obligations issued by
or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by
the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides
financial support to such U.S. government-sponsored federal agencies, no assurance can be given
that the U.S. government will always do so, since the U.S. government is not so obligated by law.
U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal
at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae, and Freddie
Mac, placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and
obtained warrants for the purchase of common stock of each instrumentality. Under this agreement,
the U.S. Treasury has pledged to provide up to $100 billion per instrumentality as needed,
including the contribution of cash capital to the instrumentalities in the event their liabilities
exceed their assets. This is intended to ensure
4
that the instrumentalities maintain a positive net
worth and meet their financial obligations, preventing mandatory triggering of receivership.
Consequently, the investments of holders, including the Funds, of mortgage-backed securities and
other obligations issued by Fannie Mae and Freddie
Mac are protected. Additionally, the U.S. Treasury has implemented a temporary program to purchase
new mortgage-backed securities issued by the instrumentalities. This is intended to create more
affordable mortgage rates for homeowners, enhance the liquidity of the mortgage market and
potentially maintain or increase the value of existing mortgage-backed securities. The program
expires in December 2009. No assurance can be given that the U.S. Treasury initiatives will be
successful.
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U.S. Treasury Obligations.
U.S. Treasury obligations consist of bills, notes and bonds
issued by the U.S. Treasury and separately traded interest and principal component parts of
such obligations that are transferable through the federal book-entry system known as
Separately Traded Registered Interest and Principal Securities (STRIPS) and Treasury
Receipts (TRs).
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Receipts.
Interests in separately traded interest and principal component parts of U.S.
government obligations that are issued by banks or brokerage firms and are created by
depositing U.S. government obligations into a special account at a custodian bank. The
custodian holds the interest and principal payments for the benefit of the registered
owners of the certificates or receipts. The custodian arranges for the issuance of the
certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS
are interests in accounts sponsored by the U.S. Treasury. Receipts are sold as zero coupon
securities.
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U.S. Government Zero Coupon Securities.
STRIPS and receipts are sold as zero coupon
securities, that is, fixed income securities that have been stripped of their unmatured
interest coupons. Zero coupon securities are sold at a (usually substantial) discount and
redeemed at face value at their maturity date without interim cash payments of interest or
principal. The amount of this discount is accreted over the life of the security, and the
accretion constitutes the income earned on the security for both accounting and tax
purposes. Because of these features, the market prices of zero coupon securities are
generally more volatile than the market prices of securities that have similar maturity but
that pay interest periodically. Zero coupon securities are likely to respond to a greater
degree to interest rate changes than are non-zero coupon securities with similar maturity
and credit qualities.
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U.S. Government Agencies.
Some obligations issued or guaranteed by agencies of the U.S.
government are supported by the full faith and credit of the U.S. Treasury, others are
supported by the right of the issuer to borrow from the U.S. Treasury, while still others
are supported only by the credit of the instrumentality. Guarantees of principal by
agencies or instrumentalities of the U.S. government may be a guarantee of payment at the
maturity of the obligation so that in the event of a default prior to maturity there might
not be a market and thus no means of realizing on the obligation prior to maturity.
Guarantees as to the timely payment of principal and interest do not extend to the value or
yield of these securities nor to the value of a Funds shares.
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BORROWING
While the Funds do not anticipate doing so, the Funds may borrow money for investment purposes.
Borrowing for investment purposes is one form of leverage. Leveraging investments, by purchasing
securities with borrowed money, is a speculative technique that increases investment risk, but also
increases investment opportunity. Because substantially all of a Funds assets will fluctuate in
value, whereas the interest obligations on borrowings may be fixed, the net asset value per share
(NAV) of the Fund will increase more when the Funds portfolio assets increase in value and
decrease more when the Funds portfolio assets decrease in value than would otherwise be the case.
Moreover, interest costs on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the returns on the borrowed funds. Under adverse conditions, the Funds
might have to sell portfolio securities to meet interest or principal payments at a time when
investment considerations would not favor such sales. The Funds intend to use leverage during
periods when the Adviser believes that the respective Funds investment objective would be
furthered.
Each Fund may also borrow money to facilitate management of the Funds portfolio by enabling the
Fund to meet redemption requests when the liquidation of portfolio instruments would be
inconvenient or disadvantageous. Such borrowing is not for
5
investment purposes and will be repaid
by the borrowing Fund promptly. As required by the Investment Company Act of 1940 (the 1940 Act),
a Fund must maintain continuous asset coverage (total assets, including assets acquired with
borrowed funds, less
liabilities exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the value of
a Funds assets should fail to meet this 300% coverage test, the Fund, within three days (not
including Sundays and holidays), will reduce the amount of the Funds borrowings to the extent
necessary to meet this 300% coverage requirement. Maintenance of this percentage limitation may
result in the sale of portfolio securities at a time when investment considerations otherwise
indicate that it would be disadvantageous to do so.
LENDING PORTFOLIO SECURITIES
Each Fund may lend portfolio securities to certain creditworthy borrowers. The borrowers provide
collateral that is maintained 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 return of the securities
loaned. A Fund receives the value of any interest or cash or non-cash distributions paid on the
loaned securities. 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 each 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 approved by the Board who administer
the lending program for the Funds in accordance with guidelines 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 the Fund has
agreed to pay a borrower), and credit, legal, counterparty and market risk. In the event a borrower
does not return a Funds securities as agreed, the Fund may experience losses if the proceeds
received from liquidating the collateral do not at least equal the value of the loaned security at
the time the collateral is liquidated plus the transaction costs incurred in purchasing replacement
securities.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements, which involve the sale of securities with
an agreement to repurchase the securities at an agreed-upon price, date and interest payment and
have the characteristics of borrowing. The securities purchased with the funds obtained from the
agreement and securities collateralizing the agreement will have maturity dates no later than the
repayment date. Generally the effect of such transactions is that a Fund can recover all or most of
the cash invested in the portfolio securities involved during the term of the reverse repurchase
agreement, while in many cases a Fund is able to keep some of the interest income associated with
those securities. Such transactions are only advantageous if a Fund has an opportunity to earn a
greater rate of interest on the cash derived from these transactions than the interest cost of
obtaining the same amount of cash. Opportunities to realize earnings from the use of the proceeds
equal to or greater than the interest required to be paid may not always be available and a Fund
intends to use the reverse repurchase technique only when the Adviser believes it will be
advantageous to the Fund. The use of reverse repurchase agreements may exaggerate any interim
increase or decrease in the value of a Funds assets. A Funds exposure to reverse repurchase
agreements will be covered by securities having a value equal to or greater than such commitments.
Under the 1940 Act, reverse repurchase agreements are considered borrowings. Although there is no
limit on the percentage of total assets the Fund may invest in reverse repurchase agreements, the
use of reverse repurchase agreements is not a principal strategy of the Funds.
6
OTHER SHORT-TERM INSTRUMENTS
In addition to repurchase agreements, each Fund may invest in short-term instruments, including
money market instruments, on an ongoing basis to provide liquidity or for other reasons. Money
market instruments are generally short-term investments that may include but are not limited to:
(i) shares of money market funds; (ii) obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities (including government-sponsored enterprises); (iii) negotiable
certificates of deposit (CDs), bankers acceptances, fixed time deposits and other obligations of
U.S. and foreign banks (including foreign branches) and similar institutions; (iv) commercial paper
rated at the date of purchase Prime-1 by Moodys or A-1 by S&P, or if unrated, of comparable
quality as determined by the Adviser; (v) non-convertible corporate debt securities (e.g., bonds
and debentures) with remaining maturities at the date of purchase of not more than 397 days and
that satisfy the rating requirements set forth in Rule 2a-7 under the 1940 Act; and (vi) short-term
U.S. dollar-denominated obligations of foreign banks (including U.S. branches) that, in the opinion
of the Adviser, are of comparable quality to obligations of U.S. banks which may be purchased by a
Fund. Any of these instruments may be purchased on a current or a forward-settled basis. Money
market instruments also include shares of money market funds. Time deposits are non-negotiable
deposits maintained in banking institutions for specified periods of time at stated interest rates.
Bankers acceptances are time drafts drawn on commercial banks by borrowers, usually in connection
with international transactions.
INVESTMENT COMPANIES
Each Fund may invest in the securities of other investment companies, including money market funds,
subject to applicable limitations under Section 12(d)(1) of the 1940 Act. Pursuant to Section
12(d)(1), a 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, a Fund may invest its assets in securities of investment companies that are money
market funds in excess of the limits discussed above.
If a Fund invests in and, thus, is a shareholder of, another investment company, the Funds
shareholders will indirectly bear the Funds 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 Funds own investment adviser and the other expenses that the
Fund bears directly in connection with the Funds 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 Funds. The acquisition of a
Funds shares by registered investment companies is subject to the restrictions of Section 12(d)(1)
of the 1940 Act, except as may at some future time 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.
FUTURES CONTRACTS, OPTIONS AND SWAP AGREEMENTS
Each Fund may utilize exchange-traded futures and options contracts and swap agreements. A Fund
will segregate cash and/or appropriate liquid assets if required to do so by SEC or Commodity
Futures Trading Commission (CFTC) regulation or interpretation.
Futures contracts generally provide for the future sale by one party and purchase by another party
of a specified commodity or security at a specified future time and at a specified price. Index
futures contracts are settled daily with a payment by one party to the other of a cash amount based
on the difference between the level of the index specified in the contract from one day to the
next. Futures contracts are standardized as to maturity date and underlying instrument and are
traded on futures exchanges.
7
A Fund is required to make a good faith margin deposit in cash or U.S. government securities with a
broker or custodian to initiate and maintain open positions in futures contracts. A margin deposit
is intended to assure completion of the contract (delivery or acceptance of the underlying
commodity or payment of the cash settlement amount) if it is not terminated prior to the specified
delivery date. Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin deposits which may range
upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is marked to market daily.
If the futures contract price changes to the extent that the margin on deposit does not satisfy
margin requirements, payment of additional variation margin will be required. Conversely, change
in the contract value may reduce the required margin, resulting in a repayment of excess margin to
the contract holder. Variation margin payments are made to and from the futures broker for as long
as the contract remains open. In such case, a Fund would expect to earn interest income on its
margin deposits. Closing out an open futures position is done by taking an opposite position
(buying a contract which has previously been sold, or selling a contract previously
purchased) in an identical contract to terminate the position. Brokerage commissions are incurred
when a futures contract position is opened or closed.
A Fund may purchase and sell put and call options. Such options may relate to particular
securities and may or may not be listed on a national securities exchange and issued by the Options
Clearing Corporation. Options trading is a highly specialized activity that entails greater than
ordinary investment risk. Options on particular securities may be more volatile than the
underlying securities, and therefore, on a percentage basis, an investment in options may be
subject to greater fluctuation than an investment in the underlying securities themselves.
Each Fund intends to use futures and options in accordance with Rule 4.5 of the Commodity Exchange
Act (CEA). A Fund may use exchange-traded futures and options, together with positions in cash
and money market instruments, to simulate full investment in its underlying Index. Exchange-traded
futures and options contracts are not currently available for all of the Indexes. Under such
circumstances, the Adviser may seek to utilize other instruments that it believes to be correlated
to the applicable Index components or a subset of the components. The Trust, on behalf of the
Funds, has filed a notice of eligibility for exclusion from the definition of the term commodity
pool operator in accordance with Rule 4.5 so that the Funds are not subject to registration or
regulation as a commodity pool operator under the CEA.
Restrictions on the Use of Futures and Options. In connection with its management of the Funds,
the Adviser has claimed an exclusion from registration as a commodity trading advisor under the CEA
and, therefore, is not subject to the registration and regulatory requirements of the CEA. Each
Fund reserves the right to engage in transactions involving futures and options thereon to the
extent allowed by the CFTC regulations in effect from time to time and in accordance with each
Funds policies. Each Fund would take steps to prevent its futures positions from leveraging its
securities holdings. When it has a long futures position, it will maintain with its custodian bank,
cash or equivalents. When it has a short futures position, it will maintain with its custodian bank
assets substantially identical to those underlying the contract or cash and equivalents (or a
combination of the foregoing) having a value equal to the net obligation of a Fund under the
contract (less the value of any margin deposits in connection with the position).
Short Sales. The Funds may engage in short sales that are either uncovered or against the box.
A short sale is against the box if at all times during which the short position is open, the Fund
owns at least an equal amount of the securities or securities convertible into, or exchangeable
without further consideration for, securities of the same issue as the securities that are sold
short. A short sale against the box is a taxable transaction to the Funds with respect to the
securities that are sold short.
Uncovered short sales are transactions under which a Fund sells a security it does not own. To
complete such a transaction, a Fund must borrow the security to make delivery to the buyer. A Fund
then is obligated to replace the security borrowed by purchasing the security at the market price
at the time of the replacement. The price at such time may be more or less than the price at which
the security was sold by a Fund. Until the security is replaced, a Fund is required to pay the
lender amounts equal to any dividends or interest that accrue during the period of the loan. To
borrow the security, a Fund also may be required to pay a premium, which would increase the cost of
the security sold. The proceeds of the short sale will be retained
8
by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out.
Until a Fund closes its short position or replaces the borrowed security, a Fund may: (a) segregate
cash or liquid securities at such a level that (i) the amount segregated plus the amount deposited
with the broker as collateral will equal the current value of the security sold short; and (ii) the
amount segregated plus the amount deposited with the broker as collateral will not be less than the
market value of the security at the time the security was sold short; or (b) otherwise cover the
Funds short position.
Swap Agreements. Each Fund may enter into swap agreements; including interest rate, index, and
total return swap agreements. Swap agreements are contracts between parties in which one party
agrees to make periodic payments to the other party based on the change in market value or level of
a specified rate, index or asset. In return, the other party agrees to make payments to the first
party based on the return of a different specified rate, index or asset. Swap agreements will
usually be done on a net basis, i.e., where the two parties make net payments with a Fund receiving
or paying, as the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of a Funds obligations over its entitlements with respect to each swap is accrued
on a daily basis and an amount of cash or equivalents having an aggregate value at least equal to
the accrued excess is maintained by the Fund.
FUTURE DEVELOPMENTS
A Fund may take advantage of opportunities in the area of options and futures contracts, options on
futures contracts, warrants, swaps and any other investments which are not presently contemplated
for use by the Fund or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Funds investment objective and legally permissible
for the Fund. Before entering into such transactions or making any such investment, a Fund will
provide appropriate disclosure.
SPECIAL CONSIDERATIONS AND RISKS
A discussion of the risks associated with an investment in each Fund is contained in the
Prospectus. The discussion below supplements, and should be read in conjunction with, the
Prospectus.
GENERAL
Investment in a Fund should be made with an understanding that the value of the Funds portfolio
securities may fluctuate in accordance with changes in the financial condition of the issuers of
the portfolio securities, the value of securities generally and other factors.
An investment in a Fund should also be made with an understanding of the risks inherent in an
investment in securities, including the risk that the financial condition of issuers may become
impaired or that the general condition of the securities markets may deteriorate (either of which
may cause a decrease in the value of the portfolio securities and thus in the value of Shares).
Securities are susceptible to general market fluctuations and to volatile increases and decreases
in value as market confidence in and perceptions of their issuers change. These investor
perceptions are based on various and unpredictable factors including expectations regarding
government, economic, monetary and fiscal policies, inflation and interest rates, economic
expansion or contraction, and global or regional political, economic and banking crises.
Holders of common stocks incur more risk than holders of preferred stocks and debt obligations
because common stockholders, as owners of the issuer, have generally inferior rights to receive
payments from the issuer in comparison with the rights of creditors of, or holders of debt
obligations or preferred stocks issued by, the issuer. Further, unlike debt securities which
typically have a stated principal amount payable at maturity (whose value, however, will be subject
to market fluctuations prior thereto), or preferred stocks which typically have a liquidation
preference and which may have stated optional or mandatory redemption provisions, common stocks
have neither a fixed principal amount nor a maturity. Common stock values are subject to market
fluctuations as long as the common stock remains outstanding.
The principal trading market for some of the securities in an Index may be in the over-the-counter
market. The existence of a liquid trading market for certain securities may depend on whether
dealers will make a market in such securities. There can be
9
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 a Funds Shares will be
adversely affected if trading markets for the Funds portfolio securities are limited or absent or
if bid/ask spreads are wide.
FUTURES AND OPTIONS TRANSACTIONS
Positions in futures contracts and options may be closed out only on an exchange which provides a
secondary market therefore. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract or option at any specific time. Thus, it may not be
possible to close a futures or options position. In the event of adverse price movements, a Fund
would continue to be required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In addition, the
applicable Fund may be required to make delivery of the instruments underlying futures contracts it
has sold.
Each Fund will minimize the risk that it will be unable to close out a futures or options contract
by only entering into futures and options for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts or uncovered call options in some strategies (e.g.,
selling uncovered index futures contracts) is potentially unlimited. The Funds do not plan to use
futures and options contracts, when available, in this manner. 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 their risk exposure
to that which is comparable to what they would have incurred through direct investment in
securities.
Utilization of futures transactions by a Fund involves the risk of imperfect or even negative
correlation to the benchmark Index if the index underlying the futures contracts differs from the
benchmark Index. There is also the risk of loss by a Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in the futures contract or option.
Certain financial futures exchanges limit the amount of fluctuation permitted in futures contract
prices during a single trading day. The daily limit establishes the maximum amount that the price
of a futures contract may vary either up or down from the previous days settlement price at the
end of a trading session. Once the daily limit has been reached in a particular type of contract,
no trades may be made on that day at a price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not limit potential losses, because the
limit may prevent the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
RISKS OF SWAP AGREEMENTS
Swap agreements are subject to the risk that the swap counterparty will default on its obligations.
If such a default occurs, a Fund will have contractual remedies pursuant to the agreements related
to the transaction, but such remedies may be subject to bankruptcy and insolvency laws which could
affect the Funds rights as a creditor.
The use of interest-rate and index swaps is a highly specialized activity that involves investment
techniques and risks different from those associated with ordinary portfolio security transactions.
These transactions generally do not involve the delivery of securities or other underlying assets
or principal.
TAX RISKS
As with any investment, you should consider how your investment in Shares of a Fund will be taxed.
The tax information in the Prospectus and this SAI is provided as general information. You should
consult your own tax professional about the tax consequences of an investment in Shares of a Fund.
10
Unless your investment in Shares is made through a tax-exempt entity or tax-deferred retirement
account, such as an individual retirement account, you need to be aware of the possible tax
consequences when a Fund makes distributions or you sell Shares.
CONTINUOUS OFFERING
The method by which Creation Units of Shares are created and traded may raise certain issues under
applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust
on an ongoing basis, at any point a distribution, as such term is used in the Securities Act, may
occur. Broker-dealers and other persons are cautioned that some activities on their part may,
depending on the circumstances, result in their being deemed participants in a distribution in a
manner which could render them statutory underwriters and subject them to the prospectus delivery
and liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes
Creation Units after placing an order with the Distributor, breaks them down into constituent
Shares, and sells such Shares directly to customers, or if it chooses to couple the creation of a
supply of new Shares with an active selling effort involving solicitation of secondary market
demand for Shares. A determination of whether one is an underwriter for purposes of the Securities
Act must take into account all the facts and circumstances pertaining to the activities of the
broker-dealer or its client in the particular case, and the examples mentioned above should not be
considered a complete description of all the activities that could lead to a categorization as an
underwriter.
Broker-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, are generally
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 under Securities Act Rule 153, a prospectus-delivery obligation under Section
5(b)(2) of the Securities Act owed to an exchange member in connection with a sale on the Exchange
is satisfied by the fact that a Funds prospectus is available at the Exchange upon request. The
prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions
on an exchange.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions as fundamental policies with respect to
each Fund. These restrictions cannot be changed with respect to a Fund without the approval of the
holders of a majority of the Funds outstanding voting securities. For these purposes of the 1940
Act, a majority of outstanding shares means the vote of the lesser of: (1) 67% or more of the
voting securities of the Fund present at the meeting if the holders of more than 50% of the Funds
outstanding voting securities are present or represented by proxy; or (2) more than 50% of the
outstanding voting securities of the Fund. Except with the approval of a majority of the
outstanding voting securities, a Fund may not:
1.
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Concentrate its investments in an industry or group of industries (i.e., hold 25% or more of
its total assets in the stocks of a particular industry or group of industries), except that
the Fund will concentrate to approximately the same extent that its underlying Index
concentrates in the stocks of such particular industry or group of industries. For purposes of
this limitation, shares of investment companies, securities of the U.S. government (including
its agencies and instrumentalities), repurchase agreements collateralized by U.S. government
securities and securities of state or municipal governments and their political subdivisions
are not considered to be issued by members of any industry.
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2.
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Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent
permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom,
as such statute, rules or regulations may be amended or interpreted from time to time.
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3.
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Make loans, except to the extent permitted under the 1940 Act, the rules and regulations
thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.
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4.
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Purchase or sell commodities or real estate, except to the extent permitted under the 1940
Act, the rules and
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regulations thereunder or any exemption therefrom, as such statute, rules or regulations may
be amended or interpreted from time to time.
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5.
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Underwrite securities issued by other persons, except to the extent permitted under the 1940
Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended or interpreted from time to time.
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In addition to the investment restrictions adopted as fundamental policies as set forth above, each
Fund observes the following restrictions, which may be changed without a shareholder vote. A Fund
will not:
1.
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Hold illiquid assets in excess of 15% of its net assets. An illiquid asset is any asset
which may not be sold or disposed of in the ordinary course of business within seven days
at approximately the value at which the Fund has valued the investment.
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2.
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Under normal circumstances, invest less than 80% of its total assets in securities that
comprise its relevant Index or in securities that the Adviser has determined have economic
characteristics that are substantially similar to the economic characteristics of the
securities that comprise its relevant Index. Prior to any change in a Funds 80%
investment policy, the Fund will provide shareholders with 60 days written notice.
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If a percentage limitation is adhered to at the time of investment or contract, a later increase or
decrease in percentage resulting from any change in value or total or net assets will not result in
a violation of such restriction, except that the percentage limitations with respect to the
borrowing of money and illiquid securities will be observed continuously.
The following descriptions of certain provisions of the 1940 Act may assist investors in
understanding the above policies and restrictions:
Concentration
. The SEC has defined concentration as investing 25% or more of an investment
companys total assets in an industry or group of industries, with certain exceptions.
Borrowing
. The 1940 Act presently allows a fund to borrow from any bank (including
pledging, mortgaging or hypothecating assets) in an amount up to 33 1/3% of its total assets (not
including temporary borrowings not in excess of 5% of its total assets).
Senior Securities
. Senior securities may include any obligation or instrument issued by a
fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior
securities, although it does not treat certain transactions as senior securities, such as certain
borrowings, short sales, reverse repurchase agreements, firm commitment agreements and standby
commitments, with appropriate earmarking or segregation of assets to cover such obligation.
Lending
. Under the 1940 Act, a fund may only make loans if expressly permitted by its
investment policies. The Funds current investment policy on lending is as follows: a Fund may
not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other
parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its
investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in
securities lending as described in its SAI.
Underwriting
. Under the 1940 Act, underwriting securities involves a fund purchasing
securities directly from an issuer for the purpose of selling (distributing) them or participating
in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not
make any commitment as underwriter, if immediately thereafter the amount of its outstanding
underwriting commitments, plus the value of its investments in securities of issuers (other than
investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds
25% of the value of its total assets.
Real Estate
. The 1940 Act does not directly restrict an investment companys ability to
invest in real estate, but does require that every investment company have a fundamental investment
policy governing such investments. The Funds will not purchase or sell real estate, except that
the Funds may purchase marketable securities issued by companies which own or invest
12
in real estate (including REITs).
Commodities
. The Funds will not purchase or sell physical commodities or commodities
contracts, except that the Funds may purchase: (i) marketable securities issued by companies which
own or invest in commodities or commodities contracts; and (ii) commodities contracts relating to
financial instruments, such as financial futures contracts and options on such contracts.
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an investment in a Fund is
contained in the Prospectus under the SUMMARY INFORMATION ABOUT PURCHASING AND SELLING SHARES,
TAXES AND FINANCIAL INTERMEDIARY COMPENSATION and BUYING AND SELLING THE FUNDS. The discussion
below supplements, and should be read in conjunction with, such sections of the Prospectus.
The Shares of each Fund are approved for listing and trading on the Exchange, subject to notice of
issuance. The Shares trade on the Exchange at prices that may differ to some degree from their net
asset value. There can be no assurance that the requirements of the Exchange necessary to maintain
the listing of Shares of any Fund will continue to be met.
The Exchange may, but is not required to, remove the Shares of a Fund from listing if: (1)
following the initial twelve-month period beginning upon the commencement of trading of the Fund,
there are fewer than 50 beneficial holders of the Shares for 30 or more consecutive trading days;
(2) the value of its underlying Index or portfolio of securities on which the Fund is based is no
longer calculated or available; (3) the indicative optimized portfolio value (IOPV) of the Fund
is no longer calculated or available; or (4) such other event shall occur or condition exists that,
in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. In addition,
the Exchange will remove the Shares from listing and trading upon termination of the Trust or a
Fund.
The Exchange will disseminate, every fifteen seconds during the regular trading day, an indicative
optimized portfolio value (IOPV) relating to the Funds. The IOPV calculations are estimates of
the value of a Funds net asset value per Share using market data converted into U.S. dollars at
the current currency rates. The IOPV price is based on quotes and closing prices from the
securities local market and may not reflect events that occur subsequent to the local markets
close. Premiums and discounts between the IOPV and the market price may occur. This should not be
viewed as a real-time update of the net asset value per Share of the Funds, which is calculated
only once a day. Neither the Funds, nor the Adviser or any of their affiliates are involved in, or
responsible for, the calculation or dissemination of such IOPVs and make no warranty as to their
accuracy.
The Trust reserves the right to adjust the Share price of a Fund in the future to maintain
convenient trading ranges for investors. Any adjustments would be accomplished through stock
splits or reverse stock splits, which would have no effect on the net assets of the Fund.
As in the case of other publicly traded securities, brokers commissions on transactions will be
based on negotiated commission rates at customary levels.
The base and trading currencies of the Funds is the U.S. dollar. The base currency is the currency
in which a Funds net asset value per Share is calculated and the trading currency is the currency
in which Shares of a Fund are listed and traded on the Exchange.
MANAGEMENT OF THE TRUST
The following information supplements and should be read in conjunction with the section in the
Prospectus entitled Fund Management.
TRUSTEES AND OFFICERS OF THE TRUST
The Board has responsibility for the overall management and operations and business affairs of the
Trust, including general supervision and review of its investment activities. The Trustees elect
the officers of the Trust who are responsible for
13
administering the day-to-day operations of the Trust and the Fund. The Trustees and executive
officers of the Trust, along with their principal occupations over the past five years and their
affiliations, if any with the Adviser, are listed below:
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Number of
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Principal
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Portfolios in
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Term of Office
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Occupation(s)
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Fund
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Other
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Position(s) Held
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and Length of
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During Past 5
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Complex
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Directorships held
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Name, Address, and Age
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with the Funds
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Time Served
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Years
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Overseen ByTrustee
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by Trustee
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Interested Trustees
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Thompson S.
Phillips, Jr.
3555 Northwest 58
th Street
Suite 600
Oklahoma City, OK
73112
(57 years old)
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Trustee and
President
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Since 2009
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T.S. Phillips
Investments, Inc.
1990 to Present
President and CEO;
FaithShares
Advisors, LLC 2009
to Present
President and
Portfolio Manager
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5
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J. Garrett Stevens
3555 Northwest 58
th Street
Suite 410
Oklahoma City, OK
73112
(29 years old)
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Trustee and Chief
Executive Officer
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Since 2009
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T.S. Phillips
Investments, Inc.
2001 to Present
Vice President;
FaithShares
Advisors, LLC 2009
to Present Chief
Executive Officer
and Portfolio
Manager
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5
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Independent Trustees
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COMPENSATION OF THE TRUSTEES AND OFFICERS
Because the Trust is recently organized, there is no historical information regarding the
compensation paid to the Trusts Trustees and officers. The Independent Trustees of the Trust do
not currently receive any compensation.
BOARD COMMITTEES
The Board has established the following standing committees:
Audit Committee
. The Board has a standing Audit Committee that is composed of each of the
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 Funds independent registered public accounting firm and whether to
terminate this relationship; reviewing the independent registered public accounting firms
compensation, the proposed scope and terms of its engagement, and the firms independence;
pre-approving audit and non-audit services provided by each Funds independent registered public
accounting firm to the Trust and certain other affiliated entities; serving as a channel of
communication between the independent registered public accounting firm and the Trustees; reviewing
the results of each external audit, including any qualifications in the independent registered
public accounting firms opinion, any related management letter, managements responses to
recommendations made by the independent registered public
14
accounting firm in connection with the
audit, reports submitted to the Committee by the internal auditing department of the Trusts
Administrator that are material to the Trust as a whole, if any, and managements responses to any
such reports; reviewing each Funds audited
financial statements and considering any significant disputes between the Trusts 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 Trusts
senior internal accounting executive, if any, the independent registered public accounting firms
report on the adequacy of the Trusts internal financial controls; reviewing, in consultation with
each Funds independent registered public accounting firm, major changes regarding auditing and
accounting principles and practices to be followed when preparing each Funds 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 Trusts 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 of the 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 Trusts 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.
Pricing and Investment Committee
. The Board also has established a Pricing and Investment
Committee that is composed of at least one Trustee and various representatives of the Trusts
service providers, as appointed by the Board. The Pricing and Investment Committee is responsible
for the valuation and revaluation of any portfolio investments for which market quotations or
prices are not readily available. Mr. Stevens currently serves as the Boards delegate on the
Pricing and Investment Committee. The Pricing and Investment Committee meets only when necessary.
The Pricing and Investment Committee reports to the Board on a quarterly basis.
OWNERSHIP OF SHARES
The following table shows the dollar amount ranges of each Trustees beneficial ownership of
shares of each Fund and each other series of the Trust as of the end of the most recently
completely calendar year. Because the Funds are new, as of the date of this SAI, none of the
Trustees beneficially owned shares of the Funds. 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 own less than 1% of the outstanding shares of the
Trust.
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Aggregate Dollar Range of Shares
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Name
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Dollar Range of Shares
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(All Funds)
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Interested Trustees
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Thompson S. Phillips, Jr.
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J. Garrett Stevens
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Independent Trustees
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15
CODE OF ETHICS
The Trust, the Adviser, and the Distributor have each adopted codes of ethics pursuant to Rule
17j-1 of the 1940 Act. These codes of ethics designed to prevent affiliated persons of the Trust,
the Adviser and the Distributor from engaging in deceptive, manipulative or fraudulent activities
in connection with securities held or to be acquired by the Funds (which may also be held by
persons subject to the codes of ethics).
There can be no assurance that the codes of ethics will be effective in preventing such activities.
Each code of ethics, filed as exhibits to this registration statement, may be examined at the
office of the SEC in Washington, D.C. or on the Internet at the SECs website at
http://www.sec.gov.
PROXY VOTING POLICIES
The Board of Trustees has delegated the responsibility to vote proxies for securities held in the
Funds portfolios to the Adviser. Proxies for the portfolio securities are voted in accordance with
the Advisers proxy voting policies and procedures, which are set forth in Appendix A to this SAI.
Information regarding how a Fund voted proxies relating to its portfolio securities during the most
recent twelve-month period ended June 30 will be available: (1) without charge by calling
1-XXX-XXX-XXXX; (2) on the Funds website at
www.faithshares.com
; and (3) on the SECs website at
http://www.sec.gov.
INVESTMENT ADVISORY AND OTHER SERVICES
FaithShares Advisors, LLC, an Oklahoma limited liability company located at 3555 Northwest 58th
Street, Suite 410 Oklahoma City, Oklahoma 73112, serves as the investment adviser to the Funds.
The Adviser is majority owned by its managing member, FaithShares Investment Management LLC, an
Oklahoma limited liability company of which Mr. Phillips and Mr. Stevens are the sole members.
Currently, the Advisers sole investment advisory client is the Trust.
The Trust and the Adviser have entered into an investment advisory agreement dated
___,
2009 (the Advisory Agreement) with respect to the Funds. Under the Advisory Agreement, the
Adviser serves as the investment adviser, makes investment decisions for each Fund, and manages the
investment portfolios and business affairs of the Funds, subject to the supervision of, and
policies established by, the Trustees of the Trust. Under the Advisory Agreement, the Adviser is
also responsible for arranging transfer agency, custody, fund administration and accounting, and
other non-distribution related services necessary for the Funds to operate. The Adviser
administers the Funds business affairs, provides office facilities and equipment and certain
clerical, bookkeeping and administrative services, and permits its officers and employees to serve
as officers, Trustees or employees of the Trust. The Advisory Agreement provides that the Adviser
shall not be protected against any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties hereunder or its
reckless disregard of its obligation and duties under this Advisory Agreement.
After the initial two-year term, the continuance of the 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
Funds; and (ii) by the vote of a majority of the Trustees who are not parties to the 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 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 Funds, by a majority of the outstanding shares of the Funds, on not less
than 30 days nor more than 60 days written notice to the Adviser, or by the Adviser on 90 days
written notice to the Trust. As used in the 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.
Pursuant to the Advisory Agreement, for the services it provides to the Funds, the Adviser receives
a fee, which is calculated daily and paid monthly at the following rates: 0.87% of the combined
daily net assets of the Funds on the first $1.5 billion, 0.75% on the next $1 billion and 0.65%
exceeding $2.5 billion. The Adviser pays all expenses of each Fund other than the management fee,
distribution fees pursuant to the Funds Distribution and Service Plan, if any, brokerage expenses,
taxes, interest, fees and expenses of the Independent Trustees (including any Trustees counsel
fees), litigation expenses, acquired fund fees and expenses and other extraordinary expenses. The
Adviser intends to donate 10% of the net income it derives from each Fund to a charitable
organization selected by such Fund, and whose mission is aligned with the moral and social beliefs
of the faith represented by the Fund.
16
THE PORTFOLIO MANAGERS
This section includes information about the Funds portfolio managers, including information about
other accounts they manage, the dollar range of Shares they own and how they are compensated.
COMPENSATION
The Adviser compensates the Funds portfolio managers for the management of the Fund. Portfolio
Managers are compensated solely through their ownership in the Adviser.
SHARES OWNED BY PORTFOLIO MANAGERS
Each Fund is required to show the dollar range of each portfolio managers beneficial ownership
of shares of each Fund as of the end of the most recently completed fiscal 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. Because the Funds are new, as of the date of this SAI,
none of the Portfolio Managers beneficially own shares of a Fund.
OTHER ACCOUNTS
In addition to the Funds, the portfolio managers are responsible for the day-to-day management of
certain other accounts, as listed below. The information below is provided as of June 30, 2009.
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Registered
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Other Pooled
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Investment Companies
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Investment Vehicles
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Other Accounts
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Number of
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Total Assets
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Number of
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Total Assets
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Number of
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Total Assets
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Name
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Accounts
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($ millions)
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Accounts
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($ millions)
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Accounts
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($ millions)
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J. Garrett Stevens
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Thompson S.
Phillips, Jr.
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THE DISTRIBUTOR
The Trust and SEI Investments Distribution Co. (the Distributor), a wholly-owned subsidiary of
SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement
dated January 16, 2009 (Distribution Agreement), whereby the Distributor acts as principal
underwriter for the Trusts shares and distributes the shares of each Fund. Shares are
continuously offered for sale by the Distributor only in Creation Units. Each Creation Unit is made
up 50,000 Shares. The Distributor will not distribute Shares in amounts less than a Creation Unit.
The principal business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania
19456.
Under the Distribution Agreement, the Distributor, as agent for the Trust, will solicit orders for
the purchase of the Shares, provided that any subscriptions and orders will not be binding on the
Trust until accepted by the Trust. The Distributor will deliver Prospectuses and, upon request,
Statements of Additional Information to persons purchasing Creation Units and will maintain records
of orders placed with it. The Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934 (the Exchange Act) and a member of the Financial Industry Regulatory
Authority (FINRA).
The Distributor may also enter into agreements with securities dealers (Soliciting Dealers) who
will solicit purchases of Creation Units of Shares. Such Soliciting Dealers may also be Authorized
Participants (as discussed in Procedures for Creation of Creation Units below) or DTC
participants (as defined below).
17
The Distribution Agreement will continue for two years from its effective date and is renewable
thereafter. The continuance of the Distribution 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 interested persons of the Trust and have no
direct or indirect financial interest in the operations of the Distribution Agreement or any
related agreement, cast in person at a meeting called for the purpose of voting on such approval.
The Distribution Agreement is terminable without penalty by the Trust on 60 days written notice
when authorized either by majority vote of its outstanding voting shares or by a vote of a majority
of its Board (including a majority of the Independent Trustees), or by the Distributor on 60 days
written notice, and will automatically terminate in the event of its assignment. The Distribution
Agreement provides that in the absence of willful misfeasance, bad faith or gross negligence on the
part of the Distributor, or reckless disregard by it of its obligations thereunder, the Distributor
shall not be liable for any action or failure to act in accordance with its duties thereunder.
Distribution Plan.
The Trust has adopted a Distribution Plan (the Plan) in accordance with the
provisions of Rule 12b-1 under the 1940 Act, which regulates circumstances under which an
investment company may directly or indirectly bear expenses relating to the distribution of its
shares. No payments pursuant to the Plan will be made during the next twelve (12) months of
operation. Continuance of the Plan must be approved annually by a majority of the Trustees of the
Trust and by a majority of the Trustees who are not interested persons (as defined in the 1940 Act)
of the Trust and have no direct or indirect financial interest in the Plan or in any agreements
related to the Plan (Qualified Trustees). The Plan requires that quarterly written reports of
amounts spent under the Plan and the purposes of such expenditures be furnished to and reviewed by
the Trustees. The Plan may not be amended to increase materially the amount that may be spent
thereunder without approval by a majority of the outstanding shares of any class of a Fund that is
affected by such increase. All material amendments of the Plan will require approval by a majority
of the Trustees of the Trust and of the Qualified Trustees.
The Plan provides that shares of each Fund pay the Distributor an annual fee of up to a maximum of
0.25% of the average daily net assets of the shares. Under the Plan, the Distributor may make
payments pursuant to written agreements to financial institutions and intermediaries such as banks,
savings and loan associations and insurance companies including, without limit, investment
counselors, broker-dealers and the Distributors affiliates and subsidiaries (collectively,
Agents) as compensation for services and reimbursement of expenses incurred in connection with
distribution assistance. The Plan is characterized as a compensation plan since the distribution
fee will be paid to the Distributor without regard to the distribution expenses incurred by the
Distributor or the amount of payments made to other financial institutions and intermediaries. The
Trust intends to operate the Plan in accordance with its terms and with the Financial Industry
Regulatory Authority (FINRA) rules concerning sales charges.
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Description of Distribution Services.
Distribution services may include: (i) services
in connection with distribution assistance; or (ii) payments to financial institutions and
other financial intermediaries, such as banks, savings and loan associations, insurance
companies, investment counselors, broker-dealers, mutual fund supermarkets and the
Distributors affiliates and subsidiaries, as compensation for services or reimbursement of
expenses incurred in connection with distribution assistance. The Distributor may, at its
discretion, retain a portion of such payments to compensate itself for distribution
services and distribution related expenses such as the costs of preparation, printing,
mailing or otherwise disseminating sales literature, advertising, and prospectuses (other
than those furnished to current shareholders of the Fund), promotional and incentive
programs, and such other marketing expenses that the Distributor may incur.
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THE ADMINISTRATOR
SEI Investments Global Funds Services (the Administrator), a Delaware statutory trust, has its
principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments
Management Corporation (SIMC), a wholly-owned subsidiary of SEI Investments Company (SEI
Investments), is the owner of all beneficial interest in the Administrator. SEI Investments and
its subsidiaries and affiliates, including the Administrator, are leading providers of funds
evaluation services, trust accounting systems, and brokerage and information services to financial
institutions, institutional investors, and money managers. The Administrator and its affiliates
also serve as administrator or sub-administrator to other mutual funds.
18
The Trust and the Administrator have entered into an administration agreement dated January 16,
2009 (the Administration Agreement). Under the Administration Agreement, the Administrator
provides the Trust with administrative services, including regulatory reporting and all necessary
office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration
Agreement, the Administrator also serves as the shareholder servicing agent for the Fund whereby
the Administrator provides certain shareholder services to the Funds.
The Administration Agreement provides that the Administrator shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to
which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Administrator in the performance of its duties or from
reckless disregard by it of its duties and obligations thereunder.
For its services under the Administration Agreement, the Administrator is entitled to a fee, which
is detailed below in the following schedule:
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Fee (as a percentage of aggregate
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average annual assets)
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Funds Average Daily Net Assets
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0.145%
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First $2 billion
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0.115%
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over $2 billion
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0.XX%
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Over $XXX million/billion
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The
foregoing fee is subject to a minimum annual fee as follows: Year 1 $70,000 per Fund, Year 2 $85,000
per Fund, Year 3 $130,000 per Fund.
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Each additional fund established after the initial 5 Funds will be subject to a minimum
annual fee equal to the schedule above.
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Each additional class of shares of a Fund established after the initial (1) class of
shares per Fund will be subject to an additional minimum annual fee equal to the schedule
above per class.
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THE CUSTODIAN
Brown Brothers Harriman (the Custodian), [40 Water St. Boston, MA 02109] serves as the custodian
of the Funds. The Custodian holds cash, securities and other assets of the Funds as required by the
1940 Act.
THE TRANSFER AGENT
Brown Brothers Harriman (the Transfer Agent), 40 Water St. Boston, MA 02109, serves as the Funds
transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
LEGAL COUNSEL
Morgan, Lewis & Bockius, LLP, 1111 Pennsylvania Avenue NW, Washington, DC 20004, serves as legal
counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[NAME], [ADDRESS], serves as the independent registered public accounting firm for the Funds.
PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES
The Trusts Board of Trustees has adopted a policy regarding the disclosure of information about
each Funds security holdings. Each Funds entire portfolio holdings are publicly disseminated each
day the Fund is open for business through financial reporting and news services including publicly
available internet web sites. In addition, the composition of the In-
19
Kind Creation Basket and the In-Kind Redemption Basket, is publicly disseminated daily prior to the
opening of the NYSE Arca via the NSCC.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each
fund. Each share of a fund represents an equal proportionate interest in that fund with each other
share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund.
Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the
Trust may create additional series or classes of shares. All consideration received by the Trust
for shares of any additional funds and all assets in which such consideration is invested would
belong to that fund and would be subject to the liabilities related thereto. Share certificates
representing shares will not be issued. The Funds shares, when issued, are fully paid and
non-assessable.
Each Share has one vote with respect to matters upon which a shareholder vote is required
consistent with the requirements of the 1940 Act and the rules promulgated thereunder. Shares of
all funds vote together as a single class, except that if the matter being voted on affects only a
particular Fund it will be voted on only by that Fund and if a matter affects a particular Fund
differently from other Funds, that Fund will vote separately on such matter. As a Delaware
statutory trust, the Trust is not required, and does not intend, to hold annual meetings of
shareholders. Approval of shareholders will be sought, however, for certain changes in the
operation of the Trust and for the election of Trustees under certain circumstances. Upon the
written request of shareholders owning at least 10% of the Trusts shares, the Trust will call for
a meeting of shareholders to consider the removal of one or more trustees and other certain
matters. In the event that such a meeting is requested, the Trust will provide appropriate
assistance and information to the shareholders requesting the meeting.
Under the Declaration of Trust, the Trustees have the power to liquidate each Fund without
shareholder approval. While the Trustees have no present intention of exercising this power, they
may do so if any Fund fails to reach a viable size within a reasonable amount of time or for such
other reasons as may be determined by the Board.
LIMITATION OF TRUSTEES LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees shall not be responsible or liable in any event for any neglect or
wrong-doing of any officer, agent, employee, investment adviser or principal underwriter of the
Trust, nor shall any Trustee be responsible for the act or omission of any other Trustee. The
Declaration of Trust also provides that The Trust shall indemnify each person who is, or has been,
a Trustee, officer, employee or agent of the Trust, any person who is serving or has served at the
Trusts request as a Trustee, officer, trustee, employee or agent of another organization in which
the Trust has any interest as a shareholder, creditor or otherwise to the extent and in the manner
provided in the By-Laws. However, nothing in the Declaration of Trust shall protect or indemnify a
Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of Trustee. Nothing
contained in this section attempts to disclaim a Trustees individual liability in any manner
inconsistent with the federal securities laws.
BROKERAGE TRANSACTIONS
The policy of the Trust regarding purchases and sales of securities for each Fund is that primary
consideration will be given to obtaining the most favorable prices and efficient executions of
transactions. Consistent with this policy, when securities transactions are effected on a stock
exchange, the Trusts policy is to pay commissions which are considered fair and reasonable without
necessarily determining that the lowest possible commissions are paid in all circumstances. The
Trust believes that a requirement always to seek the lowest possible commission cost could impede
effective portfolio management and preclude a Fund and the Adviser from obtaining a high quality of
brokerage and research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Adviser will rely upon its experience and knowledge
regarding commissions generally charged by various brokers and on its judgment in evaluating the
brokerage services received from the broker effecting the transaction. Such determinations are
necessarily subjective and imprecise, as in most cases, an
20
exact dollar value for those
services is not ascertainable. The Trust has adopted policies and procedures that prohibit the
consideration of sales of a Funds shares as a factor in the selection of a broker or dealer to
execute its portfolio transactions.
The Adviser owes a fiduciary duty to its clients to seek to provide best execution on trades
effected. In selecting a broker/dealer for each specific transaction, the Adviser chooses the
broker/dealer deemed most capable of providing the services necessary to obtain the most favorable
execution. Best execution is generally understood to mean the most favorable cost or net proceeds
reasonably obtainable under the circumstances. The full range of brokerage services applicable to
a particular transaction may be considered when making this judgment, which may include, but is not
limited to: liquidity, price, commission, timing, aggregated trades, capable floor brokers or
traders, competent block trading coverage, ability to position, capital strength and stability,
reliable and accurate communications and settlement processing, use of automation, knowledge of
other buyers or sellers, arbitrage skills, administrative ability, underwriting and provision of
information on a particular security or market in which the transaction is to occur. The specific
criteria will vary depending upon the nature of the transaction, the market in which it is
executed, and the extent to which it is possible to select from among multiple broker/dealers. The
Adviser will also use electronic crossing networks (ECNs) when appropriate.
The Adviser does not currently use the Funds assets for, or participate in, third party any soft
dollar arrangements, although it may receive proprietary research from various full service
brokers, the cost of which is bundled with the cost of the brokers execution services. The
Adviser does not pay up for the value of any such proprietary research.
The Adviser assumes general supervision over placing orders on behalf of the Trust for the purchase
or sale of portfolio securities. If purchases or sales of portfolio securities of the Trust and one
or more other investment companies or clients supervised by the Adviser are considered at or about
the same time, transactions in such securities are allocated among the several investment companies
and clients in a manner deemed equitable and consistent with its fiduciary obligations to all by
the Adviser. In some cases, this procedure could have a detrimental effect on the price or volume
of the security so far as the Trust is concerned. However, in other cases, it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Funds. The primary consideration is prompt execution of orders at the most
favorable net price.
The Funds may deal with affiliates in principal transactions to the extent permitted by exemptive
order or applicable rule or regulation.
The Funds had not commenced operations as of the date of this SAI and therefore did not pay
brokerage commissions during the past fiscal year.
Brokerage with Fund Affiliates. The Funds may execute brokerage or other agency transactions
through registered broker-dealer affiliates of either the Funds, the Adviser or the Distributor for
a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These
rules require that commissions paid to the affiliate by the Funds for exchange transactions not
exceed usual and customary brokerage commissions. The rules define usual and customary
commissions to include amounts which are reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a securities exchange during a
comparable period of time. The Trustees, including those who are not interested persons of the
Funds, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates
and review these procedures periodically.
Securities of Regular Broker-Dealer. Each Fund is required to identify any securities of its
regular brokers and dealers (as such term is defined in the 1940 Act) which it may hold at the
close of its most recent fiscal year. Regular brokers or dealers of the Trust are the ten
brokers or dealers that, during the most recent fiscal year: (i) received the greatest dollar
amounts of brokerage commissions from the Trusts portfolio transactions; (ii) engaged as
principal in the largest dollar amounts of portfolio transactions of the Trust; or (iii) sold the
largest dollar amounts of the Trusts shares. Because the Funds are new, as of the date of this
SAI, the Funds do not hold any securities of regular broker dealers to report.
21
PORTFOLIO TURNOVER RATE
Portfolio turnover may vary from year to year, as well as within a year. High turnover rates are
likely to result in comparatively greater brokerage expenses. The portfolio turnover rate for each
Fund is expected to be under 10%. The overall reasonableness of brokerage commissions is
evaluated by the Adviser based upon its knowledge of available information as to the general level
of commissions paid by other institutional investors for comparable services.
BOOK ENTRY ONLY SYSTEM
DTC acts as securities depositary for the Shares. Shares of each Fund are represented by securities
registered in the name of DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
Except in limited circumstances set forth below, certificates will not be issued for Shares.
DTC is a limited-purpose trust company that was created to hold securities of its participants (the
DTCs Participants) and to facilitate the clearance and settlement of securities transactions
among the DTC Participants in such securities through electronic book-entry changes in accounts of
the DTC Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations, some of whom (and/or their representatives)
own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE 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 (the Indirect Participants).
Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants, and persons
holding interests through DTC Participants and Indirect Participants. Ownership of beneficial
interests in Shares (owners of such beneficial interests are referred to herein as Beneficial
Owners) is shown on, and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to
Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will
receive from or through the DTC Participant a written confirmation relating to their purchase of
Shares. The Trust recognizes DTC or its nominee as the record owner of all Shares for all
purposes. Beneficial Owners of Shares are not entitled to have Shares registered in their names,
and will not receive or be entitled to physical delivery of share certificates. Each Beneficial
Owner must rely on the procedures of DTC and any DTC Participant and/or Indirect Participant
through which such Beneficial Owner holds its interests, to exercise any rights of a holder of
Shares.
Conveyance of all notices, statements, and other communications to Beneficial Owners is effected as
follows. DTC will make available to the Trust upon request and for a fee a listing of Shares held
by each DTC Participant. The Trust shall obtain from each such DTC Participant the number of
Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust
shall provide each such DTC Participant with copies of such notice, statement, or other
communication, in such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice, statement or communication may be transmitted by such DTC
Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to
each such DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant
to such transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede &Co., as the registered holder of all
Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC
Participants accounts with payments in amounts proportionate to their respective beneficial
interests in the 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 a Funds
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.
22
DTC may determine to discontinue providing its service with respect to a Fund at any time by giving
reasonable notice to the Fund and discharging its responsibilities with respect thereto under
applicable law. Under such circumstances, the Fund shall take action either to find a replacement
for DTC to perform its functions at a 09:44:13.35 22-APR-2009 Date: Operator: comparable cost or,
if such replacement is unavailable, to issue and deliver printed certificates representing
ownership of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to
the Exchange).
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The Fund had not commenced operations as of July 14, 2009 and therefore no person owned of record
beneficially 5% or more of any Shares of the Fund.
An Authorized Participant (as defined below) may hold of record more than 25% of the outstanding
Shares of a Fund. From time to time, Authorized Participants may be a beneficial and/or legal
owner of a Fund, may be affiliated with an index provider, may be deemed to have control of the
applicable Fund and/or may be able to affect the outcome of matters presented for a vote of the
shareholders of the Fund. Authorized Participants may execute an irrevocable proxy granting the
Distributor or another affiliate (the Agent) power to vote or abstain from voting such Authorized
Participants beneficially or legally owned Shares of a Fund. In such cases, the Agent shall
mirror vote (or abstain from voting) such Shares in the same proportion as all other beneficial
owners of the Fund.
The Fund had not commenced operations prior to the date of this SAI and therefore, the Trustees and
Officers of the Trust did not own any of the Funds outstanding shares.
PURCHASE AND ISSUANCE OF SHARES IN CREATION UNITS
The Trust issues and sells Shares of each Fund only: (i) in Creation Units on a continuous basis
through the Distributor, without a sales load (but subject to transaction fees), at their NAV per
share next determined after receipt of an order, on any Business Day, in proper form pursuant to
the terms of the Authorized Participant Agreement (Participant Agreement); or (ii) pursuant to
the Dividend Reinvestment Service (as defined below). The NAV of each Funds shares is calculated
each business day as of the close of regular trading on the NYSE Arca, generally 4:00 p.m., Eastern
Time. The Funds will not issue fractional Creation Units. A Business Day is any day on which the
NYSE Arca is open for business.
FUND DEPOSIT. The consideration for purchase of a Creation Unit of a Fund generally consists of the
in-kind deposit of a designated portfolio of securities (the Deposit Securities) per each
Creation Unit, constituting a substantial replication, or a portfolio sampling representation, of
the securities included in the relevant Funds benchmark Index and the Cash Component (defined
below), computed as described below. Notwithstanding the foregoing, the Trust reserves the right
to permit or require the substitution of a cash in lieu amount (Deposit Cash) to be added to
the Cash Component to replace any Deposit Security. When accepting purchases of Creation Units for
all or a portion of Deposit Cash, a Fund may incur additional costs associated with the acquisition
of Deposit Securities that would otherwise be provided by an in-kind purchaser.
Together, the Deposit Securities or Deposit Cash, as applicable, and the Cash Component constitute
the Fund Deposit, which represents the minimum initial and subsequent investment amount for a
Creation Unit of any Fund. The Cash Component is an amount equal to the difference between the
net asset value of the Shares (per Creation Unit) and the market value of the Deposit Securities or
Deposit Cash, as applicable. If the Cash Component is a positive number (i.e., the net asset value
per Creation Unit exceeds the market value of the Deposit Securities or Deposit Cash, as
applicable), the Cash Component shall be such positive amount. If the Cash Component is a negative
number (i.e., the net asset value per Creation Unit is less than the market value of the Deposit
Securities or Deposit Cash, as applicable), the Cash Component shall be such negative amount and
the creator will be entitled to receive cash in an amount equal to the Cash Component. The Cash
Component serves the function of compensating for any differences between the net asset value per
Creation Unit and the market value of the Deposit Securities or Deposit Cash, as applicable.
Computation of the Cash Component excludes any stamp duty or other similar fees and expenses
payable upon transfer of beneficial ownership of the Deposit Securities, if applicable, which shall
be the sole responsibility of the Authorized Participant (as defined below).
Each Fund, through NSCC, makes available on each Business Day, immediately prior to the opening of
business on the
23
Exchange (currently 9:30 a.m., Eastern time), the list of the names and the required number of shares of
each Deposit Security or the required amount of Deposit Cash, as applicable, to be included in the
current Fund Deposit (based on information at the end of the previous Business Day) for a Fund.
Such Fund Deposit is subject to any applicable adjustments as described below, in order to effect
purchases of Creation Units of a Fund until such time as the next-announced composition of the
Deposit Securities or the required amount of Deposit Cash, as applicable, is made available.
The identity and number of shares of the Deposit Securities or the amount of Deposit Cash, as
applicable, required for a Fund Deposit for each Fund changes as rebalancing adjustments and
corporate action events are reflected from time to time by the Adviser with a view to the
investment objective of the Fund. The composition of the Deposit Securities may also change in
response to adjustments to the weighting or composition of the component securities of a Funds
Index.
The Trust reserves the right to permit or require the substitution of an amount of cash (
i.e.,
a
cash in lieu amount) to replace any Deposit Security, which shall be added to the Deposit Cash,
if applicable, and the Cash Component, including, without limitation, in situations where the
Deposit Security: (i) may not be available in sufficient quantity for delivery; (ii) may not be
eligible for transfer through the systems of DTC for corporate securities and municipal securities;
(iii) may not be eligible for trading by an Authorized Participant (as defined below) or the
investor for which it is acting; (iv) would be restricted under the securities laws or where the
delivery of the Deposit Security to the Authorized Participant would result in the disposition of
the Deposit Security by the Authorized Participant becoming restricted under the securities laws;
or (v) in certain other situations (collectively, custom orders). The Trust also reserves the
right to include or remove Deposit Securities from the basket in anticipation of index rebalancing
changes. The adjustments described above will reflect changes, known to the Adviser on the date of
announcement to be in effect by the time of delivery of the Fund Deposit, in the composition of the
subject Index being tracked by the relevant Fund or resulting from certain corporate actions.
PROCEDURES FOR PURCHASE OF CREATION UNITS. To be eligible to place orders with the Distributor to
purchase a Creation Unit of a Fund, an entity must be (i) a Participating Party, i.e., a
broker-dealer or other participant in the clearing process through the Continuous Net Settlement
System of the NSCC (the Clearing Process), a clearing agency that is registered with the SEC; or
(ii) a DTC Participant (see BOOK ENTRY ONLY SYSTEM). In addition, each Participating Party or DTC
Participant (each, an Authorized Participant) must execute a Participant Agreement that has been
agreed to by the Distributor and the Transfer Agent, and that has been accepted by the Trust, with
respect to purchases and redemptions of Creation Units. Each Authorized Participant will agree,
pursuant to the terms of a Participation Agreement, on behalf of itself or any investor on whose
behalf it will act, to certain conditions, including that it will pay to the Trust, an amount of
cash sufficient to pay the Cash Component together with the Creation Transaction Fee (defined
below) and any other applicable fees and taxes.
All orders to purchase Shares directly from a Fund must be placed for one or more Creation Units
and in the manner and by the time set forth in the Participant Agreement and/or applicable order
form. The date on which an order to purchase Creation Units (or an order to redeem Creation Units,
as set forth below) is received and accepted is referred to as the Order Placement Date.
An 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 that, therefore, orders to purchase Shares directly from a Fund in Creation Units
have to be placed by the investors 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.
On days when the Exchange closes earlier than normal, a Fund may require orders to create Creation
Units to be placed earlier in the day. Orders must be transmitted by an Authorized Participant by
telephone or other transmission method acceptable to the Distributor pursuant to procedures set
forth in the Participant Agreement and in accordance with the applicable order form. Those placing
orders through an Authorized Participant should allow sufficient time to permit proper submission
of the purchase order to the Distributor by the cut-off time on such Business Day. Economic or
market disruptions or changes, or
24
telephone or other communication failure may impede the ability
to reach the Distributor or an Authorized Participant.
Fund Deposits must be delivered by an Authorized Participant through the Federal Reserve System
(for cash) or through DTC (for
corporate securities) and/or through a subcustody agent for (for foreign securities). With respect
to foreign Deposit Securities, the Custodian shall cause the subcustodian of such Fund to maintain
an account into which the Authorized Participant shall deliver, on behalf of itself or the party on
whose behalf it is acting, such Deposit Securities. Foreign Deposit Securities must be delivered to
an account maintained at the applicable local subcustodian. The Fund Deposit transfer must be
ordered by the Authorized Participant in a timely fashion so as to ensure the delivery of the
requisite number of Deposit Securities or Deposit Cash, as applicable, to the account of a Fund or
its agents by no later than the Settlement Date. The Settlement Date for a Fund is generally the
third Business Day after the Order Placement Date. All questions as to the number of Deposit
Securities or Deposit Cash to be delivered, as applicable, and the validity, form and eligibility
(including time of receipt) for the deposit of any tendered securities or cash, as applicable, will
be determined by the Trust, whose determination shall be final and binding. The amount of cash
represented by the Cash Component must be transferred directly to the Custodian through the Federal
Reserve Bank wire transfer system in a timely manner so as to be received by the Custodian no later
than the Settlement Date. If the Cash Component and the Deposit Securities or Deposit Cash, as
applicable, are not received by in a timely manner by the Settlement Date, the creation order may
be cancelled. Upon written notice to the Distributor, such canceled 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 Units so created generally will occur no later than the third
Business Day following the day on which the purchase order is deemed received by the Distributor.
The Authorized Participant shall be liable to the Fund for losses, if any, resulting from unsettled
orders.
ISSUANCE OF A CREATION UNIT. Except as provided herein, Creation Units will not be issued until the
transfer of good title to the Trust of the Deposit Securities or payment of Deposit Cash, as
applicable, and the payment of the Cash Component have been completed. When the subcustodian has
confirmed to the Custodian that the required Deposit Securities (or the cash value thereof) have
been delivered to the account of the relevant subcustodian or subcustodians, the Distributor and
the Adviser shall be notified of such delivery, and the Trust will issue and cause the delivery of
the Creation Units.
Creation Units may be purchased 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 net asset value of the Shares on the date the order is placed in
proper form since in addition to available Deposit Securities, cash must be deposited in an amount
equal to the sum of (i) the Cash Component, plus (ii) an additional amount of cash equal to a
percentage of the market value as set forth in the Participant Agreement, of the undelivered
Deposit Securities (the Additional Cash Deposit), which shall be maintained in a separate
non-interest bearing collateral account. 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 the Additional Cash Deposit with the Trust in an amount at least equal to the
applicable percentage, as set forth in the Participant Agreement, of the daily marked to market
value of the missing Deposit Securities. The Participant Agreement will permit the Trust to buy the
missing Deposit Securities at any time. Authorized Participants 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 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. In addition, a Transaction Fee as set forth below under Creation Transaction Fee
will be charged in all cases. The delivery of Creation Units so created generally will occur no
later than the Settlement Date.
ACCEPTANCE OF ORDERS OF CREATION UNITS. The Trust reserves the absolute right to reject an order
for Creation Units transmitted to it by the Distributor in respect of a Fund including, without
limitation, if (a) the order is not in proper form; (b) the Deposit Securities or Deposit Cash, as
applicable, delivered by the Participant are not as disseminated through the facilities of the NSCC
for that date by the Custodian; (c) the investor(s), upon obtaining the Shares ordered, would own
80% or more of the currently outstanding Shares of the Fund; (d) acceptance of the Deposit
Securities would have certain adverse tax consequences to the Fund; (e) the acceptance of the Fund
Deposit would, in the opinion of counsel, be unlawful; (f) the acceptance of the Fund Deposit would
otherwise, in the discretion of the Trust or the Adviser, have an adverse effect on the
25
Trust or
the rights of beneficial owners; (g) the acceptance or receipt of the order for a Creation Unit
would, in the opinion of counsel to the Trust, be unlawful; or (h) in the event that circumstances
outside the control of the Trust, the Custodian, the Transfer Agent and/or the Adviser make it for
all practical purposes not feasible to process orders for Creation Units.
Examples of such circumstances include acts of God or public service or utility problems such as
fires, floods, extreme weather
conditions and power outages resulting in telephone, telecopy and computer failures; market
conditions or activities causing trading halts; systems failures involving computer or other
information systems affecting the Trust, the Distributor, the Custodian, the Transfer Agent, DTC,
NSCC, Federal Reserve System, or any other participant in the creation process, and other
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 of its rejection of
the order of such person. The Trust, the Transfer Agent, the 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 either of them incur any liability for the failure to give any such
notification. The Trust, the Transfer Agent, the Custodian and the Distributor shall not be liable
for the rejection of any purchase order for Creation Units.
All questions as to the number of shares of each security in the Deposit Securities and the
validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be
determined by the Trust, and the Trusts determination shall be final and binding.
CREATION TRANSACTION FEE. A purchase (i.e., creation) transaction fee is imposed for the transfer
and other transaction costs associated with the purchase of Creation Units, and investors will be
required to pay a creation transaction fee regardless of the number of Creation Units created in
the transaction. A Fund may adjust the creation transaction fee from time to time based upon
actual experience. An additional charge of up to five (5) times the fixed transaction fee may be
imposed for cash purchases, non-standard orders, or partial cash purchases for each Fund.
Investors who use the services of a broker or other such intermediary may be charged a fee for such
services. Investors are responsible for the costs of transferring the securities constituting the
Deposit Securities to the account of the Trust.
The standard creation transaction fee for each Fund will be $500. The maximum creation transaction
fee for each Fund will be $3,000.
RISKS OF PURCHASING CREATION UNITS. There are certain legal risks unique to investors purchasing
Creation Units directly from the Funds. Because each Funds shares may be issued on an ongoing
basis, a distribution of Shares could be occurring at any time. Certain activities that a
shareholder performs as a dealer could, depending on the circumstances, result in the shareholder
being deemed a participant in the distribution in a manner that could render the shareholder a
statutory underwriter and subject to the prospectus delivery and liability provisions of the
Securities Act of 1933. For example, s shareholder could be deemed a statutory underwriter if it
purchases Creation Units from the Fund, breaks them down into the constituent Shares, and sells
those shares directly to customers, or if a shareholder chooses to couple the creation of a supply
of new Shares with an active selling effort involving solicitation of secondary-market demand for
Shares. Whether a person is an underwriter depends upon all of the facts and circumstances
pertaining to that persons activities, and the examples mentioned here should not be considered a
complete description of all the activities that could cause you to be deemed an underwriter.
Dealers who are not underwriters but are participating in a distribution (as opposed to engaging
in ordinary secondary-market transactions), and thus dealing with a Funds shares as part of an
unsold allotment within the meaning of Section 4(3)(C) of the Securities Act, will be unable to
take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act.
REDEMPTION. Shares may be redeemed only in Creation Units at their net asset value next determined
after receipt of a redemption request in proper form by a Fund through the Transfer Agent and only
on a Business Day. EXCEPT UPON LIQUIDATION OF A FUND, THE TRUST WILL NOT REDEEM SHARES IN AMOUNTS
LESS THAN CREATION UNITS. Investors must accumulate enough Shares in the secondary market to
constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no
assurance, however, that there will be sufficient liquidity in the public trading market at any
time to permit assembly of a Creation Unit. Investors should expect to incur brokerage and other
costs in
26
connection with assembling a sufficient number of Shares to constitute a redeemable
Creation Unit.
With respect to each Fund, the Custodian, through the NSCC, makes available immediately prior to
the opening of business on the Exchange (currently 9:30 a.m. Eastern time) on each Business Day,
the list of the names and share quantities of each Funds portfolio securities that will be
applicable (subject to possible amendment or correction) to redemption requests received in proper
form (as defined below) on that day (Fund Securities). Fund Securities received on redemption may
not be identical to Deposit
Securities.
Redemption proceeds for a Creation Unit are paid either in-kind or in cash, or combination thereof,
as determined by the Trust. With respect to in-kind redemptions of a Fund, redemption proceeds for
a Creation Unit will consist of Fund Securities as announced by the Custodian on the Business
Day of the request for redemption received in proper form plus cash in an amount equal to the
difference between the net asset value of the Shares being redeemed, as next determined after a
receipt of a request in proper form, and the value of the Fund Securities (the Cash Redemption
Amount), less a fixed redemption transaction fee as set forth below. In the event that the Fund
Securities have a value greater than the net asset value of the Shares, a compensating cash payment
equal to the differential is required to be made by or through an Authorized Participant by the
redeeming shareholder. Notwithstanding the foregoing, at the Trusts discretion, an Authorized
Participant may receive the corresponding cash value of the securities in lieu of the in-kind
securities value representing one or more Fund Securities.
REDEMPTION TRANSACTION FEE. A redemption transaction fee is imposed for the transfer and other
transaction costs associated with the redemption of Creation Units, and investors will be required
to pay a fixed redemption transaction fee regardless of the number of Creation Units created in the
transaction, as set forth in each Funds Prospectus, as may be revised from time to time. The
redemption transaction fee is the same no matter how many Creation Units are being redeemed
pursuant to any one redemption request. A Fund may adjust the redemption transaction fee from time
to time based upon actual experience. An additional charge of up to five (5) times the fixed
transaction fee may be imposed for cash redemptions, non-standard orders, or partial cash
redemptions (when cash redemptions are available) for each Fund. Investors who use the services of
a broker or other such intermediary may be charged a fee for such services. Investors are
responsible for the costs of transferring the Fund Securities from the Trust to their account or on
their order.
The standard redemption transaction fee for each Fund will be $500. The maximum redemption
transaction fee for each Fund will be $3,000.
PROCEDURES FOR REDEMPTION OF CREATION UNITS. Orders to redeem Creation Units must be submitted in
proper form to the Transfer Agent prior to the time as set forth in the Participant Agreement. A
redemption request is considered to be in proper form if (i) an Authorized Participant has
transferred or caused to be transferred to the Trusts Transfer Agent the Creation Unit(s) being
redeemed through the book-entry system of DTC so as to be effective by the time as set forth in the
Participant Agreement and (ii) a request in form satisfactory to the Trust is received by the
Transfer Agent from the Authorized Participant on behalf of itself or another redeeming investor
within the time periods specified in the Participant Agreement. If the Transfer Agent does not
receive the investors Shares through DTCs facilities by the times and pursuant to the other terms
and conditions set forth in the Participant Agreement, the redemption request shall be rejected.
The Authorized Participant must transmit the request for redemption, in the form required by the
Trust, to the Transfer Agent in accordance with procedures set forth in the Authorized Participant
Agreement. Investors should be aware that their particular broker may not have executed an
Authorized Participant Agreement, and that, therefore, requests to redeem Creation Units may have
to be placed by the investors broker through an Authorized Participant who has executed an
Authorized Participant Agreement. Investors making a redemption request should be aware that such
request must be in the form specified by such Authorized Participant. Investors making a request to
redeem Creation Units should allow sufficient time to permit proper submission of the request by an
Authorized Participant and transfer of the Shares to the Trusts Transfer Agent; such investors
should allow for the additional time that may be required to effect redemptions through their
banks, brokers or other financial intermediaries if such intermediaries are not Authorized
Participants.
In connection with taking delivery of shares of Fund Securities upon redemption of Creation Units,
a redeeming shareholder or Authorized Participant acting on behalf of such Shareholder must
maintain appropriate custody arrangements with a qualified
27
broker-dealer, bank or other custody
providers in each jurisdiction in which any of the Fund Securities are customarily traded, to which
account such Fund Securities will be delivered. Deliveries of redemption proceeds generally will be
made within three business days of the trade date.
ADDITIONAL REDEMPTION PROCEDURES. If it is not possible to effect deliveries of the Fund
Securities, the Trust may in its discretion exercise its option to redeem such Shares in cash, and
the redeeming investor will be required to receive its
redemption proceeds in cash. In addition, an investor may request a redemption in cash that the
Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment
equal to the NAV of its Shares based on the NAV of Shares of the relevant 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 Trusts brokerage
and other transaction costs associated with the disposition of Fund Securities). 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
net asset value. 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 net asset value.
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 Units 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 Creation Units may be paid an equivalent amount of cash. The
Authorized Participant may request the redeeming investor of the Shares to complete an order form
or to enter into agreements with respect to such matters as compensating cash payment. Further, an
Authorized Participant that is not a qualified institutional buyer, (QIB) as such term is
defined under Rule 144A of the Securities Act, will not be able to receive Fund Securities that are
restricted securities eligible for resale under Rule 144A. An Authorized Participant may be
required by the Trust to provide a written confirmation with respect to QIB status in order to
receive Fund Securities.
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 Exchange is closed (other than customary weekend and holiday
closings); (2) for any period during which trading on the Exchange is suspended or restricted; (3)
for any period during which an emergency exists as a result of which disposal of the Shares of the
Fund or determination of the NAV of the Shares is not reasonably practicable; or (4) in such other
circumstance as is permitted by the SEC.
DETERMINATION OF NET ASSET VALUE
Net asset value per Share for the Funds is computed by dividing the value of the net assets of a
Fund (i.e., the value of its total assets less total liabilities) by the total number of Shares
outstanding, rounded to the nearest cent. Expenses and fees, including the management fees, are
accrued daily and taken into account for purposes of determining net asset value. The net asset
value of each Fund is calculated by the Custodian and determined at the close of the regular
trading session on the NYSE (ordinarily 4:00 p.m. Eastern time) on each day that such exchange is
open, provided that fixed-income assets may be valued as of the announced closing time for trading
in fixed-income instruments on any day that the Securities Industry and Financial Markets
Association (SIFMA) announces an early closing time.
In calculating a Funds net asset value per Share, a Funds investments are generally valued using
market valuations. A market valuation generally means a valuation (i) obtained from an exchange, a
pricing service, or a major market maker (or dealer), (ii) based on a price quotation or other
equivalent indication of value supplied by an exchange, a pricing service, or a major market maker
(or dealer) or (iii) based on amortized cost. In the case of shares of other funds that are not
traded on an exchange, a market valuation means such funds published net asset value per share.
The Adviser may use various pricing services, or discontinue the use of any pricing service, as
approved by the Board from time to time. A price obtained from a pricing service based on such
pricing services valuation matrix may be considered a market valuation. Any assets or liabilities
denominated in currencies other than the U.S. dollar are converted into U.S. dollars at the current
market rates on the date of valuation as quoted by one or more sources.
28
In the event that current market valuations are not readily available or such valuations do not
reflect current market value, the Trusts procedures require the Pricing and Investment Committee
to determine a securitys fair value if a market price is not readily available. In determining
such value the Pricing and Investment Committee may consider, among other things, (i) price
comparisons among multiple sources, (ii) a review of corporate actions and news events, and (iii) a
review of relevant financial indicators (e.g., movement in interest rates, market indices, and
prices from the Funds index providers). In these cases, a Funds net asset value may reflect
certain portfolio securities fair values rather than their market prices. Fair value pricing
involves
subjective judgments and it is possible that the fair value determination for a security is
materially different than the value that could be realized upon the sale of the security. In
addition, fair value pricing could result in a difference between the prices used to calculate a
Funds net asset value and the prices used by a Funds benchmark Index. This may result in a
difference between a Funds performance and the performance of the Funds benchmark Index. With
respect to securities that are primarily listed on foreign exchanges, the value of the Funds
portfolio securities may change on days when you will not be able to purchase or sell your Shares.
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction with the section in the
Prospectus entitled Dividends, Distributions and Taxes.
General Policies
. Dividends from net investment income, if any, are declared and paid
quarterly by the Trust. Distributions of net realized securities gains, if any, generally are
declared and paid once a year, but the Trust may make distributions on a more frequent basis for a
Fund to improve index tracking or to comply with the distribution requirements of the Internal
Revenue Code of 1986, as amended (the Code), in all events in a manner consistent with the
provisions of the 1940 Act.
Dividends and other distributions on shares are distributed, as described below, on a pro rata
basis to Beneficial Owners of such shares. Dividend payments are made through DTC Participants and
Indirect Participants to Beneficial Owners then of record with proceeds received from the Trust.
The Trust makes additional distributions to the extent necessary (i) to distribute the entire
annual taxable income of the Trust, plus any net capital gains and (ii) to avoid imposition of the
excise tax imposed by Section 4982 of the Code. Management of the Trust reserves the right to
declare special dividends if, in its reasonable discretion, such action is necessary or advisable
to preserve the status of the Trust as a regulated investment company (RIC) or to avoid
imposition of income or excise taxes on undistributed income.
Dividend Reinvestment Service
. The Trust will not make the DTC book-entry dividend
reinvestment service available for use by Beneficial Owners for reinvestment of their cash
proceeds, but certain individual broker-dealers may make available the DTC book-entry Dividend
Reinvestment Service for use by Beneficial Owners of a Fund through DTC Participants for
reinvestment of their dividend distributions. Investors should contact their brokers to ascertain
the availability and description of these services. Beneficial Owners should be aware that each
broker may require investors to adhere to specific procedures and timetables in order to
participate in the dividend reinvestment service and investors should ascertain from their brokers
such necessary details. If this service is available and used, dividend distributions of both
income and realized gains will be automatically reinvested in additional whole Shares issued by the
Trust of the same Fund at NAV per share. Distributions reinvested in additional shares of a Fund
will nevertheless be taxable to Beneficial Owners acquiring such additional shares to the same
extent as if such distributions had been received in cash.
FEDERAL INCOME TAXES
The following is only a summary of certain additional federal income tax considerations generally
affecting the Funds and their shareholders that are not described in the Prospectus. No attempt is
made to present a detailed 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.
29
The following general discussion of certain federal income tax consequences is based on provisions
of the Internal Revenue Code of 1986, as amended (the Code) and the regulations issued thereunder
as in effect on the date of this SAI. 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.
Shareholders are urged to consult their own tax advisers regarding the application of the
provisions of tax law described in this SAI in light of the particular tax situations of the
shareholders and regarding specific questions as to federal, state, or local taxes.
Regulated Investment Company (RIC) Status
. The Funds will seek to qualify for treatment as
a RIC under the Code. Provided that for each tax year each Fund: (i) meets the requirements to be
treated as a RIC (as discussed below); and (ii) distributes at least 90% of the Funds net
investment income for such year (including, for this purpose, the excess of net realized short-term
capital gains over net long-term capital losses), the Fund itself will not be subject to federal
income taxes to the extent the Funds net investment income and the Funds net realized capital
gains, if any, are distributed to the Funds shareholders. One of several requirements for RIC
qualification is that a Fund must receive at least 90% of the Funds gross income each year from
dividends, interest, payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived with respect to the
Funds investments in stock, securities, foreign currencies and net income from an interest in a
qualified publicly traded partnership (the 90% Test). A second requirement for qualification as a
RIC is that a Fund must diversify its holdings so that, at the end of each fiscal quarter of the
Funds taxable year: (a) at least 50% of the market value of the Funds total assets is represented
by cash and cash items, U.S. government securities, securities of other RICs, and other securities,
with these other securities limited, in respect to any one issuer, to an amount not greater than 5%
of the value of the Funds total assets or 10% of the outstanding voting securities of such issuer;
and (b) not more than 25% of the value of its total assets are invested in the securities (other
than U.S. government securities or securities of other RICs) of any one issuer or two or more
issuers which the Fund controls and which are engaged in the same, similar, or related trades or
businesses, or the securities of one or more qualified publicly traded partnership (the Asset
Test).
In the event of a failure by a Fund to qualify as a RIC, the Funds distributions, to the extent
such distributions are derived from the Funds current or accumulated earnings and profits, would
constitute dividends that would be taxable to the shareholders of the Fund as ordinary income and
would be eligible for the dividends received deduction for corporate shareholders and as qualified
dividend income for individual shareholders, subject to certain limitations. This treatment would
also apply to any portion of the distributions that might have been treated in the shareholders
hands as long-term capital gains, as discussed below, had a Fund qualified as a RIC. The Board
reserves the right not to maintain the qualification of a Fund as a RIC if it determines such
course of action to be beneficial to shareholders. If a Fund determines that it will not qualify as
a RIC under Subchapter M of the Code the Fund will establish procedures to reflect the anticipated
tax liability in the Funds NAV.
Each Fund will generally be subject to a nondeductible 4% federal excise tax to the extent it fails
to distribute by the end of any calendar year 98% of its ordinary income for the year and 98% of
its capital gain net income for the one-year period ending on October 31 of that year, plus certain
other amounts. The Funds intend to make sufficient distributions, or deemed distributions, to
avoid imposition of the excise tax, but can make no assurances that all such tax liability will be
eliminated.
Each Fund
intends to distribute substantially all its net investment income
quarterly, and net realized
capital gains to shareholders annually. The distribution of net investment income and net
realized capital gains will be taxable to Fund shareholders regardless of whether the shareholder
elects to receive these distributions in cash or in additional shares. All or a portion of the net
investment income distributions may be treated as qualified dividend income (eligible for the
reduced maximum rate to individuals of 15% (lower rates apply to individuals in lower tax
brackets)) to the extent that a Fund receives qualified dividend income. Qualified dividend income
is, in general, dividend income from taxable domestic corporations and certain foreign corporations
(i.e., foreign corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock of which is readily
tradable on an established securities market in the United States).
In order for some portion of the dividends received by a Fund shareholder to be qualified dividend
income, the Fund must meet holding period and other requirements with respect to the dividend
paying stocks in its portfolio, and the shareholder must meet holding period and other requirements
with respect to the Funds shares. Distributions reported to Fund shareholders as
30
long-term
capital gains shall be taxable as such (currently at a maximum rate of 15%), regardless of how long
the shareholder has owned the shares. A Funds shareholders will be notified annually by the Fund
as to the federal tax status of all distributions made by the Fund. Distributions may be subject
to state and local taxes.
Absent further legislation, the maximum 15% tax rate on qualified dividend income and long-term
capital gains will cease to apply to taxable years beginning after December 31, 2010.
Shareholders who have not held Fund shares for a full year should be aware that the Funds may
designate and distribute, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of investment in the Funds.
If a Funds distributions exceed its taxable income and capital gains realized during a taxable
year, all or a portion of the distributions made in the same taxable year may be recharacterized as
a return of capital to shareholders. A return of capital distribution will generally not be
taxable, but will reduce each shareholders cost basis in a Fund and result in a higher reported
capital gain or lower reported capital loss when those shares on which the distribution was
received are sold.
A sale or exchange of shares in the Funds may give rise to a gain or loss. In general, any gain or
loss realized upon a taxable disposition of shares will be treated as long-term capital gain or
loss if the shares have been held for more than 12 months. Otherwise, the gain or loss on the
taxable disposition of shares will be treated as short-term capital gain or loss. Under current
law, the maximum tax rate on long-term capital gains available to non-corporate shareholders is
generally 15% for taxable years beginning before January 1, 2011. Any loss realized upon a taxable
disposition of shares held for six months or less will be treated as long-term, rather than
short-term, to the extent of any long-term capital gain distributions received (or deemed received)
by the shareholder with respect to the shares. All or a portion of any loss realized upon a
taxable disposition of shares will be disallowed if other substantially identical shares of a Fund
are purchased (through reinvestment of dividends or otherwise) within 30 days before or after the
disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect
the disallowed loss.
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 exchangers aggregate basis in the securities
surrendered plus the amount of cash paid for such Creation Units. A person who redeems Creation
Units will generally recognize a gain or loss equal to the difference between the exchangers basis
in the Creation Units and the sum of the aggregate market value of any securities received plus the
amount of any cash received for such Creation Units. The Internal Revenue Service, however, may
assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted
currently under the rules governing wash sales, or on the basis that there has been no
significant change in economic position.
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 be
treated as short-term capital gains or losses. In some circumstances, a redemption of Creation
Units may be treated as resulting in a distribution to which section 301 of the Code applies,
potentially causing amounts received by the shareholder in the redemption to be treated as dividend
income rather than as a payment in exchange for Creation Units. The rules for determining when a
redemption will be treated as giving rise to a distribution under section 301 of the Code and the
tax consequences of Code section 301 distributions are complex. Persons purchasing or redeeming
Creation Units should consult their own tax advisors with respect to the tax treatment of any
creation or redemption transaction.
Options, Swaps and Other Complex Securities
. The Funds may invest in complex securities
such as equity options, index options, repurchase agreements, foreign currency contracts, hedges
and swaps, and futures contracts. These investments may be subject to numerous special and complex
tax rules. These rules could affect whether gains and losses recognized by a Fund are treated as
ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the
Funds ability to recognize losses. In turn, those rules may affect the amount, timing or
character of the income distributed by a Fund. The
31
Funds may be subject to foreign withholding
taxes on income they may earn from investing in foreign securities, which may reduce the return on
such investments.
A Funds transactions in swaps, under some circumstances, could preclude the Funds qualifying for
the special tax treatment available to investment companies meeting the requirements to be treated
as a RIC under Subchapter M of the Code. However, it is the intention of each Funds portfolio
management to limit gains from such investments to less than 10% of the gross income of the Fund
during any fiscal year in order to maintain this qualification.
With respect to investments in zero coupon securities which are sold at original issue discount and
thus do not make periodic cash interest payments, a Fund will be required to include as part of its
current income the imputed interest on such obligations even though the Fund has not received any
interest payments on such obligations during that period. Because each Fund distributes all of its
net investment income to its shareholders, a Fund may have to sell Fund securities to distribute
such imputed income which may occur at a time when the Advisor would not have chosen to sell such
securities and which may result in taxable gain or loss.
Back-Up Withholding
. A Fund will be required in certain cases to withhold at the
applicable withholding rate and remit to the U.S. Treasury the withheld amount of taxable dividends
paid to any shareholder who (1) fails to provide a correct taxpayer identification number certified
under penalty of perjury; (2) is subject to withholding by the Internal Revenue Service for failure
to properly report all payments of interest or dividends; (3) fails to provide a certified
statement that he or she is not subject to backup withholding; or (4) fails to provide a
certified statement that he or she is a U.S. person (including a U.S. resident alien). Backup
withholding is not an additional tax and any amounts withheld may be credited against the
shareholders ultimate U.S. tax liability.
Foreign Shareholders
. Foreign shareholders (i.e., nonresident alien individuals and
foreign corporations, partnerships, trusts and estates) are generally subject to U.S. withholding
tax at the rate of 30% (or a lower tax treaty rate) on distributions derived from net investment
income and short-term capital gains; provided, however, that for the Funds taxable year beginning
after December 31, 2004 and not beginning after December 31, 2009, interest related dividends and
short-term capital gain dividends generally will not be subject to U.S. withholding taxes.
Distributions to foreign shareholders of such short-term capital gain dividends, of long-term
capital gains and any gains from the sale or other disposition of shares of the Fund generally are
not subject to U.S. taxation, unless the recipient is an individual who either (1) meets the Codes
definition of resident alien or (2) is physically present in the U.S. for 183 days or more per
year. Different tax consequences may result if the foreign shareholder is engaged in a trade or
business within the United States. In addition, the tax consequences to a foreign shareholder
entitled to claim the benefits of a tax treaty may be different than those described above.
Other Issues
. The Funds may be subject to tax or taxes in certain states where the Funds
do business. Furthermore, in those states which have income tax laws, the tax treatment of the
Funds and of Fund shareholders with respect to distributions by the Funds may differ from federal
tax treatment.
The foregoing discussion is based on federal tax laws and regulations which are in effect on the
date of this Statement of Additional Information. Such laws and regulations may be changed by
legislative or administrative action. Shareholders are advised to consult their tax advisors
concerning their specific situations and the application of state, local and foreign taxes.
FINANCIAL STATEMENTS
Each Funds financial statements and financial highlights, along with the reports of the
independent accountants, included in the Trusts Annual Reports to Shareholders on Form N-CSR under
the 1940 Act, are incorporated by reference into this SAI.
32
Exhibit A
Proxy Voting Policies and Procedures
[To be provided]
A-1
PART C: OTHER INFORMATION
Item 28
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Exhibits
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(a)(1)
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Certificate of Trust dated July 17, 2009 of FaithShares Trust (the Trust or the
Registrant) is filed herewith.
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(a)(2)
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Registrants Form of Agreement and Declaration of Trust is filed herewith.
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(b)
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Registrants Form of By-Laws are filed herewith.
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(c)
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Not applicable.
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(d)
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Advisory Agreement between the Registrant and FaithShares Advisors, LLC, to be filed by
amendment.
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(e)(1)
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Distribution Agreement between the Registrant and SEI Investments Distribution Co., to be
filed by amendment.
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(e)(2)
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Form of Authorized Participant Agreement, to be filed by amendment.
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(f)
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Not applicable.
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(g)
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Custody Agreement between the Registrant and Brown Brothers Harriman, to be filed by
amendment.
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(h)(1)
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Administration Agreement between the Registrant and SEI Investments Global Funds Services,
to be filed by amendment.
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(h)(2)
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Transfer Agency and Service Agreement between the Registrant and Brown Brothers Harriman, to
be filed by amendment.
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(i)
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Opinion and Consent of Counsel, Morgan, Lewis & Bockius LLP, to be filed by amendment.
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(j)
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Consent of independent registered public accountants, to be filed by amendment.
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(k)
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Not applicable.
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(l)(1)
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Subscription Agreement between the Registrant and [Agent], to be filed by amendment.
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(l)(2)
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Letter of Representations between the Registrant and Depository Trust Company, to be filed
by amendment.
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(m)
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Distribution Plan to be filed by amendment.
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(n)
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Not applicable.
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(o)
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Not applicable.
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(p)(1)
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Code of Ethics for the Registrant to be filed by amendment.
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(p)(2)
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Code of Ethics of FaithShares Advisors, LLC, to be filed by amendment.
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(p)(3)
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Code of Ethics of SEI Investments Distribution Co., to be filed by amendment.
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Item 29
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Persons Controlled by or under Common Control with the Fund
Not Applicable.
Item 30
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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 Trustees or officers 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 Act) may
be permitted to directors, 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
Securities and Exchange Commission 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 director, officer, or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnificaiton by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 31
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Business and other Connections of the Investment Adviser
FaithShares Advisors, LLC, (the Adviser) serves as the investment adviser for each series of the
Trust. The principal address of the Adviser is 3555 Northwest 58th Street, Suite 410, Oklahoma
City, Oklahoma 73112. The Adviser is an investment adviser registered with the SEC 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 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:
[To be provided by amendment]
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Name and Position with
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Investment Adviser
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Name of Other Company
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Connection with Other Company
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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 Trusts
Statement of Additional Information.
Item 32
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Principal Underwriters
(a)
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Furnish the name of each investment company (other than the Registrant) for which each
principal underwriter currently distributing the securities of the Registrant also acts as a
principal underwriter, distributor or investment adviser.
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Registrants distributor, SEI Investments Distribution Co. (the Distributor), acts as
distributor for:
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SEI Daily Income Trust
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July 15, 1982
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SEI Liquid Asset Trust
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November 29, 1982
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SEI Tax Exempt Trust
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December 3, 1982
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SEI Institutional Managed Trust
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January 22, 1987
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SEI Institutional International Trust
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August 30, 1988
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The Advisors Inner Circle Fund
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November 14, 1991
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The Advisors Inner Circle Fund II
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January 28, 1993
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Bishop Street Funds
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January 27, 1995
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SEI Asset Allocation Trust
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April 1, 1996
|
SEI Institutional Investments Trust
|
|
June 14, 1996
|
Oak Associates Funds
|
|
February 27, 1998
|
CNI Charter Funds
|
|
April 1, 1999
|
iShares Inc.
|
|
January 28, 2000
|
iShares Trust
|
|
April 25, 2000
|
Optique Funds, Inc.
|
|
November 1, 2000
|
Causeway Capital Management Trust
|
|
September 20, 2001
|
Barclays Global Investors Funds
|
|
March 31, 2003
|
SEI Opportunity Fund, LP
|
|
October 1, 2003
|
The Arbitrage Funds
|
|
May 17, 2005
|
The Turner Funds
|
|
January 1, 2006
|
ProShares Trust
|
|
November 14, 2005
|
Community Reinvestment Act Qualified Investment Fund
|
|
January 8, 2007
|
SEI Alpha Strategy Portfolios, LP
|
|
June 29, 2007
|
TD Asset Management USA Funds
|
|
July 25, 2007
|
SEI Structured Credit Fund, LP
|
|
July 31, 2007
|
Wilshire Mutual Funds, Inc.
|
|
July 12, 2008
|
Wilshire Variable Insurance Trust
|
|
July 12, 2008
|
Forward Funds
|
|
August 14, 2008
|
|
|
The Distributor provides numerous financial services to investment managers, pension plan
sponsors, and bank trust departments. These services include portfolio evaluation,
performance measurement and consulting services (Funds Evaluation) and automated
execution, clearing and settlement of securities transactions (MarketLink).
|
|
(b)
|
|
Furnish the Information required by the following table with respect to each director,
officer or partner of each principal underwriter named in the answer to Item 20 of Part B.
Unless otherwise noted, the business address of each director or officer is Oaks, PA 19456.
|
|
|
|
|
|
|
|
Position and Office
|
|
Positions and Offices
|
Name
|
|
with Underwriter
|
|
with Registrant
|
William M. Doran
|
|
Director
|
|
|
Edward D. Loughlin
|
|
Director
|
|
|
Wayne M. Withrow
|
|
Director
|
|
|
Kevin Barr
|
|
President & Chief Executive Officer
|
|
|
Maxine Chou
|
|
Chief Financial Officer, Chief Operations
Officer, & Treasurer
|
|
|
Karen LaTourette
|
|
Chief Compliance Officer, Anti-Money
Laundering Officer & Assistant Secretary
|
|
|
Mark J. Held
|
|
Senior Vice President
|
|
|
Lori L. White
|
|
Vice President & Assistant Secretary
|
|
|
John Coary
|
|
Vice President & Assistant Secretary
|
|
|
John Cronin
|
|
Vice President
|
|
|
Robert Silvestri
|
|
Vice President
|
|
|
Item 33.
Location of Accounts and Records:
State the name and address of each person maintaining principal possession of each account, book or
other document required to be maintained by section 31(a) of the 1940 Act Section 15 U.S.C.
80a-30(a) and the rules under that section.
All accounts, books, and other documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940, as amended, and the rules promulgated thereunder are maintained at
the following offices:
|
|
|
(a)
|
|
Registrant:
c/o FaithShares Advisors, LLC
3555 Northwest 58th Street, Suite 410
Okalahoma City, Oklahoma 73112
|
|
|
|
(b)
|
|
Adviser:
FaithShare Advisors, LLC
3555 Northwest 58th Street, Suite 410
Okalahoma City, Oklahoma 73112
|
|
|
|
(c)
|
|
Principal Underwriter:
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
|
|
|
|
(e)
|
|
Custodian:
Brown Brothers Harriman
[Address to be provided by amendment]
|
Item 34
.
Management Services
Not Applicable.
Item 35
.
Undertakings
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940,
the Trust has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Oklahoma, State
of Oklahoma on this 17th day
of July, 2009.
|
|
|
|
|
|
FaithShares Trust
|
|
|
/s/ Thompson S. Phillips, Jr.
|
|
|
Thompson S. Phillips, Jr.
|
|
|
Initial Trustee
|
|
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been
signed below by the following persons in the capacity and on the date indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Thompson S. Phillips, Jr.
Thompson S. Phillips, Jr.
|
|
Initial Trustee
|
|
July 17, 2009
|
Exhibit Index
|
|
|
Exhibit Number
|
|
Exhibit:
|
|
|
|
EX-99.A1
|
|
Certificate of Trust dated July 17, 2009 of FaithShares Trust
|
|
|
|
EX-99.A2
|
|
Registrants Form of Agreement and Declaration of Trust
|
|
|
|
EX-99.B
|
|
Registrants Form of By-Laws
|
Exhibit 99.A2
AGREEMENT AND DECLARATION OF TRUST
of
FAITHSHARES TRUST
a Delaware Statutory Trust
Principal Place of Business:
3555 Northwest 58th Street, Suite 410
Oklahoma City, Oklahoma 73112
TABLE OF CONTENTS
|
|
|
|
|
ARTICLE I. Name and Definitions
|
|
|
1
|
|
Section 1. Name
|
|
|
1
|
|
Section 2. Definitions
|
|
|
1
|
|
(a) The Trust
|
|
|
1
|
|
(b) The Trust Property
|
|
|
1
|
|
(c) Trustees
|
|
|
1
|
|
(d) Shares
|
|
|
1
|
|
(e) Shareholder
|
|
|
2
|
|
(f) Person
|
|
|
2
|
|
(g) The 1940 Act
|
|
|
2
|
|
(h) The terms Commission and Principal Underwriter
|
|
|
2
|
|
(i) Declaration of Trust
|
|
|
2
|
|
(j) By-Laws
|
|
|
2
|
|
(k) The term Interested Person
|
|
|
2
|
|
(l) Investment Adviser or Adviser
|
|
|
2
|
|
(m) Series
|
|
|
2
|
|
ARTICLE II. Purpose of Trust
|
|
|
2
|
|
ARTICLE III. Shares
|
|
|
3
|
|
Section 1. Division of Beneficial Interest
|
|
|
3
|
|
Section 2. Ownership of Shares
|
|
|
3
|
|
Section 3. Investments in the Trust
|
|
|
3
|
|
Section 4. Status of Shares and Limitation of Personal Liability
|
|
|
4
|
|
Section 5. Power of Board of Trustees to Change Provisions Relating to Shares
|
|
|
4
|
|
Section 6. Establishment and Designation of Shares
|
|
|
4
|
|
(c) Dividends, Distributions, Redemptions, and Repurchases
|
|
|
5
|
|
(d) Voting
|
|
|
6
|
|
(e) Equality
|
|
|
6
|
|
(f) Fractions
|
|
|
6
|
|
(g) Exchange Privilege
|
|
|
6
|
|
i
|
|
|
|
|
(h) Combination of Series
|
|
|
6
|
|
(i) Elimination of Series
|
|
|
6
|
|
ARTICLE IV. The Board of Trustees
|
|
|
6
|
|
Section 1. Number, Election and Tenure
|
|
|
6
|
|
Section 2. Effect of Death, Resignation, etc. of a Trustee
|
|
|
7
|
|
Section 3. Powers
|
|
|
7
|
|
Section 4. Payment of Expenses by the Trust
|
|
|
10
|
|
Section 5. Ownership of Assets of the Trust
|
|
|
10
|
|
Section 6. Service Contracts
|
|
|
10
|
|
ARTICLE V. Shareholders Voting Powers and Meetings
|
|
|
11
|
|
Section 1. Voting Powers
|
|
|
11
|
|
Section 2. Voting Power and Meetings
|
|
|
12
|
|
Section 3. Quorum and Required Vote
|
|
|
12
|
|
Section 4. Action by Written Consent
|
|
|
12
|
|
Section 5. Record Dates
|
|
|
13
|
|
ARTICLE VI. Net Asset Value, Distributions, and Redemptions
|
|
|
13
|
|
Section 1. Determination of Net Asset Value, Net Income, and Distributions
|
|
|
13
|
|
Section 2. Redemptions and Repurchases
|
|
|
13
|
|
Section 3. Redemptions at the Option of the Trust
|
|
|
14
|
|
Section 4. Transfer of Shares
|
|
|
14
|
|
ARTICLE VII. Compensation and Limitation of Liability
|
|
|
14
|
|
Section 1. Compensation of Trustees
|
|
|
14
|
|
Section 2. Indemnification and Limitation of Liability
|
|
|
14
|
|
Section 3. Trustees Good Faith Action, Expert Advice, No Bond or Surety
|
|
|
15
|
|
Section 4. Insurance
|
|
|
15
|
|
ARTICLE
VIII. Miscellaneous
|
|
|
15
|
|
Section 1. Liability of Third Persons Dealing with Trustees
|
|
|
15
|
|
Section 2. Termination of Trust or Series
|
|
|
15
|
|
Section 3. Merger and Consolidation
|
|
|
16
|
|
Section 4. Amendments
|
|
|
16
|
|
Section 5. Filing of Copies, References, Headings
|
|
|
16
|
|
ii
|
|
|
|
|
Section 6. Applicable Law
|
|
|
16
|
|
Section 7. Provisions in Conflict with Law or Regulations
|
|
|
17
|
|
Section 8. Statutory Trust Only
|
|
|
17
|
|
iii
AGREEMENT AND DECLARATION OF TRUST
OF
FAITHSHARES TRUST
WHEREAS, this AGREEMENT AND DECLARATION OF TRUST is made and entered into as of the date set
forth below by the Trustee named hereunder for the purpose of forming a Delaware statutory trust in
accordance with the provisions hereinafter set forth,
NOW, THEREFORE, the Trustee hereby directs that a Certificate of Trust be filed with the
Office of the Secretary of State of the State of Delaware and do hereby declare that the Trustees
will hold IN TRUST all cash, securities and other assets which the Trust now possesses or may
hereafter acquire from time to time in any manner and manage and dispose of the same upon the
following terms and conditions for the pro rata benefit of the holders of Shares in this Trust.
ARTICLE I.
Name and Definitions
Section 1
.
Name
. This trust shall be known as FAITHSHARES TRUST and the
Trustees shall conduct the business of the Trust under that name or any other name as they may from
time to time determine.
Section 2
.
Definitions
. Whenever used herein, unless otherwise required by
the context or specifically provided:
(a) The Trust refers to the Delaware statutory trust established by this Agreement and
Declaration of Trust, as amended from time to time;
(b) The Trust Property means any and all property, real or personal, tangible or
intangible, which is owned or held by or for the account of the Trust;
(c) Trustees refers to the persons who have signed this Agreement and Declaration of Trust,
so long as they continue in office in accordance with the terms hereof, and all other persons who
may from time to time be duly elected or appointed to serve on the Board of Trustees in accordance
with the provisions hereof, and reference herein to a Trustee or the Trustees shall refer to such
person or persons in their capacity as Trustees hereunder;
(d) Shares means the shares of beneficial interest into which the beneficial interest of
each Series of the Trust or class thereof shall be divided from time to time and includes fractions
of Shares as well as whole Shares;
1
(e) Shareholder means a record owner of outstanding Shares;
(f) Person means and includes individuals, corporations, partnerships, limited liability
companies, trusts, foundations, plans, associations, joint ventures, estates and other entities,
whether or not legal entities, and governments and agencies and political subdivisions thereof,
whether domestic or foreign;
(g) The 1940 Act refers to the Investment Company Act of 1940 and the rules and regulations
thereunder, all as amended from time to time. References herein to specific sections of the 1940
Act shall be deemed to include such rules and regulations as are applicable to such sections as
determined by the Trustees or their designees;
(h) The terms Commission and Principal Underwriter shall have the respective meanings
given them in Section 2(a)(7) and Section (2)(a)(29) of the 1940 Act;
(i) Declaration of Trust shall mean this Agreement and Declaration of Trust, as amended or
restated from time to time;
(j) By
-
Laws shall mean the By Laws of the Trust as amended from time to time;
(k) The term Interested Person has the meaning given it in Section 2(a)(19) of the 1940
Act;
(l) Investment Adviser or Adviser means a party furnishing services to the Trust pursuant
to any contract described in Article IV, Section 6(a) hereof; and
(m) Series refers to each Series of Shares established and designated under or in
accordance with the provisions of Article III.
ARTICLE II.
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the business of a management
investment company registered under the 1940 Act through one or more Series investing primarily in
securities.
2
ARTICLE III.
Shares
Section 1
.
Division of Beneficial Interest
. The beneficial interest in the
Trust shall at all times be divided into an unlimited number of Shares, with a par value of $ .001
per Share. The Trustees may authorize the division of Shares into separate Series and the division
of Series into separate classes of Shares. The different Series shall be established and
designated, and the variations in the relative rights and preferences as between the different
Series shall be fixed and determined, by the Trustees. If only one Series shall be established,
the Shares shall have the rights and preferences provided for herein and in Article III, Section 6
hereof to the extent relevant and not otherwise provided for herein.
Subject to the provisions of Article III, Section 6, each Share shall have voting rights as
provided in Article V hereof, and holders of the Shares of any Series shall be entitled to receive
dividends, when, if and as declared with respect thereto in the manner provided in Article VI,
Section 1 hereof. No Share shall have any priority or preference over any other Share of the same
Series with respect to dividends or distributions of the Trust or otherwise. All dividends and
distributions shall be made ratably among all Shareholders of a Series (or class) from the assets
held with respect to such Series according to the number of Shares of such Series (or class) held
of record by such Shareholders on the record date for any dividend or distribution or on the date
of termination of the Trust, as the case may be. Shareholders shall have no preemptive or other
right to subscribe to any additional Shares or other securities issued by the Trust or any Series.
The Trustees may from time to time divide or combine the Shares of a Series into a greater or
lesser number of Shares of such Series without thereby materially changing the proportionate
beneficial interest of such Shares in the assets held with respect to that Series or materially
affecting the rights of Shares of any other Series.
Section 2
.
Ownership of Shares
. The ownership of Shares shall be recorded on
the books of the Trust or a transfer or similar agent for the Trust, which books shall be
maintained separately for the Shares of each Series. No certificates evidencing the ownership of
Shares shall be issued except as the Board of Trustees may otherwise determine from time to time.
The Trustees may make such rules as they consider appropriate for the transfer of Shares of each
Series (or class) and similar matters. The record books of the Trust as kept by the Trust or any
transfer or similar agent, as the case may be, shall be conclusive as to the identity of the
Shareholders of each Series and as to the number of Shares of each Series held from time to time by
each Shareholder.
Section 3
.
Investments in the Trust
. Investments may be accepted by the
Trust from such Persons, at such times, on such terms, and for such consideration as the Trustees
from time to time may authorize. Each investment shall be credited to the Shareholders account in
the form of full and fractional Shares of the Trust, in such Series (or class) as the purchaser
shall select, at the net asset value per Share next determined for such Series (or class) after
receipt of
3
the investment; provided, however, that the Trustees may, in their sole discretion, impose a sales
charge or reimbursement fee upon investments in the Trust.
Section 4
.
Status of Shares and Limitation of Personal Liability
. Shares
shall be deemed to be personal property giving only the rights provided in this instrument and the
By-Laws of the Trust. Every Shareholder by virtue of having become a Shareholder shall be held to
have expressly assented and agreed to the terms hereof. The death of a Shareholder during the
existence of the Trust shall not operate to terminate the Trust, nor entitle the representative of
any deceased Shareholder to an accounting or to take any action in court or elsewhere against the
Trust or the Trustees, but shall entitle such representative only to the rights of said deceased
Shareholder under this Declaration of Trust. Ownership of Shares shall not entitle a Shareholder
to any title in or to the whole or any part of the Trust Property or right to call for a partition
or division of the same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders as partners or joint venturers. Neither the Trust nor the Trustees, nor any officer,
employee or agent of the Trust shall have any power to bind personally any Shareholder, or to call
upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such
as the Shareholder may at any time agree to pay.
Section 5
.
Power of Board of Trustees to Change Provisions Relating to
Shares
. Notwithstanding any other provision of this Declaration of Trust to the contrary, and
without limiting the power of the Board of Trustees to amend this Declaration of Trust as provided
elsewhere herein, the Board of Trustees shall have the power to amend this Declaration of Trust, at
any time and from time to time, in such manner as the Board of Trustees may determine in their sole
discretion, without the need for Shareholder action, so as to add, delete, replace or otherwise
modify any provisions relating to the Shares contained in this Declaration of Trust, provided that
before adopting any such amendment without Shareholder approval the Board of Trustees shall
determine that it is consistent with the fair and equitable treatment of all Shareholders and that
Shareholder approval is not required by the 1940 Act or other applicable law. If Shares have been
issued, Shareholder approval shall be required to adopt any amendments to this Declaration of Trust
which would adversely affect to a material degree the rights and preferences of the Shares of any
Series (or class) or to increase or decrease the par value of the Shares of any Series (or class).
Section 6
.
Establishment and Designation of Shares
. The establishment and
designation of any Series (or class) of Shares shall be effective upon the adoption by a majority
of the Trustees of a resolution which sets forth such establishment and designation and the
relative rights and preferences of such Series (or class). Each such resolution shall be
incorporated herein by reference upon adoption.
Shares of each Series (or class) established pursuant to this Section 6, unless otherwise
provided in the resolution establishing such Series, shall have the following relative rights and
preferences:
(a) Assets Held with Respect to a Particular Series. All consideration received by the Trust
for the issue or sale of Shares of a Series, including dividends and distributions paid by, and
reinvested in, such Series, together with all assets in which such consideration is invested or
4
reinvested, all income, earnings, profits, and proceeds thereof from whatever source derived,
including, without limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form
the same may be, shall irrevocably be held with respect to that Series for all purposes, subject
only to the rights of creditors, and shall be so recorded upon the books of account of the Trust.
Such consideration, assets, income, earnings, profits and proceeds thereof, from whatever source
derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any reinvestment of such proceeds, in
whatever form the same may be, are herein referred to as assets held with respect to that Series.
In the event that there are any assets, income, earnings, profits and proceeds thereof, funds or
payments which are not readily identifiable as assets held with respect to any particular Series
(collectively General Assets), the Trustees shall allocate such General Assets to, between or
among any one or more of the Series in such manner and on such basis as the Trustees, in their sole
discretion, deem fair and equitable, and any General Asset so allocated to a particular Series
shall be held with respect to that Series. Each such allocation by the Trustees shall be
conclusive and binding upon the Shareholders of all Series for all purposes in absence of manifest
error.
(b) Liabilities Held with Respect to a Particular Series. The assets of the Trust held with
respect to each Series shall be charged with the liabilities of the Trust with respect to such
Series and all expenses, costs, charges and reserves attributable to such Series, and any general
liabilities of the Trust which are not readily identifiable as being held in respect of a Series
shall be allocated and charged by the Trustees to and among any one or more Series in such manner
and on such basis as the Trustees in their sole discretion deem fair and equitable. The
liabilities, expenses, costs, charges, and reserves so charged to a Series are herein referred to
as liabilities held with respect to that Series. Each allocation of liabilities, expenses,
costs, charges and reserves by the Trustees shall be conclusive and binding upon the holders of all
Series for all purposes in absence of manifest error. All Persons who have extended credit which
has been allocated to a particular Series, or who have a claim or contract which has been allocated
to a Series, shall look exclusively to the assets held with respect to such Series for payment of
such credit, claim, or contract. In the absence of an express agreement so limiting the claims of
such creditors, claimants and contracting parties, each creditor, claimant and contracting party
shall be deemed nevertheless to have agreed to such limitation unless an express provision to the
contrary has been incorporated in the written contract or other document establishing the
contractual relationship.
(c) Dividends, Distributions, Redemptions, and Repurchases. No dividend or distribution
including, without limitation, any distribution paid upon termination of the Trust or of any Series
(or class) with respect to, or any redemption or repurchase of, the Shares of any Series (or class)
shall be effected by the Trust other than from the assets held with respect to such Series, nor
shall any Shareholder of any Series otherwise have any right or claim against the assets held with
respect to any other Series except to the extent that such Shareholder has such a right or claim
hereunder as a Shareholder of such other Series. The Trustees shall have full discretion to
determine which items shall be treated as income and which items as capital and each such
determination and allocation shall be conclusive and binding upon the Shareholders in absence of
manifest error.
5
(d) Voting. All Shares of the Trust entitled to vote on a matter shall vote without
differentiation between the separate Series on a one vote per each dollar (and a fractional vote
for each fractional dollar) of the net asset value of each Share (including fractional Shares)
basis; provided, however, if a matter to be voted on affects only the interests of certain Series
(or class of a Series), then only the Shareholders of such affected Series (or class) shall be
entitled to vote on the matter.
(e) Equality. All the Shares of each Series shall represent an equal proportionate undivided
interest in the assets held with respect to such Series (subject to the liabilities of such Series
and such rights and preferences as may have been established and designated with respect to classes
of Shares within such Series), and each Share of a Series shall be equal to each other Share of
such Series.
(f) Fractions. Any fractional Share of a Series shall have proportionately all the rights
and obligations of a whole Share of such Series, including rights with respect to voting, receipt
of dividends and distributions and redemption of Shares.
(g) Exchange Privilege. The Trustees shall have the authority to provide that the holders of
Shares of any Series shall have the right to exchange such Shares for Shares of one or more other
Series in accordance with such requirements and procedures as may be established by the Trustees.
(h) Combination of Series. The Trustees shall have the authority, without the approval of
the Shareholders of any Series unless otherwise required by applicable law, to combine the assets
and liabilities held with respect to any two or more Series into assets and liabilities held with
respect to a single Series.
(i) Elimination of Series. At any time that there are no Shares outstanding of a Series (or
class), the Trustees may abolish such Series (or class).
ARTICLE IV.
The Board of Trustees
Section 1
.
Number, Election and Tenure
. The number of Trustees constituting
the Board of Trustees shall be fixed from time to time by a written instrument signed, or by
resolution approved at a duly constituted meeting, by a majority of the Board of Trustees;
provided, however, that the number of Trustees shall in no event be less than one (1) nor more than
fifteen (15). Subject to the requirements of Section 16(a) of the 1940 Act, the Board of Trustees,
by action of a majority of the then Trustees at a duly constituted meeting, may fill vacancies in
the Board of Trustees and remove Trustees with or without cause. Each Trustee shall serve during
the continued lifetime of the Trust until he or she dies, resigns, is declared bankrupt or
incompetent by a court of competent jurisdiction, or is removed. Any Trustee may resign at any
time by written instrument signed by him and delivered to any officer of the Trust
6
or to a meeting of the Trustees. Such resignation shall be effective upon receipt unless specified
to be effective at some other time. Except to the extent expressly provided in a written agreement
with the Trust, no Trustee resigning and no Trustee removed shall have any right to any
compensation for any period following his or her resignation or removal, or any right to damages or
other payment on account of such removal. Any Trustee may be removed at any time by a vote of at
least two-thirds of the number of Trustees prior to such removal. Any Trustee may also be removed
at any meeting of Shareholders by a vote of two thirds of the total combined net asset value of all
Shares of the Trust issued and outstanding. A meeting of Shareholders for the purpose of electing
or removing one or more Trustees may be called (i) by the Trustees upon their own vote, or (ii)
upon the demand of Shareholders owning 10% or more of the Shares of the Trust in the aggregate.
Section 2
.
Effect of Death, Resignation, etc. of a Trustee
. The death,
declination, resignation, retirement, removal, or incapacity of one or more Trustees, or all of
them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the
terms of this Declaration of Trust. Whenever a vacancy in the Board of Trustees shall occur, until
such vacancy is filled as provided in Article IV, Section 1, the Trustees in office, regardless of
their number, shall have all the powers granted to the Trustees and shall discharge all the duties
imposed upon the Trustees by this Declaration of Trust.
Section 3
.
Powers
. Subject to the provisions of this Declaration of Trust,
the business of the Trust shall be managed by the Board of Trustees, and such Board shall have all
powers necessary or convenient to carry out that responsibility including the power to engage in
transactions of all kinds on behalf of the Trust. Trustees, in all instances, shall act as
principals and are and shall be free from the control of the Shareholders. The Trustees shall have
full power and authority to do any and all acts and to make and execute any and all contracts,
documents and instruments that they may consider desirable, necessary or appropriate in connection
with the administration of the Trust. Without limiting the foregoing, the Trustees may: adopt,
amend and repeal By-Laws not inconsistent with this Declaration of Trust providing for the
regulation and management of the affairs of the Trust; elect and remove such officers and appoint
and terminate such agents as they consider appropriate; appoint from their own number and establish
and terminate one or more committees consisting of two or more Trustees who may exercise the powers
and authority of the Board of Trustees to the extent that the Trustees determine; employ one or
more custodians of the assets of the Trust and may authorize such custodians to employ
subcustodians and to deposit all or any part of such assets in a system or systems for the central
handling of securities or with a Federal Reserve Bank, retain a transfer agent or a shareholder
servicing agent, or both; provide for the issuance and distribution of Shares by the Trust directly
or through one or more Principal Underwriters or otherwise; redeem, repurchase and transfer Shares
pursuant to applicable law; set record dates for the determination of Shareholders with respect to
various matters; declare and pay dividends and distributions to Shareholders of each Series from
the assets of such Series; establish from time to time, in accordance with the provisions of
Article III, Section 6 hereof, any Series of Shares, each such Series to operate as a separate and
distinct investment medium and with separately defined investment objectives and policies and
distinct investment purpose; and in general delegate such authority as they consider desirable to
any officer of the Trust, to any committee of the Trustees and to any agent or employee of the
Trust or to any such custodian, transfer or shareholder
7
servicing agent, Investment Adviser or Principal Underwriter. Any determination as to what is in
the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing
the provisions of this Declaration of Trust, the presumption shall be in favor of a grant of power
to the Trustees and unless otherwise specified herein or required by the 1940 Act or other
applicable law, any action by the Board of Trustees shall be deemed effective if approved or taken
by a majority of the Trustees then in office or a majority of any duly constituted committee of
Trustees. Any action required or permitted to be taken at any meeting of the Board of Trustees, or
any committee thereof, may be taken without a meeting if all members of the Board of Trustees or
committee (as the case may be) consent thereto in writing or electronically, and the consents are
filed with the minutes of the proceedings of the Board of Trustees, or committee, except as
otherwise provided in the 1940 Act.
Without limiting the foregoing, the Trust shall have power and authority:
(a) To invest and reinvest cash and cash items, to hold cash uninvested, and to subscribe
for, invest in, reinvest in, purchase or otherwise acquire, own, hold, pledge, sell, assign,
transfer, exchange, distribute, write options on, lend or otherwise deal in or dispose of contracts
for the future acquisition or delivery of all types of securities, futures contracts and options
thereon, and forward currency contracts of every nature and kind, including, without limitation,
all types of bonds, debentures, stocks, preferred stocks, negotiable or non-negotiable instruments,
obligations, evidences of indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers acceptances, and other securities of any kind, issued, created,
guaranteed, or sponsored by any and all Persons, including, without limitation, states,
territories, and possessions of the United States and the District of Columbia and any political
subdivision, agency, or instrumentality thereof, any foreign government or any political
subdivision of the U.S. Government or any foreign government, or any international instrumentality
or organization, or by any bank or savings institution, or by any corporation or organization
organized under the laws of the United States or of any state, territory, or possession thereof, or
by any corporation or organization organized under any foreign law, or in when issued contracts
for any such securities, futures contracts and options thereon, swap agreements, forward currency
contracts, and other derivatives, to change the investments of the assets of the Trust; and to
exercise any and all rights, powers, and privileges of ownership or interest in respect of any and
all such investments of every kind and description, including, without limitation, the right to
consent and otherwise act with respect thereto, with power to designate one or more Persons, to
exercise any of said rights, powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or write options with
respect to or otherwise deal in any property rights relating to any or all of the assets of the
Trust or any Series;
(c) To vote or give assent, or exercise any rights of ownership, with respect to stock or
other securities or property; and to execute and deliver proxies or powers of attorney to such
person or persons as the Trustees shall deem proper, granting to such person or persons such power
and discretion with relation to securities or property as the Trustees shall deem proper;
8
(d) To exercise powers and right of subscription or otherwise which in any manner arise out
of ownership of securities;
(e) To hold any security or property in a form not indicating that it is trust property,
whether in bearer, unregistered or other negotiable form, or in its own name or in the name of a
custodian or subcustodian or a nominee or nominees or otherwise or to authorize the custodian or a
subcustodian or a nominee or nominees to deposit the same in a securities depository, subject in
each case to the applicable provisions of the 1940 Act;
(f) To consent to, or participate in, any plan for the reorganization, consolidation or
merger of any corporation or issuer of any security which is held in the Trust; to consent to any
contract, lease, mortgage, purchase or sale of property by such corporation or issuer; and to pay
calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee, depository, voting
trustee or otherwise, and in that connection to deposit any security with, or transfer any security
to, any such committee, depository or trustee, and to delegate to them such power and authority
with relation to any security (whether or not so deposited or transferred) as the Trustees shall
deem proper, and to agree to pay, and to pay, such portion of the expenses and compensation of such
committee, depository or trustee as the Trustees shall deem proper;
(h) To litigate, compromise, arbitrate, settle or otherwise adjust claims in favor of or
against the Trust or a Series, or any matter in controversy, including but not limited to claims
for taxes;
(i) To enter into joint ventures, general or limited partnerships and any other combinations
or associations;
(j) To borrow funds or other property in the name of the Trust or Series exclusively for
Trust purposes;
(k) To endorse or guarantee the payment of any notes or other obligations of any Person; to
make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof;
(l) To purchase and pay for entirely out of Trust Property such insurance as the Trustees may
deem necessary, desirable or appropriate for the conduct of the business, including, without
limitation, insurance policies insuring the assets of the Trust or payment of distributions and
principal on its portfolio investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, Investment Advisers, Principal Underwriter, or independent contractors
of the Trust, individually against all claims and liabilities of every nature arising by reason of
holding Shares, holding, being or having held any such office or position, or by reason of any
action alleged to have been taken or omitted by any such Person as Trustee, officer, employee,
agent, Investment Adviser, Principal Underwriter, or independent contractor,
9
including any action taken or omitted that may be determined to constitute negligence, whether or
not the Trust would have the power to indemnify such Person against liability; and
(m) To adopt, establish and carry out pension, profit sharing, share bonus, share purchase,
savings, thrift and other retirement, incentive and benefit plans, trusts and provisions, including
the purchasing of life insurance and annuity contracts as a means of providing such retirement and
other benefits, for any or all of the Trustees, officers, employees and agents of the Trust.
The Trust shall not be limited to investing in obligations maturing before the possible
termination of the Trust or one or more of its Series. The Trust shall not in any way be bound or
limited by any present or future law or custom in regard to investment by fiduciaries. The Trust
shall not be required to obtain any court order to deal with any assets of the Trust or take any
other action hereunder.
Section 4
.
Payment of Expenses by the Trust
. Subject to the provisions of
Article III, Section 6(b), the Trustees are authorized to pay or cause to be paid out of the
principal or income of the Trust or Series, or partly out of the principal and partly out of
income, and to charge or allocate the same to, between or among such one or more of the Series that
may be established or designated pursuant to Article III, Section 6, all expenses, fees, charges,
taxes and liabilities incurred or arising in connection with the Trust or Series, or in connection
with the management thereof, including, but not limited to, the Trustees compensation and such
expenses and charges for the services of the Trusts officers, employees, Investment Advisers,
Principal Underwriter, auditors, counsel, custodian, transfer agent, Shareholder servicing agent,
and such other agents or independent contractors and such other expenses and charges as the
Trustees may deem necessary or proper to incur.
Section 5
.
Ownership of Assets of the Trust
. Title to all of the assets of
the Trust shall at all times be considered as vested in the Trust, except that the Trustees shall
have power to cause legal title to any Trust Property to be held by or in the name of one or more
of the Trustees, or in the name of the Trust, or in the name of any other Person as nominee, on
such terms as the Trustees may determine. Upon the resignation, incompetency, bankruptcy, removal,
or death of a Trustee he or she shall automatically cease to have any such title in any of the
Trust Property, and the title of such Trustee in the Trust Property shall vest automatically in the
remaining Trustees. Such vesting and cessation of title shall be effective whether or not
conveyancing documents have been executed and delivered. The Trustees may determine that the Trust
or the Trustees, acting for and on behalf of the Trust, shall be deemed to hold beneficial
ownership of any income earned on the securities owned by the Trust, whether domestic or foreign.
Section 6
.
Service Contracts
.
(a) The Trustees may, at any time and from time to time, contract for exclusive or
nonexclusive advisory, management and/or administrative services for the Trust or for any Series
with any Person; and any such contract may contain such other terms as the Trustees may determine,
including without limitation, authority for the Investment Adviser to determine from
10
time to time without prior consultation with the Trustees what investments shall be purchased,
held, sold or exchanged and what portion, if any, of the assets of the Trust shall be held
uninvested and to make changes in the Trusts investments, and such other responsibilities as may
specifically be delegated to such Person.
(b) The Trustees may also, at any time and from time to time, contract with any Persons,
appointing such Persons exclusive or nonexclusive distributor or Principal Underwriter for the
Shares of one or more of the Series or other securities to be issued by the Trust. Every such
contract may contain such other terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and from time to time, to contract with any
Persons, appointing such Person(s) to serve as custodian(s), transfer agent and/or shareholder
servicing agent for the Trust or one or more of its Series. Every such contract shall comply with
such terms as may be required by the Trustees.
(d) The Trustees are further empowered, at any time and from time to time, to contract with
any Persons to provide such other services to the Trust or one or more of the Series, as the
Trustees determine to be in the best interests of the Trust and the applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of the Trust is a shareholder, director,
officer, partner, trustee, employee, Investment Adviser, Principal Underwriter, distributor, or
affiliate or agent of or for any Person with which an advisory, management or administration
contract, or Principal Underwriters or distributors contract, or transfer, shareholder servicing
or other type of service contract may be made, or that
(ii) any Person with which an advisory, management or administration contract or Principal
Underwriters or distributors contract, or transfer, shareholder servicing or other type of
service contract may be made also has an advisory, management or administration contract, or
principal underwriters or distributors contract, or transfer, shareholder servicing or other
service contract, or has other business or interests with any other Person,
shall not affect the validity of any such contract or disqualify any Shareholder, Trustee or
officer of the Trust from voting upon or executing the same, or create any liability or
accountability to the Trust or its Shareholders, provided approval of each such contract is made
pursuant to the applicable requirements of the 1940 Act.
ARTICLE V.
Shareholders Voting Powers and Meetings
Section 1
.
Voting Powers
. Subject to the provisions of Article III, Sections
5 and 6(d), the Shareholders shall have right to vote only (i) for the election or removal of
Trustees as provided in Article IV, Section 1, and (ii) with respect to such additional matters
relating to the
11
Trust as may be required by the applicable provisions of the 1940 Act, including Section 16(a)
thereof, and (iii) on such other matters as the Trustees may consider necessary or desirable. Each
Shareholder shall have one vote for each dollar (and a fractional vote for each fractional dollar)
of the net asset value of each Share (including fractional Shares) held by such Shareholder on the
record date on each matter submitted to a vote at a meeting of Shareholders. For purposes of this
section, net asset value shall be determined pursuant to Article VIII, Section 3 of the Trusts
By-Laws as of the record date for such meeting set pursuant to Article II, Section 5 of such
By-Laws. There shall be no cumulative voting in the election of Trustees. Votes may be made in
person or by proxy. A proxy purporting to be executed by or on behalf of a Shareholder shall be
deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity
shall rest on the challenger.
Section 2
.
Voting Power and Meetings
. Meetings of the Shareholders may be
called by the Trustees for the purposes described in Section 1 of this Article V. A meeting of
Shareholders may be held at any place designated by the Trustees. Written or electronic notice of
any meeting of Shareholders shall be given or caused to be given by the Trustees by delivering
personally, electronically or mailing such notice not more than ninety (90), nor less than ten (10)
days before such meeting, postage prepaid, stating the time and place of the meeting, to each
Shareholder at the Shareholders address as it appears on the records of the Trust. Whenever
notice of a meeting is required to be given to a Shareholder under this Declaration of Trust, a
written or electronic waiver thereof, executed before or after the meeting by such Shareholder or
his or her attorney thereunto authorized and filed with the records of the meeting, or actual
attendance at the meeting of Shareholders in person or by proxy, shall be deemed equivalent to such
notice.
Section 3
.
Quorum and Required Vote
. Except as otherwise provided by the
1940 Act or in this Declaration of Trust, at any meeting of Shareholders, the presence in person or
by proxy of the holders of record of Shares issued and outstanding and entitled to vote
representing more than twenty-five percent of the total combined net asset value of all Shares
issued and outstanding and entitled to vote shall constitute a quorum for the transaction of any
business at the meeting. Any meeting of Shareholders may be adjourned from time to time by a
majority of the votes properly cast upon the question of adjourning a meeting to another date and
time, whether or not a quorum is present, and the meeting may be held as adjourned within a
reasonable time after the date set for the original meeting without further notice. Subject to the
provisions of Article III, Section 6(d) and the applicable provisions of the 1940 Act, when a
quorum is present at any meeting, a majority vote of the combined net asset value of all Shares
entitled to vote that are present in person or by proxy shall decide any questions, except only a
plurality vote shall be necessary to elect trustees.
Section 4
.
Action by Written Consent
. Any action taken by Shareholders may
be taken without a meeting if all the holders of Shares entitled to vote on the matter are provided
with not less than 7 days written or electronic notice thereof and written or electronic consent to
the action is filed with the records of the meetings of Shareholders by the holders of the number
of votes that would be required to approve the matter as provided in Article V, Section 3. Such
consent shall be treated for all purposes as a vote taken at a meeting of Shareholders.
12
Section 5
.
Record Dates
. For the purpose of determining the Shareholders who
are entitled to vote or act at any meeting or any adjournment thereof, the Trustees may fix a time,
which shall be not more than ninety (90) nor less than ten (10) days before the date of any meeting
of Shareholders, as the record date for determining the Shareholders having the right to notice of
and to vote at such meeting and any adjournment thereof, and in such case only Shareholders of
record on such record date shall have such right, notwithstanding any transfer of Shares on the
books of the Trust after the record date. For the purpose of determining the Shareholders who are
entitled to receive payment of any dividend or of any other distribution, the Trustees may fix a
date, which shall be before the date for the payment of such dividend or distribution, as the
record date for determining the Shareholders having the right to receive such dividend or
distribution. Nothing in this Section 5 shall be construed as precluding the Trustees from setting
different record dates for different Series.
ARTICLE VI.
Net Asset Value, Distributions, and Redemptions
Section 1
.
Determination of Net Asset Value, Net Income, and Distributions
.
Subject to Article III, Section 6 hereof, the Trustees, in their absolute discretion, may prescribe
and shall set forth in the By-Laws or in a duly adopted resolution of the Trustees such bases and
time for determining the per Share net asset value of the Shares of any Series and the declaration
and payment of dividends and distributions on the Shares of any Series, as they may deem necessary
or desirable.
Section 2
.
Redemptions and Repurchases
. The Trust shall purchase such Shares
as are offered by any Shareholder for redemption, upon receipt by the Trust or a Person designated
by the Trust of a request in proper form that the Trust redeem such Shares or in accordance with
such other procedures for redemption, including without limitation, prescribed numbers of Shares
which must be presented together for redemption, as the Trustees may from time to time authorize;
and the Trust will pay therefor the net asset value thereof, in accordance with the By-Laws and the
applicable provisions of the 1940 Act. Payment for said Shares shall be made by the Trust to the
Shareholder within seven days after the date on which the request for redemption is received in
proper form. The obligation set forth in this Section 2 is subject to the provision that in the
event the New York Stock Exchange (the Exchange) is closed for other than weekends or holidays,
or if permitted by the rules of the Commission during periods when trading on the Exchange is
restricted or during any emergency which makes it impracticable for the Trust to dispose of the
investments of the applicable Series or to determine fairly the value of the net assets held with
respect to such Series or during any other period permitted by order of the Commission for the
protection of investors, such obligations may be suspended or postponed by the Trustees.
The redemption price may in any case or cases be paid in cash or wholly or partly in kind in
accordance with Rule 18f-1 under the 1940 Act if the Trustees determine that such payment is
advisable in the interest of the remaining Shareholders of the Series of which the Shares are being
redeemed. Subject to the foregoing, the selection and quantity of securities or
13
other property so paid or delivered as all or part of the redemption price shall be determined by
or under authority of the Trustees. In no case shall the Trust be liable for any delay of any
corporation or other Person in transferring securities selected for delivery as all or part of any
payment in kind.
Section 3
.
Redemptions at the Option of the Trust
. The Trust shall have the
right, at its option, upon 30 days notice to the affected Shareholder at any time to redeem Shares
of any Shareholder at the net asset value thereof as described in Section 1 of this Article VI:
(i) if at such time such Shareholder owns Shares of any Series having an aggregate net asset value
of less than a minimum value determined from time to time by the Trustees; or (ii) to the extent
that such Shareholder owns Shares of a Series equal to or in excess of a maximum percentage of the
outstanding Shares of such Series determined from time to time by the Trustees; or (iii) to the
extent that such Shareholder owns Shares equal to or in excess of a maximum percentage, determined
from time to time by the Trustees, of the outstanding Shares of the Trust.
Section 4
.
Transfer of Shares
. The Trust shall transfer Shares held of
record by any Person to any other Person upon receipt by the Trust or a Person designated by the
Trust of a written request therefor in such form and pursuant to such procedures as may be approved
by the Trustees.
ARTICLE VII.
Compensation and Limitation of Liability
Section 1
.
Compensation of Trustees
. The Trustees as such shall be entitled
to reasonable compensation from the Trust, and they may fix the amount of such compensation from
time to time. Nothing herein shall in any way prevent the employment of any Trustee to provide
advisory, management, legal, accounting, investment banking or other services to the Trust and to
be specially compensated for such services by the Trust.
Section 2
.
Indemnification and Limitation of Liability
. 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 Trustees or officers 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
14
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.
Section 3
.
Trustees Good Faith Action, Expert Advice, No Bond or Surety
.
The exercise by the Trustees of their powers hereunder shall be binding upon everyone interested in
or dealing with the Trust. A Trustee shall be liable to the Trust and to any Shareholder solely
for his or her own willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee, and shall not be liable for errors of
judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be under no liability
for any act or omission in accordance with such advice nor for failing to follow such advice. The
Trustees shall not be required to give any bond as such, nor any surety if a bond is required.
Section 4
.
Insurance
. The Trustees shall be entitled and empowered to the
fullest extent permitted by law to purchase with Trust assets insurance for liability and for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or officer in connection
with any claim, action, suit or proceeding in which he or she becomes involved by virtue of his or
her capacity or former capacity with the Trust, whether or not the Trust would have the power to
indemnify him or her against such liability under the provisions of this Article VII.
ARTICLE VIII.
Miscellaneous
Section 1
.
Liability of Third Persons Dealing with Trustees
. No Person
dealing with the Trustees shall be bound to make any inquiry concerning the validity of any
transaction made or to be made by the Trustees or to see to the application of any payments made or
property transferred to the Trust or upon its order.
Section 2
.
Termination of Trust or Series
. Unless terminated as provided
herein, the Trust shall continue without limitation of time. The Trust may be terminated at any
time by the Trustees upon 60 days prior written notice to the Shareholders. Any Series or class
thereof
may be terminated at any time by the Trustees upon 60 days prior written notice to
the Shareholders of that Series or class.
Upon termination of the Trust (or any Series, as the case may be), after paying or otherwise
providing for all charges, taxes, expenses and liabilities held, severally, with respect to each
Series (or the applicable Series, as the case may be), whether due or accrued or anticipated as may
be determined by the Trustees, the Trust shall, in accordance with such procedures as the Trustees
consider appropriate, reduce the remaining assets held, severally, with respect to each Series (or
the applicable Series, as the case may be), to distributable form in cash or shares or other
securities, and any combination thereof, and distribute the proceeds held with respect to each
Series (or the applicable Series, as the case may be), to the Shareholders of that Series, as a
15
Series, ratably according to the number of Shares of that Series held by the several Shareholders
on the date of termination.
Section 3
.
Merger and Consolidation
. The Trustees may cause (i) the Trust or
one or more of its Series to the extent consistent with applicable law to be merged into or
consolidated with another Trust, Series or Person, (ii) the Shares of the Trust or any Series to be
converted into beneficial interests in another statutory trust (or series thereof), (iii) the
Shares to be exchanged for assets or property under or pursuant to any state or federal statute to
the extent permitted by law, or (iv) a sale of assets of the Trust or one or more of its Series.
In all respects not governed by statute or applicable law, the Trustees shall have power to
prescribe the procedure necessary or appropriate to accomplish a sale of assets, Share exchange,
merger, or consolidation, including the power to create one or more separate statutory trusts to
which all or any part of the assets, liabilities, profits or losses of the Trust may be transferred
and to provide for the conversion of Shares of the Trust or any Series into beneficial interests in
such separate statutory trust or trusts (or series thereof).
Section 4
.
Amendments
. This Declaration of Trust may be restated and/or
amended at any time by an instrument in writing signed by a majority of the Trustees then holding
office. Any such restatement and/or amendment hereto shall be effective immediately upon execution
and approval. The Certificate of Trust of the Trust may be restated and/or amended by a similar
procedure, and any such restatement and/or amendment shall be effective immediately upon filing
with the Office of the Secretary of State of the State of Delaware or upon such future date as may
be stated therein.
Section 5
.
Filing of Copies, References, Headings
. The original or a copy of
this instrument and of each restatement and/or amendment hereto shall be kept at the office of the
Trust where it may be inspected by any Shareholder. Anyone dealing with the Trust may rely on a
certificate by an officer of the Trust as to whether or not any such restatements and/or amendments
have been made and as to any matters in connection with the Trust hereunder; and, with the same
effect as if it were the original, may rely on a copy certified by an officer of the Trust to be a
copy of this instrument or of any such restatements and/or amendments. In this instrument and in
any such restatements and/or amendment, references to this instrument, and all expressions like
herein, hereof and hereunder, shall be deemed to refer to this instrument as amended or
affected by any such restatements and/or amendments. Headings are placed herein for convenience of
reference only and shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. Whenever the singular number is used herein, the same
shall include the plural; and the neuter, masculine and feminine genders shall include each other,
as applicable. This instrument may be executed in any number of counterparts each of which shall
be deemed an original.
Section 6
.
Applicable Law
. This Declaration of Trust is created under and is
to be governed by and construed and administered according to the laws of the State of Delaware and
the Delaware Statutory Trust Act, as amended from time to time (the Act). The Trust shall be a
Delaware statutory trust pursuant to such Act, and without limiting the provisions hereof, the
Trust may exercise all powers which are ordinarily exercised by such a statutory trust.
16
Section 7
.
Provisions in Conflict with Law or Regulations
.
(a) The provisions of this Declaration of Trust are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in conflict with the 1940
Act, the regulated investment company provisions of the Internal Revenue Code or with other
applicable laws and regulations, the conflicting provision shall be deemed never to have
constituted a part of this Declaration of Trust; provided, however, that such determination shall
not affect any of the remaining provisions of this Declaration of Trust or render invalid or
improper any action taken or omitted prior to such determination.
(b) If any provision of this Declaration of Trust shall be held invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such
jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any
other provision of this Declaration of Trust in any jurisdiction.
Section 8.
Statutory Trust Only
. It is the intention of the Trustees to
create a statutory trust pursuant to the Act, and thereby to create only the relationship of
trustee and beneficial owners within the meaning of such Act between the Trustees and each
Shareholder. It is not the intention of the Trustees to create a general partnership, limited
partnership, joint stock association, corporation, bailment, joint venture, or any form of legal
relationship other than a statutory trust pursuant to such Act. Nothing in this Declaration of
Trust shall be construed to make the Shareholders, either by themselves or with the Trustees,
partners or members of a joint stock association.
IN WITNESS WHEREOF, the Initial Trustee named below does hereby make and enter into this
Declaration of Trust as of the
day of
, 2009.
For and on behalf of FAITHSHARES TRUST.
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NAME
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TITLE
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President and Initial Trustee
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Thompson S. Phillips, Jr.
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THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS
3555 Northwest 58th Street, Suite 410
Oklahoma City, Oklahoma 73112
17