AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 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. 2
þ
POST-EFFECTIVE AMENDMENT NO. __
o
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
þ
AMENDMENT NO. 2
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) 778-8377
(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
Approximate date of proposed public offering: 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:
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Fund Summaries
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How to Obtain More Information About the Funds
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Back Cover
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2
FaithShares Baptist Values Fund
(the Baptist Values Fund)
Investment Objective
The Baptist Values Funds investment objective is to track the performance, before fees and
expenses, of the FaithShares Baptist Values Index, a custom index developed by FTSE KLD Indexes.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the
Baptist Values Fund.
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Annual Fund Operating Expenses (expenses that you pay each year
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as a percentage of the value of your investment)
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Management Fee
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0.87
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%
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Distribution and Service (12b-1) Fees
1
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0.00
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%
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Other Expenses
2
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0.00
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%
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Total Annual Fund Operating Expenses
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0.87
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%
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1
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The Baptist Values Fund has adopted a Distribution and Service (12b-1) Plan pursuant
to which payments of up to 0.25% of average daily net assets may be made, however, the Board
has determined that no such payments will be made during the first 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 first 12 months will not be recoverable during any subsequent
period.
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2
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Other Expenses are based on estimated amounts for the current fiscal year.
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Example
This Example is intended to help you compare the cost of investing in the Baptist Values Fund with
the cost of investing in other funds.
The Example assumes that you invest $10,000 in the Baptist Values 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 Baptist Value Funds operating expenses
remain the same. This Example does not include the brokerage commissions that investors may pay on
their purchases and sales of Baptist Value Fund shares. Although your actual costs may be higher
or lower, based on these assumptions your cost would be:
Portfolio Turnover
The Baptist Values 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 the Baptist Values Fund shares are held in
3
a taxable account. These costs, which are not reflected in annual fund operating expenses or in
the example, affect the Baptist Value Funds performance. The Baptist Values Fund is new,
therefore, it does not have a historical portfolio turnover rate.
Principal Investment Strategies
The Baptist Values Fund employs a passive management investment strategy designed to track the
total return performance of the FaithShares Baptist Values Index, a custom index developed 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
recommended by various entities of the Baptist denomination (the Baptist Guidelines). U.S. large
capitalization companies are considered to be the 400 largest market capitalization U.S. companies
among the following industries: basic materials, consumer goods, consumer services, financials,
health care, industrials, oil and gas, technology, telecommunications and utilities. The BV Index
has zero tolerance for, and therefore excludes from its Index, companies involved in the following
activities: direct participation or support of abortion; the manufacture of alcoholic beverages;
the ownership or operation of, or support of, gambling facilities, products or services; production
of military weapons; the production, sale or distribution of pornography; and manufacture of
tobacco products. The Index is comprised of 100 securities each of whose weighting in the Index is
rebalanced each year in June to 1%.
KLD selects securities for the BV Index by using proprietary ratings covering environmental, social
and governance and ethics criteria to evaluate the performance (ESG performance) of the 400
largest U.S. companies (as described above), determined by float-adjusted market capitalization
(capitalization calculated by using shares that are readily available for purchase on the open
market rather than total shares outstanding). KLD identifies the companies that conflict with the
Baptist Guidelines and eliminates them from the selection process. KLD then selects the companies
with the highest ESG scores by industry targeting 100 companies that match in market
capitalizations the industry diversification of the FTSE U.S. Index. (For more information on the
industry weightings of the FTSE U.S. Index, see the Funds SAI.)
FaithShares Advisors, LLC (the Adviser) will normally invest at least 80% of the Baptist Value
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 Baptist Values 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
Baptist Values Fund may also invest its other assets in securities not included in the BV Index,
but which the Adviser believes will help the Baptist Values 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
4
market funds. The Baptist Values Fund will 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 funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Baptist Values Fund are set
forth below. An investment in the Baptist Values 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 Baptist Values Fund is not actively managed.
Therefore, the Baptist Values Fund would not sell an equity security because the securitys issuer
was in financial trouble unless that security is removed from the Index. The Baptist Values Fund
may not perform the same as its Index due to tracking error.
Market Risk
: An investment in the Baptist Values 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 Baptist Values Fund may not fully replicate its Index and may hold
less than the total number of securities in its Index, the Baptist Values 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 Baptist Values 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 Baptist Values Funds share price.
The Baptist Values 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 Baptist Values Fund.
Concentration Risk
: The Baptist Value Funds assets will 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 Baptist
Values 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 Baptist Values
5
Fund to a greater extent than if the Baptist Values 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). Compared to conventional securities,
derivatives can be more sensitive to changes in interest rates or to sudden fluctuations in market
prices and thus the Baptist Values Funds losses may be greater if it invests in derivatives than
if it invests only in conventional securities.
Index Tracking Risk
: The Baptist Values 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 Baptist Values
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 Baptist Values Funds securities
holdings to reflect changes in the composition of the Index, or representative sample of the Index.
The Baptist Values Fund may not be fully invested at times, either as a result of cash flows into
the Baptist Values Fund or reserves of cash held by the Baptist Values Fund to meet redemptions and
pay expenses. If the Baptist Values 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 Baptist Values Fund purchased all of the securities in the Index.
Performance Information
The Baptist Values 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 Baptist Values Fund.
Portfolio Managers
J. Garrett Stevens, CEO of the Trust and FaithShares Advisors, LLC, and Thompson S. Phillips, Jr.,
President of the Trust and FaithShares Advisors, LLC, are the Baptist Values Funds portfolio
managers and have managed the Baptist Values Fund since its inception.
For important information about the purchase and sale of Baptist Values 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 25 of the
prospectus.
6
FaithShares Catholic Values Fund
(the Catholic Values Fund)
Investment Objective
The Catholic Values Funds investment objective is to track the performance, before fees and
expenses, of the FaithShares Catholic Values Index, a custom index developed by FTSE KLD Indexes.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the
Catholic Values 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
1
|
|
|
0.00
|
%
|
Other Expenses
2
|
|
|
0.00
|
%
|
Total Annual Fund Operating Expenses
|
|
|
0.87
|
%
|
|
|
|
1
|
|
The Catholic Values Fund has adopted a Distribution and Service (12b-1) Plan pursuant
to which payments of up to 0.25% of average daily net assets may be made, however, the Board
has determined that no such payments will be made during the first 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 first 12 months will not be recoverable during any subsequent
period.
|
|
2
|
|
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 Catholic Values Fund with
the cost of investing in other funds.
The Example assumes that you invest $10,000 in the Catholic Values 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 Catholic Values Funds operating
expenses remain the same. This Example does not include the brokerage commissions that investors
may pay on their purchases and sales of Catholic Values Fund shares. Although your actual costs
may be higher or lower, based on these assumptions your cost would be:
7
Portfolio Turnover
The Catholic Values 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 Catholic Values Fund shares are held in a
taxable account. These costs, which are not reflected in annual fund operating expenses or in the
example, affect the Catholic Values Funds performance. The Catholic Values Fund is new,
therefore, it does not have a historical portfolio turnover rate.
Principal Investment Strategies
The Catholic Values Fund employs a passive management investment strategy designed to track the
total return performance of the FaithShares Catholic Values Index, a custom index developed 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 Bishops
(USCCB) Socially Responsible Investment Guidelines (SRI Guidelines). U.S. large capitalization
companies are considered to be the 400 largest market capitalization U.S. companies among the
following industries: basic materials, consumer goods, consumer services, financials, health care,
industrials, oil and gas, technology, telecommunications and utilities.
The SRI Guidelines focus on avoiding participation in harmful activities and promotion of the
common good. The CV Index has zero tolerance for, and therefore excludes from its Index, companies
involved in the following activities: direct participation or support of abortion; manufacture of
contraceptive products; use of embryonic stem cell or fetal tissue for research or in a product;
and manufacture of tobacco products. The CV Index also excludes companies that manufacture
anti-personnel landmines or that derive greater than 5% of revenues from the production of firearms
or military weapons. The CV Index avoids inclusion of companies that have been involved in
predatory lending controversies and not taken steps to address them; have a pattern of racial or
gender discrimination or labor rights controversies without taking steps to address such
situations; and use sweatshops in the manufacture of goods. In applying the SRI Guidelines, KLD
considers companies for the CV Index with the following corporate practices: have corporate
responsibility guidelines; have corporate policies on equal pay and promotion opportunities for
women and minorities; provide generous wages and have generous benefit policies; and have programs
and policies to protect the environment and reduce greenhouse gas emissions. Companies that
provide customers with access to health care and pharmaceuticals; affordable housing or lending for
housing or create environmentally beneficial technologies and/or develop alternative, renewable or
clean energy resources are also selected for the CV Index. The Index is comprised of 100
securities each of whose weighting in the Index is rebalanced each year in June to 1%.
KLD selects securities for the CV Index by using proprietary ratings covering environmental, social
and governance and ethics criteria to evaluate the performance (ESG performance) of the 400
largest U.S. companies (as described above), determined by float-adjusted market capitalization
(capitalization calculated using shares that are readily available for purchase on the open market
rather than total shares outstanding). KLD identifies the companies that conflict with the SRI
Guidelines and eliminates them from the selection process. KLD then selects the
8
companies with the highest ESG scores by industry targeting 100 companies that match in market
capitalizations the industry diversification of the FTSE U.S. Index. (For more information on the
industry weightings of the FTSE U.S. Index, see the Funds SAI.)
FaithShares Advisors, LLC (the Adviser) will normally invest at least 80% of the Catholic Values
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 Catholic Values 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
Catholic Values Fund may also invest its other assets in securities not included in the CV Index,
but which the Adviser believes will help the Catholic Values 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 Catholic Values Fund
will 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 funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Catholic Values Fund are set
forth below. An investment in the Catholic Values 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 Catholic Values Fund is not actively managed.
Therefore, the Catholic Values Fund would not sell an equity security because the securitys issuer
was in financial trouble unless that security is removed from the Index. The Catholic Values Fund
may not perform the same as its Index due to tracking error.
Market Risk
: An investment in the Catholic Values 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.
9
Management Risk
: Because the Catholic Values Fund may not fully replicate its Index and may hold
less than the total number of securities in its Index, the Catholic Values 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 Catholic Values 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 Catholic Values Funds share price.
The Catholic Values 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 Catholic Values Fund.
Concentration Risk
: The Catholic Values Funds assets will 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 Catholic
Values 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 Catholic Values
Fund to a greater extent than if the Catholic Values 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). Compared to conventional securities,
derivatives can be more sensitive to changes in interest rates or to sudden fluctuations in market
prices and thus the Catholic Values Funds losses may be greater if it invests in derivatives than
if it invests only in conventional securities.
Index Tracking Risk
: The Catholic Values 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 Catholic Values
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 Catholic Values Funds securities
holdings to reflect changes in the composition of the Index, or representative sample of the Index.
The Catholic Values Fund may not be fully invested at times, either as a result of cash flows into
the Catholic Values Fund or reserves of cash held by the Catholic Values Fund to meet redemptions
and pay expenses. If the Catholic Values 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 Catholic Values Fund purchased all of the securities in the
Index.
Performance Information
The Catholic Values Fund has not completed a full calendar year of operations and therefore has no
performance information.
10
Investment Adviser
FaithShares Advisors, LLC serves as the investment adviser to the Catholic Values Fund.
Portfolio Managers
J. Garrett Stevens, CEO of the Trust and FaithShares Advisors, LLC, and Thompson S. Phillips, Jr.,
President of the Trust and FaithShares Advisors, LLC, are the Catholic Values Funds portfolio
managers and have managed the Catholic Values Fund since its inception.
For important information about the purchase and sale of Catholic Values 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 25 of the
prospectus.
11
FaithShares Christian Values Fund
(the Christian Values Fund)
Investment Objective
The Christian Values Funds investment objective is to track the performance, before fees and
expenses, of the FaithShares Christian Values Index, a custom index developed by FTSE KLD Indexes.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the
Christian Values 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
1
|
|
|
0.00
|
%
|
Other Expenses
2
|
|
|
0.00
|
%
|
Total Annual Fund Operating Expenses
|
|
|
0.87
|
%
|
|
|
|
1
|
|
The Christian Values Fund has adopted a Distribution and Service (12b-1) Plan pursuant
to which payments of up to 0.25% of average daily net assets may be made, however, the Board
has determined that no such payments will be made during the first 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 first 12 months will not be recoverable during any subsequent
period.
|
|
2
|
|
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 Christian Values Fund
with the cost of investing in other funds.
The Example assumes that you invest $10,000 in the Christian Values 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 Christian Values Funds operating
expenses remain the same. This Example does not include the brokerage commissions that investors
may pay on their purchases and sales of Christian Values Fund shares. Although your actual costs
may be higher or lower, based on these assumptions your cost would be:
Portfolio Turnover
The Christian Values 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 Christian Values Fund shares are held in a
12
taxable account. These costs, which are not reflected in annual fund operating expenses or in the
example, affect the Christian Values Funds performance. The Christian Values Fund is new,
therefore, it does not have a historical portfolio turnover rate.
Principal Investment Strategies
The Christian Values Fund employs a passive management investment strategy designed to track the
total return performance of the FaithShares Christian Values Index, a custom index developed 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
drawn from the guidelines of various Christian denominations (the Christian Guidelines). U.S.
large capitalization companies are considered to be the 400 largest market capitalization U.S.
companies among the following industries: basic materials, consumer goods, consumer services,
financials, health care, industrials, oil and gas, technology, telecommunications and utilities.
The CHV Index has zero tolerance for, and therefore excludes from its Index, companies involved in:
the direct participation or support of abortion; manufacture of alcoholic beverages; ownership of,
or support of, gambling facilities, products or services; production or distribution of violent
media; production, sale or distribution of pornography, use of embryonic stem cell or fetal tissue
for research in a product; and manufacture, sale or distribution of tobacco products or supply of
key elements to the tobacco industry. The Index is comprised of 100 securities each of whose
weighting in the Index is rebalanced each year in June to 1%.
KLD selects securities for the CHV Index by using proprietary ratings covering environmental,
social and governance and ethics criteria to evaluate the performance (ESG performance) of the
400 largest U.S. companies (as described above), determined by float-adjusted market capitalization
(capitalization calculated by using shares that are readily available for purchase on the open
market rather than total shares outstanding). KLD identifies the companies that conflict with the
Christian Guidelines and eliminates them from the selection process. KLD then selects the
companies with the highest ESG scores by industry targeting 100 companies that match in market
capitalizations the industry diversification of the FTSE U.S. Index. (For more information on the
industry weightings of the FTSE U.S. Index, see the Funds SAI.)
FaithShares Advisors, LLC (the Adviser) will normally invest at least 80% of the Christian Values
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 Christian Values 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
Christian Values Fund may also invest its other assets in securities not included in the CHV Index,
but which the Adviser believes will help the Christian Values
13
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 Christian Values Fund will 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 funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Christian Values Fund are
set forth below. An investment in the Christian Values 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 Christian Values Fund is not actively managed.
Therefore, the Christian Values Fund would not sell an equity security because the securitys
issuer was in financial trouble unless that security is removed from the Index. The Christian
Values Fund may not perform the same as its Index due to tracking error.
Market Risk
: An investment in the Christian Values 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 Christian Values Fund may not fully replicate its Index and may hold
less than the total number of securities in its Index, the Christian Values 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 Christian Values 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 Christian Values Funds share
price. The Christian Values 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 Christian Values Fund.
Concentration Risk
: The Christian Values Funds assets will 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 Christian
Values Fund is subject to the risk that economic, political or other conditions that have a
14
negative effect on that industry or group of industries will negatively impact the Christian Values
Fund to a greater extent than if the Christian Values 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). Compared to conventional securities,
derivatives can be more sensitive to changes in interest rates or to sudden fluctuations in market
prices and thus the Christian Values Funds losses may be greater if it invests in derivatives than
if it invests only in conventional securities.
Index Tracking Risk
: The Christian Values 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 Christian Values
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 Christian Values Funds securities
holdings to reflect changes in the composition of the Index, or representative sample of the Index.
The Christian Values Fund may not be fully invested at times, either as a result of cash flows into
the Christian Values Fund or reserves of cash held by the Christian Values Fund to meet redemptions
and pay expenses. If the Christian Values 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 Christian Values Fund purchased all of the securities in the
Index.
Performance Information
The Christian Values 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 Christian Values Fund.
Portfolio Managers
J. Garrett Stevens, CEO of the Trust and FaithShares Advisors, LLC, and Thompson S. Phillips, Jr.,
President of the Trust and FaithShares Advisors, LLC, are the Christian Values Funds portfolio
managers and have managed the Christian Values Fund since its inception.
For important information about the purchase and sale of Christian Values 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 25 of the
prospectus.
15
FaithShares Lutheran Values Fund
(the Lutheran Values Fund)
Investment Objective
The Lutheran Values Funds investment objective is to track the performance, before fees and
expenses, of the FaithShares Lutheran Values Index, a custom index developed by FTSE KLD Indexes.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the
Lutheran Values 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
1
|
|
|
0.00
|
%
|
Other Expenses
2
|
|
|
0.00
|
%
|
Total Annual Fund Operating Expenses
|
|
|
0.87
|
%
|
|
|
|
1
|
|
The Lutheran Values Fund has adopted a Distribution and Service (12b-1) Plan pursuant
to which payments of up to 0.25% of average daily net assets may be made, however, the Board
has determined that no such payments will be made during the first 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 first 12 months will not be recoverable during any subsequent
period.
|
|
2
|
|
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 Lutheran Values Fund with
the cost of investing in other funds.
The Example assumes that you invest $10,000 in the Lutheran Values 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 Lutheran Values Funds operating
expenses remain the same. This Example does not include the brokerage commissions that investors
may pay on their purchases and sales of Lutheran Values Fund shares. Although your actual costs
may be higher or lower, based on these assumptions your cost would be:
Portfolio Turnover
The Lutheran Values 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
16
transaction costs and may result in higher taxes when Lutheran Values Fund shares are held in a
taxable account. These costs, which are not reflected in annual fund operating expenses or in the
example, affect the Lutheran Values Funds performance. The Lutheran Values Fund is new,
therefore, it does not have a historical portfolio turnover rate.
Principal Investment Strategies
The Lutheran Values Fund employs a passive management investment strategy designed to track the
total return performance of the FaithShares Lutheran Values Index, a custom index developed by FTSE
KLD (the LV 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.
U.S. large capitalization companies are considered to be the 400 largest market capitalization U.S.
companies among the following industries: basic materials, consumer goods, consumer services,
financials, health care, industrials, oil and gas, technology, telecommunications and utilities.
The LV Index has zero tolerance, and therefore excludes from its Index, companies involved in the
following activities: manufacture of distilled alcohol; ownership or operation of, or support of,
gambling facilities or products or services; research and development of nuclear, biological or
chemical weapons; production, sale or distribution of pornography; and manufacture of tobacco
products. The LV Index also has zero tolerance for companies that are major producers of toxic
chemicals or have significant toxic waste releases, significant hazardous waste sites, or
significant environmental penalties liabilities. The LV Index strives to include companies
involved in the following: community development, affordable housing, corporate policies to
purchase from women and minority business, sustainable forestry and renewable energy. The Index is
comprised of 100 securities each of whose weighting in the Index is rebalanced each year in June to
1%.
KLD selects securities for the LV Index by using proprietary ratings covering environmental, social
and governance and ethics criteria to evaluate the performance (ESG performance) of the 400
largest U.S. companies (as described above), determined by float-adjusted market capitalization
(capitalization calculated by using shares that are readily available for purchase on the open
market rather than total shares outstanding). KLD identifies the companies that conflict with the
guidelines recommended by the Evangelical Lutheran Church in America Board of Pensions and
eliminates them from the selection process. KLD then selects the companies with the highest ESG
scores by industry targeting 100 companies that match in market capitalizations the industry
diversification of the FTSE U.S. Index. (For information on the industry weightings of the FTSE
U.S. Index, see the Funds SAI.)
FaithShares Advisors, LLC (the Adviser) will normally invest at least 80% of the Lutheran Values
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 Lutheran Values 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
17
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 Lutheran Values Fund may also invest its other assets in securities not
included in the LV Index, but which the Adviser believes will help the Lutheran Values 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 Lutheran Values Fund will 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 funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Lutheran Values Fund are set
forth below. An investment in the Lutheran Values 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 Lutheran Values Fund is not actively managed.
Therefore, the Lutheran Values Fund would not sell an equity security because the securitys issuer
was in financial trouble unless that security is removed from the Index. The Lutheran Values Fund
may not perform the same as its Index due to tracking error.
Market Risk
: An investment in the Lutheran Values Fund involves risks similar to those of investing
in any Lutheran Values 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 Lutheran Values Fund may not fully replicate its Index and may hold
less than the total number of securities in its Index, the Lutheran Values 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 Lutheran Values 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 Lutheran Values Funds share price.
The Lutheran Values 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
18
Code of 1986, as amended (the Code). Compliance with diversification requirements of the Code
could limit the investment flexibility of the Lutheran Values Fund.
Concentration Risk
: The Lutheran Values Funds assets will 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 Lutheran
Values 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 Lutheran Values
Fund to a greater extent than if the Lutheran Values 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). Compared to conventional securities,
derivatives can be more sensitive to changes in interest rates or to sudden fluctuations in market
prices and thus the Lutheran Values Funds losses may be greater if it invests in derivatives than
if it invests only in conventional securities.
Index Tracking Risk
: The Lutheran Values 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 Lutheran Values
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 Lutheran Values Funds securities
holdings to reflect changes in the composition of the Index, or representative sample of the Index.
The Lutheran Values Fund may not be fully invested at times, either as a result of cash flows into
the Lutheran Values Fund or reserves of cash held by the Lutheran Values Fund to meet redemptions
and pay expenses. If the Lutheran Values 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 Lutheran Values Fund purchased all of the securities in the
Index.
Performance Information
The Lutheran Values 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 Lutheran Values Fund.
Portfolio Managers
J. Garrett Stevens, CEO of the Trust and FaithShares Advisors, LLC, and Thompson S. Phillips, Jr.,
President of the Trust and FaithShares Advisors, LLC, are the Lutheran Values Funds portfolio
managers and have managed the Lutheran Values Fund since its inception.
For important information about the purchase and sale of Lutheran Values 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 25 of the
prospectus.
19
FaithShares Methodist Values Fund
(the Methodist Values Fund)
Investment Objective
The Methodist Values Funds investment objective is to track the performance, before fees and
expenses, of the FaithShares Methodist Values Index, a custom index developed by FTSE KLD Indexes.
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
1
|
|
|
0.00
|
%
|
Other Expenses
2
|
|
|
0.00
|
%
|
Total Annual Fund Operating Expenses
|
|
|
0.87
|
%
|
|
|
|
1
|
|
The Methodist Values Fund has adopted a Distribution and Service (12b-1) Plan pursuant
to which payments of up to 0.25% of average daily net assets may be made, however, the Board
has determined that no such payments will be made during the first 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 first 12 months will not be recoverable during any subsequent
period.
|
|
2
|
|
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 Methodist Values Fund
with the cost of investing in other funds.
The Example assumes that you invest $10,000 in the Methodist Values 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 Methodist Values Funds operating
expenses remain the same. This Example does not include the brokerage commissions that investors
may pay on their purchases and sales of Methodist Values Fund shares. Although your actual costs
may be higher or lower, based on these assumptions your cost would be:
Portfolio Turnover
The Methodist Values 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 Methodist Values Fund shares are held in a
taxable account. These costs, which are not reflected in annual Methodist Values Fund operating
20
expenses or in the example, affect the Methodist Values Funds performance. The Methodist Values
Fund is new, therefore, it does not have a historical portfolio turnover rate.
Principal Investment Strategies
The Methodist Values Fund employs a passive management investment strategy designed to track the
total return performance of the FaithShares Methodist Values Index, a custom index developed 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 (the Principles). U.S. large capitalization companies are considered to be the
400 largest market capitalization U.S. companies among the following industries: basic materials,
consumer goods, consumer services, financials, health care, industrials, oil and gas, technology,
telecommunications and utilities. The MV Index focuses on avoiding companies that derive specified
revenues from business practices that conflict with the teachings of the United Methodist Church.
For example, companies that derive 10% or more of revenues from the following activities will be
excluded from the MV Index: sale, distribution or marketing of alcoholic beverages or supplying key
elements for alcoholic production; production of goods and services related to gambling;
manufacture, sale or distribution of antipersonnel weapons and ammunition; production, sale or
distribution of pornographic products or services; sale, distribution, or marketing of tobacco
products or supplying key elements to the tobacco industry; or a combination of the aforementioned
activities. The Index is comprised of 100 securities each of whose weighting in the Index is
rebalanced each year in June to 1%.
KLD selects securities for the MV Index by using proprietary ratings covering environmental, social
and governance and ethics criteria to evaluate the performance (ESG performance) of the 400
largest U.S. companies (as described above), determined by float-adjusted market capitalization
(capitalization calculated by using shares that are readily available for purchase on the open
market rather than total shares outstanding). KLD identifies the companies that conflict with the
Principles and eliminates them from the selection process. KLD then selects the companies with the
highest ESG scores by industry targeting 100 companies that match in market capitalizations the
industry diversification of the FTSE U.S. Index. (For more information on the industry weightings
of the FTSE U.S. Index, see the Funds SAI.)
FaithShares Advisors, LLC (the Adviser) will normally invest at least 80% of the Methodist Values
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 Methodist Values 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
Methodist Values Fund may also invest its other assets in securities not included in the MV Index,
but which the Adviser believes will help the Methodist
21
Values 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 Methodist Values Fund will 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 funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Methodist Values Fund are
set forth below. An investment in the Methodist Values 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 Methodist Values Fund is not actively managed.
Therefore, the Methodist Values Fund would not sell an equity security because the securitys
issuer was in financial trouble unless that security is removed from the Index. The Methodist
Values Fund may not perform the same as its Index due to tracking error.
Market Risk
: An investment in the Methodist Values 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 Methodist Values Fund may not fully replicate its Index and may hold
less than the total number of securities in its Index, the Methodist Values 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 Methodist Values 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 Methodist Values Funds share
price. The Methodist Values 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 Methodist Values Fund.
Concentration Risk
: The Methodist Values Funds assets will 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 Methodist
Values Fund is subject to the risk that economic, political or other conditions that have a
22
negative effect on that industry or group of industries will negatively impact the Methodist Values
Fund to a greater extent than if the Methodist Values 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). Compared to conventional securities,
derivatives can be more sensitive to changes in interest rates or to sudden fluctuations in market
prices and thus the Methodist Values Funds losses may be greater if it invests in derivatives than
if it invests only in conventional securities.
Index Tracking Risk
: The Methodist Values 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 Methodist Values
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 Methodist Values Funds securities
holdings to reflect changes in the composition of the Index, or representative sample of the Index.
The Methodist Values Fund may not be fully invested at times, either as a result of cash flows into
the Methodist Values Fund or reserves of cash held by the Methodist Values Fund to meet redemptions
and pay expenses. If the Methodist Values 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 Methodist Values Fund purchased all of the securities in the
Index.
Performance Information
The Methodist Values 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 Methodist Values Fund.
Portfolio Managers
J. Garrett Stevens, CEO of the Trust and FaithShares Advisors, LLC, and Thompson S. Phillips, Jr.,
President of the Trust and FaithShares Advisors, LLC, are the Methodist Values Funds portfolio
managers and have managed the Methodist Values Fund since its inception.
For important information about the purchase and sale of Methodist Values 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 25 of the
prospectus.
23
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.
24
Additional Index Information
The Indexes were developed by FTSE KLD Indexes (FTSE KLD) under a cooperation agreement between
KLD Research and Analytics, Inc. (KLD) and FTSE International Limited (FTSE) and licensed to
FaithShares Advisors, LLC 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 largest 400 US equities
by market capitalization from the FTSE U.S. Index. 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. Companies are
added to an Index at the time of the annual reconstitution. Companies may be removed from an Index
at any time during the year due to certain corporate actions. Each index is rebalanced annually on
the third Friday of June each year.
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. FTSE KLD has no obligation to take the needs of the Trust, the
Adviser or the shareholders of the Funds into consideration in determining, composing or
calculating the Indexes. 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
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
25
investment techniques in seeking to track an Index. Each Fund may invest in stock index futures
contracts and other derivatives. Each Fund will not take defensive positions.
Each Fund may change its investment objective without shareholder approval.
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.
26
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.
27
A discussion regarding the basis for the Boards approval of the investment advisory agreement with
the Adviser will be available in the Funds first Annual or 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 advisers. 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.
Net asset value per share for the Funds is computed by dividing the value of the net assets of the
Funds (
i.e.
the value of its total assets less total liabilities) by its total number of shares
outstanding. Expenses and fees, including management and distribution fees, if any, are accrued
daily and taken into account for purposes of determining net asset value. Net asset value is
28
determined each business day, normally as of the close of regular trading of the NYSE (ordinarily
4:00 p.m., Eastern time).
When determining net asset value, 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 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
29
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.
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.
30
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 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
31
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.
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
.
32
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:
Call:
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(call collect) 405-778-8377
Monday through Friday
8:30 a.m. to 4:30 p.m. (Central Time)
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Write:
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FaithShares Trust
3555 Northwest 58th Street, Suite 410
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: 811-22263
33
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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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 Indexes (FTSE KLD) under a
cooperation agreement between KLD Research and Analytics, Inc. (KLD) and FTSE International
Limited (FTSE), jointly 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 for the Indexes is the largest 400 U.S. equities
included in the FTSE U.S. Index. The 400 largest U.S. equities are determined by float-adjusted market
capitalization on the relevant determination date or closest business day of each year. Largest
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. For companies with non-U.S. incorporation for tax or regulatory purposes, KLD follows
FTSE country classification. 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.
Index Construction
Each Index is constructed as follows: FTSE/KLD evaluates the ESG performance of the 400 largest
U.S. equities in the following industries: oil and gas; consumer goods; telecommunications;
technology; basic materials; health care; utilities; industrials; consumer services; and
financials. The companies in each industry peer group are ranked according to ESG performance.
For each index, KLD removes any companies that FAIL the screens for that Index, then selects the
highest ranked companies in each industry according to industry diversification requirements (see
below). Each Index is constructed to
1
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 FTSE U.S. Index.
The following table shows the industry diversification for the FTSE United States Index as of June
22, 2009:
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Basic Materials
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Consumer Goods
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Consumer Services
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Financials
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12
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Health Care
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15
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Industrials
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11
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Oil & Gas
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13
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Technology
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16
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|
Telecommunications
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4
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Utilities
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4
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|
Each Index reconstitutes annually on the third Friday of June. Companies can only be added to an
Index at reconstitution. Companies may be removed at any time during the year due to certain
corporate actions.
Hypothetical Index Performance
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
hypothetical
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, hypothetical performance information for purposes of this comparison beginning as of
June 18, 2004.
The back-tested performance information shown below is not the performance of any Fund or Index and
is not an indication of how any Fund or Index would have performed in the past or will perform in
the future.
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YTD
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For year ended 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]
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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)%
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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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)%
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(0.14
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)%
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7.11
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%
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2
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|
|
|
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|
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|
|
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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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Christian Values Index
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(22.27
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)%
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|
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(0.04
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)%
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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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)%
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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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)%
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0.74
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%
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7.61
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%
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S&P 500 Index
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(26.21
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)%
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(8.22
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)%
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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., June 22, 2009) are based on back-testing (i.e., calculations of how the index might have
performed in the past if it had existed). The hypothetical index performance for the five year
period prior to commencement of the Indexes is based on the performance of the individual
securities that comprised each Index as of June 30, 2009. In calculating the hypothetical
performance, the following assumptions were made: 1) each Index was rebalanced each year on the
third Friday of June to give each security an equal 1% weight in the Index; and 2) there were no
removals or additions of Index constituents (
i.e.
, the companies comprising each Index as of June
30, 2009 were the same for the entire period for which the hypothetical index performance is
shown). 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.
3
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.
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).
4
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 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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|
|
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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.
|
5
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 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.
6
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.
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
7
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.
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
8
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 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
9
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 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.
10
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.
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:
11
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 a
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, 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 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:
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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.
12
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 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.
13
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 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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Portfolios in
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Principal
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Fund
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Term of Office
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Occupation(s)
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Complex
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Other
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Name, Address,
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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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Overseen By
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Directorships held
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and Age
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with the Funds
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Time Served
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Years
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Trustee
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by Trustee
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Interested Trustees
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Thompson S.
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Trustee and
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Since 2009
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T.S. Phillips
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5
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Phillips, Jr.
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President
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Investments, Inc.
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3555 Northwest 58
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1990 to Present
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Street
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President and CEO;
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Suite 600
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FaithShares
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Oklahoma City,
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Advisors, LLC 2009
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OK 73112
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to Present
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(58 years old)
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President and
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Portfolio Manager
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J. Garrett Stevens
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Trustee and Chief
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Since 2009
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T.S. Phillips
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5
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3555 Northwest 58
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Executive Officer
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Investments, Inc.
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Street
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2001 to Present
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Suite 410
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Vice President;
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Oklahoma City,
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FaithShares
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OK 73112
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Advisors, LLC 2009
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(30 years old)
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to Present Chief
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Executive Officer
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and Portfolio
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Manager
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14
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Number of
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Portfolios in
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Principal
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Fund
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Term of Office
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Occupation(s)
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Complex
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Other
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Name, Address,
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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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Overseen By
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Directorships held
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and Age
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with the Funds
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Time Served
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Years
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Trustee
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by Trustee
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Independent Trustees
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Nancy Bainbridge
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Trustee
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Since 2009
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Commercial Federal
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5
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c/o FaithShares
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Bank
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Trust
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--Vice-President
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3555 Northwest 58
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May 2002-March
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Street
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2005; Spirit Bank-
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Suite 410
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Senior
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Oklahoma City,
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Vice-President-
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OK 73112
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March 2005-Present
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(54 years old)
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Thomas S. Burgin
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Trustee
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Since 2009
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T.C. Burgin, CPA,
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5
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Director of the
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c/o FaithShares
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PC- President
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South Oklahoma
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Trust
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1991-Present
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Chamber of
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3555 Northwest 58
th
Street
Suite 410
Oklahoma City,
OK
73112
(59 years old)
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Commerce
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Dr. Adrian E. Cole
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Trustee
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Since 2009
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New Covenant United
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5
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Director of
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c/o FaithShares
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Methodist Church
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Oklahoma
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Trust
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1996-Present-Senior
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Federal
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3555 Northwest 58
th
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Minister
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Credit Union
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Street
Suite 410
Oklahoma City,
OK
73112
(58 years old)
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Steven McConnell
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Trustee
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Since 2009
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DeBee Gilchrist
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5
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c/o FaithShares
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--Attorney
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Trust
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2004-2006
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3555 Northwest 58
th
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Legacy Bank-
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Street
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Corporate Counsel &
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Suite 410
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Senior Trust
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Oklahoma City,
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Officer
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OK 73112
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2006-Present
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(42 years old)
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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
15
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 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.
Fair Value Committee
. The Board also has established a Fair Value Committee that may be
comprised of representatives from the Adviser, representatives from the Funds administrator,
counsel to the Funds, and/or members of the Board of Trustees. The Fair Value Committee operates
under procedures approved by the Board. The Fair Value 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 Fair Value Committee. The
Fair Value Committee meets periodically, as necessary.
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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$
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0
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$
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0
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J. Garrett Stevens
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$
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0
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$
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0
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Independent Trustees
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16
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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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Nancy Bainbridge
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$
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0
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$
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0
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Thomas S. Burgin
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$
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0
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$
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0
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Dr. Adrian E. Cole
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$
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0
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$
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0
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Steven McConnell
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$
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0
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$
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0
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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 collect
1-405-778-8377; (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 October 20,
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
17
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.
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 September 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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0
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0
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0
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0
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36
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125
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Thompson S.
Phillips, Jr.
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0
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0
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0
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0
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36
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125
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CONFLICTS OF INTEREST
The portfolio managers management of other accounts is not expected to give rise to potential
conflicts of interest in connection with their management of the Funds investments, on the one
hand, and the investments of the other accounts, on the other. For certain other accounts, the
portfolio managers act in an investment consulting role (hiring money managers and/or selecting
mutual funds and performing quarterly investment performance analysis); for the remaining other
accounts,
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the portfolio manager trades in and out of three specific ETFs to which it is limited. No account
has a performance based fee. The portfolio managers do not actively select stocks for any other
account.
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 October 20, 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 of 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).
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
19
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.
The Trust
and the Administrator have entered into an administration agreement
dated October 20,
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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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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20
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
KPMG, [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-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.
21
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 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, any third party 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.
22
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
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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.
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.
23
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.
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 October 31, 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.
24
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 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 that has been accepted by the Transfer Agent and 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
25
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 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
26
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 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.
27
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 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.
28
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 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
29
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.
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
30
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.
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
31
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 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
32
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 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.
33
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.
34
Exhibit A
Proxy Voting Policies and Procedures
FAITHSHARES ADVISORS, LLC
Proxy Voting Procedures
The Advisory Agreement between FaithShares Trust (the Trust) and FaithShares Advisors, LLC (the
Adviser), empowers the Adviser to vote proxies on behalf of the Trust. The Adviser votes proxies
for securities held in client accounts using the following procedures to comply with Rule 206(4)-6
under the Investment Advisers Act of 1940. Specifically, Rule 206(4)-6 requires that the Adviser:
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Adopt and implement written policies and procedures reasonably designed to ensure that
we vote client securities in the best interest of clients;
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Disclose to clients how they may obtain information from us about how we voted proxies
for their securities; and
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Describe our proxy voting policies and procedures to clients and furnish them a copy of
our policies and procedures on request.
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A.
Objective
Where the Adviser is given responsibility for voting proxies, it must take reasonable steps under
the circumstances to ensure that proxies are received and voted in the best interest of its
clients, which generally means voting proxies with a view to
enhancing the value
of the
shares of stock held in client accounts.
The financial interest of our clients is the primary consideration in determining how proxies
should be voted. In the case of social and political responsibility issues that in our view do not
primarily involve financial considerations, it is not possible to represent fairly the diverse
views of our clients and, thus, unless a client has provided other instructions, the [Adviser
generally votes in accordance with the recommendations of [proxy voting agent] (see discussion
below) on these issues, although, on occasion the Adviser abstains from voting on these issues.
When making proxy-voting decisions, the Adviser generally adheres to its Proxy Voting Guidelines
(the Guidelines), as revised from time to time by the Adviser
1
. The Guidelines, which have been
developed with reference to the positions of [proxy voting agent], set forth the Advisers
positions on recurring issues and criteria for addressing non-recurring issues and incorporates
many of [proxy voting agents] standard operating policies.
B.
Accounts for Which the Advisor Has Proxy Voting Responsibility
The Adviser generally is responsible for voting proxies with respect to securities selected by the
Adviser and held in client accounts. The Advisers form of advisory agreement provides clients
with an alternative as to whether the client or the Adviser will be responsible for proxy voting.
However, the Adviser does not vote proxies for securities not selected by the Adviser but that are
nevertheless held in a client account or where the Adviser otherwise is not vested with
discretionary authority over securities held in a client account.
C.
Adherence to Client Proxy Voting Policies
Although clients do not always have proxy-voting policies, if a client has such a policy and
instructs the Adviser to follow it, the Adviser is required to comply with it except in any
instance in which doing so would be contrary to the economic interests of the client or otherwise
imprudent or unlawful.
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1
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The Policy and Procedures are described generally in our Form ADV,
Part II and are made available to clients on request.
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The Adviser must,
to the extent possible
, comply with each clients proxy voting policy.
If such policies conflict, the Adviser may vote proxies to reflect each policy in proportion to the
respective clients interest in any pooled account, for example (unless in the particular situation
voting in such a manner would be imprudent or otherwise inconsistent with applicable law).
D.
Arrangement with [Proxy Voting Agent]
The Adviser presently uses [proxy voting agent] to assist in voting proxies. [[proxy voting agent]
is a premier proxy research, advisory, voting and vote-reporting service that specializes in global
proxy voting.] [Proxy voting agents] primary function with respect to the Adviser is to apprise
the Adviser of shareholder meeting dates of all securities holdings, translate proxy materials
received from companies, provide associated research and provide considerations and recommendations
for voting on particular proxy proposals. Although the Adviser may consider [proxy voting agents]
and others recommendations on proxy issues, the Adviser bears ultimate responsibility for proxy
voting decisions.
E.
Conflicts
From time to time, proxy voting proposals may raise conflicts between the interests of the
Advisers clients and the interests of the Adviser and its employees.
The Adviser must take
certain steps designed to ensure, and must be able to demonstrate that those steps resulted in, a
decision to vote the proxies that was based on the clients best interest and was not the product
of the conflict.
For example, conflicts of interest may arise when:
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proxy votes regarding non-routine matters are solicited by an issuer that has an
institutional separate account relationship with the Adviser
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;
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a proponent of a proxy proposal has a business relationship with the Adviser; or
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the Adviser has business relationships with participants in proxy contests, corporate
directors or director candidates.
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The Advisers Proxy Voting Committee is primarily responsible for monitoring and resolving possible
material conflicts with respect to proxy voting. Any portfolio manager or research analyst with
knowledge of a personal conflict of interest relating to a particular matter shall disclose that
conflict to the Chief Compliance Officer and may be required to rescue him or herself from the
proxy voting process. Issues raising possible conflicts of interest are referred to the Proxy
Voting Committee for resolution. Application of the Guidelines or voting in accordance with the
[proxy voting agent] vote recommendation should, in most cases, adequately address any possible
conflicts of interest.
F.
Special Issues with Voting Foreign Proxies
Although the Adviser has arrangements with
[proxy voting agent]
, voting proxies with respect to
shares of foreign stocks may involve significantly greater effort and corresponding cost due to the
variety of regulatory schemes and corporate practices in foreign countries with respect to proxy
voting. Logistical problems in voting foreign proxies include the following:
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Each country has its own rules and practices regarding shareholder notification, voting
restrictions, registration conditions and share blocking.
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To vote shares in some countries, the shares may be blocked by the custodian or
depository (or bearer shares deposited with a specified financial institution) for a
specified number of days (usually five or fewer but sometimes longer) before or after the
shareholder meeting. When blocked, shares typically
may not be traded
until the
day after the blocking period. The Adviser may refrain from voting shares of foreign
stocks subject to blocking restrictions where, in the Advisers judgment, the benefit from
voting the shares is outweighed by the interest of maintaining client liquidity in the
shares. This decision generally is made on a case-by-case basis based
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2
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For this purpose, H GI generally will consider as non-routine
any matter listed in New York Stock Exchange Rule 452.11, relating to when a
member Advisor may not vote a proxy without instructions from its customer (for
example, contested matters are deemed non-routine).
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on relevant factors, including the length of the blocking period, the significance of the holding,
and whether the stock is considered a long-term holding.
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Often it is difficult to ascertain the date of a shareholder meeting because certain
countries, such as France, do not require companies to publish announcements in any
official stock exchange publication.
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Time frames between shareholder notification, distribution of proxy materials,
book-closure and the actual meeting date may be too short to allow timely action.
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Language barriers will generally mean that an English translation of proxy information
must be obtained or commissioned before the relevant shareholder meeting.
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Some companies and/or jurisdictions require that, in order to be eligible to vote, the
shares of the beneficial holders be registered in the companys share registry.
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Lack of a proxy voting service by custodians in certain countries.
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Because the cost of voting on a particular proxy proposal could exceed the expected benefit to a
client (including an ERISA plan), the Adviser may weigh the costs and benefits of voting on proxy
proposals relating to foreign securities and make an informed decision on whether voting a given
proxy proposal is prudent.
G.
Reports
The Advisers Form ADV Part II sets forth how clients may obtain information from the Adviser about
how it voted proxies with respect to their securities. If requested, the Adviser provides clients
with periodic reports on the Advisers proxy voting decisions and actions for securities in their
accounts, in such forms or intervals as the clients reasonably request. In the case of ERISA
plans, the named fiduciary that appointed the Adviser is required to monitor periodically the
Advisers activities, including our decisions and actions with regard to proxy voting.
Accordingly, the Adviser provides these named fiduciaries on request with reports to enable them to
monitor the Advisers proxy voting decisions and actions, including our adherence (as applicable)
to their proxy voting policies.
H.
Operational Procedures
The Advisers [
Group] is responsible for administering the proxy voting process as set forth in
these procedures. The [Proxy Administrator] in the [
Group] works with [proxy voting agent], the
proxy voting service, and is responsible for ensuring that meeting notices are reviewed and proxy
matters are communicated to the portfolio managers or research analysts for consideration and
voting recommendations. The Proxy Administrator is also responsible for fielding questions
regarding a proxy vote from [proxy voting agent], and soliciting feedback from the portfolio
managers and, or research analysts covering the company.
The Proxy Administrator will process proxies of a routine nature in accordance with the Advisers
Proxy Voting Guidelines when the vote recommendation from [proxy voting agent] and company
management are in agreement on how the proposal should be voted. A response or feedback from the
portfolio manager or research analyst covering the company will be solicited in writing by the
Proxy Administrator when proposals are not covered by the Guidelines, [proxy voting agent]
recommends a vote contrary to company management, or the Guidelines are unclear on how a proxy
should be voted. Responses from portfolio managers and research analysts are required to be in
writing and are maintained by the Proxy Administrator. The Proxy Administrator is responsible for
the actual submission of the proxies in a timely fashion.
A portfolio manager or research analyst may submit a proxy recommendation to the Proxy
Administrator for processing contrary to the Guidelines or [proxy voting agent] vote recommendation
if he or she determines that it is in the best interest of clients. Portfolio managers or research
analysts who submit voting recommendations inconsistent with the Guidelines or [proxy voting agent]
vote recommendations are required to document the rationale for their recommendation. The Proxy
Voting Committee will review the recommendation in order to determine whether the portfolio
managers or research analysts
37
voting rationale appears reasonable and in the best interests of clients. If the Proxy Voting Committee does not
agree that the portfolio managers or research analysts rationale is reasonable and in the best
interests of clients, the Proxy Voting Committee will vote the proxy and document the reason(s) for
its decision. The Proxy Administrator is responsible for maintaining the documentation provided
by portfolio managers, research analysts, and the Proxy Voting Committee, and assuring that it
adequately reflects the basis for any recommendation or vote that is cast in opposition to the
Guidelines or [proxy voting agent] vote recommendation.
I
Securities Subject to Lending Arrangements
For various legal or administrative reasons, the Adviser, customarily and typically does not, and
is often unable to vote securities that are, at the time of such vote, on loan pursuant to a
clients securities lending arrangement with the clients custodian. the Adviser will refrain from
voting such securities where the costs to the client and/or administrative inconvenience of
retrieving securities then on loan outweighs the benefit of voting, assuming retrieval under such
circumstances is even feasible and/or possible. In certain extraordinary situations, the Adviser
may seek to have securities then on loan pursuant to such securities lending arrangements retrieved
by the clients custodians for voting purposes. This decision will generally be made on a
case-by-case basis depending on whether, in the Advisers judgment, the matter to be voted on has
critical significance to the potential value of the securities in question, the relative cost
and/or administrative inconvenience of retrieving the securities, the significance of the holding
and whether the stock is considered a long-term holding. There can be no guarantee that any such
securities can be retrieved for such purpose.
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FAITHSHARES ADVISORS, LLC
Proxy Voting Guidelines
The Advisory Agreement between FaithShares Trust (the Trust) and FaithShares Advisors, LLC (the
Adviser), empowers the Adviser to vote proxies on behalf of the Trust. The Adviser votes proxies
for securities held in client accounts using the following guidelines to comply with Rule 206(4)-6
under the Investment Advisers Act of 1940. Specifically, Rule 206(4)-6 requires that the Adviser:
General Guidelines
The proxy voting guidelines below summarize FaithShares Advisors, LLCs (the Adviser) position on
various issues of concern to investors and give a general indication of how portfolio securities
held in client accounts will be voted on proposals dealing with particular issues. The guidelines
are not exhaustive and do not include all potential voting issues. In addition, because proxy
voting issues and circumstances of individual companies are so varied, there may be instances when
the Adviser may not vote in strict adherence to these guidelines as outlined below. The following
guidelines are grouped according to the types of proposals generally presented to shareholders.
(i)
Board of Directors Issues
The Adviser will generally vote for all Board of Directors nominees unless certain actions by the
Directors warrant votes to be withheld. These instances include Directors who:
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Attend less than 75% of the board and committee meetings unexcused;
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Ignore a shareholders proposal that is approved by a majority of the votes cast
for two (2) consecutive years;
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Have failed to act on takeover offers where the majority of the shareholders have
tendered their shares;
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Are inside directors and sit on the audit, compensation or nomination committees;
and
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Enacted egregious corporate governance policies.
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All other items are voted on a case-by-case basis with the exception of the following, which the
Adviser will generally oppose:
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Proposals to limit the tenure of outside directors;
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Proposals to impose mandatory retirement ages for outside directors; and
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Proposals requiring directors to own a minimum amount of company stock in order
to qualify as director or remain on the board.
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(ii)
Auditors
the Adviser will generally vote for proposals to ratify auditors, unless:
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An auditor has a financial interest in or association with the company, and is
therefore not independent; or
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There is reason to believe that the independent auditor has rendered an opinion
that is neither accurate nor indicative of the companys financial position.
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(iii)
Executive and Director Compensation
the Adviser will generally support executive compensation plans that motivate participants to focus
on long-term shareholder value and returns, encourage employee stock ownership, and more closely
align employee interests with those of shareholders. The Adviser will also support resolutions
regarding directors fees. In general, the Adviser will determine votes for the following on a
case-by-case basis:
39
|
|
|
Stock-based incentive plans;
|
|
|
|
|
Performance-based stock option proposals;
|
|
|
|
|
Stock plans in lieu of cash;
|
|
|
|
|
Proposals to ratify or cancel executive severance agreements; and
|
|
|
|
|
Management proposals seeking approval to re-price options
|
The Adviser will generally vote for:
|
|
|
Employee stock purchase plans where the purchase price is at least 85 percent of
fair market value, offering period is 27 months or less, and potential voting power
dilution is ten percent or less;
|
|
|
|
|
Proposals to implement an ESOP or increase authorized shares for existing ESOPs,
unless the number of shares allocated to the ESOP is excessive (more than five
percent of outstanding shares);
|
|
|
|
|
Proposals to implement a 401(k) savings plan for employees;
|
|
|
|
|
Proposals seeking additional disclosure of executive and director pay
information, provided that the information is relevant to shareholders needs, would
not put the company at a disadvantage, and is not unduly burdensome; and
|
|
|
|
|
Proposals to expense stock options.
|
The Adviser will generally vote against:
|
|
|
Retirement plans for non-employee directors;
|
|
|
|
|
Shareholder proposals seeking to set absolute levels on compensation or otherwise
dictate the amount or forms of compensation; and
|
|
|
|
|
Shareholder proposals requiring director fees to be paid in stock only
|
(iv)
Takeover/Tender Offer Defenses
Anti-takeover proposals are analyzed on a case-by-case basis. However, since investors
customarily, in our view, suffer a diminution of power as a result of the adoption of such
proposals, they are generally opposed by the Adviser unless structured in such a way that they give
shareholders the ultimate decision on any proposal or offer. Specifically, the Adviser will under
normal circumstances oppose:
|
|
|
Dual class exchange offers and dual class recapitalizations (unequal voting
rights);
|
|
|
|
|
Proposals to require a supermajority shareholder vote to approve charter and
by-law amendments;
|
|
|
|
|
Proposals to require a supermajority shareholder vote to approve mergers and
other significant business combinations; and
|
|
|
|
|
Fair price provisions with shareholder vote requirements greater than a majority
of disinterested shares.
|
The Adviser will generally vote in favor of the following issues:
|
|
|
Proposals to adopt anti-greenmail charter by-law amendments or to otherwise
restrict a companys ability to make greenmail payments; and
|
|
|
|
|
Proposals to require approval of blank check preferred stock issues for other
than general corporate purposes
|
(v)
Capital Structure and Shareholder Rights
This category consists of broad issues concerning capital structure and shareholder rights. These
types of issues generally call for revisions to the corporate by-laws, which will impact
shareholder ownership rights. All items are reviewed and voted on a case-by-case basis; however,
the Adviser endeavors to balance the ownership rights of shareholders and their best interests with
providing management of each corporation the greatest operational latitude.
40
(vi)
Social and Political Responsibility Issues
In the case of social and political responsibility issues that in the Advisers view do not
primarily involve financial considerations, it is not possible to represent fairly the diverse
views of the Advisers clients. Unless a client has given us other instructions, the Adviser
generally votes in accordance with the recommendations of [proxy voting agent] on these social and
political issues, although the Adviser sometimes abstains from voting on these issues.
41
PART C: OTHER INFORMATION
|
|
|
Item 28
.
|
|
Exhibits
|
|
|
|
(a)(1)
|
|
Certificate of Trust dated July 17, 2009 of FaithShares Trust (the Trust or the
Registrant) is incorporated herein by reference to Exhibit (a)(1) of Pre-Effective Amendment
No. 1 to the Registrants Registration Statement on Form N-1A (File Nos. 333-156529 and
811-22263), as filed with the U.S. Securities and Exchange Commission (the SEC) via EDGAR
Accession No. 0000950123-09-023575 on July 20, 2009.
|
|
|
|
(a)(2)
|
|
Registrants Form of Agreement and Declaration of Trust is incorporated herein by reference
to Exhibit (a)(2) of Pre-Effective Amendment No. 1 to the Registrants Registration Statement
on Form N-1A (File Nos. 333-156529 and 811-22263), as filed with the SEC via EDGAR Accession
No. 0000950123-09-023575 on July 20, 2009.
|
|
|
|
(b)
|
|
Registrants By-Laws are incorporated herein by reference to Exhibit (b) of Pre-Effective
Amendment No. 1 to the Registrants Registration Statement on Form N-1A (File Nos. 333-156529
and 811-22263), as filed with the SEC via EDGAR Accession No. 0000950123-09-023575 on July 20,
2009.
|
|
|
|
(c)
|
|
Not applicable.
|
|
|
|
(d)
|
|
Advisory Agreement dated October 20, 2009 between the Registrant and FaithShares Advisors, LLC is filed herewith.
|
|
|
|
(e)(1)
|
|
Distribution Agreement dated October 20, 2009 between the Registrant and SEI Investments Distribution Co. is filed
herewith.
|
|
|
|
(e)(2)
|
|
Form of Authorized Participant Agreement is filed herewith.
|
|
|
|
(f)
|
|
Not applicable.
|
|
|
|
(g)
|
|
Custodian Agreement dated September 28, 2009 between the Registrant and Brown Brothers
Harriman & Co. is filed herewith.
|
|
|
|
(h)
|
|
Transfer Agency Services Agreement dated September 28, 2009 between the Registrant and Brown
Brothers Harriman & Co. is filed herewith.
|
|
|
|
(i)
|
|
Opinion and Consent of Counsel, Morgan, Lewis & Bockius LLP, to be filed by amendment.
|
|
|
|
(j)
|
|
Consent of independent registered public accountants, to be filed by amendment.
|
|
|
|
(k)
|
|
Not applicable.
|
|
|
|
(l)
|
|
Not applicable.
|
|
|
|
(m)
|
|
Distribution and Service Plan dated October 20, 2009 is filed herewith.
|
|
|
|
(n)
|
|
Not applicable.
|
|
|
|
(o)
|
|
Not applicable.
|
|
|
|
(p)(1)
|
|
Code of Ethics of the Registrant is filed herewith.
|
|
|
|
(p)(2)
|
|
Code of Ethics of FaithShares Advisors, LLC is filed herewith.
|
|
|
|
(p)(3)
|
|
Code of Ethics of SEI Investments Distribution Co. is filed herewith.
|
|
|
|
(q)
|
|
Powers of Attorney for Nancy Bainbridge, Steven McConnell, Thomas C. Burgin, and Adrian E. Cole are filed herewith.
|
|
|
|
Item 29
.
|
|
Persons Controlled by or under Common Control with the Fund
|
|
|
|
Not Applicable.
|
|
|
|
Item 30
.
|
|
Indemnification
|
The Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any
officer, agent, employee, Adviser or Principal Underwriter of the Trust, nor shall any Trustee be
responsible for the act or omission of any other Trustee, and, subject to the provisions of the
By-Laws, the Trust out of its assets may indemnify and hold harmless each and every Trustee and
officer of the Trust from and against any and all claims, demands, costs, losses, expenses, and
damages whatsoever arising out of or related to such 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 indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
|
|
|
Item 31
.
|
|
Business and other Connections of the Investment 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:
|
|
|
|
|
Name and Position with
|
|
|
|
|
Investment Adviser
|
|
Name of Other Company
|
|
Connection with Other Company
|
Thompson S. Phillips, Jr.
President
|
|
T.S. Phillips
Investments, Inc.
|
|
President
|
|
|
|
|
|
|
|
Phillips Capital
Advisors, Inc.
|
|
President
|
|
|
|
|
|
|
|
Phillips Securities
Insurance Agency,
Inc.
|
|
President
|
|
|
|
|
|
|
|
Phillips Investment
Consultants, LLC
|
|
President
|
|
|
|
|
|
J. Garrett Stevens
Chief Executive Officer
|
|
T.S. Phillips
Investments, Inc.
|
|
Vice President
|
|
|
|
|
|
|
|
Phillips Capital
Advisors, Inc.
|
|
Vice President
|
|
|
|
|
|
|
|
Capitalist Asset
Management, LLC
|
|
President
|
|
|
|
|
|
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
.
|
|
Principal Underwriters
|
(a)
|
|
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.
|
|
|
|
Registrants distributor, SEI Investments Distribution Co. (the Distributor), acts as
distributor for:
|
|
|
|
SEI Daily Income Trust
|
|
July 15, 1982
|
SEI Liquid Asset Trust
|
|
November 29, 1982
|
SEI Tax Exempt Trust
|
|
December 3, 1982
|
SEI Institutional Managed Trust
|
|
January 22, 1987
|
SEI Institutional International Trust
|
|
August 30, 1988
|
The Advisors Inner Circle Fund
|
|
November 14, 1991
|
The Advisors Inner Circle Fund II
|
|
January 28, 1993
|
Bishop Street Funds
|
|
January 27, 1995
|
SEI Asset Allocation Trust
|
|
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
|
|
|
Karen LaTourette
|
|
Officer, & Treasurer
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
|
|
|
40 Water Street
|
|
|
Boston, MA 02109
|
|
|
|
Item 34
.
|
|
Management Services
|
Not Applicable.
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940,
the Registrant has duly caused this Pre-Effective Amendment No. 2 to Registration Statement No.
333-156529 to be signed on its behalf by the undersigned, thereto duly authorized, in the City of
Oklahoma, State of Oklahoma on this 5th day of November, 2009.
|
|
|
|
|
|
FaithShares Trust
|
|
|
/s/ J. Garrett Stevens
|
|
|
J. Garrett Stevens
|
|
|
Trustee and Chief Executive Officer
|
|
|
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.
|
|
Trustee and President
|
|
November 5, 2009
|
|
|
|
|
|
Thompson S. Phillips, Jr.
|
|
|
|
|
|
|
|
|
|
*
|
|
Trustee
|
|
November 5, 2009
|
|
|
|
|
|
Nancy Bainbridge
|
|
|
|
|
|
|
|
|
|
*
|
|
Trustee
|
|
November 5, 2009
|
|
|
|
|
|
Steven McConnell
|
|
|
|
|
|
|
|
|
|
*
|
|
Trustee
|
|
November 5, 2009
|
|
|
|
|
|
Thomas C. Burgin
|
|
|
|
|
|
|
|
|
|
*
|
|
Trustee
|
|
November 5, 2009
|
|
|
|
|
|
Adrian E. Cole
|
|
|
|
|
|
|
|
|
|
/s/ J. Garrett Stevens
|
|
Trustee and Chief Executive Officer
|
|
November 5, 2009
|
|
|
|
|
|
J. Garrett Stevens
|
|
|
|
|
|
|
|
|
|
/s/ Stephen Panner
|
|
Assistant Treasurer
|
|
November 5, 2009
|
|
|
|
|
|
Stephen Panner
|
|
|
|
|
|
|
|
|
|
*/s/ J. Garrett Stevens
|
|
|
|
|
|
|
|
|
|
J. Garrett Stevens
|
|
|
|
|
|
|
|
|
|
* Attorney-in-Fact, pursuant to the powers of attorney filed herewith.
|
Exhibit Index
|
|
|
Exhibit Number
|
|
Exhibit:
|
|
|
|
EX-99.D
|
|
Advisory Agreement dated October 20, 2009 between the Registrant and FaithShares Advisors, LLC
|
|
|
|
EX-99.E1
|
|
Distribution Agreement dated October 20, 2009 between the Registrant and SEI Investments Distribution Co.
|
|
|
|
EX-99.E2
|
|
Form of Authorized Participant Agreement
|
|
|
|
EX-99.G
|
|
Custodian Agreement dated September 28, 2009 between the Registrant and Brown Brothers Harriman & Co.
|
|
|
|
EX-99.H
|
|
Transfer Agency Services Agreement dated September 28, 2009 between the Registrant and Brown Brothers
Harriman & Co.
|
|
|
|
EX-99.M
|
|
Distribution and Service Plan dated October 20, 2009
|
|
|
|
EX-99.P1
|
|
Code of Ethics of the Registrant
|
|
|
|
EX-99.P2
|
|
Code of Ethics of FaithShares Advisors, LLC
|
|
|
|
EX-99.P3
|
|
Code of Ethics of SEI Investments Distribution Co.
|
|
|
|
EX-99.Q
|
|
Powers of Attorney for Nancy Bainbridge, Steven McConnell, Thomas C. Burgin and Adrian E. Cole
|
Exhibit 99.E2
FORM
OF AUTHORIZED
PARTICIPANT AGREEMENT
THIS AUTHORIZED PARTICIPANT AGREEMENT (this
Agreement
) is entered into by and between SEI
Investments Distribution Co. (
Distributor
) and
(the
Participant
) and is subject to acceptance by FaithShares, Inc. (the
Fund
) and
Brown Brothers Harriman & Co as transfer agent (the
Transfer Agent
) for the Fund.
WHEREAS, Distributor serves as the principal underwriter of the Fund in connection with the sale
and distribution of shares of beneficial interest (
Shares
) of each portfolio or series of
the Fund (each, a
Portfolio
and collectively, the
Portfolios
) as set forth on
Exhibit A attached hereto; and
WHEREAS, Transfer Agent serves as the transfer agent for the Fund, and is an Index Receipt Agent as
that term is defined in the rules of the National Securities Clearing Corporation (NSCC); and
WHEREAS, the Shares of any Portfolio may be purchased or redeemed only by or through an authorized
participant, such as Participant, who has entered into an authorized participant agreement
substantially in the form hereof.
NOW, THEREFORE, the parties hereto, in consideration of the premises and of the mutual agreements
contained herein, and intending to be legally bound hereby, agree as follows:
ARTICLE 1 DEFINED TERMS
The capitalized terms used in this Agreement are defined as set forth herein. Any capitalized
terms used herein that are not defined shall have the meaning set forth in the Prospectus.
1.01
1933 Act
means the Securities Act of 1933, as amended.
1.02
1934 Act
means the Securities Exchange Act of 1934, as amended.
1.03
1940 Act
means the Investment Company Act of 1940, as amended.
1.04
AML Program
shall have the meaning set forth in
Section 3.01(iv)
.
1.05
Affiliated Person
shall have the meaning given to it by Section 2(a) of the 1940
Act, subject to such exemptions as may be granted by the SEC by any rule, regulation or order.
1.06
Authorized Person
shall have the meaning set forth in
ARTICLE 5
.
1.07
Balancing Amount
will be an amount equal to the differential, if any, between the
total aggregate market value of the Deposit Securities and the NAV per Creation Unit next
determined.
1.08
Beneficial Owner
shall have the meaning given to it by Rule 16a-1(a)(2) of the 1934
Act.
1.09
Business Day
shall mean each day the New York Stock Exchange is open for regular
trading and the Trust and the Custodian are open for business.
1.10
CEA
means the Commodity Exchange Act, as amended.
1.11
Cash Amount
means the Balancing Amount plus the applicable transaction fee.
1.12
Cash
shall mean same day funds in United States dollars.
1.13
CNS Process
means the Continuous Net Settlement clearing processes of NSCC, as such
processes have been enhanced to effect purchases and redemptions of Creation Units.
1.14
CNS System
means the Continuous Net Settlement clearing processes of NSCC.
1.15
Code
means the Internal Revenue Code of 1986, as amended.
1.16
Contractual Settlement Date
means the date as specified in the Prospectus and the
Procedures Handbook upon which delivery of Deposit Securities must be made to the Fund.
1.17
Creation Unit
shall have the meaning set forth in
Section 2.01
.
1.18
Custodian
means the Funds custodian, as of the Effective Date, the custodian of
the fund is Brown Brothers Harriman & Co.
1.19
Deposit Securities
means an in-kind deposit of a designated portfolio of equity
securities selected by or on behalf of the Fund.
1.20
DTC
means The Depository Trust Company.
1.21
DTC Participant
shall have the meaning set forth in
Section 3.01
.
1.22
DTC Process
means the process for effecting purchases orders or redemption requests
of Creation Units through DTC other than through the use of the CNS System.
1.23
FINRA
means the Financial Industry Regulatory Authority.
1.24
FinCEN
shall have the meaning set forth in
Section 3.01(iii)
.
1.25
Fund Deposit
means the Deposit Securities plus or
minus the
Balancing Amount
.
1.26
Fund Securities
means in-kind redemption proceeds of a designated portfolio of
equity securities selected by the Adviser.
1.27
Indemnified Party
shall have the meaning set forth in
Section 6.01
.
1.28
Intraday Indicative Value
means the value of the Fund, as calculated and published
by the New York Stock Exchange or any similar exchange or widely recognized industry organization,
throughout the trading day based on the last sale prices of the securities specified for creation
and redemption plus any estimated cash amounts associated with the creation unit, on a per share
basis.
1.29
Listing Exchange
shall have the meaning set forth in
Section 8.01
.
1.30
NAV
shall have the meaning set forth in
Section 6.02
.
1.31
OFAC
shall have the meaning set forth in
Section 3.01(iii)
.
1.32
Orders
shall have the meaning set forth in
Section 2.02
.
1.33
Participant Client
means any party on whose behalf the Participant acts in
connection with an Order (whether a customer or otherwise).
1.34
Participating Party
shall have the meaning set forth in
Section 3.01
.
2
1.35
PIN Number
shall have the meaning set forth in
ARTICLE 5
.
1.36
Procedures Handbook
shall have the meaning set forth in
Section 2.02
.
1.37
Prospectus
means the Funds then current prospectus and statement of additional
information included in its effective registration statement, as supplemented or amended from time
to time.
1.38
Purchase Order
shall have the meaning set forth in
Section 2.02
.
1.39
Redemption Request
shall have the meaning set forth in
Section 2.02
.
ARTICLE 2 ORDERS FOR PURCHASE AND REDEMPTION
2.01
Creation Units
. The Shares of any Portfolio may be purchased or redeemed only in
aggregations of a specified number of Shares, as stated in the Prospectus, referred to herein as a
Creation Unit
. The Participant is hereby authorized to purchase and redeem Creation
Units of any Portfolio listed in the Prospectus, which may be revised by the Fund from time to
time.
2.02
Procedures for Orders
. The Participant may purchase and/or redeem Creation Units of
Shares through (i) the CNS Process or (ii) the DTC Process. The procedures for placing and
processing an order to purchase Shares (each a
Purchase Order
) and a request to redeem
Shares (each a
Redemption Request
) (as used herein, Purchase Orders and Redemption
Requests are collectively referred to as
Orders
) are described in the Funds Prospectus
and in the then current procedures handbook as prepared by the Distributor and made available to
the Participant from time to time (
Procedures Handbook
). All Orders shall be made in
accordance with the terms and procedures set forth in the Prospectus and Procedures Handbook;
provided that in the event of a conflict, the terms and procedures of the Prospectus shall control.
Each party hereto agrees to comply with the provisions of such documents to the extent applicable
to it. The Fund reserves the right to issue additional or other procedures relating to the manner
of purchasing or redeeming Creation Units, and the Participant agrees to comply with such
procedures as may be issued from time to time.
2.03
NSCC Authorization
. Solely with respect to Orders through the CNS Process, the
Participant, hereby authorizes the Transfer Agent to transmit to the NSCC on behalf of the
Participant such instructions, including amounts of the Deposit Securities and the Cash Amount as
are necessary consistent with such Orders. The Participant agrees to be bound by the terms of such
instructions issued by the Transfer Agent and reported to NSCC as though such instructions were
issued by the Participant directly to NSCC.
2.04
Consent to Recording
. It is contemplated that the phone lines used by the
Distributor, the Transfer Agent, the Fund or their Affiliated Persons will be recorded, and the
Participant hereby consents to the recording of all calls with any of those parties.
2.05
Irrevocability
. The Fund reserves the absolute right to reject any Order. Once
accepted, all Orders are irrevocable.
2.06
Prospectus Delivery
. The Participant consents to the delivery of Portfolio
Prospectuses electronically, and understands that unless this consent is revoked, the Participant
can only obtain access to Prospectuses from the Distributor electronically. The Participant
understands that current Prospectuses and all required reports for each applicable Portfolio are
available at the Funds website at
______________________. The Participant can revoke
this consent to delivering a Prospectus electronically at any time by calling [1-800-xxx-xxxx]. The
Participant agrees to maintain a valid e-mail address, and further agrees to promptly notify the
Distributor if
3
its e-mail address changes. The Participant understands that it must have regular and continuous
Internet access to access all documents relating to a Prospectus.
2.07
Closing Time
. The Distributor shall receive all Orders no later than the closing time
of the regular trading session on the applicable stock exchange (the Closing Time) (ordinarily
4:00 p.m., Eastern Time) on the date such Order is placed and pursuant to any requirements or
procedures as described in the Prospectus or Procedures Handbook. An Order is considered to have
been received by the Distributor only upon the Distributors issuance of a batch number or an
affirmation to the Participant (which is generated by the Distributors order processing system
only after all applicable order information is communicated to the Distributor employee taking the
Order and the information has been entered into the Distributors proprietary system) as specified
in the Procedures Handbook. Please note that the batch number or affirmation is not an indication
that the Order has been accepted by the Distributor or the Fund, but only an indication that the
Order was properly received prior to the Closing Time on the date on which an Order to purchase
Shares is received by the Distributor. AS THE ORDER ENTRY PROCESS CAN TAKE SEVERAL MINUTES OR
LONGER, DEPENDING ON VOLUME AND THE TYPE OF ORDER INVOLVED, PARTICIPANTS ARE URGED TO PLACE ORDERS
AS EARLY IN THE DAY AS POSSIBLE, AS ORDERS INITIATED NEAR THE APPLICABLE CLOSING TIME MAY NOT BE
PROCESSED IN TIME TO RECEIVE A BATCH NUMBER OR AFFIRMATION AND MAY NOT BE RECEIVED PRIOR TO THE
CLOSING TIME.
ARTICLE 3 REPRESENTATIONS, WARRANTIES AND COVENANTS OF PARTICIPANT
3.01
Representations, Warranties and Covenants of Participant
. The Participant hereby
represents, warrants and covenants the following:
The Participant (i) is and will continue to be a member in good standing of the NSCC so long
as this Agreement is in full force and effect and (ii) with respect to (x) all orders of Creation
Units of Shares of any Portfolio, it is a
DTC Participant
, and (y) any order of Creation
Units of Shares of any Portfolio initiated through the CNS Process, it is a member of NSCC and a
participant in the CNS System of NSCC (a
Participating Party
). If any change in the
foregoing status of the Participant occurs the Participant shall give prompt written notice to the
Distributor and the Fund of such change. Upon such notice, the Distributor, in consultation with
the Fund, may terminate this Agreement.
(i) Unless
Section 3.01(ii)
applies, the Participant either (i) is registered as a
broker-dealer under the 1934 Act and is a member in good standing of FINRA, or (ii) is exempt from
being, or otherwise is not required to be, licensed as a broker-dealer or a member of FINRA, and in
either case is qualified to act as a broker or dealer in the states or other jurisdictions where
the nature of its business so requires. In connection with the purchase or redemption of Creation
Units and any related offers or sales of Shares, the Participant will maintain any such
registrations, qualifications and membership in good standing and in full force and effect
throughout the term of this Agreement. The Participant will comply with all applicable federal
laws, the laws of the states or other jurisdictions concerned, and the rules and regulations
promulgated thereunder, and with the FINRA By-Laws and NASD Conduct Rules (or of comparable FINRA
Conduct Rules, if such NASD Conduct Rules are subsequently renamed, repealed, rescinded, or are
otherwise replaced by FINRA Conduct Rules) if it is a FINRA member, in each case, to the extent
applicable to its role acting as Participant hereunder and will not offer or sell Shares in any
state or jurisdiction where they may not lawfully be offered and/or sold.
(ii) If the Participant is offering or selling Shares in jurisdictions outside the several
states, territories and possessions of the United States and is not otherwise required to be
registered, qualified or a member of FINRA as set forth in
Section 3.01(i)
above, the
Participant will, in connection with such offers and sales, (i) observe the applicable laws of the
jurisdiction in which such offer and/or sale is made, (ii) comply with the prospectus delivery and
other requirements of
4
the 1933 Act, and the regulations promulgated thereunder, and (iii) conduct its business in
accordance with the NASD Conduct Rules (or with comparable FINRA Conduct Rules, if such NASD
Conduct Rules are subsequently renamed, repealed, rescinded, or are otherwise replaced by FINRA
Conduct Rules), to the extent the foregoing relates to the Participants transactions in, and
activities with respect to, Shares.
(iii) The Participant is and will continue to be in compliance with all applicable laws and
regulations aimed at the prevention and detection of money laundering and/or the financing of
terrorism activities, including the Bank Secrecy Act, as amended by USA PATRIOT Act; rules and
regulations issued by the U.S. Treasury Department, including the Office of Foreign Asset Control
(
OFAC
), the Financial Crimes and Enforcement Network (
FinCEN
), the SEC and
FINRA.
(iv) The Participant has an anti-money laundering program (
AML Program
), that at
minimum includes, i) an AML compliance officer designated to administer and oversee the AML
Program, ii) ongoing training for appropriate personnel, iii) internal controls and procedures
reasonably designed to prevent and detect suspicious activity monitoring and terrorist financing
activities; iv) procedures to comply with know your customer requirements and to verify the
identity of all customers; v) appropriate record keeping procedures. In addition Customer agrees
to fully cooperate with requests from the government regulators and Distributor for information
relating to customers and/or transactions involving the Fund Shares, as permitted by law, in order
for Distributor to comply with its regulatory requirements. Without in any way limiting the
foregoing, Participant acknowledges that Distributor is authorized to take any action necessary to
restrict distribution activities to the extent necessary to comply with its regulatory obligations
applicable to it.
(v) The Participant acknowledges that in addition to satisfying the prospectus delivery and
disclosure requirements of the 1933 Act, it and any other participant in the distribution of the
Shares purchased by the Participant may have an obligation to comply with the disclosure delivery
requirements under the CEA.
(vi) The Participant will not make, or permit any of its representatives to make, any
representations concerning the Shares or any Indemnified Party other than representations contained
(A) in the then-current Prospectus of the Fund, (B) in printed information approved by the Fund as
information supplemental to such Prospectus or (C) in any promotional materials or sales literature
furnished to the Participant by the Fund.
(vii) The Participant will not furnish or cause to be furnished to any person or display or
publish any information or material relating to the Shares, any Indemnified Person or the Fund that
are not consistent with the Funds then current Prospectus.
(viii) The Participant agrees to abide by the terms of the then current click-through
agreement set forth on the applicable website, which terms are hereby incorporated herein.
ARTICLE 4 STATUS OF PARTICIPANT
4.01
General
. The Participant acknowledges that (a) the Participant shall have no
authority to act as agent for the Fund or the Distributor in any matter or in any respect; (b) the
Participant will make itself and its employees available, upon reasonable request, during normal
business hours to consult with the Distributors or its designees concerning the performance of the
Participants responsibilities under this Agreement; (c) the Participant, as a DTC Participant,
agrees that it shall be bound by all of the obligations of a DTC Participant in addition to any
obligations that it undertakes hereunder or in accordance with the Prospectus and (d) the
Participant agrees, subject to any privacy, confidentiality or other obligations it may have to its
customers arising under federal or state securities laws or the applicable rules of any
self-regulatory organization, to assist the Distributor in ascertaining certain information
regarding sales of Shares made by or through the Participant upon request of the Fund or the
Distributor that is necessary for the Fund
5
to comply with its obligations to distribute information to its shareholders under applicable state
or federal securities laws; provided that consistent with market practice, the Participant may
undertake to deliver prospectuses, proxy material, annual and other reports of the Fund or other
similar information that the Fund is obligated to deliver to its shareholders to the Participants
customers that custody Shares with the Participant, after receipt from the Fund of sufficient
quantities to allow mailing thereof to such customers.
4.02
Treatment as Underwriter
. The Participant understands and acknowledges that the
method by which Creation Units will be created and traded may raise certain issues under applicable
securities laws. For example, because new Creation Units of Shares may be issued and sold by the
Fund on an ongoing basis, at any point a distribution, as such term is used in the 1933 Act, may
occur. The Participant understands and acknowledges that some activities on its part, depending on
the circumstances, may result in its being deemed a participant in a distribution in a manner which
could render it a statutory underwriter and subject it to the prospectus delivery and liability
provisions of the 1933 Act. The Participant also understands and acknowledges that dealers who are
not underwriters but are effecting transactions in Shares, whether or not participating in the
distribution of Shares, are generally required to deliver a prospectus.
4.03
Creditworthiness
. The Participant understands that it will be required from time to
time to satisfy certain creditworthiness criteria established and approved by the Fund.
ARTICLE 5 AUTHORIZED PERSONS
Concurrently with the execution of this Agreement and upon request from the Distributor from time
to time thereafter, the Participant shall deliver to the Distributor, with a copy to the Transfer
Agent, notarized and duly certified as appropriate by its secretary or other duly authorized
official, a certificate in the form of
Exhibit B
setting forth the names and signatures of
all persons authorized to give instructions relating to activity contemplated hereby or by any
other notice, request or instruction given on behalf of the Participant (each, an
Authorized
Person
). The Distributor may accept and rely upon such certificate as conclusive evidence of
the facts set forth therein and shall consider such certificate to be in full force and effect
until the Distributor receives a superseding certificate bearing a subsequent date. Upon the
termination or revocation of authority of any formerly Authorized Person by the Participant, the
Participant shall give immediate written notice of such fact to the Distributor and such notice
shall be effective upon receipt by the Distributor. The Distributor shall issue to each Authorized
Person a unique personal identification number (the
PIN Number
) by which such Authorized
Person shall be identified and by which instructions issued by the Participant hereunder shall be
authenticated. The PIN Number shall be kept confidential by the Participant and shall only be
provided to the Authorized Person. If, after issuance, the Authorized Persons PIN Number is
changed, the new PIN Number shall become effective on a date mutually agreed upon by the
Participant and the Distributor.
ARTICLE 6 INDEMNIFICATION AND LIMITATION OF LIABILITY
6.01
Indemnification
. The Participant hereby agrees to indemnify, defend and hold harmless
the Distributor, the Fund, the Transfer Agent, and each of their respective subsidiaries,
Affiliated Persons, directors, officers, employees and agents, and each person, if any, who
controls such persons within the meaning of Section 15 of the 1933 Act (each an
Indemnified
Party
) from and against any loss, liability, cost and expense (including attorneys fees)
incurred by such Indemnified Party as a result of (i) any breach by the Participant (or an
affiliate of the Participant) of any provision of this Agreement; (ii) any failure on the part of
the Participant to perform any of its obligations set forth in the Agreement; (iii) any failure by
the Participant to comply with applicable laws, including rules and regulations of self-regulatory
organizations; (iv) actions of such Indemnified Party in reliance upon any instructions issued by
Participant reasonably believed by such Indemnified Party to be genuine and to have been given by
the Participant, or (v) (A) any representation by the Participant, its employees or its agents or
other representatives
6
about the Shares, any Indemnified Party or the Fund that is not consistent with the Funds
Prospectus made in connection with the offer or the solicitation of an offer to buy or sell Shares
and (B) any untrue statement or alleged untrue statement of a material fact contained in any
research reports, marketing material and sales literature related to the Fund or any alleged
omission to state therein a material fact required to be stated therein or necessary to make the
statements therein not misleading to the extent that such statement or omission relates to the
Shares, any Indemnified Party or the Fund, unless, in either case, such representation, statement
or omission was made or included by the Participant at the written direction of the Distributor or
is based upon any omission or alleged omission by the Distributor to state a material fact in
connection with such representation, statement or omission necessary to make such representation,
statement or omission not misleading.
6.02
Limitation of Liability
. The Distributor, the Fund and the Transfer Agent shall not
be liable to the Participant for any damages arising out of (i) mistakes or errors in data provided
in connection with Orders except to the extent arising out of data provided by the Distributor;
(ii) mistakes or errors arising out of interruptions or delays of communications with the
Participant, the Transfer Agent, the Fund or the Funds adviser, (iii) mistakes or errors of the
Transfer Agent, or (iv) differences in performance between the Funds Net Asset Value
(
NAV
), the Intraday Indicative Value, the Deposit Securities, or the underlying index
benchmark of any Portfolio.
ARTICLE 7 CONFIDENTIAL INFORMATION.
7.01
General
. Distributor and the Fund (in such capacity, the
Receiving Party
)
acknowledge and agree to maintain the confidentiality of Confidential Information (as hereinafter
defined) provided by Distributor and the Fund (in such capacity, the
Disclosing Party
) in
connection with this Agreement. The Receiving Party shall not disclose or disseminate the
Disclosing Partys Confidential Information to any Person other than (a) those employees, agents,
contractors, subcontractors and licensees of the Receiving Party, or (b) with respect to
Distributor as a Receiving Party, to those employees, agents, contractors, subcontractors and
licensees of any agent or affiliate, who have a need to know it in order to assist the Receiving
Party in performing its obligations, or to permit the Receiving Party to exercise its rights under
this Agreement. In addition, the Receiving Party (a) shall take all reasonable steps to prevent
unauthorized access to the Disclosing Partys Confidential Information, and (b) shall not use the
Disclosing Partys Confidential Information, or authorize other Persons to use the Disclosing
Partys Confidential Information, for any purposes other than in connection with performing its
obligations or exercising its rights hereunder. As used herein, reasonable steps means steps
that a party takes to protect its own, similarly confidential or proprietary information of a
similar nature, which steps shall in no event be less than a reasonable standard of care.
7.02
Definition of Confidential Information
. The term
Confidential Information
,
as used herein, shall mean all business strategies, plans and procedures, proprietary information,
methodologies, data and trade secrets, and other confidential information and materials (including,
without limitation, any non-public personal information as defined in Regulation S-P) of the
Disclosing Party, its affiliates, their respective clients or suppliers, or other Persons with whom
they do business, that may be obtained by the Receiving Party from any source or that may be
developed as a result of this Agreement.
7.03
Exclusions
. The provisions of this
Article 7
respecting Confidential
Information shall not apply to the extent, but only to the extent, that such Confidential
Information: (a) is already known to the Receiving Party free of any restriction at the time it is
obtained from the Disclosing Party, (b) is subsequently learned from an independent third party
free of any restriction and without breach of this Agreement; (c) is or becomes publicly available
through no wrongful act of the Receiving Party or any third party; (d) is independently developed
by or for the Receiving Party without reference to or use of any Confidential Information of the
Disclosing Party; or (e) is required to be disclosed pursuant to an applicable law, rule,
regulation, government requirement or court order, or the rules of any stock exchange (provided,
however, that the Receiving Party
7
shall advise the Disclosing Party of such required disclosure promptly upon learning thereof in
order to afford the Disclosing Party a reasonable opportunity to contest, limit and/or assist the
Receiving Party in crafting such disclosure).
7.04
Disclosure of Confidential Information
. The Receiving Party shall advise its
employees, agents, contractors, subcontractors and licensees, and shall require its agents and
affiliates to advise their employees, agents, contractors, subcontractors and licensees, of the
Receiving Partys obligations of confidentiality and non-use under this
Article 7
, and
shall be responsible for ensuring compliance by its and its affiliates employees, agents,
contractors, subcontractors and licensees with such obligations. In addition, the Receiving Party
shall require all persons that are provided access to the Disclosing Partys Confidential
Information, other than the Receiving Partys accountants and legal counsel, to execute
confidentiality or non-disclosure agreements containing provisions substantially similar to those
set forth in this
Article 7
. The Receiving Party shall promptly notify the Disclosing
Party in writing upon learning of any unauthorized disclosure or use of the Disclosing Partys
Confidential Information by such persons.
7.05
Obligations Upon Termination
. Upon the Disclosing Partys written request following
the termination of this Agreement, the Receiving Party promptly shall return to the Disclosing
Party, or destroy, all Confidential Information of the Disclosing Party provided under or in
connection with this Agreement, including all copies, portions and summaries thereof.
Notwithstanding the foregoing sentence, (a) the Receiving Party may retain one copy of each item of
the Disclosing Partys Confidential Information for purposes of identifying and establishing its
rights and obligations under this Agreement, for archival or audit purposes and/or to the extent
required by applicable law, and (b) Distributor shall have no obligation to return or destroy
Confidential Information of the Fund that resides in save tapes of Distributor; provided, however,
that in either case all such Confidential Information retained by the Receiving Party shall remain
subject to the provisions of this
Article 7
for so long as it is so retained. If requested
by the Disclosing Party, the Receiving Party shall certify in writing its compliance with the
provisions of this paragraph.
ARTICLE 8 ORDERS.
8.01
Listing Exchange
. The Participant understands and agrees that an Order may be
submitted only on days that the national securities exchange which is the primary exchange or other
market on which with Shares are traded (the
Listing Exchange
) is open for trading or
business.
8.02
Purchase Orders
. Participant agrees that all Purchase Orders will be made in
accordance with the terms and procedures set forth in the Prospectus and Procedures Handbook;
provided that in the event of a conflict, the terms and procedures of the Prospectus shall control.
To effect a purchase of a Creation Unit of a particular Fund, the Participant agrees on behalf of
itself, and any Participant Client, to deliver to the Fund a Fund Deposit plus a purchase
transaction fee as described in the Prospectus and/or the Procedures Handbook. The amount of such
purchase transaction fee shall be determined by the Fund, or the investment adviser to the Fund
(the Adviser), in its sole discretion and may be changed from time to time. The Fund Deposit
shall consist of the requisite Deposit Securities plus or minus a Balancing Amount. The Balancing
Amount will be payable to or receivable from the Fund depending on the net asset value of Shares of
the Fund next determined after the Order has been placed. The Fund may permit or require the
substitution of an amount of cash to be added to the Balancing Amount to replace any Deposit
Securities (i.e., cash in lieu).
(i)
Title to Securities; Restricted Securities
. The Participant shall deliver the
Deposit Securities to the Custodian free and clear of all liens, restrictions, charges, duties,
encumbrances and not subject to any adverse claims, including, without limitation, any restriction
upon sale or transfer arising out of (i) any agreement or arrangement entered into by the
Participant or any Participant Client (ii) any provision of the 1933 Act, and any regulations there
under (except that portfolio securities of issuers other than U.S. issuers shall not be required to
have been registered
8
under the 1933 Act if exempt from such registration), or the applicable laws or regulations of
any other applicable jurisdiction or (iii) such securities being designated restricted securities
as such term is used in Rule 144(a)(3)(i) promulgated under the 1933 Act.
(ii)
Corporate Actions
. With respect to a Purchase Order of a particular Fund, the
Fund acknowledges and agrees to return to the Participant any dividend, distribution or other
corporate action paid to the Fund in respect of any Deposit Security transferred to the Fund that,
based on the valuation of such Deposit Security at the time of transfer, should have been paid to
the Participant.
8.03
Redemption Request
. The Participant understands and agrees that Redemption Requests
may be submitted only on days that the Fund is open for business, as required by Section 22(e) of
the 1940 Act and that Participant will not attempt to place an Order for purchasing or redeeming
any Creation Unit, except as set forth in the Prospectus and Procedures Handbook of the Fund. In
addition, in connection with each Redemption Request, the Participant agrees to ascertain that the
Shares to be redeemed have not been loaned or pledged to another party and are not the subject of a
repurchase agreement, securities lending agreement or any other arrangement that would preclude the
delivery of such Shares to the Transfer Agent in accordance with the Prospectus or as otherwise
required by the Fund. In addition the Participant agrees that the Fund will acquire good and
unencumbered title to Shares, free and clear of all liens, restrictions, charges and encumbrances
and not subject to any adverse claims, including without limitation, any restriction upon the sale
or transfer of such Shares. The Participant understands and agrees that in the event collateral or
Shares are not transferred to the Transfer Agent as set forth in the Procedures Handbook, the
Redemption Request trade may be broken by the Fund and the Participant will be solely responsible
for all costs incurred by the Fund or the Distributor related to breaking the trade. The
Distributor will only process Redemption Requests upon verification from the Transfer Agent of the
Funds receipt of such collateral or shares. The Participant understands that shares may be
redeemed only when one or more Creation Units of Shares of a Beneficial Owner are held in the
account of a single Participant.
(i)
Corporate Actions
. With respect to any Redemption Request, the
Participant on behalf of itself and any Participant Client acknowledges and agrees to return to
the Fund any dividend, distribution or other corporate action paid to it or a Participant Client
in respect of any Fund Security that is transferred to the Participant or any Participant Client
that, based on the the valuation of such Fund Security at the time of transfer, should have been
paid to the Fund. The Fund is entitled to reduce the amount of proceeds due to the Participant or
any Participant Client by an amount equal to any dividend, distribution or other corporate action
paid to the Participant or the Participant Client in respect of any Fund Security that is
transferred to the Participant or any Participant Client that, based on the valuation of such Fund
Security at the time of transfer, should have been paid to the Fund.
8.04
Beneficial Ownership Limitation
. The Participant represents and warrants to the
Distributor and the Trust that, any portfolio securities deposited with the Fund will have an
adjusted tax basis equal to the fair market value of such securities at the time of the
contributions. The Participant agrees and represents that with regards to any order for one or more
Creation Units of Shares of the Fund that, after giving effect to the purchase of Shares, it will
not hold more than eighty percent (80%) or more of the outstanding Shares of the relevant Fund and
that it will not treat such purchase as eligible for tax-free treatment under section 351 of the
Code. The Fund and its Transfer Agent and Distributor may request information from the Participant
regarding Share ownership of each Fund, and to rely thereon to the extent necessary to make a
determination regarding ownership of eighty percent (80%) or more of the currently outstanding
Shares of any Fund by a Beneficial Owner as a condition to the acceptance of a deposit of Deposit
Securities.
9
ARTICLE 9 MISCELLANEOUS
9.01
Termination, and Amendment
. This Agreement may be terminated (i) at any time by any
party upon mutual agreement of the parties; (ii) upon thirty days prior written notice by any party
to the other parties or (iii) upon written notice of the Distributor in the event of a breach by
the Participant of any provision of this Agreement or the Procedures Handbook. This Agreement
supersedes any prior such agreement between or among the parties. This Agreement may be amended by
the Fund or the Distributor from time to time without the consent of the Participant or any
Beneficial Owner by mailing a copy of such amendment to the Participant and the Transfer Agent. For
purposes of this Agreement, mail will be deemed received by the Participant on the fifth Business
Day following the deposit of such mail into the U.S. Postal system. If the Participant fails to
object in writing to the amendment within five days after its receipt, the amendment will become
part of this Agreement in accordance with its terms.
9.02
Third Party Beneficiary
. The Participant and the Distributor understand and agree
that the Fund and each Portfolio, each as a third party beneficiary to this Agreement, is entitled
and intends to proceed directly against the Participant in the event that the Participant fails to
honor any of its obligations pursuant to this Agreement that benefit the Fund or such Portfolio.
9.03
Incorporation by Reference
. The Participant acknowledges receipt of the Prospectus
and Procedures Handbook, represents that it has reviewed such documents and understands the terms
thereof, and further acknowledges that the procedures contained therein pertaining to the creation
and redemption of Shares are incorporated herein by reference.
9.04
Notices
. All notices provided for or permitted under this Agreement shall be deemed
effective upon receipt, and shall be in writing and (a) delivered personally, (b) sent by
commercial overnight courier with written verification of receipt, or (c) sent by certified or
registered U.S. mail, postage prepaid and return receipt requested, to the party to be notified, at
the address for such party set forth below. Notices to Distributor shall be sent to the attention
of: General Counsel, SEI Investments Distribution Co., 1 Freedom Valley Drive, Oaks, Pennsylvania
19456. Notices to the Participant shall be sent to ______________________. Notices to the
Transfer Agent shall be sent to ______________________.
9.05
Commencement of Trading
. The Participant may not submit an Order pursuant to this
Agreement until five Business Days after effectiveness of this Agreement (which shall not take
effect until acknowledged by the Transfer Agent or such earlier date agreed upon between the
Distributor and the Participant.
9.06
Dispute Resolution
. Whenever either party desires to institute legal proceedings
against the other concerning this Agreement, it shall first provide written notice to that effect
to such other parties. The party providing such notice shall refrain from instituting said legal
proceedings for a period of thirty days following the date of provision of such notice. During
such period, the parties shall attempt in good faith to amicably resolve their dispute by
negotiation among their executive officers.
9.07
Governing Law
. This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Pennsylvania without giving effect to any conflict of laws or
choice of laws rules or principles thereof. To the extent that the applicable laws of the
Commonwealth of Pennsylvania, or any of the provisions of this Agreement, conflict with the
applicable provisions of the 1940 Act, the latter shall control.
9.08
Counterparts
. This Agreement may be executed in two or more counterparts, all of
which shall constitute one and the same instrument. Each such counterpart shall be deemed an
original, and it shall not be necessary in making proof of this Agreement to produce or account for
more than one such counterpart. This Agreement shall be deemed executed by both parties
10
when any one or more counterparts hereof or thereof, individually or taken together, bears the
original or facsimile signatures of each of the parties.
9.09
Force Majeure
. No breach of any obligation of a party to this Agreement (other than
obligations to pay amounts owed) will constitute an event of default or breach to the extent it
arises out of a cause, existing or future, that is beyond the control and without negligence of the
party otherwise chargeable with breach or default, including without limitation: work action or
strike; lockout or other labor dispute; flood; war; riot; theft; act of terrorism, earthquake or
natural disaster. Either party desiring to rely upon any of the foregoing as an excuse for default
or breach will, when the cause arises, give to the other party prompt notice of the facts which
constitute such cause; and, when the cause ceases to exist, give prompt notice thereof to the other
party.
9.10
Severability.
Any provision of this Agreement that is determined to be invalid or
unenforceable in any jurisdiction shall be ineffective to the extent of such invalidity or
unenforceability in such jurisdiction, without rendering invalid or unenforceable the remaining
provisions of this Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. If a court of competent jurisdiction declares any provision of this Agreement
to be invalid or unenforceable, the parties agree that the court making such determination shall
have the power to reduce the scope, duration, or area of the provision, to delete specific words or
phrases, or to replace the provision with a provision that is valid and enforceable and that comes
closest to expressing the original intention of the parties, and this Agreement shall be
enforceable as so modified.
9.11
Assignment.
No party may assign its rights or obligations under this Agreement (in
whole or in part) without the prior written consent of the parties, which shall not be unreasonably
withheld.
[Signature Page Follows]
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IN WITNESS WHEREOF,
the Participant and Distributor have each duly executed this Agreement, as of
the day and year above written.
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[Participant]
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SEI INVESTMENTS DISTRIBUTION CO
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By:
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By:
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Name:
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ACCEPTED BY:
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Brown Brothers and Harriman & Co.
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FaithShares, Inc.
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EXHIBIT
A
PORTFOLIOS
FAITHSHARES BAPTIST VALUES EXCHANGE TRADED FUND
FAITHSHARES CATHOLIC VALUES EXCHANGE TRADED FUND
FAITHSHARES CHRISTIAN VALUES EXCHANGE TRADED FUND
FAITHSHARES LUTHERAN VALUES EXCHANGE TRADED FUND
FAITHSHARES METHODIST VALUES EXCHANGE TRADED FUND
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EXHIBIT B
FORM OF CERTIFIED AUTHORIZED PERSONS OF AUTHORIZED PARTICIPANT
The following are the names, titles and signatures of all persons (each an
Authorized
Person
) authorized to give instructions relating to any activity contemplated by the
Participant Agreement or any other notice, request or instruction on behalf of the Participant
pursuant to the [Fund Name] Participant Agreement. In addition, SIDCO is requesting that one
authorized trader is designated as the primary contact; this will enable SIDCO to relay information
efficiently to the APs. Please complete and return to SIDCO.
AP Firm Name: ______________________________________________________________________
Desk Name: _________________________________________________________________________
Authorized Persons:
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Name (Primary Contact)
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Signature
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Email Address
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Signature
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The
undersigned, ____________________ [name], ____________________ [title] of
____________________
[company], does hereby certify that the persons listed above have been
duly elected to the offices set forth beneath their names, that they presently hold such offices,
that they have been duly authorized to act as Authorized Persons pursuant to the [Fund Name]
Participant Agreement by and between ____________________ [Authorized Participant],
____________________
[Fund Name] and Brown Brothers Harriman & Co. as Transfer Agent, dated
____________________, and that their signatures set forth above are their own true and genuine
signatures.
In Witness Whereof, the undersigned has hereby set his/her hand and the seal of [company] on
the date set forth below.
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Subscribed and sworn to before me this day of
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15
Exhibit 99.G
CUSTODIAN AGREEMENT
THIS AGREEMENT
, dated as of September 28, 2009, between FaithShares Trust, a management
investment company organized under the laws of the State of Delaware and registered
with the Commission under the Investment Company Act of 1940 (the
1940 Act
) (the
Fund
), and
BROWN
BROTHERS HARRIMAN & CO.
, a limited partnership formed under the laws of the State of New York
(
BBH&Co.
or the
Custodian
).
WITNESSETH:
WHEREAS
, the Fund wishes to employ BBH&Co. to act as custodian for the Fund and to provide related
services, all as provided herein, and BBH&Co. is willing to accept such employment, subject to the
terms and conditions herein set forth;
NOW, THEREFORE
, in consideration of the mutual covenants and agreements herein contained, the Fund
and BBH&Co. hereby agree, as follows:
1.
Appointment of Custodian.
The Fund hereby appoints BBH&Co. as the Funds Custodian, and
BBH&Co. hereby accepts such appointment. All Investments of the Fund delivered to the Custodian or
its agents or Subcustodians shall be dealt with as provided in this Agreement. The duties of the
Custodian with respect to the Funds Investments shall be only as set forth expressly in this
Agreement which duties are generally comprised of safekeeping and various administrative duties
that will be performed in accordance with Instructions and as reasonably required to effect
Instructions.
2.
Representations, Warranties and Covenants of the Fund.
The Fund hereby represents, warrants
and covenants each of the following:
2.1 This Agreement has been, and at the time of delivery of each Instruction such
Instruction will have been, duly authorized, executed and delivered by the Fund. Neither
this Agreement nor any Instruction issued thereunder violates any Applicable Law or
conflicts with or constitutes a default under the Funds prospectus, articles of
organization or other constitutive document or any agreement, judgment, order or decree to
which the Fund is a party or by which it or its Investments is bound.
2.2 By providing an Instruction with respect to the first acquisition of an Investment in
a jurisdiction other than the United States of America, the Fund shall be deemed to have
confirmed to the Custodian that the Fund has (a) assessed and accepted all material Country
or Sovereign Risks and accepted responsibility for their occurrence, (b) made all
determinations required to be made by the Fund under the 1940 Act, and (iii) appropriately
and adequately disclosed to its shareholders, other investors and all persons who have
rights in or to such Investments, all material investment risks, including those relating
to the custody and settlement infrastructure or the servicing of securities in such
jurisdiction.
2.3 The Fund shall safeguard and shall solely be responsible for the safekeeping of any
testkeys, identification codes, passwords, other security devices or statements of account
with which the Custodian provides it. If the Fund uses any on-line or similar
communications service made available by the Custodian, the Fund shall be solely
responsible for ensuring the security of its access to the service and for the use of the
service, and shall only attempt to access the service and the Custodians computer systems
as directed by the Custodian. If the Custodian provides any computer software to the Fund
relating to the services described in this Agreement, the Fund will only use the software
for the purposes for which the Custodian provided the software to the Fund, and will abide
by the license agreement accompanying the software and any other security policies which
the Custodian provides to the Fund.
2.4 By providing an Instruction in respect of an Investment (which Instruction may relate
to among other things, the execution of trades), the Fund hereby (i) authorizes BBH&Co. to
complete such documentation as may be required or appropriate for the execution of the
Instruction, and agrees to be contractually bound to the terms of such documentation as
is without recourse against BBH&Co.; (ii) represents, warrants and covenants that it has
accepted and agreed to comply with all Applicable Law, terms and conditions to which it
and/or its Investment may be bound, including without limitation,
1
requirements imposed by the Investment prospectus or offering circular, subscription agreement, any application or
other documentation relating to an Investment (e.g., compliance with suitability
requirements and eligibility restrictions); (iii) acknowledges and agrees that BBH&Co. will
not be responsible for the accuracy of any information provided to it by or on behalf of
the Fund, or for any underlying commitment or obligation inherent to an Investment; (iv)
represents, warrants and covenants that it will not effect any sale, transfer or
disposition of Investment(s) held in the BBH&Co.s name by any means other than the
issuance of an Instruction by the Fund to BBH&Co.; (v) acknowledges that collective
investment schemes (and/or their agent(s)) in which the Fund invests may pay to BBH certain
fees (including without limitation, shareholder servicing and/or trailer fees) in respect
of the Funds investments in such schemes; (vi) represents, warrants and covenants that it
will provide BBH&Co. with such information as is necessary or appropriate to enable
BBH&Co.s performance pursuant to an Instruction or under this Agreement; (vii) represents
that it is not a Plan (which term includes (1) employee benefit plans that are subject to
the United States (US) Employee Retirement Income Security Act of 1974, as amended
(ERISA), or plans, individual retirement accounts and other arrangements that are subject
to Section 4975 of the US Internal Revenue Code of 1986, as amended (the Code), (2)
plans, individual retirement accounts and other arrangements that are subject to the
prohibited transaction provisions of Section 406 of ERISA or Section 4975 of the Code, and
(3) entities the underlying assets of which are considered to include plan assets of such
plans, accounts and arrangements), or an entity purchasing shares on behalf of, or with the
plan assets of, a Plan; and (viii) undertakes to inform BBH&Co. and to keep the same
updated as to the status under ERISA or Section 4975 of the Code, each as amended, of the
beneficial investor to the Investment, and as to any tax withholding or benefit to which an
Investment may be subject.
3.
Representation and Warranty of BBH&Co.
BBH&Co. hereby represents and warrants that this
Agreement has been duly authorized, executed and delivered by BBH&Co. and does not and will not
violate any Applicable Law or conflict with or constitute a default under BBH&Co.s limited
partnership agreement or any agreement, instrument, judgment, order or decree to which BBH&Co. is a
party or by which it is bound.
4.
Instructions.
Unless otherwise explicitly indicated herein, the Custodian shall perform its
duties pursuant to Instructions. As used herein, the term
Instruction
shall mean a directive
initiated by the Fund, acting through its board of directors or trustees or other Authorized
Person, which directive shall conform to the requirements of this Section 4.
4.1
Authorized Persons.
For purposes hereof, an
Authorized Person
shall be a person or
entity authorized to give Instructions to the Custodian by written notices or otherwise for
or on behalf of the Fund in accordance with procedures delivered to and acknowledged by the
Custodian. The Custodian may treat any Authorized Person as having the full authority of
the Fund to issue Instructions hereunder unless the notice of authorization contains
explicit limitations as to said authority. The Custodian shall be entitled to rely upon
the authority of Authorized Persons until it receives appropriate written notice from the
Fund to the contrary.
4.2
Form of Instruction.
Each Instruction shall be transmitted by such secured or
authenticated electro-mechanical means as the Custodian shall make available to the Fund
from time to time unless the Fund shall elect to transmit such Instruction in accordance
with Subsections 4.2.1 through 4.2.3 of this Section.
4.2.1
Fund Designated Secured-Transmission Method.
Instructions may be
transmitted through a secured or tested electro-mechanical means identified by the
Fund or by an Authorized Person entitled to give Instruction and acknowledged and
accepted by the Custodian, it being understood that such acknowledgment shall
authorize the Custodian to accept such means of delivery but shall not represent a judgment by the
Custodian as to the reasonableness or security of the means utilized by the
Authorized Person.
4.2.2
Written Instructions.
Instructions may be transmitted in a writing that
bears the manual signature of Authorized Persons.
4.2.3
Other Forms of Instruction.
Instructions may also be transmitted by
another means determined by the Fund or Authorized Persons and acknowledged and
accepted by the Custodian
2
(subject to the same limits as to acknowledgements as are
contained in Subsection 4.2.1, above) including Instructions given orally or by
SWIFT or telefax (whether tested or untested).
When an Instruction is given by means established under Subsections 4.2.1 through 4.2.3, it
shall be the responsibility of the Custodian to use reasonable care to adhere to any
security or other procedures established in writing between the Custodian and the
Authorized Person with respect to such means of Instruction, but the Authorized Person
shall be solely responsible for determining that the particular means chosen is reasonable
under the circumstances. Oral Instructions shall be binding upon the Custodian only if
and when the Custodian takes action with respect thereto. With respect to telefax
instructions, the parties agree and acknowledge that receipt of legible instructions cannot
be assured, that the Custodian cannot verify that authorized signatures on telefax
instructions are original or properly affixed, and that the Custodian shall not be liable
for losses or expenses incurred through actions taken in reliance on inaccurately stated,
illegible or unauthorized telefax instructions. The provisions of Section 4A of the
Uniform Commercial Code shall apply to Funds Transfers performed in accordance with
Instructions. The Funds Transfer Services Schedule and the Electronic and Online Services
Schedule to this Agreement shall each comprise a designation of a means of delivering
Instructions for purposes of this Section 4.2.
4.3
Completeness and Contents of Instructions.
The Authorized Person shall be
responsible for assuring the adequacy and accuracy of Instructions. Particularly, upon any
acquisition or disposition or other dealing in the Funds Investments and upon any delivery
and transfer of any Investment or moneys, the person initiating the Instruction shall give
the Custodian an Instruction with appropriate detail, including, without limitation:
4.3.1 The transaction date and the date and location of settlement;
4.3.2 The specification of the type of transaction;
4.3.3 A description of the Investments or moneys in question, including, as
appropriate, quantity, price per unit, amount of money to be received or delivered
and currency information. Where an Instruction is communicated by electronic
means, or otherwise where an Instruction contains an identifying number such as a
CUSIP, SEDOL or ISIN number, the Custodian shall be entitled to rely on such number
as controlling notwithstanding any inconsistency contained in the Instruction,
particularly with respect to Investment description; and
4.3.4 The name of the broker or similar entity concerned with execution of the
transaction.
If the Custodian determines that an Instruction is either unclear or incomplete, the
Custodian may give prompt notice of such determination to the Fund, and the Fund shall
thereupon amend or otherwise reform the Instruction. In such event, the Custodian shall
have no obligation to take any action in response to the Instruction initially delivered
until the redelivery of an amended or reformed Instruction.
4.4
Timeliness of Instructions.
In giving an Instruction, the Fund shall take into
consideration delays which may occur due to the involvement of a Subcustodian or agent,
differences in time zones, and other factors particular to a given market, exchange or
issuer. When the Custodian has
established specific timing requirements or deadlines with respect to particular classes of
Instruction, or when an Instruction is received by the Custodian at such a time that it
could not reasonably be expected to have acted on such instruction due to time zone
differences or other factors beyond its reasonable control, the execution of any
Instruction received by the Custodian after such deadline or at such time (including any
modification or revocation of a previous Instruction) shall be at the risk of the Fund.
5.
Safekeeping of Fund Assets.
The Custodian shall hold Investments delivered to it or
Subcustodians for the Fund in accordance with the provisions of this Section. The Custodian shall
not be responsible for (a) the safekeeping of Investments not delivered or that are not caused to
be issued to it or its Subcustodians; or, (b) pre-existing faults or defects in Investments that
are delivered to the Custodian or its Subcustodians. The Custodian is hereby authorized to hold
with itself or a Subcustodian, and to record in one or more accounts, all Investments delivered to
and accepted by the Custodian, any Subcustodian or their respective agents pursuant to an
Instruction or
3
in consequence of any corporate action or income event. The Custodian shall hold
Investments for the account of the Fund and shall segregate Investments from assets belonging to
the Custodian and shall cause its Subcustodians to segregate Investments from assets belonging to
the Subcustodian in an account held for the Fund or in an account maintained by the Subcustodian
generally for non-proprietary assets of the Custodian.
5.1
Use of Securities Depositories.
The Custodian may deposit and maintain Investments
in any Securities Depository, either directly or through one or more Subcustodians
appointed by the Custodian. Investments held in a Securities Depository shall be held (a)
subject to the agreement, rules, statement of terms and conditions or other document or
conditions effective between the Securities Depository and the Custodian or the
Subcustodian, as the case may be, and (b) in an account for the Fund or in bulk segregation
in an account maintained for the non-proprietary assets of the entity holding such
Investments in the Depository. If market practice or the rules and regulations of the
Securities Depository prevent the Custodian, the Subcustodian or (any agent of either) from
holding its client assets in such a separate account, the Custodian, the Subcustodian or
other agent shall as appropriate segregate such Investments for benefit of the Fund or for
benefit of clients of the Custodian generally on its own books.
5.2
Certificated Assets.
Investments which are certificated may be held in registered or
bearer form: (a) in the Custodians vault; (b) in the vault of a Subcustodian or agent of
the Custodian or a Subcustodian; or (c) in an account maintained by the Custodian,
Subcustodian or agent at a Securities Depository; all in accordance with customary market
practice in the jurisdiction in which any Investments are held.
5.3
Registered Assets
. Investments which are registered may be registered in the name of
the Custodian, a Subcustodian, or in the name of the Fund or a nominee for any of the
foregoing, and may be held in any manner set forth in Section 5.2 above with or without
any identification of fiduciary capacity in such registration.
5.4
Book Entry Assets.
Investments which are represented by book-entry may be so held in
an account maintained by the Book-entry Agent on behalf of the Custodian, a Subcustodian or
another Agent of the Custodian, or a Securities Depository.
5.5
Replacement of Lost Investments.
In the event of a loss of Investments for which
loss the Custodian is responsible under the terms of this Agreement, the Custodian shall
replace such Investment, or in the event that such replacement cannot be effected, the
Custodian shall pay to the Fund the fair market value of such Investment based on the last
available price as of the close of business in the relevant market on the date that a claim
was first made to the Custodian with respect to such loss, or such other lesser amount as
shall be agreed by the parties.
6.
Administrative Duties of the Custodian.
The Custodian shall perform the following
administrative duties with respect to Investments of the Fund.
6.1
Purchase of Investments.
Pursuant to Instruction, Investments purchased for the
account of the Fund shall be paid for (a) against delivery thereof to the Custodian or a
Subcustodian, as the case may be, either directly or through a Clearing Corporation or a
Securities Depository (in accordance with the rules of such Securities Depository or such
Clearing Corporation), or (b) otherwise in accordance with an Instruction, Applicable Law,
generally accepted trade practices, or the terms of the instrument representing such
Investment.
6.2
Sale of Investments.
Pursuant to Instruction, Investments sold for the account of
the Fund shall be delivered (a) against payment therefor in cash, by check or by bank wire
transfer, (b) by credit to the account of the Custodian or the applicable Subcustodian, as
the case may be, with a Clearing Corporation or a Securities Depository (in accordance with
the rules of such Securities Depository or such Clearing Corporation), or (c) otherwise in
accordance with an Instruction, Applicable Law, generally accepted trade practices, or the
terms of the instrument representing such Investment.
6.3
Delivery and Receipt in Connection with Borrowings of the Fund or other Collateral
and Margin Requirements.
Pursuant to Instruction, the Custodian may deliver or receive
Investments or cash of the
4
Fund in connection with borrowings or loans by the Fund and other collateral and margin requirements.
6.4
Futures and Options.
If, pursuant to an Instruction, the Custodian shall become a
party to an agreement with the Fund and a futures commission merchant regarding margin
(
Tri-Party Agreement
), the Custodian shall (a) receive and retain, to the extent the same
are provided to the Custodian, confirmations or other documents evidencing the purchase or
sale by the Fund of exchange-traded futures contracts and commodity options, (b) when
required by such Tri-Party Agreement, deposit and maintain in an account opened pursuant to
such Agreement (
Margin Account
), segregated either physically or by book-entry in a
Securities Depository for the benefit of any futures commission merchant, such Investments
as the Fund shall have designated as initial, maintenance or variation margin deposits or
other collateral intended to secure the Funds performance of its obligations under the
terms of any exchange-traded futures contracts and commodity options; and (c) thereafter
pay, release or transfer Investments into or out of the margin account in accordance with
the provisions of such Agreement. Alternatively, the Custodian may deliver Investments, in
accordance with an Instruction, to a futures commission merchant for purposes of margin
requirements in accordance with Rule 17f-6 under the 1940 Act. The Custodian shall in no
event be responsible for the acts and omissions of any futures commission merchant to whom
Investments are delivered pursuant to this Section; for the sufficiency of Investments held
in any Margin Account; or, for the performance of any terms of any exchange-traded futures
contracts and commodity options.
6.5
Contractual Obligations and Similar Investments.
From time to time, the Funds
Investments may include Investments that are not ownership interests as may be represented
by certificate (whether registered or bearer), by entry in a Securities Depository or by
Book-Entry Agent, registrar or similar agent for recording ownership interests in the
relevant Investment. If the Fund shall at any time acquire such Investments, including
without limitation deposit obligations, loan participations, repurchase agreements and
derivative arrangements, the Custodian shall (a) receive and retain, to the extent the same
are provided to the Custodian, confirmations or other documents evidencing the arrangement;
and (b) perform on the Funds account in accordance with the terms of the applicable
arrangement, but only to the extent directed to do so by Instruction. The Custodian shall
have no responsibility for agreements running to the Fund as to which it is not a party
other than to retain, to the extent the same are provided to the Custodian, documents or
copies of documents evidencing the arrangement and, in accordance with Instruction, to
include such arrangements in reports made to the Fund.
6.6
Exchange of Securities.
Unless otherwise directed by Instruction, the Custodian
shall: (a) exchange securities held for the account of the Fund for other securities in
connection with any reorganization, recapitalization, conversion, stock split, change of
par value of shares or similar
event, and (b) deposit any such securities in accordance with the terms of any
reorganization or protective plan.
6.7
Surrender of Securities.
Unless otherwise directed by Instruction, the Custodian may
surrender securities: (a) in temporary form for definitive securities; (b) for transfer
into the name of an entity allowable under Section 5.3; and (c) for a different number of
certificates or instruments representing the same number of shares or the same principal
amount of indebtedness.
6.8
Rights, Warrants, Etc.
Pursuant to Instruction, the Custodian shall (a) deliver
warrants, puts, calls, rights or similar securities to the issuer or trustee thereof, or to
any agent of the issuer or trustee, for purposes of exercising such rights or selling such
securities, and (b) deliver securities in response to any tender offer.
6.9
Mandatory Corporate Actions.
Unless otherwise directed by Instruction, the
Custodian shall: (a) comply with the terms of all mandatory or compulsory exchanges, calls,
tenders, redemptions or similar rights of securities ownership affecting securities held on
the Funds account and promptly notify the Fund of such action; and (b) collect all stock
dividends, rights and other items of like nature with respect to such securities.
6.10
Income Collection.
Unless otherwise directed by Instruction, the Custodian shall
collect any amount due and payable to the Fund with respect to Investments and promptly
credit the amount collected to a Principal or Agency Account; provided, however, that the
Custodian shall not be responsible for: (a)
5
the collection of amounts due and payable with
respect to Investments that are in default or (b) the collection of cash or share
entitlements with respect to Investments that are not registered in the name of the
Custodian or its Subcustodians. The Custodian is hereby authorized to endorse and deliver
any instrument required to be so endorsed and delivered to effect collection of any amount
due and payable to the Fund with respect to Investments.
6.11
Corporate Action Information.
In fulfilling the duties set forth in Sections 6.6
through 6.10 above, the Custodian shall provide to the Fund such material information
pertaining to a corporate action which the Custodian actually receives; provided that the
Custodian shall not be responsible for the completeness or accuracy of such information.
Information relative to any pending corporate action made available to the Fund via any of
the services described in the Electronic and Online Services Schedule shall constitute the
delivery of such information by the Custodian. Any advance credit of cash or shares
expected to be received as a result of any corporate action shall be subject to actual
collection and may be reversed by the Custodian.
6.12
Proxy Materials.
The Custodian shall deliver, or cause to be delivered, to the
Fund proxy forms, notices of meeting, and any other notices or announcements materially
affecting or relating to Investments received by the Custodian. Information relative to any
pending corporate action made available to the Fund via any of the services described in
the Electronic and Online Services Schedule shall constitute the delivery of such
information by the Custodian.
6.13
Ownership Certificates and Disclosure of the Funds Interest
.
The Custodian is
hereby authorized to execute on behalf of the Fund ownership certificates, affidavits or
other disclosure required under Applicable Law or established market practice in connection
with the receipt of income, capital gains or other payments by the Fund with respect to
Investments, or in connection with the sale, purchase or ownership of Investments.
With respect to securities issued in the United States of America, the
Custodian [X] may [ ] may not release the identity of the Fund to
an issuer which requests such information pursuant to the Shareholder
Communications Act of 1985 for the specific purpose of direct
communications between such issuer and the Fund. IF NO BOX IS CHECKED,
THE CUSTODIAN SHALL RELEASE SUCH INFORMATION UNTIL IT RECEIVES CONTRARY
INSTRUCTIONS FROM THE FUND. With respect to securities issued outside
of the United States of America, information shall be released in
accordance with law or custom of the particular country in which such
security is located.
6.14.
Taxes.
The Custodian shall, where applicable, assist the Fund in the reclamation
of taxes withheld on dividends and interest payments received by the Fund. In the
performance of its duties with respect to tax withholding and reclamation, the Custodian
shall be entitled to rely on the advice of counsel and upon information and advice
regarding the Funds tax status that is received from or on behalf of the Fund without duty
of separate inquiry.
6.15
Other Dealings.
The Custodian shall otherwise act as directed by Instruction,
including without limitation effecting the free payments of moneys or the free delivery of
securities, provided that such Instruction shall indicate the purpose of such payment or
delivery and that the Custodian shall record the party to whom the payment or delivery is
made.
6.16
Nondiscretionary Details and Minor Expenses.
The Custodian shall attend to all
nondiscretionary details in connection with the sale or purchase or other administration of
Investments, except as otherwise directed by Instruction, and may make payments to itself
or others for minor expenses of administering Investments under this Agreement, provided
that the Fund shall have the right to request an accounting with respect to such expenses.
6.17
Use of Agents.
The Custodian may at any time in its discretion appoint (and may at
any time remove) agents (other than Subcustodians) to carry out some or all of the
administrative provisions of this Agreement (
Agents
), provided, however, that the
appointment of an Agent shall not relieve the Custodian
6
of its administrative obligations
under this Agreement.
7.
Cash Accounts, Deposits and Money Movements.
Subject to the terms and conditions set forth in
this Section 7, the Fund hereby authorizes the Custodian to open and maintain, with itself or with
Subcustodians, cash accounts in United States Dollars, in such other currencies as are the
currencies of the countries in which the Fund maintains Investments or in such other currencies as
the Fund shall from time to time request by Instruction. Notwithstanding anything in this
Agreement to the contrary, the Fund shall be liable as principal for any overdrafts occurring in
any cash accounts.
7.1
Types of Cash Accounts
.
Cash accounts opened on the books of the Custodian
(
Principal Accounts
) shall be opened in the name of the Fund. Such accounts collectively
shall be a deposit obligation of the Custodian and shall be subject to the terms of this
Section 7 and the general liability provisions contained in Section 9. Cash accounts
opened on the books of a Subcustodian may be opened in the name of the Fund or the
Custodian or in the name of the Custodian for its customers generally (
Agency Accounts
).
Such deposits shall be obligations of the Subcustodian and shall be treated as an
Investment of the Fund. Accordingly, the Custodian shall be responsible for exercising
reasonable care in the administration of such accounts, but shall not be liable for their
repayment in the event the Subcustodian, by reason of its bankruptcy, insolvency or
otherwise, fails to make repayment. In connection with the services provided hereunder,
the Custodian is hereby directed to open cash accounts on its books and records from time
to time for the purposes of receiving subscriptions and/or processing redemptions on behalf
of the Fund, and/or for the purposes of aggregating, netting and/or clearing transactions
(including, without limitation foreign exchange, repurchase agreements, capital stock
activity, expense payment) or other administrative purposes on behalf of the Fund or the
Fund and affiliated funds (each an Account). Each such Account shall be subject to the
terms and conditions of this Agreement (including, without limitation Section 7.6) and the
Fund shall be liable for the satisfaction of its own obligations in connection with each
Account; provided however, the Fund shall not be liable for the obligations of any other
affiliated fund thereunder.
7.1.1
Administrative Accounts.
In connection with the services provided hereunder,
the Custodian is hereby directed to open cash accounts on its books and records
from time to time for the purposes of receiving subscriptions and/or processing
redemptions on behalf of the Fund and/or for the purposes of aggregating, netting
and/or clearing transactions (including, without limitation foreign exchange, repurchase agreements, capital
stock activity, expense payment) or other administrative purposes, each on behalf
of the Fund (each an Account). Each such Account shall be subject to the terms
and conditions of this Agreement and the Fund shall be liable for the satisfaction
of its obligations in connection with each Account.
7.2
Payments and Credits with Respect to the Cash Accounts
.
The Custodian shall make
payments from or deposits to any of the cash accounts in the course of carrying out its
administrative duties, including but not limited to income collection with respect to the
Funds Investments, and otherwise in accordance with Instructions. The Custodian and its
Subcustodians shall be required to credit amounts to the cash accounts only when moneys are
actually received in cleared funds in accordance with banking practice in the country and
currency of deposit. Any credit made to any Principal or Agency Account before actual
receipt of cleared funds shall be provisional and may be reversed by the Custodian in the
event such payment is not actually collected. Unless otherwise specifically agreed in
writing by the Custodian or any Subcustodian, all deposits shall be payable only at the
branch of the Custodian or Subcustodian where the deposit is made or carried.
7.3
Currency and Related Risks.
The Fund bears the risks of holding or transacting in
any currency, including any mark to market exposure associated with a foreign exchange
transaction undertaken with the Custodian. The Custodian shall not be liable for any loss
or damage arising from the applicability of any law or regulation now or hereafter in
effect, or from the occurrence of any event, which may delay or affect the transferability,
convertibility or availability of any currency in the country (a) in which such Principal
or Agency Accounts are maintained or (b) in which such currency is issued, and in no event
shall the Custodian be obligated to make payment of a deposit denominated in a currency
during the period during which its transferability, convertibility or availability has been
affected by any such law, regulation or event. Without limiting the generality of the
foregoing, neither the Custodian nor any Subcustodian shall
7
be required to repay any
deposit made at a foreign branch of either the Custodian or Subcustodian if such branch
cannot repay the deposit due to a cause for which the Custodian would not be responsible in
accordance with the terms of Section 9 of this Agreement unless the Custodian or such
Subcustodian expressly agrees in writing to repay the deposit under such circumstances.
All currency transactions in any account opened pursuant to this Agreement are subject to
exchange control regulations of the United States and of the country where such currency is
the lawful currency or where the account is maintained. Any taxes, costs, charges or fees
imposed on the convertibility of a currency held by the Fund shall be for the account of
the Fund.
7.4
Foreign Exchange Transactions
.
The Custodian shall, subject to the terms of this
Section, settle foreign exchange transactions (including contracts, futures, options and
options on futures) on behalf and for the account of the Fund with such currency brokers or
banking institutions, including Subcustodians, as the Fund may direct pursuant to
Instructions. The Custodian may act as principal in any foreign exchange transaction with
the Fund in accordance with Section 7.4.2 of this Agreement. The obligations of the
Custodian in respect of all foreign exchange transactions (whether or not the Custodian
shall act as principal in such transaction) shall be contingent on the free, unencumbered
transferability of the currency transacted on the actual settlement date of the
transaction.
7.4.1
Third Party Foreign Exchange Transactions
.
The Custodian shall process
foreign exchange transactions (including without limitation contracts, futures,
options, and options on futures), where any third party acts as principal
counterparty to the Fund on the same basis it performs duties as agent for the Fund
with respect to any other of the Funds Investments. Accordingly the Custodian
shall only be responsible for delivering or receiving currency on behalf of the
Fund in respect of such contracts pursuant to Instructions. The Custodian shall not
be responsible for the failure of any counterparty (including any Subcustodian) in
such agency transaction to perform its obligations thereunder. The Custodian (a)
shall transmit cash and Instructions to and from the
currency broker or banking institution with which the Fund has executed a foreign
exchange contract or option, (b) may make free outgoing payments of cash in the
form of Dollars or foreign currency without receiving confirmation of a foreign
exchange contract or option or confirmation that the countervalue currency
completing the foreign exchange contract has been delivered or received or that the
option has been delivered or received, (c) may, in connection with cash payments
made to third party currency brokers/dealers for settlement of the Funds foreign
exchange spot or forward transactions, foreign currency swap transactions and
similar foreign exchange transactions, process settlements using the facilities of
the CLS Bank according to CLS Banks standard terms and conditions
,
and (d) shall
hold in safekeeping all confirmations, certificates and other documents and
agreements received by the Custodian and evidencing or relating to such foreign
exchange transactions. The Fund accepts full responsibility for its use of
third-party foreign exchange dealers and for execution of the foreign exchange
contracts and options and understands that the Fund shall be responsible for any
and all costs and interest charges which may be incurred by the Fund or the
Custodian as a result of the failure or delay of third parties to deliver foreign
exchange.
7.4.2
Foreign Exchange with the Custodian as Principal
.
The Custodian, as
principal, may undertake such foreign exchange transactions with the Fund as the
Custodian and the Fund may agree from time to time. In this event, the foreign
exchange transaction will be performed in accordance with the particular agreement
of the parties, or in the event a principal foreign exchange transaction is
initiated by Instruction in the absence of specific agreement, the transaction will
be performed in accordance with the usual commercial terms of the Custodian. In
the event that the Fund defaults on the settlement of any such foreign exchange
transaction with the Custodian, the Fund shall be liable for contracted currency of
the transaction together with any mark to market exposure associated with the
replacement purchase of the contracted currency undertaken with the Custodian.
7.5
Delays
.
If no event of Force Majeure shall have occurred and be continuing and in
the event that a delay shall have been caused by the negligence or willful misconduct of
the Custodian in carrying out an Instruction to credit or transfer cash, the Custodian
shall be liable to the Fund: (a) with respect to Principal
8
Accounts, for interest to be
calculated at the rate customarily paid on such deposit and currency by the Custodian on
overnight deposits at the time the delay occurs for the period from the day when the
transfer should have been effected until the day it is in fact effected; and, (b) with
respect to Agency Accounts, for interest to be calculated at the rate customarily paid on
such deposit and currency by the Subcustodian on overnight deposits at the time the delay
occurs for the period from the day when the transfer should have been effected until the
day it is in fact effected. The Custodian shall not be liable for delays in carrying out
Instructions to transfer cash which are not due to the Custodians own negligence or
willful misconduct.
7.6
Advances.
If, for any reason in connection with this Agreement the Custodian or any
Subcustodian makes an Advance to facilitate settlement or otherwise for the benefit of the
Fund (whether or not any Principal or Agency Account shall be overdrawn either during, or
at the end of, any Business Day), the Fund hereby does:
7.6.1 acknowledge that the Fund shall have no right, title or interest in or to
any Investments purchased with such Advance or proceeds of such Investments, and
that any credit to an account of Fund shall be provisional, until: (a) the debit of
the Principal or Agency Account by Custodian for an amount equal to Advance Costs;
and/or (b) if such debit produces an overdraft in such account, reimbursement to
the Custodian or Subcustodian for the amount of such overdraft;
7.6.2 acknowledge that the Custodian has an automatically perfected statutory
security interest in Investments purchased with any such Advance pursuant to
Section 9-206 of the Uniform Commercial Code as in effect in the State of New York
from time to time;
7.6.3 in addition, in order to secure the obligations of the Fund to pay or
perform any and all obligations of the Fund pursuant to this Agreement, including
without limitation to repay any Advance made pursuant to this Agreement, grant to
the Custodian a security interest in all Investments and proceeds thereof (as
defined in the Uniform Commercial Code as currently in effect in the State of New
York); and agree to take, and agree that the Custodian may take, in respect of the
security interest referenced above, any further actions that the Custodian may
reasonably require.
7.7
Custodians Rights
Neither the Custodian nor any Subcustodian shall be obligated to
make any Advance or to allow an Advance to occur to the Fund, and in the event that the
Custodian or any Subcustodian does make or allow an Advance, any such Advance and any
transaction giving rise to such Advance shall be for the account and risk of the Fund and
shall not be deemed to be a transaction undertaken by the Custodian for its own account and
risk. If such Advance shall have been made or allowed by a Subcustodian or any other
person, the Custodian may assign all or part of its security interest referenced above and
any other rights granted to the Custodian hereunder to such Subcustodian or other person.
If the Fund shall fail to repay the Advance Costs when due, the Custodian or its assignee,
as the case may be, shall be entitled to a portion of the available cash balance in any
Agency or Principal Account equal to such Advance Costs, and the Fund authorizes the
Custodian, on behalf of the Fund, to pay an amount equal to such Advance Costs irrevocably
to such Subcustodian or other person, and to dispose of any property in such Account to the
extent necessary to make such payment. Any Investments credited to accounts subject to
this Agreement created pursuant hereto shall be treated as financial assets credited to
securities accounts under Articles 8 and 9 of the Uniform Commercial Code as in effect in
the State of New York from time to time. Accordingly, the Custodian and any Subcustodian
shall have the rights and benefits of a secured creditor that is a securities intermediary
under such Articles 8 and 9.
7.8
Integrated Account
.
For purposes hereof, deposits maintained in all Principal
Accounts (whether or not denominated in Dollars) shall collectively constitute a single and
indivisible current account with respect to the Funds obligations to the Custodian or its
assignee, and balances in the Principal Accounts shall be available for satisfaction of the
Funds obligations under this Section 7. The Custodian shall further have a right of
offset against the balances in any Agency Account maintained hereunder to the extent that
the aggregate of all Principal Accounts is overdrawn.
8.
Subcustodians and Securities Depositories
.
Subject to the provisions hereinafter set forth in
this Section
9
8, the Fund hereby authorizes the Custodian to utilize Securities Depositories to act
on behalf of the Fund and to appoint from time to time and to utilize Subcustodians. With respect
to securities and funds held by a Subcustodian, either directly or indirectly (including by a
Securities Depository or Clearing Corporation), notwithstanding any provisions of this Agreement to
the contrary, payment for securities purchased and delivery of securities sold may be made prior to
receipt of securities or payment, respectively, and securities or payment may be received in a form
in accordance with (a) governmental regulations, (b) rules of Securities Depositories and Clearing
Agencies, (c) generally accepted trade practice in the applicable local market, (d) the terms and
characteristics of the particular Investment, or (e) the terms of Instructions.
8.1
Domestic Subcustodians and Securities Depositories
.
The Custodian may deposit and/or
maintain, either directly or through one or more Agents appointed by the Custodian,
Investments of the Fund in any Securities Depository in the United States, including The
Depository Trust Company, provided such Depository meets applicable requirements of the
Federal Reserve Bank or of the Securities and Exchange Commission. The Custodian may,, from
time to time, appoint any bank as defined in Section 2(a)(5) of the 1940 Act meeting the
requirements of a custodian under Section 17(f) of the 1940 Act and the rules and
regulations thereunder to act on behalf of the
Fund as a Subcustodian for purposes of holding Investments of the Fund in the United
States.
8.2
Foreign Subcustodians and Securities Depositories
.
Unless instructed otherwise by the
Fund, the Custodian may deposit and/or maintain non-U.S. Investments of the Fund in any
non-U.S. Securities Depository provided such Securities Depository meets the requirements
of an eligible securities depository under Rule 17f-7 promulgated under the 1940 Act, or
any successor rule or regulation (Rule 17f-7) or which by order of the Securities and
Exchange Commission is exempted therefrom. Prior to the time that securities are placed
with such depository, but subject to the provisions of Section 8.2.4 below, the Custodian
shall have prepared an assessment of the custody risks associated with maintaining assets
with the Securities Depository and shall have established a system to monitor such risks on
a continuing basis in accordance with subsection 8.2.3 of this Section. Additionally, the
Custodian may, from time to time, appoint (a) any bank, trust company or other entity
meeting the requirements of an eligible foreign custodian
under Rule 17f-5 or which by
order of the Securities and Exchange Commission is exempted therefrom, or (b) any bank as
defined in Section 2(a)(5) of the 1940 Act meeting the requirements of a custodian under
Section 17(f) of the 1940 Act and the rules and regulations thereunder, to act on behalf of
the Fund as a Subcustodian for purposes of holding Investments of the Fund outside the
United States.
8.3
Delegation of Board Review of Subcustodians.
From time to time, the Custodian may
agree to perform certain reviews of Subcustodians and of Subcustodian Contracts as the
delegate of the Funds Board. In such event, the Custodians duties and obligations with
respect to this delegated review will be performed in accordance with the terms of the
attached 17f-5 Delegation Schedule to this Agreement.
8.4
Board Approval of Foreign Subcustodians
.
Unless and except to the extent that the
Board has delegated to the Custodian and the Custodian has accepted delegation of review of
certain matters concerning the appointment of Subcustodians pursuant to Subsection 8.3, the
Custodian shall, prior to the appointment of any Subcustodian for purposes of holding
Investments of the Fund outside the United States, obtain written confirmation of the
approval of the Board of Trustees or Directors of the Fund with respect to (a) the identity
of a Subcustodian, and (b) the Subcustodian agreement which shall govern such appointment,
such approval to be signed by an Authorized Person. An Instruction to open an account in a
given country shall comprise authorization of the Custodian to hold assets in such country
in accordance with the terms of this Agreement. The Custodian shall not be required to
make independent inquiry as to the authorization of the Fund to invest in such country.
8.5
Monitoring and Risk Assessment of Securities Depositories.
Prior to the placement of
any assets of the Fund with a non-U.S. Securities Depository, the Custodian: (a) shall
provide to the Fund or its authorized representative an assessment of the custody risks
associated with maintaining assets within such Securities Depository; and (b) shall have
established a system to monitor the custody risks associated with maintaining assets with
such Securities Depository on a continuing basis and to promptly notify the Fund or its
Investment Adviser of any material changes in such risk. In performing its duties under
this subsection, the Custodian shall use reasonable care and may rely on such reasonable
sources of information
10
as may be available including but not limited to: (i) published
ratings; (ii) information supplied by a Subcustodian that is a participant in such
Securities Depository; (iii) industry surveys or publications; (iv) information supplied by
the depository itself, by its auditors (internal or external) or by the relevant Foreign
Financial Regulatory Authority. It is acknowledged that information procured through some
or all of these sources may not be independently verifiable by the Custodian and that
direct access to Securities Depositories is limited under most circumstances. Accordingly,
the Custodian shall not be responsible for errors or omissions in its duties hereunder
provided that it has performed its monitoring and assessment duties with reasonable care.
The risk assessment shall be provided to the Fund or its Investment Advisor by such means
as the Custodian shall reasonably establish. Advices of material change in such assessment
may be provided by the Custodian in the manner established as customary between the Fund and the Custodian for
transmission of material market information.
8.6
Responsibility for Subcustodians
.
Except as provided in the last sentence of this
Section 8.6, the Custodian shall be liable to the Fund for any loss or damage to the Fund
caused by or resulting from the acts or omissions of any Subcustodian to the extent that
such acts or omissions would be deemed to be negligence, gross negligence or willful
misconduct in accordance with the terms of the relevant subcustodian agreement under the
laws, circumstances and practices prevailing in the place where the act or omission
occurred. The liability of the Custodian in respect of the countries and Subcustodians
designated by the Custodian, from time to time on the Global Custody Network Listing shall
be subject to the additional condition that the Custodian actually recovers such loss or
damage from the Subcustodian.
8.7
New Countries.
The Fund shall be responsible for informing the Custodian
sufficiently in advance of a proposed investment which is to be held in a country in which
no Subcustodian is authorized to act in order that the Custodian shall, if it deems
appropriate to do so, have sufficient time to establish a subcustodial arrangement in
accordance herewith. In the event, the Custodian is unable to establish such arrangements
prior to the time the investment is to be acquired, the Custodian is authorized to
designate at its discretion a local safekeeping agent, and the use of the local safekeeping
agent shall be at the sole risk of the Fund, and accordingly the Custodian shall be
responsible to the Fund for the actions of such agent if and only to the extent the
Custodian shall have recovered from such agent for any damages caused the Fund by such
agent.
9.
Responsibility of the Custodian.
In performing its duties and obligations hereunder, the
Custodian shall use reasonable care under the facts and circumstances prevailing in the market
where performance is effected. Subject to the specific provisions of this Section, the Custodian
shall be liable for any direct damage incurred by the Fund in consequence of the Custodians
negligence, bad faith or willful misconduct. In no event shall the Custodian be liable hereunder
for any special, indirect, punitive or consequential damages arising out of, pursuant to or in
connection with this Agreement even if the Custodian has been advised of the possibility of such
damages. It is agreed that the Custodian shall have no duty to assess the risks inherent in the
Funds Investments or to provide investment advice with respect to such Investments and that the
Fund as principal shall bear any risks attendant to particular Investments such as failure of
counterparty or issuer.
9.1
Limitations of Performance
.
The Custodian shall not be responsible under this
Agreement for any failure to perform its duties, and shall not be liable hereunder for any
loss or damage in association with such failure to perform for or in consequence of the
following causes:
9.1.1
Force Majeure.
Force Majeure
shall mean any circumstance or event which is
beyond the reasonable control of the Custodian, a Subcustodian or any agent of the
Custodian or a Subcustodian and which adversely affects the performance by the
Custodian of its obligations hereunder, by the Subcustodian of its obligations
under its Subcustody Agreement or by any other Agent of the Custodian or the
Subcustodian, including any event caused by, arising out of or involving (a) an act
of God, (b) accident, fire, water or wind damage or explosion, (c) any computer,
system or other equipment failure or malfunction caused by any computer virus or
the malfunction or failure of any communications medium, (d) any interruption of
the power supply or other utility service, (e) any strike or other work stoppage,
whether partial or total, (f) any delay or disruption resulting from or reflecting
the occurrence of any Country or Sovereign Risk, (g) any disruption of, or
suspension of trading in, the securities, commodities or foreign exchange
11
markets,
whether or not resulting from or reflecting the occurrence of any Country or
Sovereign Risk, (h) any encumbrance on the transferability of a currency or a
currency position on the actual settlement date of a foreign exchange transaction,
whether or not resulting from or reflecting the occurrence of any Country or
Sovereign Risk, or (i) any other cause similarly beyond the reasonable control of
the Custodian.
9.1.2
Country Risk.
Country Risk
shall mean, with respect to the acquisition,
ownership, settlement or custody of Investments in a jurisdiction, all risks
relating to, or arising in consequence of, systemic and markets factors affecting
the acquisition, payment for or ownership of Investments including (a) the
prevalence of crime and corruption, (b) the inaccuracy or unreliability of business
and financial information, (c) the instability or volatility of banking and
financial systems, or the absence or inadequacy of an infrastructure to support
such systems, (d) custody and settlement infrastructure of the market in which such
Investments are transacted and held, (e) the acts, omissions and operation of any
Securities Depository, (f) the risk of the bankruptcy or insolvency of banking
agents, counterparties to cash and securities transactions, registrars or transfer
agents, and (g) the existence of market conditions which prevent the orderly
execution or settlement of transactions or which affect the value of assets.
9.1.3
Sovereign Risk.
Sovereign Risk
shall mean, in respect of any jurisdiction,
including the United States of America, where Investments are acquired or held
hereunder or under a Subcustody Agreement, (a) any act of war, terrorism, riot,
insurrection or civil commotion, (b) the imposition of any investment, repatriation
or exchange control restrictions by any Governmental Authority, (c) the
confiscation, expropriation or nationalization of any Investments by any
Governmental Authority, whether de facto or de jure, (d) any devaluation or
revaluation of the currency, (e) the imposition of taxes, levies or other charges
affecting Investments, (f) any change in the Applicable Law, or (g) any other
economic or political risk incurred or experienced.
9.2.
Limitations on Liability.
The Custodian shall not be liable for any loss, claim,
damage or other liability arising from the following causes:
9.2.1
Failure of Third Parties.
The failure of any third party including: (a) any
issuer of Investments or Book-Entry Agent or other agent of an issuer; (b) any
counterparty with respect to any Investment, including any issuer of
exchange-traded or other futures, option, derivative or commodities contract; (c)
failure of an Investment Advisor, foreign custody manager or other agent of the
Fund; or (d) failure of other third parties similarly beyond the control or choice
of the Custodian.
9.2.2
Information Sources.
The Custodian may rely upon information received from
issuers of Investments or agents of such issuers, information received from
Subcustodians and from other commercially reasonable sources such as commercial
data bases and the like, but shall not be responsible for specific inaccuracies in
such information, provided that the Custodian has relied upon such information in
good faith, or for the failure of any commercially reasonable information
provider.
9.2.3
Reliance on Instruction
.
Action by the Custodian or the Subcustodian in
accordance with an Instruction, even when such action conflicts with, or is
contrary to any provision of, the Funds declaration of trust, certificate of
incorporation or by-laws or other constitutive document, Applicable Law, or actions
by the trustees, directors or shareholders of the Fund.
9.2.4
Restricted Securities.
The limitations inherent in the rights,
transferability or similar investment characteristics of a given Investment of the
Fund.
10.
Indemnification.
The Fund hereby indemnifies the Custodian and each Subcustodian, and their
respective Agents, nominees and the partners, employees, officers and directors, and agrees to hold
each of them harmless from and against all claims and liabilities, including counsel fees and
taxes, incurred or assessed against any of them in connection with the performance of this
Agreement and any Instruction. If a Subcustodian or any other person
12
indemnified under the preceding sentence, gives written notice of claim to the Custodian, the Custodian shall promptly
give written notice to the Fund. Not more than thirty days following the date of such notice,
unless the Custodian shall be liable under Section 8 hereof in respect of
such claim, the Fund will pay the amount of such claim or reimburse the Custodian for any payment
made by the Custodian in respect thereof.
11.
Reports and Records.
The Custodian shall:
11.1 create and maintain records relating to the performance of its obligations under this
Agreement;
11.2 make available to the Fund, its auditors, agents and employees, upon reasonable
request and during normal business hours of the Custodian, all records maintained by the
Custodian pursuant to Section 11.1 above, subject, however, to all reasonable security
requirements of the Custodian then applicable to the records of its custody customers
generally; and
11.3 make available to the Fund all Electronic Reports; it being understood that the
Custodian shall not be liable hereunder for the inaccuracy or incompleteness thereof or for
errors in any information included therein.
11.4 The Fund shall examine all records, however produced or transmitted, promptly upon
receipt and notify the Custodian promptly of any discrepancy or error. Unless the Fund
delivers written notice of any such discrepancy or error within a reasonable time after its
receipt of the records, the records shall be deemed to be true and accurate.
11.5 The Fund acknowledges that the Custodian obtains information on the value of assets
from outside sources which may be utilized in certain reports made available to the Fund.
The Custodian deems such sources to be reliable but the Fund acknowledges and agrees that
the Custodian does not verify such information nor make any representations or warrantees
as to its accuracy or completeness and accordingly shall be without liability in selecting
and using such sources and furnishing such information.
12.
Miscellaneous.
12.1
Powers of Attorney, etc.
The Fund will promptly execute and deliver, upon request,
such proxies, powers of attorney or other instruments as may be necessary or desirable for
the Custodian to provide, or to cause any Subcustodian to provide, custody services.
12.2
Entire Agreement; Amendment.
This Agreement constitutes the entire understanding and
agreement of the parties hereto and supersedes any other oral or written agreements
heretofore in effect between the Fund and the Custodian with respect to the subject matter
hereof. No provision of this Agreement may be amended or terminated except by a statement
in writing signed by the party against which enforcement of the amendment or termination is
sought, provided, however, that an Instruction shall, whether or not such Instruction shall
constitute a waiver, amendment or modification for purposes hereof, be deemed to have been
accepted by the Custodian when it commences actions pursuant thereto or in accordance
therewith. In the event of a conflict between the terms of this Agreement and the terms of
a service level agreement or other operating agreement in place between the parties from
time to time, the terms of this Agreement shall control.
12.3
Binding Effect; Assignment.
This Agreement shall be binding upon and shall inure
to the benefit of the Custodian/Administrator and the Fund and their successors and
assignees, provided that the Fund may not assign this Agreement without the prior written
consent of the Custodian. Each party agrees that only the parties to this Agreement and/or
their successors in interest shall have a right to enforce the terms of this Agreement.
Accordingly, no client of the Fund or other third party shall have any rights under this
Agreement and such rights are explicitly disclaimed by the parties.
12.4
GOVERNING LAW, JURISDICTION AND VENUE.
THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
THE CONFLICTS OF LAW PRINCIPLES OF SUCH
13
STATE. THE PARTIES HERETO IRREVOCABLY CONSENT TO
THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE FEDERAL COURTS
LOCATED IN NEW YORK CITY. THE FUND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING IN ANY OF THE AFORESAID COURTS AND
ANY CLAIM THAT ANY SUCH ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
FURTHERMORE, EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY RIGHT THAT IT MAY HAVE TO
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
12.5
Notices.
Notices and other writings contemplated by this Agreement, other than
Instructions, shall be delivered (a) by hand, (b) by first class registered or certified
mail, postage prepaid, return receipt requested, (c) by a nationally recognized overnight
courier, or (d) by facsimile transmission, provided that any notice or other writing sent
by facsimile transmission shall also be mailed, postage prepaid, to the party to whom such
notice is addressed. All such notices shall be addressed, as follows:
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If to the Fund:
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FaithShares Trust
3555 NW 58th St. Ste. 410
Oklahoma City, OK 73112
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Attn: J. Garrett Stevens
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Telephone:
Facsimile:
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(405) 778-8377
(405) 778-8375
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If to the Custodian:
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Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Attn:
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Telephone:
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(617) 772-1818
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Facsimile:
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(617) 772-XXXX,
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or such other address as the Fund or the Custodian may have designated in writing to the
other.
12.6
Headings.
Paragraph headings included herein are for convenience of reference only
and shall not modify, define, expand or limit any of the terms or provisions hereof.
12. 7
Severability.
In the event any provision of this Agreement is determined to be void
or unenforceable, such determination shall not affect the remainder of this Agreement,
which shall continue to be in force.
12.8
Counterparts.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original. This Agreement shall become effective when one or more
counterparts have been signed and delivered by the Fund and the Custodian. A photocopy or
telefax of the Agreement shall be acceptable evidence of the existence of the Agreement and
the Custodian shall be protected in relying on the photocopy or telefax until the Custodian
has received the original of the Agreement.
12.9
Confidentiality.
The parties hereto agree that each shall treat confidentially the
terms and conditions of this Agreement and all information provided by each party to the
other regarding its business and operations. All confidential information provided by a
party hereto shall be used by any other party hereto solely for the purpose of rendering or
obtaining services pursuant to this Agreement and, except as may be required in carrying
out this Agreement, shall not be disclosed
to any third party without the prior consent of such providing party. The foregoing shall
not be applicable to any information that is publicly available when provided or thereafter
becomes publicly available other than through a breach of this Agreement, or that is
required to be disclosed by or to any bank examiner of the Custodian or any Subcustodian,
any Regulatory Authority, any auditor of the parties hereto, or by judicial or
administrative process or otherwise by Applicable Law.
14
12.10
Tape-recording.
The Fund on behalf of itself and its Customers authorizes the
Custodian to tape record any and all telephonic or other oral instructions given to the
Custodian by or on behalf of the Fund, including from any Authorized Person. This
authorization will remain in effect until and unless revoked by the Fund in writing. The
Fund further agrees to solicit valid written or other consent from any of its employees
with respect to telephone communications to the extent such consent is required by
applicable law.
12.11
Counsel/ Certified Public Accountant
.
In fulfilling its duties hereunder, the
Custodian shall be entitled to receive and act upon the advice of (i) counsel and/or a
certified public accountant regularly retained by the Custodian in respect of such
matters, (ii) counsel and/or a certified public accountant for the Fund or (iii) such
counsel or certified public accountant as the Fund and the Custodian may agree upon, with
respect to all matters, and the Custodian shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
12.12
Conflict.
Nothing contained in this Agreement shall prevent the Custodian and its
associates from (i) dealing as a principal or an intermediary in the sale, purchase or loan
of the Funds Investments to, or from the Custodian or its associates; (ii) acting as a
custodian, a subcustodian, a trustee, an agent, securities dealer, an investment manager or
in any other capacity for any other client whose interests may be adverse to the interest
of the Fund; or (iii) buying, holding, lending, and dealing in any way in any assets for
the benefit of its own account, or for the account of any other client whose interests may
be adverse to the Fund notwithstanding that the same or similar assets may be held or dealt
in by, or for the account of the Fund by the Custodian. The Fund hereby voluntarily
consents to, and waives any potential conflict of interest between the Custodian and/or its
associates and the Fund, and agrees that:
(a) the Custodians and/or its associates engagement in any such transaction shall
not disqualify the Custodian from continuing to perform as the custodian of the
Fund under this Agreement;
(b) the Custodian and/or its associates shall not be under any duty to disclose any
information in connection with any such transaction to the Fund;
(c) the Custodian and/or its associates shall not be liable to account to the Fund
for any profits or benefits made or derived by or in connection with any such
transaction; and
(d) the Fund shall use all reasonable efforts to disclose this provision, among
other provisions in this Agreement, to its shareholders.
13.
Definitions.
The following defined terms will have the respective meanings set forth below.
13.1
Advance(s)
shall mean any extension of credit by or through the Custodian or by or
through any Subcustodian and shall include, without limitation, amounts due to the
Custodian as the principal counterparty to any foreign exchange transaction with the Fund
as described in Section 7.4.2 hereof, or paid to third parties for account of the Fund or
in discharge of any expense, tax or other item payable by the Fund.
13.2
Advance Costs
shall mean any Advance, interest on the Advance and any related
expenses, including without limitation any mark to market loss of the Custodian or
Subcustodian on any Investment to which Section 7.6.1 applies.
13.3
Agency Account(s)
shall mean any deposit account opened on the books of a Subcustodian
or other banking institution in accordance with Section 7.1 hereof.
13.4
Agent(s)
shall have the meaning set forth in the last sentence of Section 6 hereof.
13.5
Applicable Law
shall mean with respect to each jurisdiction, all (a) laws, statutes,
treaties, regulations, guidelines (or their equivalents); (b) orders, interpretations,
licenses and permits; and (c) judgments, decrees, injunctions, writs, orders and similar
actions by a court of competent jurisdiction; compliance with which is required or
customarily observed in such jurisdiction.
15
13.6
Authorized Person(s)
shall mean any person or entity authorized to give Instructions
on behalf of the Fund in accordance with Section 4.1 hereof.
13.7
Book-entry Agent(s)
shall mean an entity acting as agent for the issuer of Investments
for purposes of recording ownership or similar entitlement to Investments, including
without limitation a transfer agent or registrar.
13.8
Clearing Corporation
shall mean any entity or system established for purposes of
providing securities settlement and movement and associated functions for a given
market(s).
13.9
Delegation Schedule
shall mean any separate schedule entered into between the
Custodian and the Fund or its authorized representative with respect to certain matters
concerning the appointment and administration of Subcustodians delegated to the Custodian
pursuant to Rule 17f-5 under the 1940 Act.
13.10
Electronic and Online Services Schedule
shall mean any separate agreement entered
into between the Custodian and the Fund or its authorized representative with respect to
certain matters concerning certain electronic and online services as described therein and
as may be made available from time to time by the Custodian to the Fund.
13.11
Electronic Reports
shall mean any reports prepared by the Custodian and remitted to
the Fund or its authorized representative via the internet or electronic mail.
13.12
Foreign Custody Manager
shall mean the Funds foreign custody manager appointed
pursuant to Rule 17f-5 of the 1940 Act.
13.13
Foreign Financial Regulatory Authority
shall have the meaning given by Section
2(a)(50) of the 1940 Act.
13.14
Funds Transfer Services Schedule
shall mean any separate schedule entered into
between the Custodian and the Fund or its authorized representative with respect to certain
matters concerning the processing of payment orders from Principal Accounts of the Fund.
13.15
G
lobal Custody Network Listing
shall mean the Countries and Subcustodians approved
for Investments in non-U.S. Markets.
13.16
Instruction(s)
shall have the meaning assigned in Section 4 hereof.
13.17
Investment Advisor
shall mean any person or entity who is an Authorized Person to
give Instructions with respect to the investment and reinvestment of the Funds
Investments.
13.18
Investment(s)
shall mean any investment asset of the Fund, including without
limitation securities, bonds, notes, and debentures as well as receivables, derivatives,
contractual rights or entitlements and other intangible assets, but shall not include any
Principal Account.
13.19
Margin Account
shall have the meaning set forth in Section 6.4 hereof.
13.20
Principal Account(s)
shall mean deposit accounts of the Fund carried on the books of
BBH&Co. as principal in accordance with Section 7 hereof.
13.21
Safekeeping Account
shall mean an account established on the books of the Custodian
or any Subcustodian for purposes of segregating the interests of the Fund (or clients of
the Custodian or Subcustodian) from the assets of the Custodian or any Subcustodian.
13.22
Securities Depository
shall mean a central or book entry system or agency established
under Applicable Law for purposes of recording the ownership and/or entitlement to
investment securities for a given market that, if a foreign Securities Depository, meets
the definitional requirements of Rule 17f-7
16
under the 1940 Act.
13.23
Subcustodian(s)
shall mean each foreign bank appointed by the Custodian pursuant to
Section 8 hereof, but shall not include Securities Depositories.
13.24
Tri-Party Agreement
shall have the meaning set forth in Section 6.4 hereof.
13.25
1940 Act
shall mean the Investment Company Act of 1940.
14.
Compensation.
The Fund agrees to pay to the Custodian (a) a fee in an amount set forth in the
fee letter between the Fund and the Custodian in effect on the date hereof or as amended from time
to time, and (b) all out-of-pocket expenses incurred by the Custodian, including the fees and
expenses of all Subcustodians and other amounts paid by the Custodian to a third party for account
or benefit of the Fund, and payable from time to time. Amounts payable by the Fund under and
pursuant to this Section 14 shall be payable by wire transfer to the Custodian at BBH&Co. in New
York, New York.
15.
Termination.
This Agreement may be terminated by either party in accordance with the provisions
of this Section. The provisions of this Agreement and any other rights or obligations incurred or
accrued by any party hereto prior to termination of this Agreement shall survive any termination of
this Agreement.
15.1
Term, Notice and Effect
. This Agreement shall have an initial term of three (3)
years from the date hereof. Thereafter, this Agreement shall automatically renew for
successive one (1) year periods unless either party terminates this Agreement by written
notice effective no sooner than seventy-five (75) days following the date that notice to
such effect shall be delivered to the other party at its address set forth in Section 12.5
hereof. Notwithstanding the foregoing provisions, either party may terminate this
Agreement at any time (a) for cause, which is a material breach of the Agreement not cured
within 60 days, in which case termination shall be effective upon written receipt of
notice by the non-terminating party, or (b) upon thirty (30) days written notice to the
other party in the event that either party is adjudged bankrupt or insolvent, or there
shall be commenced against such party a case under any applicable bankruptcy, insolvency,
or other similar law now or hereafter in effect.
15.2
Notice and Succession.
In the event a termination notice is given by a party
hereto, all reasonable costs and expenses associated with any required systems, facilities,
procedures, personnel, and other resourced modifications as well as the movement of records
and materials and the conversion thereof shall be paid by the Fund for which Services shall
cease to be performed hereunder. Furthermore, to the extent that it appears impracticable
given the circumstances to effect an orderly delivery of the necessary and appropriate
records of BBH to a successor within the time specified in the notice of termination as
aforesaid, BBH and the Fund agree that this Agreement shall remain in full force and effect
for such reasonable period as may be required to complete necessary arrangements with a
successor.
15.3
Successor Custodian
.
In the event of the appointment of a successor custodian, it is
agreed that the Investments of the Fund held by the Custodian or any Subcustodian shall be
delivered to the successor custodian in accordance with reasonable Instructions. The
Custodian agrees to cooperate with the Fund in the execution of documents and performance
of other actions necessary
or desirable in order to facilitate the succession of the new custodian. If no successor
custodian shall be appointed, the Custodian shall in like manner transfer the Funds
Investments in accordance with Instructions.
15.4
Delayed Succession.
If no Instruction has been given as of the effective date of
termination, Custodian may at any time on or after such termination date and upon ten (10)
consecutive calendar days written notice to the Fund either (a) deliver the Investments of
the Fund held hereunder to the Fund at the address designated for receipt of notices
hereunder; or (b) deliver any investments held hereunder to a bank or trust company having
a capitalization of $2,000,000 USD equivalent and operating under the Applicable Law of the
jurisdiction where such Investments are located, such delivery to be at the risk of the
Fund. In the event that Investments or moneys of the Fund remain in the custody of the
Custodian or its Subcustodians after the date of termination owing to the failure of the
Fund to issue Instructions with respect to their disposition or owing to the fact that such
disposition could not be accomplished in
17
accordance with such Instructions despite diligent
efforts of the Custodian, the Custodian shall be entitled to compensation for its services
with respect to such Investments and moneys during such period as the Custodian or its
Subcustodians retain possession of such items and the provisions of this Agreement shall
remain in full force and effect until disposition in accordance with this Section is
accomplished.
16.
Compliance Policies and Procedures.
To assist the Fund in complying with Rule 38a-1 of the
1940 Act, BBH&Co. represents that it has adopted written policies and procedures reasonably
designed to prevent violation of the federal securities laws in fulfilling its obligations under
the Agreement and that it has in place a compliance program to monitor its compliance with those
policies and procedures. BBH&Co will upon request provide the Fund with information about our
compliance program as mutually agreed.
IN WITNESS WHEREOF
, each of the parties hereto has caused this Agreement to be duly executed as of
the date first above written.
The undersigned acknowledges that (I/we) have received a copy of this document.
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BROWN BROTHERS HARRIMAN & CO.
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FaithShares Trust
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By:
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/s/ Patricia R. Fallon
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By:
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/s/ J. Garrett Stevens
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Name:
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Patricia R. Fallon
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Name:
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J. Garrett Stevens
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Title:
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Managing Director
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Title:
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Chief Executive Officer
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Date:
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October 8, 2009
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Date:
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September 29, 2009
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Brown Brothers Harriman & Co. (BBH&Co.) is a limited partnership organized under the laws of the
United States of America (US) and is subject to the US Treasury Regulations set forth under 31
CFR 500, et seq. BBH&Co. may not establish any relationship with any Prohibited Person or Entity
as such term is defined under the regulations. No customer of BBH&Co. may be owned or controlled
by an entity or person: (i) that is listed in the Annex to, or is otherwise subject to the
provisions of Executive Order 13224, issued on September 24, 2001 (EO13224)
<
www.treasury.gov/offices/enforcement/ofac/programs/terror/terror.pdf
>; (ii) whose
name appears on the United States Treasury Departments Office of Foreign Assets Control (OFAC)
most current list of Specifically Designated National and Blocked Persons (which list may be
published from time to time in various mediums including, but not limited to, the OFAC website;
(iii) who commits, threatens to commit or supports terrorism, as such term is defined in EO13224;
or (iv) who is otherwise affiliated with any entity or person listed above (any and all parties or
persons described in clauses (i) through (iv) above are herein referred to as a Prohibited
Person).
18
FUNDS TRANSFER SERVICES SCHEDULE TO CUSTODIAN AGREEMENT
1.
Execution of Payment Orders
. Brown Brothers Harriman & Co. (the
Custodian
) is hereby
instructed by
FaithShares Trust
(the
Fund
) to execute each payment order, whether denominated
in United States dollars or other applicable currencies, received by the Custodian in the Funds
name as sender and authorized and confirmed by an Authorized Person as defined in a Custodian
Agreement dated as of September 23, 2009 by and between the Custodian and the Fund, as amended
or restated from time thereafter (the
Agreement
), provided that the Fund has sufficient available
funds on deposit in a Principal Account as defined in the Agreement and provided that the order (i)
is received by the Custodian in the manner specified in this Funds Transfer Services Schedule or
any amendment hereafter; (ii) complies with any written instructions and restrictions of the Fund
as set forth in this Funds Transfer Services Schedule or any amendment hereafter; (iii) is
authorized by the Fund or is verified by the Custodian in compliance with a security procedure set
forth in Paragraph 2 below for verifying the authenticity of a funds transfer communication sent to
the Custodian in the name of the Fund or for the detection of errors set forth in any such
communication; and (iv) contains sufficient data to enable the Custodian to process such transfer.
2.
Security Procedure
. The Fund hereby elects to use the procedure selected below as its
security procedure (the
Security Procedure
). The Security Procedure will be used by the Custodian
to verify the authenticity of a payment order or a communication amending or canceling a payment
order. The Custodian will act on instructions received provided the instruction is authenticated by
the Security Procedure. The Fund agrees and acknowledges in connection with (i) the size, type and
frequency of payment orders normally issued or expected to be issued by the Fund to the Custodian,
(ii) all of the security procedures offered to the Fund by the Custodian, and (iii) the usual
security procedures used by customers and receiving banks similarly situated, that authentication
through the Security Procedure shall be deemed commercially reasonable for the authentication of
all payment orders submitted to the Custodian. The Fund hereby elects
(please choose one)
the
following Security Procedure as described below:
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BBH WorldView®
Payment Products
. BIDS and BIDS Worldview Payment
Products, are on-line payment order authorization facilities with built-in authentication
procedures. The Custodian and the Fund shall each be responsible for maintaining the
confidentiality of passwords or other codes to be used by them in connection with BIDS.
The Custodian will act on instructions received through BIDS without duty of further
confirmation unless the Fund notifies the Custodian that its password is not secure.
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SWIFT
. The Custodian and the Fund shall comply with SWIFTs authentication
procedures. The Custodian will act on instructions received via SWIFT
provided the instruction is authenticated by the SWIFT system.
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Computer Transmission
. The Custodian is able to accept transmissions
sent from the Funds computer facilities to the Custodians computer facilities provided
such transmissions are encrypted and digitally certified or are otherwise authenticated in
a reasonable manner based on available technology. Such procedures shall be established
in an operating protocol between the Custodian and the Fund.
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Telefax Instructions
. A payment order transmitted to the Custodian by
telefax transmission shall transmitted by the Fund to a telephone number specified from
time to time by the Custodian for such purposes. If it detects no discrepancies, the
Custodian will follow one of the procedures below.
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1.
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If the telefax requests a repetitive payment order, the
Custodian may call the Fund at its last known telephone number, request to
speak to the Fund or Authorized Person, and confirm the authorization and
the details of the payment order (a
Callback
); or
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2.
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If the telefax requests a non-repetitive order, the
Custodian will perform a Callback.
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All faxes must be accompanied by a fax cover sheet which indicates the senders name,
company name, telephone number, fax number, number of pages, and number of transactions or
instructions attached.
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Telephonic
. A telephonic payment order shall be called into the Custodian
at the telephone number designated from time to time by the Custodian for that purpose.
The caller shall identify herself/himself as an Authorized Person. The Custodian shall
obtain the payment order data from the caller. The Custodian shall then:
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1.
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If a telephonic repetitive payment order, the Custodian
may perform a Callback; or
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2.
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If a telephonic non-repetitive payment order, the
Custodian will perform a Callback.
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In the event the Fund chooses a procedure which is not a Security Procedure as described above, the
Fund agrees to be bound by any payment order (whether or not authorized) issued in its name and
accepted by the Custodian in compliance with the procedure selected by the Fund.
3.
Rejection of Payment Orders
. The Custodian shall give the Fund timely notice of the
Custodians rejection of a payment order. Such notice may be given in writing or orally by
telephone, each of which is hereby deemed commercially reasonable. In the event the Custodian
fails to execute a properly executable payment order and fails to give the Fund notice of the
Custodians non-execution, the Custodian shall be liable only for the Funds actual damages and
only to the extent that such damages are recoverable under UCC 4A (as defined in Paragraph 7
below). Notwithstanding anything in this Funds Transfer Services Schedule and the Agreement to the
contrary, the Custodian shall in no event be liable for any consequential or special damages under
this Funds Transfer Services Schedule, whether or not such damages relate to services covered by
UCC 4A, even if the Custodian has been advised of the possibility of such damages. Whenever
compensation in the form of interest is payable by the Custodian to the Fund pursuant to this Funds
Transfer Services Schedule, such compensation will be payable as specified in UCC 4A.
4.
Cancellation of Payment Orders
. The Fund may cancel a payment order but the Custodian
shall have no liability for the Custodians failure to act on a cancellation instruction unless the
Custodian has received such cancellation instruction at a time and in a manner affording the
Custodian reasonable opportunity to act prior to the Custodians execution of the order. Any
cancellation shall be sent and confirmed in the manner set forth in Paragraph 2 above.
5.
Responsibility for the Detection of Errors and Unauthorized Payment Orders
. Except as
may be provided, the Custodian is not responsible for detecting any Fund error contained in any
payment order sent by the Fund to the Custodian. In the event that the Funds payment order to the
Custodian either (i) identifies the beneficiary by both a name and an identifying or bank account
number and the name and number identify different persons or entities, or (ii) identifies any bank
by both a name and an identifying number and the number identifies a person or entity different
from the bank identified by name, execution of the payment order, payment to the beneficiary,
cancellation of the payment order or actions taken by any bank in respect of such payment order may
be made solely on the basis of the number. The Custodian shall not be liable for interest on the
amount of any payment order that was not authorized or was erroneously executed unless the Fund so
notifies the Custodian within thirty (30) business days following the Funds receipt of notice that
such payment order had been processed. If a payment order in the name of the Fund and accepted by
the Custodian was not authorized by the Fund, the liability of the parties will be governed by the
applicable provisions of UCC 4A.
6.
Laws and Regulations
. The rights and obligations of the Custodian and the Fund with
respect to any payment order executed pursuant to this Funds Transfer Services Schedule will be
governed by any applicable laws, regulations, circulars and funds transfer system rules, the laws
and regulations of the United States of America and of other relevant countries including exchange
control regulations and limitations on dealings or other sanctions, and including without
limitation those sanctions imposed under the law of the United States of America by the Office of
Foreign Assets Control. Any taxes, fines, costs, charges or fees imposed by relevant authorities
on such transactions shall be for the account of the Fund.
7.
Miscellaneous
. All accounts opened by the Fund or its authorized agents at the
Custodian subsequent to the date hereof shall be governed by this Funds Transfer Schedule. All
terms used in this Funds Transfer Services Schedule shall have the meaning set forth in Article 4A
of the Uniform Commercial Code as currently in effect in the State of New York (UCC 4A) unless
otherwise set forth herein. The terms and conditions of this Funds Transfer
20
Services Schedule are in addition to, and do not modify or otherwise affect, the terms and conditions of the Agreement
and any other agreement or arrangement between the parties hereto.
8.
Indemnification
. The Custodian does not recommend the sending of instructions by
telefax or telephonic means as provided in Paragraph 2.
BY ELECTING TO SEND INSTRUCTIONS BY
TELEFAX OR TELEPHONIC MEANS, THE FUND AGREES TO INDEMNIFY THE CUSTODIAN AND ITS PARTNERS, OFFICERS
AND EMPLOYEES FOR ALL LOSSES THEREFROM
.
OPTIONAL
: The Custodian will perform a Callback if instructions are sent by
telefax or telephonic means as provided in Paragraph 2 above.
THE FUND MAY, AT ITS
OWN RISK AND BY HEREBY AGREEING TO INDEMNIFY THE CUSTODIAN AND ITS PARTNERS,
OFFICERS AND EMPLOYEES FOR ALL LOSSES THEREFROM,
ELECT TO WAIVE A CALLBACK BY THE
CUSTODIAN BY INITIALLING HERE:___
The undersigned acknowledges that (I/we) have received a copy of this document.
Accepted and agreed:
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BROWN BROTHERS HARRIMAN & CO.
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FaithShares Trust
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By:
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/s/ Patricia R. Fallon
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By:
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/s/ J. Garrett Stevens
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Name:
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Patricia R. Fallon
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Name:
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J. Garrett Stevens
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Title:
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Managing Director
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Title:
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Chief Executive Officer
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Date:
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October 8, 2009
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Date:
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September 29, 2009
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21
ELECTRONIC AND ON-LINE SERVICES SCHEDULE
This Electronic
and On-Line Services Schedule (this
Schedule
) to a Custodian Agreement dated as of September 23, 2009
(as amended from time to time hereafter, the
Agreement
) by and between Brown
Brothers Harriman & Co. (
we, us our
) and
FaithShares Trust
(
you, your
), provides general
provisions governing your use of and access to the Services (as hereinafter defined) provided to
you by us via the Internet (at
www.bbhco.com or such other URL as we may instruct you to use to
access our products
) and via a direct dial-up connection
between your computer and our
computers, as of September 23, 2009 (the
Effective Date).
Use of the Services
constitutes acceptance of the terms and conditions of this Schedule, any Appendices hereto, the
Terms and Conditions posted on our web site, and any terms and conditions specifically governing a
particular Service or our other products, which may be set forth in the Agreement or in a separate
related agreement (collectively, the
Related Agreements
).
1.
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General Terms.
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You will be granted access to our suite of online products, which may include, but shall not be
limited to the following services via the Internet or dial-up connection (each separate service
is a
Service
; collectively referred to as the
Services
):
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1.1.
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BBH WorldView®, a system for effectuating securities and fund trade instruction and
execution, processing and handling instructions, and for the input and retrieval of other
information;
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1.2.
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F/X WorldView, a system for executing foreign exchange trades;
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1.3.
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Fund WorldView, a system for receiving fund and prospectus information;
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1.4.
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BBHCOnnect, a system for placing securities trade instructions and following the
status and detail of trades;
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1.5.
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ActionView
SM
, a system for receiving certain corporate action information;
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1.6.
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Risk View, an interactive portfolio risk analysis tool; and
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1.7.
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Such other services as we shall from time to time offer.
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2.1.
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A digital certificate and/or an encryption key may be required to access certain
Services. You may apply for a digital certificate and/or an encryption key by following
the procedures set forth at
http://www.bbh.com/certs/
. You also will need an
identification code (
ID
) and password(s) (
Password
) to access the Services.
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2.2.
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You agree to safeguard your digital certificate and/or encryption key, ID, and
Password and not to give or make available, intentionally or otherwise, your digital
certificate, ID, and/or Password to any unauthorized person. You must immediately notify
us in writing if you believe that your digital certificate and/or encryption key,
Password, or ID has been compromised or if you suspect unauthorized access to your account
by means of the Services or otherwise, or when a person to whom a digital certificate
and/or an encryption key, Password, or ID has been assigned leaves or is no longer
permitted to access the Services.
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2.3.
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We will not be responsible for any breach of security, or for any unauthorized
trading or theft by any third party, caused by your failure (be it intentional,
unintentional, or negligent) to maintain the confidentiality of your ID and/or Password
and/or the security of your digital certificate and/or encryption key.
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3.1.
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Proper instructions under this Schedule shall be provided as designated in the
Related Agreements (
Instructions
).
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3.2.
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The following additional provisions apply to Instructions provided via the Services:
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a.
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Instructions sent by electronic mail will not be accepted or acted upon.
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b.
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You authorize us to act upon Instructions received through the Services
utilizing your digital certificate, ID, and/or Password as though they were duly
authorized written instructions, without any duty of verification or inquiry on our
part, and agree to hold us harmless for any losses you experience as a result.
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c.
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From time to time, the temporary unavailability of third party
telecommunications or computer systems required by the Services may result in a
delay in processing Instructions. In such an event, we shall not be liable to you or any third party for any
liabilities, losses, claims, costs, damages,
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penalties, fines, obligations, or
expenses of any kind (including without limitation, reasonable attorneys,
accountants, consultants, or experts fees and disbursements) that you experience
due to such a delay.
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4.
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Electronic Documents.
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We may make periodic statements, disclosures, notices, and other documents available to you
electronically, and, subject to any delivery and receipt verification procedures required by
law, you agree to receive such documents electronically and to check the statements for
accuracy. If you believe any such statement contains incorrect information, you must follow
the procedures set forth in the Related Agreement(s).
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5.
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Malicious Code.
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You understand and agree that you will be responsible for the introduction (by you, your
employees, agents, or representatives) into the Services, whether intentional or unintentional,
of (i) any virus or other code, program, or sub-program that damages or interferes with the
operation of the computer system containing the code, program or sub-program, or halts,
disables, or interferes with the operation of the Services themselves; or (ii) any device,
method, or token whose knowing or intended purpose is to permit any person to circumvent the
normal security of the Services or the system containing the software code for the Services
(
Malicious Code
). You agree to take all necessary actions and precautions to prevent the
introduction and proliferation of any Malicious Code into those systems that interact with the
Services.
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6.
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Indemnification.
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For avoidance of doubt, you hereby agree that the provisions in the Related Agreement(s)
related to your indemnification of us and any limitations on our liability and responsibilities
to you shall be applicable to this Agreement, and are hereby expressly incorporated herein. You
agree that the Services are comprised of telecommunications and computer systems, and that it
is possible that Instructions, information, transactions, or account reports might be added to,
changed, or omitted by electronic or programming malfunction, unauthorized access, or other
failure of the systems which comprise the Services, despite the security features that have
been designed into the Services. You agree that we will not be liable for any action taken or
not taken in complying with the terms of this Schedule, except for our willful misconduct or
gross negligence. The provisions of this paragraph shall survive the termination of this
Schedule and the Related Agreements.
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7.
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Payment.
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You may be charged for services hereunder as set forth in a fee schedule from time to time
agreed by us.
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8.
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Term/Termination.
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8.1.
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This Schedule is effective as of the date you sign it or first use the Services,
whichever is first, and continues in effect until such time as either you or we terminate
the Schedule in accordance with this Section 8 and/or until your off-line use of the
Services is terminated.
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8.2.
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We may terminate your access to the Services at any time, for any reason, with five
(5) business days prior notice; provided that we may terminate your access to the Services
with no prior notice (i) if your account with us is closed, (ii) if you fail to comply
with any of the terms of this Agreement, (iii) if we believe that your continued access to
the Services poses a security risk, or (iv) if we believe that you are violating or have
violated applicable laws, and we will not be liable for any loss you may experience as a
result of such termination. You may terminate your access to the Services at any time by
giving us ten (10) business days notice. Upon termination, we will cancel all your
Passwords and IDs and any in-process or pending Instructions will be carried out or
cancelled, at our sole discretion.
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9.1.
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Notices.
All notices, requests, and demands (other than routine operational
communications, such as Instructions) shall be in such form and effect as provided in the
Related Agreement(s).
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9.2.
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Inconsistent Provisions.
Each Service may be governed by separate terms and
conditions in addition to this Schedule and the Related Agreement(s). Except where
specifically provided to the contrary in this Schedule, in the event that such separate
terms and conditions conflict with this Schedule and the Related Agreement(s), the
provisions of this Schedule shall prevail to the extent this Schedule applies to the
transaction in question.
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9.3.
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Binding Effect; Assignment; Severability.
This Schedule shall be binding on you,
your employees, officers and agents. We may assign or delegate our rights and duties
under this Schedule at any time without notice to you. Your rights under this Schedule
may not be assigned without our prior written consent. In the event that any provision of
this Schedule conflicts with the law under which this Schedule is to be construed or if
any such provision is held invalid or unenforceable by a court with jurisdiction over you
and us, such provision shall be deemed to be restated to effectuate as nearly as possible
the purposes of the Schedule in accordance with applicable law. The remaining provisions
of this Schedule and the application of the challenged provision to persons or
circumstances other than those as to which it is invalid or unenforceable shall not be
affected thereby, and each such provision shall be valid and enforceable to the full
extent permitted by law.
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9.4.
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Choice of Law; Jury Trial.
This Schedule shall be governed by and construed, and the
legal relations between the parties shall be determined, in accordance with the laws of
the State of New York, without giving effect to the principles of conflicts of laws. Each
party agrees to waive its right to trial by jury in any action or proceeding based upon or
related to this Agreement. The parties agree that all actions and proceedings based upon
or relating to this Schedule shall be litigated exclusively in the federal and state
courts located within New York City, New York.
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The undersigned acknowledges that (I/we) have received a copy of this document.
FaithShares Trust (you)
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By:
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/s/ J. Garrett Stevens
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Title:
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Chief Executive Officer
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Date:
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September 29, 2009
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24
17f-5 DELEGATION SCHEDULE
By its execution of this Delegation Schedule dated as of
September 23, 2009, between
FaithShares Trust
, a management investment company registered with the Securities and
Exchange Commission (the
Commission
) under the Investment Company Act of 1940, as amended (the
1940
Act
), acting through its Board of Directors/Trustees or its duly appointed representative (the
Fund
), hereby appoints
BROWN BROTHERS HARRIMAN & CO.
, a New York limited partnership with an office
in Boston, Massachusetts (the
Delegate
) as its delegate to perform certain functions with respect
to the custody of Funds Assets outside the United States.
1.
Maintenance of Funds Assets Abroad
. The Fund, acting through its Board or its duly
authorized representative, hereby instructs the Delegate pursuant to the terms of the Custodian
Agreement dated as of the date hereof executed by and between the Fund and the Delegate (the
Custodian Agreement
) to place and maintain the Funds Assets in countries outside the United States
in accordance with Instructions received from the Funds Investment Advisor. Such instruction
shall constitute an Instruction under the terms of the Custodian Agreement. The Fund acknowledges
that (a) the Delegate shall perform services hereunder only with respect to the countries where it
accepts delegation as Foreign Custody Manager as indicated on the Delegates Global Custody Network
Listing; (b) depending on conditions in the particular country, advance notice may be required
before the Delegate shall be able to perform its duties hereunder in or with respect to such
country (such advance notice to be reasonable in light of the specific facts and circumstances
attendant to performance of duties in such country); and (c) nothing in this Delegation Schedule
shall require the Delegate to provide delegated or custodial services in any country, and there may
from time to time be countries as to which the Delegate determines it will not provide delegation
services.
2.
Delegation
. Pursuant to the provisions of Rule 17f-5 under the 1940 Act as amended, the
Board hereby delegates to the Delegate, and the Delegate hereby accepts such delegation and agrees
to perform only those duties set forth in this Delegation Schedule concerning the safekeeping of
the Funds Assets in each of the countries as to which it acts as the Boards delegate. The
Delegate is hereby authorized to take such actions on behalf of or in the name of the Fund as are
reasonably required to discharge its duties under this Delegation Schedule, including, without
limitation, to cause the Funds Assets to be placed with a particular Eligible Foreign Custodian in
accordance herewith. The Fund confirms to the Delegate that the Fund or its Investment Adviser has
considered the Sovereign Risk and prevailing Country Risk as part of its continuing investment
decision process, including such factors as may be reasonably related to the systemic risk of
maintaining the Funds Assets in a particular country, including, but not limited to, financial
infrastructure, prevailing custody and settlement systems and practices (including the use of any
Securities Depository in the context of information provided by the Custodian in the performance of
its duties as required under Rule 17f-7 and the terms of the Custodian Agreement governing such
duties), and the laws relating to the safekeeping and recovery of the Funds Assets held in custody
pursuant to the terms of the Custodian Agreement.
3.
Selection of Eligible Foreign Custodian and Contract Administration
. The Delegate shall
perform the following duties with respect to the selection of Eligible Foreign Custodians and
administration of certain contracts governing the Funds foreign custodial arrangements:
(a)
Selection of Eligible Foreign Custodian
. The Delegate shall place and maintain
the Funds Assets with an Eligible Foreign Custodian, provided that the Delegate shall have
determined that the Funds Assets will be subject to reasonable care based on the standards
applicable to custodians in the relevant market after considering factors relevant to the
safekeeping of such assets including without limitation:
(i) The Eligible Foreign Custodians practices, procedures, and internal controls,
including, but not limited to, the physical protections available for certificated
securities (if applicable), the controls and procedures for dealing with any
Securities Depository, the method of keeping custodial records, and the security
and data protection practices;
(ii) Whether the Eligible Foreign Custodian has the requisite financial strength to
provide reasonable care for the Funds Assets;
(iii) The Eligible Foreign Custodians general reputation and standing; and
(iv) Whether the Fund will have jurisdiction over and be able to enforce judgments
against the Eligible Foreign Custodian, such as by virtue of the existence of any
offices of such Eligible
25
Foreign Custodian in the United States or such Eligible Foreign Custodians appointment of an agent for service of process in the United
States or consent to jurisdiction in the United States.
The Delegate shall be required to make the foregoing determination to the best of its
knowledge and belief based only on information reasonably available to it.
(b)
Contract Administration
. The Delegate shall cause that the foreign custody
arrangements with an Eligible Foreign Custodian shall be governed by a written contract
that the Delegate has determined will provide reasonable care for Fund assets based on the
standards applicable to custodians in the relevant market. Each such contract shall,
except as set forth in the last paragraph of this subsection (b), include provisions that
provide:
(i) For indemnification or insurance arrangements (or any combination of the
foregoing) such that the Fund will be adequately protected against the risk of loss
of assets held in accordance with such contract;
(ii) That the Funds Assets will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the Eligible Foreign Custodian or
its creditors except a claim of payment for their safe custody or administration
or, in the case of cash deposits, liens or rights in favor of creditors of such
Custodian arising under bankruptcy, insolvency or similar laws;
(iii) That beneficial ownership of the Funds Assets will be freely transferable
without the payment of money or value other than for safe custody or
administration;
(iv) That adequate records will be maintained identifying the Funds Assets as
belonging to the Fund or as being held by a third party for the benefit of the
Fund;
(v) That the Funds independent public accountants will be given access to those
records described in (iv) above or confirmation of the contents of such records;
and
(vi) That the Delegate will receive sufficient and timely periodic reports with
respect to the safekeeping of the Funds Assets, including, but not limited to,
notification of any transfer to or from the Funds account or a third party account
containing the Funds Assets.
Such contract may contain, in lieu of any or all of the provisions specified in this
Section 3(b), such other provisions that the Delegate determines will provide, in their
entirety, the same or a greater level of care and protection for the Funds Assets as the
specified provisions, in their entirety.
(c)
Limitation to Delegated Selection
. Notwithstanding anything in this
Delegation Schedule to the contrary, the duties under this Section 3 shall apply only to
Eligible Foreign Custodians selected by the Delegate and shall not apply to Securities
Depositories or to any Eligible Foreign Custodian that the Delegate is directed to use
pursuant to Section 7 of this Delegation Schedule.
4.
Monitoring
. The Delegate shall establish a system to monitor at reasonable intervals
(but at least annually) the appropriateness of maintaining the Funds Assets with each Eligible
Foreign Custodian that has been selected by the Delegate pursuant to Section 3 of this Delegation
Schedule. The Delegate shall monitor the continuing appropriateness of placement of the Funds
Assets in accordance with the criteria established under Section 3(a) of this Delegation Schedule.
The Delegate shall monitor the continuing appropriateness of the contract governing the Funds
arrangements in accordance with the criteria established under Section 3(b) of this Delegation
Schedule.
5.
Reporting
. At least annually and more frequently as mutually agreed between the parties,
the Delegate shall provide to the Board written reports specifying placement of the Funds Assets
with each Eligible Foreign Custodian selected by the Delegate pursuant to Section 3 of this Delegation
Schedule and shall promptly report on any material changes to such foreign custody arrangements.
Delegate will prepare such a report with respect to any Eligible Foreign Custodian that the
Delegate has been instructed to use pursuant to Section 7 of this Delegation Schedule only to the
extent specifically agreed with respect to the particular situation.
6.
Withdrawal of Funds Assets
. If the Delegate determines that an arrangement with a
specific Eligible Foreign Custodian selected by the Delegate under Section 3 of this Delegation
Schedule no longer meets the requirements of said Section, Delegate shall withdraw the Funds
Assets from the non-complying arrangement as soon as reasonably practicable; provided, however,
that if in the reasonable judgment of the Delegate, such
26
withdrawal would require liquidation of
any of the Funds Assets or would materially impair the liquidity, value or other investment
characteristics of the Funds Assets, it shall be the duty of the Delegate to provide information
regarding the particular circumstances and to act only in accordance with Instructions of the Fund
or its Investment Advisor with respect to such liquidation or other withdrawal.
7.
Direction as to Eligible Foreign Custodian
. Notwithstanding this Delegation Schedule,
the Fund, acting through its Board, its Investment Advisor or its other Authorized Representative,
may direct the Delegate to place and maintain the Funds Assets with a particular Eligible Foreign
Custodian, including without limitation with respect to investment in countries as to which the
Custodian will not provide delegation services. In such event, the Delegate shall be entitled to
rely on any such instruction as an Instruction under the terms of the Custodian Agreement and shall
have no duties under this Delegation Schedule with respect to such arrangement save those that it
may undertake specifically in writing with respect to each particular instance.
8.
Standard of Care
. In carrying out its duties under this Delegation Schedule, the
Delegate agrees to exercise reasonable care, prudence and diligence such as a person having
responsibility for safekeeping the Funds Assets would exercise.
9.
Representations
. The Delegate hereby represents and warrants that it is a U.S. Bank and
that this Delegation Schedule has been duly authorized, executed and delivered by the Delegate and
is a legal, valid and binding agreement of the Delegate.
The Fund hereby represents and warrants that its Board of Directors has determined that it is
reasonable to rely on the Delegate to perform the delegated responsibilities provided for herein
and that this Delegation Schedule has been duly authorized, executed and delivered by the Fund and
is a legal, valid and binding agreement of the Fund.
10.
Effectiveness; termination
. This Delegation Schedule shall be effective as of the date
on which this Delegation Schedule shall have been accepted by the Delegate, as indicated by the
date set forth below the Delegates signature. This Delegation Schedule may be terminated at any
time, without penalty, by written notice from the terminating party to the non-terminating party.
Such termination shall be effective on the 30th calendar day following the date on which the
non-terminating party shall receive the foregoing notice. The foregoing to the contrary
notwithstanding, this Delegation Schedule shall be deemed to have been terminated concurrently with
the termination of the Custodian Agreement.
11.
Notices
. Notices and other communications under this Delegation Schedule are to be made
in accordance with the arrangements designated for such purpose under the Custodian Agreement
unless otherwise indicated in a writing referencing this Delegation Schedule and executed by both
parties.
12.
Definitions
. Capitalized terms not otherwise defined in this Delegation Schedule have
the following meanings:
a. Country Risk shall have the meaning set forth in Section [ ] of the Custodian
Agreement.
b.
Eligible Foreign Custodian
shall have the meaning set forth in Rule
17f-5(a)(1) of the
1940 Act and shall also include a U.S. Bank.
c.
Funds Assets
shall mean any of the Funds investments (including foreign
currencies) for which the primary market is outside the United States, and such cash and
cash equivalents as are reasonably necessary to effect the Funds transactions in such
investments.
d.
Instructions
shall have the meaning set forth in the Custodian Agreement.
e.
Securities Depository
shall have the meaning set forth in Rule 17f-7 of the
1940 Act.
f.
Sovereign Risk
shall have the meaning set forth in Section [6.3] of the
Custodian Agreement.
g .
U.S. Bank
shall mean a bank which qualifies to serve as a custodian of assets
of investment
27
companies under Section 17(f) of the 1940 Act.
13.
Governing Law and Jurisdiction
. This Delegation Schedule shall be construed in
accordance with the laws of the State of New York. The parties hereby submit to the exclusive
jurisdiction of the Federal courts sitting in the State of New York or the Commonwealth of
Massachusetts or of the state courts of either such State or such Commonwealth.
14.
Fees
. Delegate shall perform its functions under this Delegation Schedule for the
compensation determined under the Custodian Agreement.
15.
Integration
. This Delegation Schedule sets forth all of the Delegates duties with
respect to the selection and monitoring of Eligible Foreign Custodians, the administration of
contracts with Eligible Foreign Custodians, the withdrawal of assets from Eligible Foreign
Custodians and the issuance of reports in connection with such duties. The terms of the Custodian
Agreement shall apply generally as to matters not expressly covered in this Delegation Schedule,
including dealings with the Eligible Foreign Custodians in the course of discharge of the
Delegates obligations under the Custodian Agreement.
IN WITNESS WHEREOF
, each of the parties hereto has caused this Agreement to be duly executed as of
the date first above written.
The undersigned acknowledges that (I/we) have received a copy of this document.
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BROWN BROTHERS HARRIMAN & CO.
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FaithShares Trust
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By:
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/s/ Patricia R. Fallon
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By:
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/s/ J. Garrett Stevens
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Name:
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Patricia R. Fallon
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Name:
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J. Garrett Stevens
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Title:
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Managing Director
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Title:
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Chief Executive Officer
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