government reimbursement for medical expenses, rising costs of medical products and
services, pricing pressure (including price discounting), limited product lines and an increased emphasis
on the delivery of healthcare through outpatient services. Companies in the health care sector are heavily
dependent on obtaining and defending patents, which may be time consuming and costly, and the expiration
of patents may also adversely affect the profitability of these companies. Health care companies are
also subject to extensive litigation based on product liability and similar claims. In addition, their
products can become obsolete due to industry innovation, changes in technologies or other market developments.
Many new products in the health care sector require significant research and development and may be subject
to regulatory approvals, all of which may be time consuming and costly with no guarantee that any product
will come to market.
The following section provides
information regarding certain other risks of investing in the Fund.
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.
Cybersecurity
and Disaster Recovery Risks.
Information and technology systems relied upon by the Fund, the Adviser,
the Sub-Adviser, the Fund’s other service providers (including, but not limited to, the Fund Accountant,
Custodian, Transfer Agent, Administrator, Distributor and index providers, as applicable), market makers,
Authorized Participants, financial intermediaries and/or the issuers of securities in which the Fund
invests may be vulnerable to damage or interruption from computer viruses, network failures, computer
and telecommunication failures, infiltration by unauthorized persons, security breaches, usage errors,
power outages and catastrophic events such as fires, tornadoes, floods, hurricanes and earthquakes. Although
the Adviser, the Sub-Adviser and the Fund’s other service providers have implemented measures to
manage risks relating to these types of events, if these systems are compromised, become inoperable for
extended periods of time or cease to function properly, significant investment may be required to fix
or replace them. The failure of these systems and/or of disaster recovery plans could cause significant
interruptions in the operations of the Fund, the Adviser, the Sub-Adviser, the Fund’s other service
providers, market makers, Authorized Participants, financial intermediaries and/or issuers of securities
in which the Fund invests and may result in a failure to maintain the security, confidentiality or privacy
of sensitive data, impact the Fund’s ability to calculate its net asset value or impede trading.
Such a failure could also harm the reputation of the Fund, the Adviser, the Sub-Adviser, the Fund’s
other service providers, market makers, Authorized Participants, financial intermediaries and/or issuers
of securities in which the Fund invests, subject such entities and their respective affiliates to legal
claims or otherwise affect their business and financial performance.
Operational Risk.
The Fund is exposed to operational risk
arising from a number of factors, including but not limited to human error, processing and communication
errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or
inadequate processes and technology or systems failures. The Fund seek to reduce these operational risks
through controls and procedures. However, these measures do not address every possible risk and may be
inadequate for those risks that they are intended to address.
Temporary Defensive Investments
The Fund may take temporary
defensive positions that are inconsistent with its normal investment policies and strategies—for
instance, by allocating assets to cash, cash equivalent investments or other less volatile instruments
— in response to adverse or unusual market, economic, political, or other conditions. In doing so,
the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective.
Disclosure of Portfolio
Holdings
The Fund’s portfolio holdings will be disclosed each day on its website at http://www.pacificglobaletfs.com.
A description of the Fund’s policies and procedures with respect to the disclosure of the Fund’s
portfolio securities is available in the SAI.
Fund Management
The
Adviser
Pacific
Global Advisors LLC, located at 840 Newport Center Drive, 7th Floor, Newport Beach, California 92660,
serves as the investment adviser (“Adviser”) to Pacific Global US Equity Income ETF (“Fund”).
The Adviser is wholly-owned by Pacific Global Asset Management LLC and is an indirect wholly-owned subsidiary
of Pacific Life Insurance Company.
12
The
Adviser is responsible for the Fund’s investment operations and its business affairs. Pursuant
to a management agreement between the Trust and the Adviser with respect to the Fund (“Management
Agreement”) and subject to the general oversight of the Board, the Adviser provides or causes to
be furnished all supervisory and other services reasonably necessary for the operation of the Fund, including
audit, portfolio accounting, legal, transfer agency, custody, printing costs, certain administrative
services (provided pursuant to a separate administration agreement), certain distribution services (provided
pursuant to a separate distribution agreement), certain shareholder and distribution-related services
(provided pursuant to a separate Rule 12b-1 Plan and related agreements) under what is essentially an
all-in fee structure. The Fund may bear other expenses which are not covered under the Management Agreement
that may vary and will affect the total level of expenses paid by the Fund, such as taxes and governmental
fees, brokerage fees, commissions and other transaction expenses, costs of borrowing money, including
interest expenses, certain custody expenses and extraordinary expenses (such as litigation and indemnification
expenses).
The Adviser is paid a monthly management fee at an annual rate (stated as a percentage
of the average daily net assets of the Fund) of 0.29%. The management agreement between the Fund and
the Adviser provides that the Adviser will pay all operating expenses of the Fund, except for certain
expenses, including but not limited to, interest expenses, taxes, brokerage expenses, future Rule 12b-1
fees (if any), acquired fund fees and expenses, and the management fee payable to the Adviser under the
Management Agreement.
Pursuant to the Management Agreement, and subject to the Board’s approval, the
Adviser is authorized to delegate the day-to-day management of the Fund’s investment program. The
Adviser has appointed Cadence Capital Management LLC as the sub-adviser (“Sub-Adviser”) to
manage the Fund’s investment program. The Adviser oversees and monitors the nature and quality
of the services provided by the Sub-Adviser, including investment performance and execution of investment
strategies. The Adviser performs compliance monitoring services to help the Fund maintain compliance
with applicable laws and regulations and provides services related to, among others, the valuation of
Fund securities, risk management and oversight of trade execution and brokerage services.
A discussion regarding the
Board of Trustees’ approval of the Management Agreement and Subadvisory Agreement with respect to
the Fund will be available in the Trust’s semi-annual report for the fiscal year ended June 30,
2019.
The
Sub-Adviser
Cadence Capital Management LLC, located at 265 Franklin Street, 4th Floor, Boston,
Massachusetts 02110, serves as sub-adviser to Pacific Global US Equity Income ETF. As of December 31,
2018, the Sub-Adviser has approximately $2.9 Billion in assets under management.
The Sub-Adviser provides
advisory services to registered investment companies, private domestic and offshore pooled investment
vehicles and institutional accounts. The Sub-Adviser is a direct, wholly-owned subsidiary of Pacific
Global Asset Management LLC, an indirect wholly-owned subsidiary of Pacific Life Insurance Company and
an affiliate of the Adviser. The Sub-Adviser is responsible for the day-to-day management of the Fund’s
portfolio pursuant to a subadvisory agreement between the Trust, the Adviser and the Sub-Adviser with
respect to the Fund (“Subadvisory Agreement”).
Portfolio Managers
The portfolio managers listed
below are jointly and primarily responsible for the day-to-day management of the Fund. Please refer to
the SAI for additional information about the portfolio managers’ compensation, other accounts managed
by the portfolio managers and their ownership of Shares of the Fund.
13
J. Paul Dokas, CFA.
Mr. Dokas joined Cadence in 2013
and currently serves as Senior Portfolio Manager, Managing Director. Prior to joining Cadence, Mr. Dokas
was the Director - Investments at Hirtle Callaghan, responsible for the development of asset allocation
models and the allocation of capital to investment strategies in the Hirtle Callaghan Funds. Mr. Dokas
was also responsible for developing investment strategies to be used in the Hirtle Callaghan Funds. Before
that, he was Senior Vice President at Delaware Investment Advisors where he led the Structured Products
Group. Prior to joining Delaware Investments, Mr. Dokas worked at Bell Atlantic where he spent nearly
ten years in various positions in the Trust Investment Group ending in the position of Director - Trust
Investments. The Trust Investment Group was responsible for the oversight and management of approximately
$20 billion in employee benefit trusts. Mr. Dokas holds a Bachelors of Business Administration from Loyola
College, an MBA from the University of Maryland and added the Chartered Financial Analyst (CFA) designation
in 1987.
Robert E. Ginsberg, CFA.
Mr. Ginsberg joined Cadence
in the summer of 2011 and currently serves as a Senior Portfolio Manager, Managing Director. Prior to
joining Cadence, he was a Senior Analyst and Portfolio Manager at Invesco and Putnam Investments. At
Putnam, Mr. Ginsberg also served as a Managing Director. Mr. Ginsberg started his investment career at
Delaware Investments in Philadelphia where he worked as an Equity Analyst before being promoted to Portfolio
Manager. Mr. Ginsberg holds a BS in Economics and an MBA, both from The Wharton School. He earned his
CFA designation in 2000.
Shareholder Information
Determination of NAV
The NAV per Share for the
Fund is computed by dividing the value of the net assets of the Fund (i.e., the value of its total assets
less total liabilities) by the total number of Shares outstanding. Expenses and fees, including the management
fee, are accrued daily and taken into account for purposes of determining NAV. The NAV of the Fund is
determined each business day as of the close of trading (ordinarily 4:00 p.m. Eastern time) on the NYSE.
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.
The
values of the Fund’s portfolio securities are based on the securities’ closing prices on their
local principal markets, where available. In the absence of a last reported sales price, or if no sales
were reported, and for other assets for which market quotes are not readily available, values may be
based on quotes obtained from a quotation reporting system, established market makers or by an outside
independent pricing service. Prices obtained by an outside independent pricing service use information
provided by market makers or estimates of market values obtained from data related to investments or
securities with similar characteristics and may use a computerized grid matrix of securities and its
evaluations in determining what it believes is the fair value of the portfolio securities. If a market
quotation for a security is not readily available or the Adviser believes it does not otherwise accurately
reflect the market value of the security at the time the Fund calculates its NAV, the security will be
fair valued by the Adviser, in accordance with the Trust’s valuation policies and procedures approved
by the Board of Trustees of the Trust. The Fund may also use fair value pricing in a variety of circumstances,
including but not limited to, situations where the value of a security in the Fund’s portfolio has
been materially affected by events occurring after the close of the market on which the security is principally
traded (such as a corporate action or other news that may materially affect the price of a security)
or trading in a security has been suspended or halted. Fair value pricing involves subjective judgments
and it is possible that a fair value determination for a security is materially different than the value
that could be realized upon the sale of the security. To the extent the Fund invests in securities that
are primarily listed on foreign exchanges or other markets that trade on weekends or other days when
the Fund does not price its Shares, the value of the Fund’s portfolio securities may change on days
when the Fund shareholder will not be able to purchase or sell his or her Shares.
14
Buying
and Selling Exchange-Traded Shares
The Fund issues and redeems Shares at NAV only in Creation Units.
Only APs may acquire Shares directly from the Fund, and only APs may tender their Shares for redemption
directly to the Fund, at NAV. APs must be (i) a broker-dealer or other participant in the clearing process
through the Continuous Net Settlement System of the NSCC, a clearing agency that is registered with the
SEC; or (ii) a Depository Trust Company (“DTC”) participant (as discussed below). In addition,
each AP must execute a Participant Agreement that has been agreed to by the Distributor, and that has
been accepted by the Transfer Agent, with respect to purchases and redemptions of Creation Units. Once
created, Shares trade in the secondary market in quantities less than a Creation Unit.
An Authorized Participant
that is not a “qualified institutional buyer,” as such term is defined under Rule 144A of the
Securities Act, will not be able to receive, as part of a redemption, restricted securities eligible
for resale under Rule 144A.
Most investors buy and sell Shares in secondary market transactions through brokers.
Shares are listed for trading on the secondary market on the Exchange and can be bought and sold throughout
the trading day like other publicly traded securities.
When buying or selling Shares through a broker,
you will incur customary brokerage commissions and charges, and you may pay some or all of the spread
between the bid and the offer price in the secondary market on each leg of a round trip (purchase and
sale) transaction. In addition, because secondary market transactions occur at market prices, you may
pay more than NAV when you buy Shares, and receive less than NAV when you sell those Shares.
Book Entry
Shares are held in book-entry
form, which means that no stock certificates are issued. DTC or its nominee is the record owner of all
outstanding Shares.
Investors owning Shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all Shares. DTC’s participants include
securities brokers and dealers, banks, trust companies, clearing corporations and other institutions
that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares,
you are not entitled to receive physical delivery of stock certificates or to have Shares registered
in your name, and you are not considered a registered owner of Shares. Therefore, to exercise any right
as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures
are the same as those that apply to any other securities that you hold in book entry or “street
name” through your brokerage account.
Continuous Offering
The method by which Creation Units are created
and traded may raise certain issues under applicable securities laws. Because new Creation Units are
issued and sold by the Trust on an ongoing basis, a “distribution,” as such term is used in
the Securities Act of 1933, as amended (“Securities Act”), may occur at any point. Broker dealers
and other persons are cautioned that some activities on their part may, depending on the circumstances,
result in their being deemed participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act.
For
example, a broker dealer firm or its client may be deemed a statutory underwriter if it takes Creation
Units after placing an order with the Transfer Agent, 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
15
examples
mentioned above should not be considered a complete description of all the activities that could lead
to a categorization as an underwriter.
Broker dealers who are not “underwriters” but are participating
in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares
that are part of an “unsold allotment” within the meaning of Section 4(3)(C) of the Securities
Act, would be unable to take advantage of the prospectus delivery exemption provided by Section 4(3)
of the Securities Act. This is because the prospectus delivery exemption in Section 4(3) of the Securities
Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. As
a result, broker dealer firms should note that dealers who are not underwriters but are participating
in a distribution (as contrasted with ordinary secondary market transactions) and thus dealing with Shares
that are part of an overallotment within the meaning of Section 4(3)(A) of the Securities Act would be
unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities
Act. Firms that incur a prospectus delivery obligation with respect to Shares are reminded that, under
Rule 153 of the Securities Act, a prospectus delivery obligation under Section 5(b)(2) of the Securities
Act owed to an exchange member in connection with a sale on the Exchange is satisfied by the fact that
the 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.
In addition, certain affiliates
of the Fund and the Adviser may purchase and resell Fund shares pursuant to this Prospectus.
For More Information:
Existing
Shareholders or Prospective Investors
Pacific Global ETF Trust
c/o Foreside Fund Services, LLC
3 Canal Plaza, Suite 100
Portland,
ME 04101
Dealers
Foreside Fund Services, LLC: (866) 933-2398
Distribution and Service Plan
The
Board has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule 12b-1 under
the 1940 Act. In accordance with the Plan, the Fund is authorized to pay an amount up to 0.25% of its
average daily net assets each year for certain distribution-related activities and shareholder services.
No
Rule 12b-1 fees are currently paid by the Fund, and there are no plans to impose these fees. However,
in the event Rule 12b-1 fees are charged in the future, because the fees are paid out of the Fund’s
assets, over time these fees will increase the cost of your investment and may cost you more than certain
other types of sales charges.
Frequent Purchases and Redemptions of Fund Shares
The Board has evaluated the risks of frequent
purchases and redemptions of Fund shares (“market timing”) activities by the Fund’s shareholders.
The Board noted that Shares can only be purchased and redeemed directly from the Fund in Creation Units
by Authorized Participants (“APs”) and that the vast majority of trading in Shares occurs on
the secondary market. Because the secondary market trades do not involve the Fund directly, it is unlikely
those trades would cause many of the harmful effects of market
16
timing,
including dilution, disruption of portfolio management, increases in the Fund’s trading costs and
the realization of capital gains.
With respect to trades directly with the Fund, to the extent
effected in-kind, those trades do not cause any of the harmful effects (as previously noted) that may
result from frequent cash trades. To the extent that the Trust allows or requires trades to be effected
in whole or in part in cash, the Board noted that those trades could result in dilution to the Fund and
increased transaction costs, which could negatively impact the Fund’s ability to achieve its investment
objective. However, the Board noted that direct trading by APs is critical to ensuring that Shares trade
at or close to NAV. The Fund also employs fair valuation pricing to minimize potential dilution from
market timing. The Fund imposes transaction fees on in-kind purchases and redemptions of Shares 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 securities, reflecting the fact that the Fund’s
trading costs increase in those circumstances. Given this structure, the Board determined that it is
not necessary to adopt policies and procedures to detect and deter market timing of Shares.
Distributions
Dividends and Distributions
The
Fund intends to qualify each year as a regulated investment company under the Internal Revenue Code of
1986, as amended (the “Code”). As a regulated investment company, the Fund generally pays no
federal income tax on the income and gains it distributes to you. The Fund expects to declare and distribute
all of its net investment income, if any, to shareholders as dividends quarterly.
The Fund will distribute
net realized capital gains, if any, at least annually. The Fund may distribute such income dividends
and capital gains more frequently, if necessary, in order to reduce or eliminate federal excise or income
taxes on the Fund. The amount of any distribution will vary, and there is no guarantee the Fund will
pay either an income dividend or a capital gains distribution.
Annual Statements
Each year, you will receive
an annual statement (Form 1099) of your account activity to assist you in completing your federal, state
and local tax returns. Distributions declared in December to shareholders of record in such month, but
paid in January, are taxable as if they were paid in December. The Fund make every effort to search for
reclassified income to reduce the number of corrected forms mailed to you. However, when necessary, you
will receive a corrected Form 1099 to reflect reclassified information.
Avoid “Buying a Dividend”
At
the time you purchase your Shares, the price of Shares may reflect undistributed income, undistributed
capital gains, or net unrealized appreciation in value of portfolio securities held by the Fund. For
taxable investors, a subsequent distribution to you of such amounts, although constituting a return of
your investment, would be taxable. Buying Shares in the Fund just before it declares an income dividend
or capital gains distribution is sometimes known as “buying a dividend.”
Dividend Reinvestment Service
Brokers
may make available the Depository Trust Company book-entry dividend reinvestment service to their customers
who own Fund Shares. If this service is available and used, dividend distributions of both income and
capital gains will automatically be reinvested in additional whole Shares of the Fund purchased on the
secondary market. Without this service, investors would receive their distributions in cash. 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 Fund shareholders to adhere to specific
procedures and timetables. If this service is available and used,
17
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
Tax
Considerations
The Fund expects, based on its investment objective and strategies, that its distributions,
if any, will be taxable as ordinary income, capital gains, or some combination of both. This is true
whether you reinvest your distributions in additional Shares or receive them in cash. For federal income
tax purposes, Fund distributions of short-term capital gains are taxable to you as ordinary income. Fund
distributions of long-term capital gains are taxable to you as long-term capital gains no matter how
long you have owned your Shares. A portion of income dividends reported by the Fund may be qualified
dividend income eligible for taxation by individual shareholders at long-term capital gain rates provided
certain holding period requirements are met.
As with any investment, you should consider how your Fund investment
will be taxed. The tax information in this Prospectus is provided as general information. You should
consult your own tax professional about the tax consequences of an investment in the Fund, including
the possible application of foreign, state and local taxes. Unless your investment in the Fund is through
a tax-exempt entity or tax-deferred retirement account, such as a 401(k) plan, you need to be aware of
the possible tax consequences when: (i) the Fund makes distributions, (ii) you sell Shares in the secondary
market or (iii) you create or redeem Creation Units.
Taxes on Distributions
The Fund intends to distribute,
at least annually, substantially all of its net investment income and net capital gains. For federal
income tax purposes, distributions of investment income are generally taxable as ordinary income or qualified
dividend income. Taxes on distributions of capital gains (if any) are determined by how long the Fund
owned the investments that generated them, rather than how long a shareholder has owned his or her Shares.
Sales of assets held by the Fund for more than one year generally result in long-term capital gains and
losses, and sales of assets held by the Fund for one year or less generally result in short-term capital
gains and losses. Distributions of the Fund’s net capital gain (the excess of net long-term capital
gains over net short-term capital losses) that are reported by the Fund as capital gain dividends (“Capital
Gain Dividends”) will be taxable as long-term capital gains, which for non-corporate shareholders
are subject to tax at reduced rates of up to 20% (lower rates apply to individuals in lower tax brackets).
Distributions of short-term capital gain will generally be taxable as ordinary income. Dividends and
distributions are generally taxable to you whether you receive them in cash or reinvest them in additional
Shares.
Distributions
reported by the Fund as “qualified dividend income” are generally taxed to noncorporate shareholders
at rates applicable to long-term capital gains, provided holding period and other requirements are met.
“Qualified dividend income” generally is income derived from dividends paid by U.S. corporations
or certain foreign corporations that are either incorporated in a U.S. possession or eligible for tax
benefits under certain U.S. income tax treaties. In addition, dividends that the Fund received in respect
of stock of certain foreign corporations may be qualified dividend income if that stock is readily tradable
on an established U.S. securities market.
U.S. individuals with income exceeding specified thresholds are
subject to a 3.8% Medicare contribution tax on all or a portion of their “net investment income,”
which includes interest, dividends, and certain capital gains (generally including capital gains distributions
and capital gains realized on the sale of Shares). This 3.8% tax also applies to all or a portion of
the undistributed net investment income of certain shareholders, such as estates and trusts, whose gross
income as adjusted or modified for tax purposes exceeds certain threshold amounts.
18
In
general, your distributions are subject to federal income tax for the year in which they are paid. Certain
distributions paid in January, however, may be treated as paid on December 31 of the prior year. Distributions
are generally taxable even if they are paid from income or gains earned by the Fund before your investment
(and thus were included in the Shares’ NAV when you purchased your Shares).
You may wish to avoid investing
in the Fund shortly before a dividend or other distribution, because such a distribution will generally
be taxable even though it may economically represent a return of a portion of your investment. Distributions
in excess of the Fund’s current and accumulated earnings and profits are treated as a tax-free return
of your investment to the extent of your basis in the Shares, and generally as capital gain thereafter.
A return of capital, which for tax purposes is treated as a return of your investment, reduces your basis
in Shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition of Shares.
A distribution will reduce the Fund’s NAV per Share and may be taxable to you as ordinary income
or capital gain even though, from an economic standpoint, the distribution may constitute a return of
capital.
Dividends,
interest and gains from non-U.S. investments of the Fund may give rise to withholding and other taxes
imposed by foreign countries. Tax conventions between certain countries and the United States may, in
some cases, reduce or eliminate such taxes.
If you are neither a resident nor a citizen of the United States
or if you are a foreign entity, distributions (other than Capital Gain Dividends) paid to you by the
Fund will generally be subject to a U.S. withholding tax at the rate of 30% unless a lower treaty rate
applies. The Fund may, under certain circumstances, report all or a portion of a dividend as an “interest-related
dividend” or a “short-term capital gain dividend,” which would generally be exempt from
this 30% U.S. withholding tax, provided certain other requirements are met.
The Fund (or a financial
intermediary, such as a broker, through which a shareholder owns Shares) generally is required to withhold
and remit to the U.S. Treasury a percentage of the taxable distributions and sale or redemption proceeds
paid to any shareholder who fails to properly furnish a correct taxpayer identification number, who has
underreported dividend or interest income, or who fails to certify that he, she or it is not subject
to such withholding.
Shortly after the close of each calendar year, you will be informed of the character
of any distributions received from the Fund.
Taxes When Shares are Sold on the Exchange
Any capital gain or loss
realized upon a sale of Shares generally is treated as a long-term capital gain or loss if Shares have
been held for more than one year and as a short-term capital gain or loss if Shares have been held for
one year or less. However, any capital loss on a sale of Shares held for six months or less is treated
as long-term capital loss to the extent of Capital Gain Dividends paid with respect to such Shares. The
ability to deduct capital losses may be limited.
Taxes on Purchases and Redemptions of Creation Units
An Authorized Participant
having the U.S. dollar as its functional currency for U.S. federal income tax purposes who exchanges
securities for Creation Units generally recognizes a gain or a loss. The gain or loss will be equal to
the difference between the value of the Creation Units at the time of the exchange and the exchanging
Authorized Participant’s aggregate basis in the securities delivered plus the amount of any cash
paid for the Creation Units. An Authorized Participant who exchanges Creation Units for securities will
generally recognize a gain or loss equal to the difference between the exchanging Authorized Participant’s
basis in the Creation Units and the aggregate U.S. dollar market value of the securities received, plus
any cash received for such Creation Units. The Internal Revenue Service may assert, however, that a loss
that is realized upon an exchange of securities for Creation Units may not be currently deducted under
the rules governing “wash sales” (for an Authorized Participant who does not
19
mark-to-market
their holdings), or on the basis that there has been no significant change in economic position. Persons
exchanging securities should consult their own tax advisor with respect to whether wash sale rules apply
and when a loss might be deductible.
Any capital gain or loss realized upon redemption of Creation
Units is generally treated as long-term capital gain or loss if Shares have been held for more than one
year and as a short-term capital gain or loss if Shares have been held for one year or less.
The information in this section
“Tax Information” is not intended or written to be used as tax advice. Because everyone’s
tax situation is unique, you should consult your tax professional about federal, state, local or foreign
tax consequences before making an investment in the Fund.
Stock Exchange Share Prices
Trading
prices of Shares on the Exchange may differ from the Fund’s daily NAV. Market forces of supply and
demand, economic conditions and other factors may affect the trading prices of Shares. To provide additional
information regarding the indicative value of Shares, the Exchange or a market data vendor disseminates
information every 15 seconds through the facilities of the Consolidated Tape Association, or other widely
disseminated means, an updated “intraday indicative value” (“IIV”) for Shares as
calculated by an information provider or market data vendor. The Fund is not involved in or responsible
for any aspect of the calculation or dissemination of the IIVs and makes no representation or warranty
as to the accuracy of the IIVs. If the calculation of the IIV is based on the basket of Deposit Securities
and/or a designated amount of U.S. cash, such IIV may not represent the best possible valuation of the
Fund’s portfolio because the basket of Deposit Securities does not necessarily reflect the precise
composition of the current Fund portfolio at a particular point in time and does not include a reduction
for the fees, operating expenses, or transaction costs incurred by the Fund. The IIV should not be viewed
as a “real-time” update of the Fund’s NAV because the IIV may not be calculated in the
same manner as the NAV, which is computed only once a day, typically at the end of the business day.
The IIV is generally determined by using both current market quotations and/or price quotations obtained
from broker-dealers that may trade in the Deposit Securities.
Financial Highlights
Because
the Fund has not commenced operations as of the date of this Prospectus, no financial highlights information
is available.
Premium/Discount Information
Information regarding how often Shares of the Fund traded on the Exchange at a price
above (i.e., at a premium) or below (i.e., at a discount) the NAV of the Fund during the past four calendar
quarters, or since inception, as applicable, can be found at the Fund’s website at http://www.pacificglobaletfs.com.
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Sub-Adviser
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Pacific Global Advisors
LLC
840
Newport Center Drive, 7
th
Floor
Newport
Beach, CA 92660
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Cadence Capital Management LLC
265 Franklin Street, 4th
Floor
Boston,
MA 02110
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Custodian
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Transfer
Agent
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U.S. Bank, N.A.
1555 N. Rivercenter Drive.,
MK-WI-S302
Milwaukee,
WI 53212
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U.S. Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee,
WI 53202
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Distributor
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Independent
Registered Public Accounting Firm
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Foreside Fund Services,
LLC
Three
Canal Plaza, Suite 100
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Deloitte & Touche, LLP
695 Town Center Drive, Suite
1000
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20
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Portland,
ME 04101
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Costa Mesa, CA 92636
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Legal Counsel
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Thompson Hine LLP
1919 M Street, N.W., Suite 700
Washington, D.C. 20036
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Disclaimers
Shares of the Trust are not sponsored, endorsed,
or promoted by the Exchange. The Exchange makes no representation or warranty, express or implied, to
the owners of the Shares of the Fund. The Exchange is not responsible for, nor has it participated in,
the determination of the timing of, prices of, or quantities of the Shares of the Fund to be issued,
or in the determination or calculation of the equation by which the Shares are redeemable. The Exchange
has no obligation or liability to owners of the Shares of the Fund in connection with the administration,
marketing, or trading of the Shares of the Fund. Without limiting any of the foregoing, in no event shall
the Exchange have any liability for any lost profits or indirect, punitive, special, or consequential
damages even if notified of the possibility thereof.
Additional Information
This
Prospectus does not contain all the information included in the Registration Statement filed with the
SEC with respect to the Fund’s Shares. Information about the Fund can be reviewed and copied at
the SEC’s Public Reference Room and information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1.202.551.8090. The Fund’s Registration Statement, including this
Prospectus, the SAI and the exhibits may be examined at the offices of the SEC (100 F Street, NE, Washington,
DC 20549) or on the EDGAR database at the SEC’s website (http://www.sec.gov), and copies may be
obtained, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov,
or by writing the SEC’s Public Reference Section, Washington, DC 20549-1520. These documents and
other information concerning the Trust also may be inspected at the offices of Pacific Global Advisors
LLC, 840 Newport Center Drive, 7
th
Floor, Newport Beach, California, 92660. These documents and other information concerning the Trust also
may be inspected at the offices of U.S. Bancorp Fund Services, LLC, 615 East Michigan Street, Milwaukee,
WI 53202.
The
SAI for the Fund, which has been filed with the SEC, provides more information about the Fund. The SAI
is incorporated herein by reference and is legally part of this Prospectus. Additional information about
the Fund’s investments will be available in the Fund’s annual and semi-annual reports to shareholders.
In the Fund’s annual report, when available, you will find a discussion of the market conditions
and investment strategies that significantly affected the Fund’s performance during its last fiscal
year. The SAI and the Fund’s annual and semi-annual reports may be obtained without charge by writing
to the Fund at c/o Foreside Fund Services, LLC, at Three Canal Plaza, Suite 100, Portland, ME 04101 or
by calling (866) 933-2398.
Investment Company Act file no. 811-23376.
21
PACIFIC
GLOBAL ETF TRUST
STATEMENT OF ADDITIONAL INFORMATION
Dated February 1, 2019
This Statement of Additional Information (“SAI”) is not a prospectus, and
should be read in conjunction with the Prospectus of Pacific Global ETF Trust (“Trust”) dated
February 1, 2019, as amended (“Prospectus”) for the following series of the Trust, as it may
be supplemented from time to time:
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Fund
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Ticker
Symbol
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Listing
Exchange
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Pacific Global™ US
Equity Income ETF
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USDY
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NYSE Arca, Inc.
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Capitalized
terms used herein that are not defined have the same meaning as in the Prospectus, unless otherwise noted.
A copy of the Prospectus, SAI and the Trust’s Annual Report may be obtained without charge by writing
to the Trust or the Trust’s Distributor, Foreside Fund Services, LLC at Three Canal Plaza, Suite
100, Portland, ME 04101, or by calling (866) 933-2398 (9 a.m. to 6 p.m. Eastern Time).
TABLE
OF CONTENTS
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GENERAL DESCRIPTION OF THE TRUST
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3
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EXCHANGE LISTING AND
TRADING
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3
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INVESTMENT POLICIES AND RISKS
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4
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INVESTMENT RESTRICTIONS AND POLICIES
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20
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BOARD OF TRUSTEES
OF THE TRUST
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21
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MANAGEMENT AND OTHER SERVICE PROVIDERS
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28
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PORTFOLIO HOLDINGS DISCLOSURE
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32
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QUARTERLY PORTFOLIO SCHEDULE
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32
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CODE OF ETHICS
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32
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PROXY VOTING POLICIES AND PROCEDURES
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33
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BROKERAGE TRANSACTIONS
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33
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BOOK ENTRY ONLY SYSTEM
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35
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CREATION AND REDEMPTION
OF CREATION UNITS
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36
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DETERMINATION OF NET ASSET VALUE
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43
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DIVIDENDS AND DISTRIBUTIONS
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44
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CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
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44
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TAXES
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44
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CAPITAL STOCK
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53
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SHAREHOLDER REPORTS
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53
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FINANCIAL STATEMENTS
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54
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DISCLAIMERS
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58
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GENERAL DESCRIPTION OF THE TRUST
Pacific Global ETF Trust
(the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “1940
Act”) as an open-end series management investment company. The Trust was organized as a Delaware
statutory trust on June 26, 2018. The Trust currently consists of one series portfolio, which is Pacific
Global US Equity Income ETF (the “Fund”). The Fund is “diversified” for purposes
of the 1940 Act and is actively managed. The shares of the Fund are referred to herein as “Shares.”
Pacific Global Advisors LLC (the “Adviser”) acts as investment adviser to the Fund; Cadence
Capital Management LLC (the “Sub-Adviser”) acts as the sub-adviser.
The Fund offers and issues
Shares at their net asset value (“NAV”) only in aggregations of a specified number of Shares
(each, a “Creation Unit”). The Fund generally offers and issues Shares in exchange for a basket
of securities (“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. Shares are or will be listed on NYSE Arca, Inc. (the “Exchange”) and
trade on the Exchange at market prices that may differ from the Shares’ NAV. Shares are also redeemable
only in Creation Unit aggregations, primarily for a basket of Deposit Securities together with a Cash
Component. A Creation Unit of the Fund generally consists of 50,000 Shares, though this may change from
time to time. Creation Units are not expected to consist of fewer than 50,000 Shares. As a practical
matter, only institutions or large investors purchase or redeem Creation Units. Except when aggregated
in Creation Units, Shares are not redeemable securities.
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 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 (“SEC”) applicable to management investment companies
offering redeemable securities. As in the case of other publicly traded securities, brokers’ commissions
on transactions in the secondary market will be based on negotiated commission rates at customary levels.
EXCHANGE LISTING AND TRADING
Shares are listed for trading
and trade throughout the day on the Exchange.
There can be no assurance that the Fund will continue to meet
the requirements of the Exchange necessary to maintain the listing of Shares. An Exchange will consider
the suspension of trading in, and will initiate delisting proceedings of, the Shares of the Fund under
any of the following circumstances: (i) if any of the requirements set forth in the Exchange rules are
not continuously maintained; (ii) if the Exchange files separate proposals under Section 19(b) of the
1940 Act and any of the statements regarding: (a) the index composition; (b) the description of the Fund;
(c) limitations on the Fund’s portfolio holdings or reference assets; (d) dissemination and availability
of the index or intraday indicative values; or (e) the applicability of the Exchange listing rules specified
in such proposals are not continuously maintained; (iii) if following the initial 12-month period beginning
at the commencement of trading of the Fund, there are fewer than 50 beneficial owners of the Shares of
the Fund; (iv) if the value of the Fund’s underlying index is no longer calculated or available
or an interruption to the dissemination persists past the trading day in which it occurred or the underlying
index is replaced with a new index, unless the new underlying index meets certain Exchange requirements;
(v) if the intraday indicative value is no longer disseminated at least every 15 seconds during the Exchange’s
regular market session and the interruption to the dissemination persists past the trading day in which
it occurred; or (vi) such other event shall occur or condition shall exist that, in the opinion of the
Exchange, makes further dealings on the Exchange inadvisable. The Exchange will remove the Shares of
the Fund from listing and trading upon termination of the Fund.
A discussion of exchange listing and trading
matters associated with an investment in the Fund is contained in the Prospectus under the headings “Summary
Information—Principal Risks of Investing in
3
the
Fund” with respect to the applicable Fund, “Additional Information About the Funds’ Investment
Strategies and Risks—Risks of Investing in the Fund,” “Shareholder Information—Determination
of NAV” and “Shareholder Information—Buying and Selling Exchange-Traded Shares.”
The discussion below supplements, and should be read in conjunction with, such sections of the Prospectus.
The
Shares of the Fund are listed on the Exchange and will trade in the secondary market at prices that may
differ to some degree from its NAV. The Exchange may, but is not required to remove the Shares of the
Fund from listing if: (1) following the initial twelve (12) 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, or (2) such other event shall occur or condition exists that, in the opinion of the Exchange,
makes further dealings on the Exchange inadvisable. In addition, the Exchange will remove the Shares
from listing and trading upon termination of the Trust. There can be no assurance that the requirements
of the Exchange necessary to maintain the listing of Shares of the Fund will continue to be met.
As
in the case of other publicly-traded securities, when you buy or sell shares through a financial intermediary
you may incur a brokerage commission on that transaction determined by that financial intermediary.
In
order to provide investors with a basis to gauge whether the market price of the Shares on the Exchange
is approximately consistent with the current NAV on a per Share basis, every 15 seconds throughout the
Exchange’s regular trading hours, an estimated intra-day NAV is calculated and disseminated in accordance
with the relevant listing standards of the Exchange. The Fund is not involved in or responsible for the
calculation or dissemination of the intra-day NAV and makes no warranty as to its accuracy.
An intra-day NAV is based
on a securities component and a cash component (or an all cash amount) that comprises that day’s
Creation Deposit (as defined below), as disseminated prior to that Business Day’s commencement of
trading.
INVESTMENT POLICIES AND RISKS
A discussion of the risks
associated with an investment in the Fund is contained in the Prospectus under the headings “Summary
Information—Principal Investment Strategies of the Fund” with respect to the applicable Fund,
“Summary Information—Principal Risks of Investing in the Fund” with respect to the applicable
Fund and “Additional Information About the Funds’ Investment Strategies and Risks.” The
discussion below supplements, and should be read in conjunction with, such sections of the Prospectus.
General
Considerations and Risks
An investment in the Fund should be made with an understanding that the value of
the Fund’s 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.
In
the event that the securities in the Fund’s index are not listed on a national securities exchange,
the principal trading market for some may be in the over-the-counter market. The existence of a liquid
trading market for certain securities may depend on whether dealers will make a market in such securities.
There can be no assurance that a market will be made or maintained or that any such market will be or
remain liquid. The price at which securities may be sold and the value of the Fund’s Shares will
be adversely affected if trading markets for the Fund’s portfolio securities are limited or absent
or if bid/ask spreads are wide.
The Fund has filed with the National Futures Association (“NFA”)
a notice claiming an exclusion from the definition of the term “commodity pool operator” (“CPO”)
under the Commodity Exchange Act, as amended (“CEA”), and the rules of the Commodity Futures
Trading Commission (“CFTC”) promulgated thereunder, with respect to the Fund’s operations.
Therefore, neither the Fund nor the Adviser is subject
4
to
registration or regulation as a commodity pool or CPO under the CEA. If the Fund becomes subject to these
requirements, as well as related NFA rules, the Fund may incur additional compliance and other expenses.
Active
Management Risk
The Fund is actively managed, which means that investment decisions are made based
on investment views. There is no guarantee that the investment views will produce the desired results
or expected returns, which may cause the Fund to fail to meet its investment objective or to underperform
its benchmark index or funds with similar investment objectives and strategies. Furthermore, active trading
that can accompany active management may result in high portfolio turnover, which may have a negative
impact on performance. Active trading may result in higher brokerage costs or mark-up charges, which
are ultimately passed on to shareholders of the Fund. Active trading may also result in adverse tax consequences.
Authorized
Participant Concentration
Only an Authorized Participant (as defined in the Creations and Redemptions section
of the Fund’s prospectus (the “Prospectus”)) may engage in creation or redemption transactions
directly with the Fund. The Fund has a limited number of institutions that act as Authorized Participants.
To the extent that these institutions exit the business or are unable to proceed with creation and/or
redemption orders with respect to the Fund and no other Authorized Participant is able to step forward
to create or redeem Creation Units, Fund shares may trade at a discount to NAV and possibly face trading
halts and/or delisting.
Borrowing
The Fund may borrow money to the extent permitted under the 1940 Act, as interpreted
or modified by regulation from time to time. This means that, in general, the Fund may borrow money from
banks for any purpose in an amount up to ⅓ of the Fund’s total assets. The Fund also may borrow
money for temporary administrative purposes in an amount not to exceed 5% of the Fund’s total assets.
Specifically,
provisions of the 1940 Act require the Fund to maintain continuous asset coverage (that is, total assets
including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with
an exception for borrowings not in excess of 5% of the Fund’s total assets made for temporary purposes.
Any borrowings for temporary purposes in excess of 5% of the Fund’s total assets must maintain continuous
asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or other
reasons, the Fund may be required to sell some of its portfolio holdings within three (3) days (not including
Sundays and holidays) to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint to sell securities at that time.
The Fund also may enter into certain transactions
that can be viewed as constituting a form of borrowing or financing transaction by such Fund. To the
extent the Fund “covers” its obligations or liabilities by the segregation or “earmarking”
of assets, in accordance with procedures adopted by Board reasonably designed to be consistent with the
regulations, rules and SEC staff interpretations under the 1940 Act, such borrowing will not be (i) considered
a “senior security” by the Fund or (ii) subject to the 300% asset coverage requirement otherwise
applicable to borrowings by the Fund. Borrowing will tend to exaggerate the effect on the Fund’s
NAV of any increase or decrease in the market value of the Fund’s portfolio. Money borrowed will
be subject to interest costs that may or may not be recovered by appreciation of the securities purchased.
In addition, the Fund may be required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate.
5
Costs
of Buying or Selling Shares Risk
Investors buying or selling 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 the Fund’s Shares have more trading volume and market liquidity and higher
if the Fund’s Shares have little trading volume and market liquidity. Further, increased market
volatility may cause increased bid/ask spreads. Due to the costs of buying or selling 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.
Cybersecurity
and Disaster Recovery Risks
In connection with the increased use of technologies such as the Internet and the
dependence on computer systems to perform necessary business functions, the Fund is susceptible to operational,
information security, and related risks due to the possibility of cyber-attacks or other incidents. Cyber
incidents may result from deliberate attacks or unintentional events. Cyber-attacks include, but are
not limited to, infection by computer viruses or other malicious software code, gaining unauthorized
access to systems, networks, or devices that are used to service the Fund’s operations through hacking
or other means for the purpose of misappropriating assets or sensitive information, corrupting data,
or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require
gaining unauthorized access, such as causing denial-of-service attacks (which can make a website unavailable)
on the Fund’s website. In addition, authorized persons could inadvertently or intentionally release
confidential or proprietary information stored on the Fund’s systems.
Cybersecurity failures or
breaches by the Fund’s third party service providers (including, but not limited to, the adviser,
the sub-adviser, distributor, custodian, transfer agent, and financial intermediaries) may cause disruptions
and impact the service providers’ and the Fund’s business operations, potentially resulting
in financial losses, the inability of Fund shareholders to transact business and the mutual funds to
process transactions, inability to calculate the Fund’s net asset value, violations of applicable
privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation
costs, and/or additional compliance costs. The Fund and its shareholders could be negatively impacted
as a result of successful cyber-attacks against, or security breakdowns of, the Fund or its third-party
service providers.
The Fund may incur substantial costs to prevent or address cyber incidents in the
future. In addition, there is a possibility that certain risks have not been adequately identified or
prepared for. Furthermore, the Fund cannot directly control any cybersecurity plans and systems put in
place by third party service providers. Cybersecurity risks are also present for issuers of securities
in which the Fund invests, which could result in material adverse consequences for such issuers, and
may cause the Fund’s investment in such securities to lose value.
Derivatives
Derivatives are financial
instruments whose values are based on the value of one or more indicators, such as a security, asset,
currency, interest rate, or index. The Fund’s use of derivatives involves risks different from,
and possibly greater than, the risks associated with investing directly in securities and other more
traditional investments. Moreover, although the value of a derivative is based on an underlying indicator,
a derivative does not carry the same rights as would be the case if the Fund invested directly in the
underlying securities.
6
Dividend-Paying
Stock Risk
While
the Fund may hold securities of companies that have historically paid a high dividend yield, those companies
may reduce or discontinue their dividends, reducing the yield of the Fund. Low priced securities in the
Fund may be more susceptible to these risks. Past dividend payments are not a guarantee of future dividend
payments. Also, the market return of high dividend yield securities, in certain market conditions, may
perform worse than other investment strategies or the overall stock market. The Fund’s emphasis
on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and
underperform the market. Also, a company may reduce or eliminate its dividend.
Equity Securities
An investment in the Fund
should also be made with an understanding of the risks inherent in an investment in equity securities,
including the risk that the financial condition of issuers may become impaired or that the general condition
of the securities market may deteriorate (either of which may cause a decrease in the value of the portfolio
securities and thus in the value of Shares). Common stocks are susceptible to general stock market fluctuations
and to volatile increases and decreases in value as market confidence in and perceptions of their issuers
change. These investor perceptions are based on various and unpredictable factors, including expectations
regarding government, economic, monetary and fiscal policies, inflation and interest rates, economic
expansion or contraction, and global or regional political, economic and banking crises.
Holders of common stocks
incur more risk than holders of preferred stocks and debt obligations because common stockholders, as
owners of the issuer, have generally inferior rights to receive payments from the issuer in comparison
with the rights of creditors of, or holders of debt obligations or preferred stocks issued by, the issuer.
Further, unlike debt securities, which typically have a stated principal amount payable at maturity (whose
value, however, will be subject to market fluctuations prior thereto), or preferred stocks, which typically
have a liquidation preference and which may have stated optional or mandatory redemption provisions,
common stocks have neither a fixed principal amount nor a maturity. Common stock values are subject to
market fluctuations as long as the common stock remains outstanding.
Fluctuation of Net Asset Value
The
net asset value (“NAV”) of the Fund’s Shares will generally fluctuate with changes in
the market value of the Fund’s holdings. The market prices of the Shares will generally fluctuate
in accordance with changes in NAV as well as the relative supply and demand for Shares on the Exchange.
The Fund cannot predict whether the Shares will trade below, at or above the NAV of the Shares of the
Fund. Price differences may be due, in large part, to the fact that supply and demand forces at work
in the secondary trading market for the Shares will be closely related to, but not identify to, the same
forces influencing the prices of the stocks of the Fund’s Index trading individually or in the aggregate
at any point in time.
Foreign Securities
An investment in the Fund involves risks similar to those of
investing in portfolios of equity securities traded on non-U.S. exchanges. These risks include market
fluctuations caused by such factors as economic and political developments and changes in interest rates
and perceived trends in stock prices. Investing in securities issued by issuers domiciled in countries
other than the domicile of the investor and denominated in currencies other than an investor’s local
currency entails certain considerations and risks not typically encountered by the investor in making
investments in its home country and in that country’s currency. These considerations include favorable
or unfavorable changes in interest rates, currency exchange rates, exchange control regulations and the
costs that may be incurred in connection with conversions between various currencies. Investing in any
of the Fund also involves certain risks and considerations not typically associated with investing in
the Fund whose portfolio contains exclusively securities of U.S. issuers. These risks include generally
less liquid and less efficient securities markets; generally greater price volatility; less publicly
available information about issuers; the imposition of
7
withholding
or other taxes; the imposition of restrictions on the expatriation of funds or other assets of the Fund;
higher transaction and custody costs; delays and risks attendant in settlement procedures; difficulties
in enforcing contractual obligations; lower liquidity and significantly smaller market capitalization;
different accounting and disclosure standards; lower levels of regulation of the securities markets;
more substantial government interference with the economy; higher rates of inflation; greater social,
economic, and political uncertainty; the risk of nationalization or expropriation of assets; and the
risk of war.
ADRs, GDRs and EDRs
The Fund may purchase equity securities of non-U.S. issuers.
To the extent the Fund invests in equity securities of non-U.S. issuers, certain of the Fund’s investments
in such securities may be in the form of American Depositary Receipts (“ADRs”), Global Depositary
Receipts (“GDRs”) and European Depositary Receipts (“EDRs”) (collectively, “Depositary
Receipts”). Depositary Receipts are receipts, typically issued by a bank or trust issuer, which
evidence ownership of underlying securities issued by a non-U.S. issuer. For ADRs, the depository is
typically a U.S. financial institution and the underlying securities are issued by a non-U.S. issuer.
For other forms of Depositary Receipts, the depository may be a non-U.S. or a U.S. entity, and the underlying
securities may be issued by a non-U.S. or a U.S. issuer. Depositary Receipts are not necessarily denominated
in the same currency as their underlying securities. Generally, ADRs, issued in registered form, are
designed for use in the U.S. securities markets, and EDRs, issued in bearer form, are designed for use
in European securities markets. GDRs are tradable both in the United States and in Europe and are designed
for use throughout the world.
The Fund will not invest in any unlisted Depositary Receipt or any Depositary Receipt
that the Sub-Adviser deems illiquid at the time of purchase or for which pricing information is not readily
available. In general, Depositary Receipts must be sponsored, but the Fund may invest in unsponsored
Depositary Receipts under certain limited circumstances. The issuers of unsponsored Depositary Receipts
are not obligated to disclose material information in the United States. Therefore, there may be less
information available regarding such issuers and there may be no correlation between available information
and the market value of the Depositary Receipts.
Emerging Markets
Investments in emerging
market countries may be subject to greater risks than investments in developed countries. These risks
include: (i) less social, political, and economic stability; (ii) greater illiquidity and price volatility
due to smaller or limited local capital markets for such securities, or low or non-existent trading volumes;
(iii) foreign exchanges and broker-dealers may be subject to less scrutiny and regulation by local authorities;
(iv) local governments may decide to seize or confiscate securities held by foreign investors and/or
local governments may decide to suspend or limit an issuer’s ability to make dividend or interest
payments; (v) local governments may limit or entirely restrict repatriation of invested capital, profits,
and dividends; (vi) capital gains may be subject to local taxation, including on a retroactive basis;
(vii) issuers facing restrictions on dollar or euro payments imposed by local governments may attempt
to make dividend or interest payments to foreign investors in the local currency; (viii) investors may
experience difficulty in enforcing legal claims related to the securities and/or local judges may favor
the interests of the issuer over those of foreign investors; (ix) bankruptcy judgments may only be permitted
to be paid in the local currency; (x) limited public information regarding the issuer may result in greater
difficulty in determining market valuations of the securities, and (xi) lax financial reporting on a
regular basis, substandard disclosure and differences in accounting standards may make it difficult to
ascertain the financial health of an issuer.
Emerging market securities markets are typically marked by a
high concentration of market capitalization and trading volume in a small number of issuers representing
a limited number of industries, as well as a high concentration of ownership of such securities by a
limited number of investors. In addition, brokerage and other costs associated with transactions in emerging
market securities markets can be higher, sometimes significantly, than similar costs incurred in securities
markets in developed countries. Although some emerging markets have become more established and tend
to issue securities of higher credit
8
quality,
the markets for securities in other emerging market countries are in the earliest stages of their development,
and these countries issue securities across the credit spectrum. Even the markets for relatively widely
traded securities in emerging market countries may not be able to absorb, without price disruptions,
a significant increase in trading volume or trades of a size customarily undertaken by institutional
investors in the securities markets of developed countries. The limited size of many of these securities
markets can cause prices to be erratic for reasons apart from factors that affect the soundness and competitiveness
of the securities issuers. For example, prices may be unduly influenced by traders who control large
positions in these markets. Additionally, market making and arbitrage activities are generally less extensive
in such markets, which may contribute to increased volatility and reduced liquidity of such markets.
The limited liquidity of emerging market securities may also affect the Fund’s ability to accurately
value its portfolio securities or to acquire or dispose of securities at the price and time it wishes
to do so or in order to meet redemption requests.
Many emerging market countries suffer from uncertainty and corruption
in their legal frameworks. Legislation may be difficult to interpret and laws may be too new to provide
any precedential value. Laws regarding foreign investment and private property may be weak or non-existent.
Sudden changes in governments may result in policies that are less favorable to investors such as policies
designed to expropriate or nationalize “sovereign” assets. Certain emerging market countries
in the past have expropriated large amounts of private property, in many cases with little or no compensation,
and there can be no assurance that such expropriation will not occur in the future.
Investment in the securities
markets of certain emerging market countries is restricted or controlled to varying degrees. These restrictions
may limit the Fund’s investment in certain emerging market countries and may increase the expenses
of the Fund. Certain emerging market countries require governmental approval prior to investments by
foreign persons or limit investment by foreign persons to only a specified percentage of an issuer’s
outstanding securities or a specific class of securities which may have less advantageous terms (including
price) than securities of the company available for purchase by nationals.
Many emerging market countries
lack the social, political, and economic stability characteristic of the United States. Political and
social instability among emerging market countries can be common and may be caused by an uneven distribution
of wealth, social unrest, labor strikes, civil wars, and religious oppression. Economic instability in
emerging market countries may take the form of: (i) high interest rates; (ii) high levels of inflation,
including hyperinflation; (iii) high levels of unemployment or underemployment; (iv) changes in government
economic and tax policies, including confiscatory taxation; and (v) imposition of trade barriers.
The
Fund’s income and, in some cases, capital gains from foreign securities will be subject to applicable
taxation in certain of the emerging market countries in which it invests, and treaties between the United
States and such countries may not be available in some cases to reduce the otherwise applicable tax rates.
Emerging
markets also have different clearance and settlement procedures, and in certain of these emerging markets
there have been times when settlements have been unable to keep pace with the volume of securities transactions,
making it difficult to conduct such transactions.
In the past, certain governments in emerging market countries
have become overly reliant on the international capital markets and other forms of foreign credit to
finance large public spending programs, which in the past have caused huge budget deficits. Often, interest
payments have become too overwhelming for a government to meet, representing a large percentage of total
GDP. These foreign obligations have become the subject of political debate and served as fuel for political
parties of the opposition, which pressure the government not to make payments to foreign creditors, but
instead to use these funds for, among other things, social programs. Either due to an inability to pay
or submission to political pressure, foreign governments have been forced to seek a restructuring of
their loan and/or bond obligations, have declared a temporary suspension of interest payments or have
defaulted. These events have adversely affected the values of securities issued by foreign governments
and corporations
9
domiciled
in those countries and have negatively affected not only their cost of borrowing, but their ability to
borrow in the future as well.
Futures and Options
Futures contracts and options may from time to time be used by
the Fund to simulate investment in certain securities, to facilitate trading or to reduce transaction
costs. The Fund may enter into futures contracts and options that are traded on a U.S. or non-U.S. exchange.
The Fund will not use futures or options for speculative purposes.
Risk of Futures and
Options
There
are several risks accompanying the utilization of futures contracts and options on futures contracts.
A position in futures contracts and options on futures contracts may be closed only on the exchange on
which the contract was made (or a linked exchange). While the Fund plans to utilize futures contracts
only if an active market exists for such contracts, there is no guarantee that a liquid market will exist
for the contract at a specified time. In the event of adverse price movements, the Fund would continue
to be required to make daily cash payments to maintain its required margin. In such situations, if the
Fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be required to deliver the
instruments underlying the futures contracts it has sold.
The risk of loss in trading futures contracts
or uncovered call options in some strategies (e.g., selling uncovered stock index futures contracts)
is potentially unlimited. The Fund does not plan to use futures and options contracts in this way. The
risk of a futures position may still be large as traditionally measured due to the low margin deposits
required. In many cases, a relatively small price movement in a futures contract may result in immediate
and substantial loss or gain to the investor relative to the size of a required margin deposit. The Fund,
however, intend to utilize futures and options contracts in a manner designed to limit their risk exposure
to levels comparable to a direct investment in the types of stocks in which they invest.
There is a risk of loss
by the Fund of the initial and variation margin deposits in the event of bankruptcy of the FCM with which
the Fund has an open position in a futures contract. The assets of the Fund may not be fully protected
in the event of the bankruptcy of the FCM or central counterparty because the Fund might be limited to
recovering only a pro rata share of all available funds and margin segregated on behalf of an FCM’s
customers. If the FCM does not provide accurate reporting, the Fund is also subject to the risk that
the FCM could use the Fund’s assets, which are held in an omnibus account with assets belonging
to the FCM’s other customers, to satisfy its own financial obligations or the payment obligations
of another customer to the central counterparty.
Utilization of futures and options on futures by the Fund involves
the risk of imperfect or even negative correlation to its Underlying Index if the index underlying the
futures contract differs from the Underlying Index. There is also the risk of loss 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. The purchase of put or call options will be based upon predictions by the Adviser as to anticipated
trends, which predictions could prove to be incorrect.
Because the futures market generally imposes
less burdensome margin requirements than the securities market, an increased amount of participation
by speculators in the futures market could result in price fluctuations. 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 by which the price of a futures contract may vary either up
or down from the previous day’s 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. It is possible that futures contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
10
liquidation
of futures positions and subjecting the Fund to substantial losses. In the event of adverse price movements,
the Fund would be required to make daily cash payments of variation margin.
Futures
Futures
contracts provide for the future sale by one party and purchase by another party of a specified amount
of a specific asset, currency, rate or index at a specified future time and at a specified price. Stock
index futures are based on investments that reflect the market value of common stock of the firms included
in an underlying index. The Fund may enter into futures contracts to purchase securities indexes when
the Adviser anticipates purchasing the underlying securities and believes prices will rise before the
purchase will be made. To the extent required by law, liquid assets committed to futures contracts will
be maintained.
Futures contracts may be bought and sold on U.S. and non-U.S. exchanges. Futures
contracts in the U.S. have been designed by exchanges that have been designated “contract markets”
by the CFTC and must be executed through a futures commission merchant (“FCM”), which is a
brokerage firm that is a member of the relevant contract market. Each exchange guarantees performance
of the contracts as between the clearing members of the exchange, thereby reducing the risk of counterparty
default. Futures contracts may also be entered into on certain exempt markets, including exempt boards
of trade and electronic trading facilities, available to certain market participants. Because all transactions
in the futures market are made, offset or fulfilled by an FCM through a clearinghouse associated with
the exchange on which the contracts are traded, the Fund will incur brokerage fees when it buys or sells
futures contracts.
Upon entering into a futures contract, the Fund will be required to deliver to an
account controlled by the FCM an amount of cash or cash equivalents known as “initial margin,”
which is in the nature of a performance bond or good faith deposit on the contract and is returned to
the Fund upon termination of the futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments, known as “variation margin,” to and from the FCM will be made daily as
the price of the instrument or index underlying the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known as “marking-to-market.”
At
any time prior to the expiration of a futures contract, the Fund may elect to close the position by taking
an opposite position, which will operate to terminate the Fund’s existing position in the contract.
This transaction, which is effected through a member of an exchange, cancels the obligation to make or
take delivery of the underlying instrument or asset. Although some futures contracts by their terms require
the actual delivery or acquisition of the underlying instrument or asset, some require cash settlement.
A
call option gives a holder the right to purchase a specific security at a specified price (“exercise
price”) within a specified period of time. A put option gives a holder the right to sell a specific
security at a specified exercise price within a specified period of time. The initial purchaser of a
call option pays the “writer” a premium, which is paid at the time of purchase and is retained
by the writer whether or not such option is exercised. The Fund may purchase put options to hedge its
portfolio against the risk of a decline in the market value of securities held and may purchase call
options to hedge against an increase in the price of securities it is committed to purchase. The Fund
may write put and call options along with a long position in options to increase its ability to hedge
against a change in the market value of the securities it holds or is committed to purchase. Investments
in futures contracts and other investments that contain leverage may require the Fund to maintain liquid
assets. Generally, the Fund maintains an amount of liquid assets equal to its obligations relative to
the position involved, adjusted daily on a marked-to-market basis. With respect to futures contracts
that are contractually required to “cash-settle,” the Fund maintains liquid assets in an amount
at least equal to the Fund’s daily marked-to-market obligation (i.e., the Fund’s daily net
liability, if any), rather than the contracts’ notional value (i.e., the value of the underlying
asset). By maintaining assets equal to its net obligation under cash-settled futures contracts, the Fund
may employ leverage to a greater extent than if the Fund set aside assets equal to the futures contracts’
full notional value. The Fund bases its asset maintenance policies on methods permitted by the staff
of the SEC and may modify these policies in the future to comply with any changes in the guidance articulated
from time to time by the SEC or its staff.
11
Options
An option on a futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the right, but not the obligation, in return for the
premium paid, to assume a position in the underlying futures contract at a specified exercise price at
any time prior to the expiration date of the option. The writer of the option becomes contractually obligated
to take the opposite futures position specified in the option.
Upon exercise of an option on a futures contract,
the delivery of the futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer’s futures margin account that represents
the amount by which the market price of the futures contract exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures contract. The potential for
loss related to the purchase of an option on a futures contract is limited to the premium paid for the
option plus transaction costs. Because the value of the option is fixed at the point of sale, there are
no daily cash payments by the purchaser to reflect changes in the value of the underlying contract; however,
the value of the option changes daily and that change would be reflected in the net asset value per Share
(“NAV”) of the Fund.
The Fund may purchase and write put and call options on futures contracts that are
traded on an exchange as a hedge against changes in value of its portfolio securities, or in anticipation
of the purchase of securities, and may enter into closing transactions with respect to such options to
terminate existing positions. There is no guarantee that such closing transactions can be effected.
The
Fund’s use of options on futures contracts is subject to the risks related to derivative instruments
generally. In addition, the amount of risk the Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. The purchase of an option
also entails the risk that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option purchased. The writer of an option on a futures contract is subject
to the risk of having to take a possibly adverse futures position if the purchaser of the option exercises
its rights. If the writer were required to take such a position, it could bear substantial losses. The
potential for loss related to writing call options is unlimited. The potential for loss related to writing
put options is limited to the agreed upon price per share, also known as the “strike price,”
less the premium received from writing the put.
U.S. Federal Tax Treatment of Futures Contracts
The
Fund may be required for federal income tax purposes to mark-to-market and recognize as income for each
taxable year its net unrealized gains and losses on certain futures contracts or options contracts as
of the end of the year as well as those actually realized during the year. Gain or loss from futures
contracts or options contracts on broad-based indexes required to be marked-to-market will be 60% long-term
and 40% short-term capital gain or loss. Application of this rule may alter the timing and character
of distributions to shareholders. The Fund may be required to defer the recognition of losses on futures
contracts or options contracts to the extent of any unrecognized gains on related positions held by the
Fund.
In
order for the Fund to continue to qualify for U.S. federal income tax treatment as a “regulated
investment company” under Section 851 of the Internal Revenue Code of 1986, as amended (the "Code"),
at least 90% of the Fund’s gross income for a taxable year must be derived from qualifying sources,
including, dividends, interest, income derived from loans of securities, gains from the sale of securities
or of foreign currencies or other income derived with respect to the Fund’s business of investing
in securities. It is anticipated that any net gain realized from the closing out of futures contracts
or options contracts will be considered gain from the sale of securities and, therefore, will be qualifying
income for purposes of the 90% requirement.
The Fund intends to distribute to shareholders annually any net
capital gains that have been recognized for U.S. federal income tax purposes (including unrealized gains
at the end of the Fund’s fiscal year) on futures transactions and certain options contracts. Such
distributions are combined with distributions of
12
capital
gains realized on the Fund’s other investments, and shareholders are advised on the nature of the
distributions.
Investment Companies
The Fund may invest in the securities of other investment companies,
subject to applicable limitations under Section 12(d)(1) of the 1940 Act. Pursuant to Section 12(d)(1),
the Fund may invest in the securities of another investment company (the “acquired company”)
provided that the Fund, immediately after such purchase or acquisition, does not own in the aggregate:
(i) more than 3% of the total outstanding voting stock of the acquired company; (ii) securities issued
by the acquired company having an aggregate value in excess of 5% of the value of the total assets of
the Fund; or (iii) securities issued by the acquired company and all other investment companies (other
than Treasury stock of the Fund) having an aggregate value in excess of 10% of the value of the total
assets of the Fund. To the extent allowed by law or regulation, the Fund may invest its assets in securities
of investment companies in excess of the limits discussed above.
If the Fund invests in and, thus, is a shareholder
of, another investment company, the Fund’s shareholders will indirectly bear the Fund’s proportionate
share of the fees and expenses paid by such other investment company, including advisory fees, in addition
to both the management fees payable directly by the Fund to the Fund’s own investment adviser and
the other expenses that the Fund bears directly in connection with the Fund’s own operations.
Consistent
with the restrictions discussed above and while they have no current intention to do so, the Fund may
invest in different types of investment companies from time to time, including business development companies
(“BDCs”). A BDC is a less common type of an investment company that more closely resembles
an operating company than a typical investment company. BDCs generally focus on investing in, and providing
managerial assistance to, small, developing, financially troubled, private companies or other companies
that may have value that can be realized over time and with managerial assistance. Similar to an operating
company, a BDC’s total annual operating expense ratio typically reflects all of the operating expenses
incurred by the BDC, and is generally greater than the total annual operating expense ratio of a mutual
fund that does not bear the same types of operating expenses. However, as a shareholder of a BDC, the
Fund does not directly pay for a portion of all of the operating expenses of the BDC, just as a shareholder
of a computer manufacturer does not directly pay for the cost of labor associated with producing such
computers. As a result, the fees and expenses of the Fund that invests in a BDC will be effectively overstated
by an amount equal to the “Acquired Fund Fees and Expenses.” Acquired Fund Fees and Expenses
are not included as an operating expense of the Fund in the Fund’s financial statements, which more
accurately reflect the Fund’s actual operating expenses.
Section 12(d)(1) of the 1940 Act restricts
investments by registered investment companies in securities of other registered investment companies,
including the Fund. The acquisition of the Fund’s Shares by registered investment companies is subject
to the restrictions of Section 12(d)(1) of the 1940 Act, except as may be permitted by exemptive rules
under the 1940 Act or as may at some future time 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.
Issuer Risk
Fund performance depends on the performance of individual securities
to which the Fund has exposure. Changes in the financial condition or credit rating of an issuer of those
securities may cause the value of the securities to decline.
13
Large
Capitalization Companies
Stock prices of large capitalization companies may be less volatile than those of
small- and mid-capitalization companies. However, larger companies may not be able to attain the high
growth rates of successful smaller companies, and thus, returns on investments in securities of large
companies could trail the returns on investments in securities of small- and mid-sized companies.
Market
Risk
Overall
market risks may also affect the value of the Fund. Factors such as domestic economic growth and market
conditions, interest rate levels and political events affect the securities markets.
Market Trading Risk
The Fund faces numerous
market trading risks, including the potential lack of an active market for the Shares, losses from trading
in secondary markets, and disruption in the creation/redemption process of the Fund. Any of these factors
may lead to the Shares trading at a premium or discount to the Fund’s net asset value (“NAV”).
Mid-Capitalization
Companies
Stock
prices of mid-capitalization companies may be more volatile than those of large capitalization companies
and, therefore, the Fund’s Share price may be more volatile than those of funds that invest a larger
percentage of their assets in stocks issued by large capitalization companies. Stock prices of mid-capitalization
companies are also more vulnerable than those of large capitalization companies to adverse business or
economic developments, and the stocks of mid-capitalization companies may be less liquid, making it more
difficult for the Fund to buy and sell them. In addition, mid-capitalization companies generally have
less diverse product lines than large capitalization companies and are more susceptible to adverse developments
related to their products.
National Closed Market Trading Risk
To the extent that the underlying securities
held by the Fund trade on foreign exchanges that may be closed when the securities exchange on which
the Fund’s shares trade is open, there are likely to be deviations between the current price of
such an underlying security and the last quoted price for the underlying security (i.e., the Fund’s
quote from the closed foreign market). These deviations could result in premiums or discounts to the
Fund’s NAV that may be greater than those experienced by other exchange-traded funds (“ETFs”).
Operational
Risk
The
Fund is exposed to operational risk arising from a number of factors, including but not limited to human
error, processing and communication errors, errors of the Fund’s service providers, counterparties
or other third-parties, failed or inadequate processes and technology or systems failures. The Fund seeks
to reduce these operational risks through controls and procedures. However, these measures do not address
every possible risk and may be inadequate for those risks that they are intended to address.
Repurchase Agreements
A repurchase agreement is
an instrument under which the purchaser (i.e., the Fund) acquires the security and the seller agrees,
at the time of the sale, to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the purchaser’s holding period. Repurchase agreements may be construed
to be collateralized loans by the purchaser to the seller secured by the securities transferred to the
purchaser. If a repurchase agreement is construed to be a collateralized loan, the underlying securities
will not be considered to be owned by the Fund but only to constitute collateral for
14
the
seller’s obligation to pay the repurchase price, and, in the event of a default by the seller, the
Fund may suffer time delays and incur costs or losses in connection with the disposition of the collateral.
In
any repurchase transaction, the collateral for a repurchase agreement may include: (i) cash items; (ii)
obligations issued by the U.S. government or its agencies or instrumentalities; or (iii) obligations
that, at the time the repurchase agreement is entered into, are rated in the highest rating category
generally by at least two nationally recognized statistical rating organizations (“NRSROs”),
or, if unrated, determined to be of comparable quality by the Adviser. Collateral, however, is not limited
to the foregoing and may include, for example, obligations rated below the highest category by NRSROs.
Collateral for a repurchase agreement may also include securities that the Fund could not hold directly
without the repurchase obligation.
Irrespective of the type of collateral underlying the repurchase
agreement, in the case of a repurchase agreement entered into by a non-money market fund, the repurchase
obligation of a seller must be of comparable credit quality to securities that are rated in the highest
two short-term credit rating categories by at least one NRSRO or, if unrated, deemed by the Adviser to
be of equivalent quality.
Repurchase agreements pose certain risks for the Fund if it utilizes them. Such risks
are not unique to the Fund, but are inherent in repurchase agreements. The Fund seeks to minimize such
risks, but because of the inherent legal uncertainties involved in repurchase agreements, such risks
cannot be eliminated. Lower quality collateral and collateral with longer maturities may be subject to
greater price fluctuations than higher quality collateral and collateral with shorter maturities. If
the repurchase agreement counterparty were to default, lower quality collateral may be more difficult
to liquidate than higher quality collateral. Should the counterparty default and the amount of collateral
not be sufficient to cover the counterparty’s repurchase obligation, the Fund would retain the status
of an unsecured creditor of the counterparty (i.e., the position the Fund would normally be in if it
were to hold, pursuant to its investment policies, other unsecured debt securities of the defaulting
counterparty) with respect to the amount of the shortfall. As an unsecured creditor, the Fund would be
at risk of losing some or all of the principal and income involved in the transaction.
Reverse Repurchase Agreements
Reverse
repurchase agreements 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. Generally,
the effect of such transactions is that the 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
the Fund is able to keep some of the interest income associated with those securities. Such transactions
are advantageous only if the Fund has an opportunity to earn a rate of interest on the cash derived from
these transactions that is greater 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 the 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 increase or decrease in the value of the Fund’s assets. The Fund’s exposure
to reverse repurchase agreements will be covered by liquid assets having a value equal to or greater
than such commitments. The use of reverse repurchase agreements is a form of leverage because the proceeds
derived from reverse repurchase agreements may be invested in additional securities.
Sector Risk
Sector risk is the possibility
that securities within the same group of industries will decline in price due to sector-specific market
or economic developments. If the Fund invests more heavily in a particular sector, the value of its shares
may be especially sensitive to factors and economic risks that specifically affect that sector. As a
result, the Fund’s share price may fluctuate more widely than the value of shares of a fund that
invests in a broader range of industries.
15
Consumer Discretionary Sector Risk.
To the extent that the consumer discretionary
sector continues to represent a significant portion of the Index, the Fund will be sensitive to changes
in, and its performance will depend to a greater extent on, the overall condition of the consumer discretionary
sector. These companies may be adversely affected by changes in the worldwide economy, consumer spending,
competition, demographics and consumer preferences, exploration and production spending.
Consumer
Staples Sector Risk.
Companies engaged in the production and distribution of basic materials may be adversely
affected by changes in world events, political and economic conditions, energy conservation, environmental
policies, commodity price volatility, changes in exchange rates, imposition of import controls, increased
competition, depletion of resources and labor relations.
Financial Services Sector
Risk.
Companies
in the financial sector are often subject to extensive governmental regulation and, recently, government
intervention and the potential for additional regulation, which may adversely affect the scope of their
activities, the prices they can charge and the amount of capital they must maintain. Governmental regulation
may change frequently and may have significant adverse consequences for companies in the financial sector,
including effects not intended by such regulation. The impact of recent or future regulation in various
countries on any individual financial company or on the sector as a whole cannot be predicted. Certain
risks may impact the value of investments in the financial sector more severely than investments outside
this sector, including the risks associated with companies that operate with substantial financial leverage.
Companies in the financial sector may also be adversely affected by increases in interest rates and loan
losses, decreases in the availability of money or asset valuations, credit rating downgrades and adverse
conditions in other related markets. Insurance companies, in particular, may be subject to severe price
competition and/or rate regulation, which may have an adverse impact on their profitability. In the recent
past, deterioration of the credit markets impacted a broad range of mortgage, asset-backed, auction rate,
sovereign debt and other markets, including U.S. and non-U.S. credit and interbank money markets, thereby
affecting a wide range of financial institutions and markets. A number of large financial institutions
have failed, merged with stronger institutions or have had significant government infusions of capital.
This situation created instability in the financial markets and caused certain financial companies to
incur large losses. Some financial companies experienced declines in the valuations of their assets,
took actions to raise capital (such as the issuance of debt or equity securities), or even ceased operations.
Some financial companies borrowed significant amounts of capital from government sources and may face
future government-imposed restrictions on their businesses or increased government intervention. Those
actions caused the securities of many financial companies to decline in value. The financial sector is
particularly sensitive to fluctuations in interest rates.
Health Care Sector Risk.
Companies
in the health care sector are subject to extensive government regulation and their profitability can
be significantly affected by restrictions on government reimbursement for medical expenses, rising costs
of medical products and services, pricing pressure (including price discounting), limited product lines
and an increased emphasis on the delivery of healthcare through outpatient services. Companies in the
health care sector are heavily dependent on obtaining and defending patents, which may be time consuming
and costly, and the expiration of patents may also adversely affect the profitability of these companies.
Health care companies are also subject to extensive litigation based on product liability and similar
claims. In addition, their products can become obsolete due to industry innovation, changes in technologies
or other market developments. Many new products in the health care sector require significant research
and development and may be subject to regulatory approvals, all of which may be time consuming and costly
with no guarantee that any product will come to market.
16
Industrial Sector Risk.
Industrial companies are affected by supply
and demand both for their specific product or service and for industrial sector products in general.
Government regulation, world events, exchange rates and economic conditions, technological developments
and liabilities for environmental damage and general civil liabilities will likewise affect the performance
of these companies. Aerospace and defense companies, a component of the industrial sector, can be significantly
affected by government spending policies because companies involved in this industry rely, to a significant
extent, on U.S. and foreign government demand for their products and services. Thus, the financial condition
of, and investor interest in, aerospace and defense companies are heavily influenced by governmental
defense spending policies which are typically under pressure from efforts to control the U.S. (and other)
government budgets. Transportation securities, a component of the industrial sector, are cyclical and
have occasional sharp price movements which may result from changes in the economy, fuel prices, labor
agreements and insurance costs.
Information Technology Sector Risk.
Information
technology companies face intense competition, both domestically and internationally, which may have
an adverse effect on profit margins. Information technology companies may have limited product lines,
markets, financial resources or personnel. The products of information technology companies may face
product obsolescence due to rapid technological developments and frequent new product introduction, unpredictable
changes in growth rates and competition for the services of qualified personnel. Companies in the information
technology sector are heavily dependent on patent protection and the expiration of patents may adversely
affect the profitability of these companies.
Securities Lending
The Fund may lend portfolio securities to
certain borrowers. The borrowers provide collateral that is maintained in an amount at least equal to
the current market value of the securities loaned. The Fund may terminate a loan at any time and obtain
the return of the securities loaned. The 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. The 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, the 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.
The 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
of Trustees of the Trust (the “Board”) who administer the lending program for the Fund in accordance
with guidelines approved by the Board. In such capacity, the lending agent causes the delivery of loaned
securities from the 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 the Fund’s
securities as agreed, the Fund may experience losses if the proceeds received from liquidating
17
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.
Investing cash collateral
subjects the Fund to greater market risk, including losses on the collateral and, should the Fund need
to look to the collateral in the event of the borrower’s default, losses on the loan secured by
that collateral.
Short-Term Instruments
The Fund may invest in short-term instruments, including money
market instruments, on an ongoing basis to provide liquidity for cash equitization, funding, or under
abnormal market conditions. 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 Moody’s or “A-1”
by Standard & Poor’s Financial Services LLC, 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 the Fund. Any of these instruments may be purchased
on a current or a forward-settled basis. 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.
Tax
Risks
As
with any investment, you should consider how your investment in Shares 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.
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 the Fund makes distributions or you sell Shares.
U.S.
Government Securities
The 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 the Federal National Mortgage Association (“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”).
18
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 the Federal Home Loan Mortgage Corporation (“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
(the “Senior Preferred Stock Purchase Agreement” or “Agreement”). Under the Agreement,
the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the
contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets.
This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial
obligations, preventing mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury
announced that it was amending the Agreement to allow the $200 billion cap on the U.S. Treasury’s
funding commitment to increase as necessary to accommodate any cumulative reduction in net worth over
the next three years. As a result of this Agreement, the investments of holders, including the Fund,
of mortgage-backed securities and other obligations issued by Fannie Mae and Freddie Mac are protected.
The
total public debt of the United States as a percentage of gross domestic product has grown rapidly since
the beginning of the 2008-2009 financial downturn. Although high debt levels do not necessarily indicate
or cause economic problems, they may create certain systemic risks if sound debt management practices
are not implemented. A high national debt can raise concerns that the U.S. government will not be able
to make principal or interest payments when they are due. This increase has also necessitated the need
for the U.S. Congress to negotiate adjustments to the statutory debt limit to increase the cap on the
amount the U.S. government is permitted to borrow to meet its existing obligations and finance current
budget deficits. In August 2011, S&P lowered its long-term sovereign credit rating on the U.S. In
explaining the downgrade at that time, S&P cited, among other reasons, controversy over raising the
statutory debt limit and growth in public spending. On September 8, 2017, following passage by Congress,
the President of the United States signed the Continuing Appropriations Act, 2018 and Supplemental Appropriations
for Disaster Relief Requirements Act, 2017, which suspends the statutory debt limit through December
8, 2017. On January 22, 2018, Congress passed a short-term funding measure to allow legislators until
February 8, 2018 to negotiate a longer-term solution. Any controversy or ongoing uncertainty regarding
the statutory debt limit negotiations may impact the U.S. long-term sovereign credit rating and may cause
market uncertainty. As a result, market prices and yields of securities supported by the full faith and
credit of the U.S. government may be adversely affected.
Valuation Risk
The sale price the Fund
could receive for a security may differ from the Fund’s valuation of the security, particularly
for securities or assets that trade low volume or volatile markets or that are valued using a fair value
methodology. In addition, the value of the securities or assets in the Fund’s portfolio may change
on days when shareholders will not be able to purchase or sell the Fund’s shares.
Warrants and Subscription Rights
Warrants
are equity securities in the form of options issued by a corporation which give the holder the right
to purchase stock, usually at a price that is higher than the market price at the time the warrant is
19
issued.
A purchaser takes the risk that the warrant may expire worthless because the market price of the common
stock fails to rise above the price set by the warrant.
When-Issued Securities, Delayed-Delivery and Forward
Commitment Securities
A when-issued, delayed-delivery or forward commitment security is one whose terms
are available and for which a market exists, but which have not been issued. If the Fund engages in when-issued,
delayed-delivery or forward commitment transactions, it relies on the other party to consummate the sale.
If the other party fails to complete the sale, the Fund may miss the opportunity to obtain the security
at a favorable price or yield.
When purchasing a security on a when-issued, delayed-delivery or forward commitment
basis, the Fund assumes the rights and risks of ownership of the security, including the risk of price
and yield changes. At the time of settlement, the market value of the security may be more or less than
the purchase price. The yield available in the market when the delivery takes place also may be higher
than those obtained in the transaction itself. Because the Fund does not pay for the security until the
delivery date, these risks are in addition to the risks associated with its other investments.
Decisions
to enter into when-issued, delayed-delivery or forward commitment transactions will be considered on
a case-by-case basis when necessary to maintain continuity in a company’s index membership. The
Fund will segregate cash or liquid securities equal in value to commitments for the when-issued transactions.
The Fund will segregate additional liquid assets daily so that the value of such assets is equal to the
amount of the commitments.
INVESTMENT
RESTRICTIONS AND POLICIES
The Trust has adopted the following investment restrictions as fundamental policies
with respect to the Fund. These restrictions cannot be changed without the approval of the holders of
a majority of the Fund’s outstanding voting securities. For purposes of the 1940 Act, a majority
of the outstanding voting securities of the Fund means the vote, at an annual or a special meeting of
the security holders of the Trust, of the lesser of (1) 67% or more of the voting securities of the Fund
present at such meeting, if the holders of more than 50% of the outstanding voting securities of the
Fund are present or represented by proxy, or (2) more than 50% of the outstanding voting securities of
the Fund. Under these restrictions:
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1.
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The Fund may not make loans, except that the
Fund may: (i) lend portfolio securities; (ii) enter into repurchase agreements; (iii) purchase all or
a portion of an issue of debt securities, bank loan or participation interests, bank certificates of
deposit, bankers’ acceptances, debentures or other securities, whether or not the purchase is made
upon the original issuance of the securities; and (iv) participate in an interfund lending program with
other registered investment companies;
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2.
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The
Fund may not borrow money, except as permitted under the 1940 Act, and as interpreted or modified by
regulation from time to time;
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3.
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The
Fund may not issue senior securities, except as permitted under the 1940 Act, and as interpreted or modified
by regulation from time to time;
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4.
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The
Fund may not purchase or sell real estate, except that the Fund may: (i) invest in securities of issuers
that invest in real estate or interests therein; (ii) invest in mortgage-related securities and other
securities that are secured by real estate or interests therein; and (iii) hold and sell real estate
acquired by the Fund as a result of the ownership of securities;
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5.
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The Fund may not engage in the business of
underwriting securities issued by others, except to the extent that the Fund may be considered an underwriter
within the meaning of the Securities Act of 1933, as amended (“Securities Act”), in the disposition
of
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20
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restricted securities or in connection with
its investments in other investment companies;
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6.
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The
Fund may not purchase or sell commodities, unless acquired as a result of owning securities or other
instruments, but it may purchase, sell or enter into financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts or derivative instruments and may
invest in securities or other instruments backed by commodities; and
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7.
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The Fund may not purchase any security if,
as a result of that purchase, more than 25% of the Fund’s net assets would be invested in securities
of issuers having their principal business activities in the same industry or group of industries. This
limit does not apply to securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
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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 will
be continuously complied with.
The Fund’s policy to, under normal circumstances, invest at least 80% of its
assets (net assets plus any borrowings for investment purposes) (“Assets”) in securities of
U.S. companies that pay regular dividends is non-fundamental and may be changed by the Board without
shareholder approval. Shareholders will be provided with at least sixty days’ notice in the manner
prescribed by the SEC before any change in the Fund’s policy to invest at least 80% of its Assets
in the particular type of investment suggested by its name.
With respect to interpretations of the SEC
or its staff described in fundamental restriction number 2 and number 3 above, the SEC and its staff
have identified various securities trading practices and derivative instruments used by mutual funds
that give rise to potential senior security issues under Section 18(f) of the 1940 Act, which prohibits
mutual funds from issuing senior securities. Under the 1940 Act, a mutual fund may borrow from a bank,
provided that immediately after any such borrowing there is an asset coverage of at least 300 percent
for all borrowings; or from a bank or other persons for temporary purposes only, provided that such temporary
borrowings are in an amount not exceeding 5% of the Fund's total assets at the time when the borrowing
is made. However, rather than rigidly deeming all such practices outside of bank borrowing as impermissible
forms of issuing a "senior security" under Section 18(f), the SEC and its staff through interpretive
releases, including Investment Company Act Release No. 10666 (April 18, 1979), and no-action letters
has developed an evolving series of methods by which a fund may address senior security issues. In particular,
the common theme in this line of guidance has been to use methods of "covering" fund obligations that
might otherwise create a senior security-type obligation by holding sufficient liquid assets that permit
a fund to meet potential trading and derivative-related obligations. Thus, a potential Section 18(f)
senior security limitation is not applicable to activities that might be deemed to involve a form of
the issuance or sale of a senior security by the Fund, provided that the Fund's engagement in such activities
is consistent with or permitted by Section 18 of the 1940 Act, the rules and regulations promulgated
thereunder or interpretations of the SEC or its staff.
BOARD OF TRUSTEES OF THE TRUST
The Board of the Trust consists of five Trustees,
three of whom are not “interested persons” (as defined in the 1940 Act), of the Trust (“Independent
Trustees”). The Board is responsible for overseeing the management and operations of the Trust,
including the general oversight of the duties and responsibilities performed by the Adviser and other
service providers to the Trust. The Adviser is responsible for the day-to-day administration, operation
and business affairs of the Trust.
The Board believes that each Trustee’s experience, qualifications,
attributes or skills on an individual basis and in combination with those of the other Trustees lead
to the conclusion that the Board possesses the requisite skills and attributes to carry out its oversight
responsibilities with respect to the
21
Trust.
The Board believes that the Trustees’ ability to review, critically evaluate, question and discuss
information provided to them, to interact effectively with the Adviser, the Trust’s other service
providers, counsel and independent auditors, and to exercise effective business judgment in the performance
of their duties, support this conclusion. In reaching its conclusion, the Board also has considered the
(i) experience, qualifications, attributes and/or skills, among others, of its members, (ii) each member’s
character and integrity, (iii) the length of service as a board member of the Trust, (iv) each person’s
willingness to serve and ability to commit the time necessary to perform the duties of a Trustee, and
(v) as to each Independent Trustee, such Trustee’s status as not being an “interested person”
(as defined in the 1940 Act) of the Trust. In addition, the following specific experience, qualifications,
attributes and/or skills apply as to each Trustee.
References to the experience, qualifications,
attributes, and skills of Trustees are pursuant to requirements of the SEC, do not constitute the holding
out of the Board or any Trustee as having any special expertise or experience, and shall not impose any
greater responsibility or liability on any such person or on the Board by reason thereof.
The Trustees of the Trust,
their addresses, positions with the Trust, ages, term of office and length of time served, principal
occupations during the past five years, the number of portfolios in the Fund Complex overseen by each
Trustee and other directorships, if any, held by the Trustees, are set forth below.
The Board is also responsible
for overseeing the nature, extent, and quality of the services provided to the Funds by the Adviser and
receives information about those services at its regular meetings. In addition, on an annual basis (following
the initial two-year period), in connection with its consideration of whether to renew the Management
Agreement with the Adviser and the Subadvisory Agreement with the Sub-Adviser, the Board or its designee
may meet with the Adviser, as appropriate, to review such services. Among other things, the Board regularly
considers the Adviser’s adherence to the Fund’s investment restrictions and compliance with
various Fund policies and procedures and with applicable securities regulations. The Board also reviews
information about the Fund’s performance and the Fund’s investments, including, for example,
portfolio holdings schedules.
The Trust’s Chief Compliance Officer reports regularly to the Board to review
and discuss compliance issues and Fund or Adviser risk assessments. At least annually, the Trust’s
Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of
the Trust’s policies and procedures and those of its service providers, including the Adviser. The
report addresses the operation of the policies and procedures of the Trust and each service provider
since the date of the last report; any material changes to the policies and procedures since the date
of the last report; any recommendations for material changes to the policies and procedures; and any
material compliance matters since the date of the last report.
The Board receives reports from the Fund’s
service providers regarding operational risks and risks related to the valuation and liquidity of portfolio
securities. Annually, the Funds’ independent registered public accounting firm reviews with the
Audit Committee its audit of the Fund’s financial statements, focusing on major areas of risk encountered
by the Fund and noting any significant deficiencies or material weaknesses in the Fund’s internal
controls. Additionally, in connection with its oversight function, the Board oversees Fund management’s
implementation of disclosure controls and procedures, which are designed to ensure that information required
to be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized,
and reported within the required time periods. The Board also oversees the Trust’s internal controls
over financial reporting, which comprise policies and procedures designed to provide reasonable assurance
regarding the reliability of the Trust’s financial reporting and the preparation of the Trust’s
financial statements.
From their review of these reports and discussions with the Adviser, the Chief Compliance
Officer, the independent registered public accounting firm and other service providers, the Board and
the Audit Committee learn in detail about the material risks of the Fund, thereby facilitating a dialogue
about how management and service providers identify and mitigate those risks.
22
The
Board recognizes that not all risks that may affect the Fund can be identified and/or quantified, that
it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary
to bear certain risks (such as investment-related risks) to achieve the Fund’s goals, and that the
processes, procedures and controls employed to address certain risks may be limited in their effectiveness.
Moreover, reports received by the Board as to risk management matters are typically summaries of the
relevant information. Most of the Fund’s investment management and business affairs are carried
out by or through the Adviser and other service providers, each of which has an independent interest
in risk management but whose policies and the methods by which one or more risk management functions
are carried out may differ from the Fund’s and each other’s in the setting of priorities, the
resources available or the effectiveness of relevant controls. As a result of the foregoing and other
factors, the Board’s ability to monitor and manage risk, as a practical matter, is subject to limitations.
Independent
Trustees
The
address of each trustee is c/o Pacific Global ETF Trust, 840 Newport Center Drive, 7th Floor, Newport
Beach, CA 92660. Each trustee serves for the life of the Trust, subject to their earlier death, incapacitation,
resignation, retirement or removal as more specifically provided in the Trust’s organizational documents.
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Name, Year of Birth, and Position(s)
held with the Trust
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Length of Time Served
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Principal Occupation(s) During
Past Five Years
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Number of Portfolios in the Fund
Complex Overseen
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Other Directorships Held By Trustee
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Robert J. Blattenberg,
1950
Trustee
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Since 2018
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Consultant,
Ringler Associates, Inc. (April 2016 – Present); Chief Executive
Officer, Ringler Associates (February 1983 – April 2016)
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1
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None
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D.
Robinson Cluck,
1956
Trustee
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Since
2018
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Chairman,
Canterbury
Consulting, Inc. (December 1988 – Present)
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1
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Trustee, UCI Foundation
(2014
– Present)
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John C. Siciliano
1954
Trustee
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Since, 2018
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Senior Managing Director,
PwC Advisory, LLC (September 2012 – Present)
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1
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None
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Interested
Trustees and Officers
The address of each trustee is c/o Pacific Global ETF Trust, 840 Newport Center Drive,
7th Floor, Newport Beach, CA 92660. Each trustee serves for the life of the Trust, subject to their
earlier death, incapacitation, resignation, retirement or removal as more specifically provided in the
Trust’s organizational documents.
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Name, Year of Birth, and Position(s)
held with the Trust
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Length of Time Served
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Principal Occupation(s) During
Past Five Years
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Number of Portfolios in the Fund Complex
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Other Directorships Held By Trustee
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23
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Overseen
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Kevin R. Byrne,
1955
Trustee and Chair
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Since 2018
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Chief Executive
Officer, Pacific Global Asset Management LLC (November 2018 – Present); Senior Vice President, Pacific
Life Insurance Company (August 2012 – November 2018)
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1
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None
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Sharon
A. Cheever,
1955
Trustee
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Since
2018
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Director,
Senior Vice President and General Counsel, Pacific Life Insurance Company (Jan. 2008 – Present);
Senior Vice President and General Counsel, Pacific Global Asset Management LLC (August 2012 – Present);
Senior Vice President and General Counsel, Cadence Capital Management LLC (July 2016 – August 2016);
Senior Vice President and General Counsel, Pacific Life Fund Advisors LLC (January 2008 – October
2015); Senior Vice President and General Counsel, Pacific Private Fund Advisors LLC (August 2013 –
March 2015)
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1
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None
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24
Officer
Information
The address for each officer is c/o Pacific Global ETF Trust, 840 Newport Center
Drive, 7th Floor, Newport Beach, CA 92660. Each officer of serves for a one year term or until their
successors are elected and qualified.
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Officer’s Name, and Year
of Birth
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Position(s) Held with the Trust
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Length of Time Served
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Principal Occupation(s) During The Past Five Years
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Joshua B. Schwab,
1981
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Vice President, Treasurer and
Chief Financial Officer
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Since 2018
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Assistant Vice President, Pacific Global Asset Management LLC (2015 – Present);
Assistant Vice President, Pacific Life Insurance Company, (2015 – Present); Associate Vice President,
Pacific Alternative Asset Management Company, LLC (2007 – 2015)
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Jane M. Guon,
1964
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Vice President and Secretary
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Since
2018
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Vice President and Secretary, Pacific Life Insurance Company (2011 – Present);
Vice President and Secretary, Pacific Global Asset Management LLC (2013 – Present)
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Carol E. Rumsey,
1960
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Vice
President and Chief Compliance Officer
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Since 2018
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Chief Compliance Officer, Pacific Private Fund Advisors LLC (2014
– Present); Assistant Vice President, Pacific Global Asset Management LLC (2014 – Present);
Chief Compliance Officer, Pacific Asset Management (2013 – Present); Assistant Vice President, Pacific
Life Insurance Company (1991 – Present)
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Michael
J. Skillman,
1963
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Chief Executive Officer and President
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Since
2018
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CEO & Managing Director, Cadence Capital Management LLC (2004 – Present);
Vice President, Pacific Life Insurance Company (2016 – Present)
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Anthony J. Dufault,
1971
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Vice
President
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Since 2018
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Assistant Vice President, Pacific Global Asset Management LLC,
(2018 – Present); Assistant Vice President, Pacific Life Insurance Company (2007 – Present)
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Joseph G. Lallande,
1970
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Vice
President and Assistant Secretary
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Since 2018
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AVP & Counsel, Pacific
Life Insurance Company (2010 – Present)
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Board Committees
The Board has an Audit Committee
consisting of the three Trustees who are Independent Trustees. Mr. John Siciliano currently serves as
a member of the Audit Committee and has been designated as an “audit committee financial expert”
as defined under Item 407 of Regulation S-K of the Securities Exchange Act of 1934, as amended (“Exchange
Act”). Mr. Siciliano, an Independent Trustee, also serves as the Chairman of the Audit Committee.
The Audit Committee has the responsibility, among other things, to: (i) oversee the accounting and financial
reporting processes of the Trust and its internal control over financial reporting; (ii) oversee the
quality and integrity of the Trust’s financial statements and the independent audit thereof; (iii)
oversee or, as appropriate, assist the Board’s oversight of the Trust’s compliance with legal
and regulatory requirements that relate to the Trust’s accounting and financial reporting, internal
control over financial reporting and independent audit; (iv) approve prior to appointment the engagement
of the Trust’s independent registered public accounting firm and, in connection therewith, to review
and evaluate the qualifications, independence and performance of the Trust’s independent registered
public accounting firm; and (v) act as a liaison between the Trust’s independent registered public
accounting firm and the full Board.
25
The
Board also has a Nominating Committee consisting of the three Trustees who are Independent Trustees.
D. Robinson Cluck, an Independent Trustee, is the Chairman of the Nominating Committee. The Nominating
Committee is responsible for recommending qualified candidates to the Board in the event that a position
is vacated or created. The Nominating Committee would consider recommendations by shareholders if a vacancy
were to exist. Shareholders may recommend candidates for Board positions by forwarding their correspondence
to the Secretary of the Trust at the Trust’s address and the shareholder communication will be forwarded
to the Committee Chairperson for evaluation. In considering Trustee nominee candidates, the Nominating
Committee takes into account a wide variety of factors, including the overall diversity of the Board’s
composition. The Nominating Committee believes the Board generally benefits from diversity of background,
experience and views among its members, and considers this a factor in evaluating the composition of
the Board, but has not adopted any specific policy in this regard.
The Board has determined that its leadership
structure is appropriate given the business and nature of the Trust. In connection with its determination,
the Board considered that the Chairman of the Board is an Interested Trustee. The Chairman of the Board
can play an important role in setting the agenda of the Board and also serves as a key point person for
dealings between management and the Independent Trustees. The Independent Trustees believe that the Chairman’s
role as CEO of the parent company of the Adviser facilitates meaningful dialogue between the Adviser
and the Independent Trustees. The Board also considered that the Chairman of the Audit Committee is an
Independent Trustee, which yields similar benefits with respect to the functions and activities of the
various Board committees. The Independent Trustees also regularly meet outside the presence of management.
The Board has determined that its committees help ensure that the Trust has effective and independent
governance and oversight. The Board also believes that its leadership structure facilitates the orderly
and efficient flow of information to the Independent Trustees from management of the Trust, including
the Adviser. The Board reviews its structure on an annual basis.
As an integral part of its
responsibility for oversight of the Trust in the interests of shareholders, the Board, as a general matter,
oversees risk management of the Trust’s investment programs and business affairs. The function of
the Board with respect to risk management is one of oversight and not active involvement in, or coordination
of, day-to-day risk management activities for the Trust. The Board recognizes that (i) not all risks
that may affect the Trust can be identified, (ii) it may not be practical or cost-effective to eliminate
or mitigate certain risks, (iii) it may be necessary to bear certain risks (such as investment-related
risks) to achieve the Trust’s goals, and (iv) the processes, procedures and controls employed to
address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees
that may relate to risk management matters are typically summaries of the relevant information.
The
Board exercises oversight of the risk management process primarily through the Audit Committee, and through
oversight by the Board itself. The Trust faces a number of risks, such as investment-related and compliance
risks. The Adviser’s personnel seek to identify and address risks, i.e., events or circumstances
that could have material adverse effects on the business, operations, shareholder services, investment
performance or reputation of the Trust. Under the overall supervision of the Board or the applicable
Committee of the Board, the Trust, or the Adviser employ a variety of processes, procedures and controls
to identify such possible events or circumstances, to lessen the probability of their occurrence and/or
to mitigate the effects of such events or circumstances if they do occur. Different processes, procedures
and controls are employed with respect to different types of risks. Various personnel, including the
Trust’s Chief Compliance Officer, as well as various personnel of the Adviser and other service
providers such as the Trust’s independent accountants, may report to the Audit Committee and/or
to the Board with respect to various aspects of risk management, as well as events and circumstances
that have arisen and responses thereto.
As of the date of this SAI, the officers and Trustees of the
Trust, in the aggregate, do not own any shares of the Fund.
26
For
each Trustee, the dollar range of equity securities beneficially owned by the Trustee in the Trust and
in all registered investment companies advised by the Adviser (“Family of Investment Companies”)
that are overseen by the Trustee is shown below.
|
|
|
|
|
|
|
Name of Trustee
|
|
Dollar Range of Equity Securities in the Trust (as of December 31, 2018)
|
|
Aggregate Dollar Range of Equity
Securities in all Registered Investment Companies Overseen By Trustee In Family of Investment Companies
(as of December 31, 2018)
|
|
Robert J. Blattenberg
|
|
None
|
|
None
|
|
Kevin R. Byrne
|
|
None
|
|
None
|
|
Sharon A. Cheever
|
|
None
|
|
None
|
|
D. Robinson Cluck
|
|
None
|
|
None
|
|
John C. Siciliano
|
|
None
|
|
None
|
As to each Independent Trustee
and his immediate family members, no person owned beneficially or of record securities in the Adviser
or Foreside Fund Services, LLC (“Distributor”), or a person (other than a registered investment
company) directly or indirectly controlling, controlled by or under common control with the Adviser or
the Distributor.
Shareholder Communications to the Board
Shareholders may send communications to the
Board by addressing the communications directly to the Board (or individual Board members) and/or otherwise
clearly indicating in the salutation that the communication is for the Board (or individual Board members).
The shareholder may send the communication to either the Trust’s office or directly to such Board
members at the address specified for each Trustee. Other shareholder communications received by the Trust
not directly addressed and sent to the Board will be reviewed and generally responded to by management.
Such communications will be forwarded to the Board at management’s discretion based on the matters
contained therein.
Remuneration of Trustees
Each current Independent Trustee is paid an annual retainer of
$10,000 for his or her services as a Board member to the Trust, together with out-of-pocket expenses
in accordance with the Board’s policy on travel and other business expenses relating to attendance
at meetings.
Annual Trustee fees may be reviewed periodically and changed by the Board.
Both
the Fund and the Trust are new and thus information about the compensation paid to the Trustees by the
Trust for its most recent fiscal year is not available.
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, 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 Trust’s
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 Amended and Restated 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
27
section
attempts to disclaim a Trustee’s individual liability in any manner inconsistent with the federal
securities laws.
MANAGEMENT
AND OTHER SERVICE PROVIDERS
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled “Management of the Funds.”
Investment Adviser
Pacific Global Advisors
LLC acts as investment adviser to the Fund pursuant to an investment advisory agreement between the Trust
and the Adviser with respect to the Fund (“Management Agreement”). The Adviser is responsible
for the Fund’s investment operations and its business affairs. Pursuant to the Management Agreement
and subject to the general oversight of the Board, the Adviser provides or causes to be furnished all
supervisory and other services reasonably necessary for the operation of the Fund, including audit, portfolio
accounting, legal, transfer agency, custody, printing costs, certain administrative services (provided
pursuant to a separate administration agreement), certain distribution services (provided pursuant to
a separate distribution agreement), certain shareholder and distribution-related services (provided pursuant
to a separate Rule 12b-1 Plan and related agreements) under what is essentially an all-in fee structure.
The Fund may bear other expenses which are not covered under the Management Agreement that may vary and
will affect the total level of expenses paid by the Fund, such as taxes and governmental fees, brokerage
fees, commissions and other transaction expenses, costs of borrowing money, including interest expenses,
certain custody expenses and extraordinary expenses (such as litigation and indemnification expenses).
The
Adviser is wholly-owned by Pacific Global Asset Management LLC, a wholly owned subsidiary of Pacific
Life Insurance Company (“Pacific Life”). Pacific Life is an indirect wholly-owned subsidiary
of Pacific Mutual Holding Company, a mutual insurance holding company and ultimate parent company of
the Pacific Life group of companies.
The Fund pays the Adviser a unified fee (“Management Fee”)
under the Management Agreement in return for providing investment management, investment advisory and
supervisory services and for being obligated to pay certain Fund expenses discussed above. The Adviser
is paid a monthly Management Fee at an annual rate of 0.29% of the average daily net assets of the Fund.
Under a unitary fee structure, the Adviser is responsible for paying substantially all the expenses of
the Fund, excluding payments under the Fund’s 12b-1 plan (if any), interest expenses, taxes, acquired
fund fees and expenses, brokerage fees, costs of holding shareholder meetings, litigation, indemnification
and extraordinary expenses. The Adviser may from time to time waive all or a portion of its Management
Fee. Fee waivers and subsidies will increase the Fund’s total return. These voluntary waivers
may be terminated at any time without notice. To the extent that the Adviser agrees to waive its fee,
it may enter into a relationship agreement with the Sub-Adviser to share the economic impact of the fee
waiver or expense subsidy.
Pursuant to the Management Agreement, and subject to the Board’s approval, the
Adviser is authorized to delegate the day-to-day management of the Fund’s investment program. The
Adviser has appointed Cadence Capital Management LLC as the sub-adviser (“Sub-Adviser”) to
manage the Fund’s investment program. The Adviser oversees and monitors the nature and quality
of the services provided by the Sub-Adviser, including investment performance and execution of investment
strategies. The Adviser performs compliance monitoring services to help the Fund maintain compliance
with applicable laws and regulations and provides services related to, among others, the valuation of
Fund securities, risk management and oversight of trade execution and brokerage services.
The Adviser will continue
to have responsibility for all investment advisory services performed pursuant to any such subadvisory
agreements. The Adviser will review the performance of the Sub-Adviser and make recommendations to the
Board with respect to the retention of the Sub-Adviser and the renewal of its contract.
28
A
discussion regarding the basis for the Board of Trustees’ approval of the advisory agreements for
the Fund will be available in the Fund’s annual report to shareholders dated June 30, 2018.
Pursuant
to the Management Agreement, the Fund has agreed to indemnify the Adviser for certain liabilities, including
certain liabilities arising under the federal securities laws, unless such loss or liability results
from willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless
disregard of its obligations and duties. The Management Agreement is terminable upon 60 days’ notice
by the Adviser and will terminate automatically in the event of its assignment (as defined in the 1940
Act). The Management Agreement will continue in effect for a period of not more than two years from its
execution only so long as such continuance is specifically approved at least annually in accordance with
the requirements of the 1940 Act.
The Sub-Adviser
Cadence Capital Management LLC, located at
265 Franklin Street, 4th Floor, Boston, Massachusetts 02110, serves as sub-adviser to the Fund. As of
December 31, 2018, the Sub-Adviser had approximately $2.9 billion in assets under management.
The
Sub-Adviser provides advisory services to registered investment companies, private domestic and offshore
pooled investment vehicles and institutional accounts. The Sub-Adviser is a direct, wholly-owned subsidiary
of Pacific Global Asset Management LLC, an indirect wholly-owned subsidiary of Pacific Life Insurance
Company and an affiliate of the Adviser.
The Sub-Adviser is responsible for the day-to-day management
of the Fund’s portfolio pursuant to a subadvisory agreement between the Adviser and the Sub-Adviser
with respect to the Fund (“Subadvisory Agreement”).
The Subadvisory Agreement provides that the
subadviser will furnish investment advisory services in connection with the management of the Fund. In
that regard, the Sub-Adviser is obligated to keep certain books and records of the Fund. Under the Subadvisory
Agreement, the Sub-Adviser, subject to the supervision of the Adviser, is responsible for managing the
assets of the Fund in accordance with the Fund’s investment objectives, policies and restrictions.
The Sub-Adviser determines what securities and other instruments are purchased and sold for the Fund
and is responsible for obtaining and evaluating financial data relevant to the Fund. The Adviser continues
to have responsibility for all investment advisory services provided to the Fund pursuant to the Management
Agreement and supervises the Sub-Adviser's performance of such services.
The SubAdvisory Agreement
may be terminated by the Fund, the Adviser or the Sub-Adviser upon 60 days written notice. The SubAdvisory
Agreement will continue in effect for a period of not more than two years from its execution only so
long as such continuance is specifically approved at least annually in accordance with the requirements
of the 1940 Act.
Other Accounts Managed by the Portfolio Managers
|
|
|
|
|
|
|
|
|
Other Accounts Managed
As
of December 31, 2018
|
Accounts with respect to which
the advisory fee is based on the
performance
of the account
|
|
Name of
Portfolio
Manager
|
Category of Account
|
Number of Accounts in Category
|
Total Assets in Accounts in Category
|
Number of Accounts in Category
|
Total Assets in Accounts in Category
|
|
J. Paul Dokas
|
Registered investment companies
|
2
|
$1.440 million
|
0
|
0
|
|
|
Other pooled
|
1
|
$153 million
|
1
|
0
|
29
|
|
|
|
|
|
|
|
|
investment vehicles
|
|
|
|
|
|
|
Other accounts
|
10
|
$943 million
|
0
|
0
|
|
Robert E. Ginsberg
|
Registered investment companies
|
4
|
$1,706 million
|
0
|
0
|
|
|
Other pooled investment
vehicles
|
1
|
$153 million
|
0
|
0
|
|
|
Other accounts
|
13
|
$973 million
|
0
|
0
|
Portfolio
Manager Compensation
The portfolio managers are compensated by the Sub-Adviser. Each portfolio manager’s
compensation consists of a fixed annual base salary and a share of the firm’s profits. Compensation
of the portfolio managers is not tied directly to the Fund’s performance or assets under management.
Portfolio
Manager Share Ownership
Pacific Global US Equity Income ETF
J. Paul Dokas:
None
Robert E Ginsberg:
None
Conflicts
of Interest
A conflict of interest may arise as a result of the Portfolio Managers being responsible
for multiple accounts, including the Fund that may have different investment guidelines and objectives.
In addition to the Fund, these accounts may include other mutual funds managed on an advisory or sub-advisory
basis, separate accounts and collective trust accounts. An investment opportunity may be suitable for
the Fund as well as for any of the other managed accounts. However, the investment may not be available
in sufficient quantity for all of the accounts to participate fully. In addition, there may be limited
opportunity to sell an investment held by the Fund or the other account. The other accounts may have
similar investment objectives or strategies as the Fund, may track the same benchmarks or indices as
the Fund tracks, and may sell securities that are eligible to be held, sold or purchased by the Fund.
The Portfolio Managers may be responsible for accounts that have different advisory fee schedules, such
as performance-based fees, which may create an incentive for the Portfolio Managers to favor one account
over another in terms of access to investment opportunities or the allocation of the Portfolio Managers’
time and resources. The Portfolio Managers may also manage accounts whose investment objectives and policies
differ from those of the Fund, which may cause the Portfolio Managers to effect trading in one account
that may have an adverse effect on the value of the holdings within another account, including the Fund.
To
address and manage these potential conflicts of interest, the Sub-Adviser has adopted compliance policies
and procedures to allocate investment opportunities and to ensure that each of their clients is treated
on a fair and equitable basis. Such policies and procedures include, but are not limited to, trade allocation
and trade aggregation policies and oversight by investment management and the Compliance team.
Custodian
U.S.
Bank, N.A. (the “Custodian”), located at 1555 North River Center Drive, Suite 302, Milwaukee,
WI 53212, serves as custodian for the Fund pursuant to a custody agreement between the Trust, on behalf
of the Fund, and the Custodian. In that capacity, the Custodian holds the Fund’s assets.
30
The
Transfer Agent and Administrator
U.S. Bancorp Fund Services, LLC (the “Administrator”),
located at 615 East Michigan Street, Milwaukee, WI 53202, serves as the Fund’s transfer agent pursuant
to a transfer agent servicing agreement. In addition, the Administrator provides various accounting services
to the Fund pursuant to the fund accounting servicing agreement. The Trust and the Administrator have
entered into the fund administration servicing agreement (“Administration Agreement”). Under
the Administration Agreement, the Administrator provides the Trust with administrative services, including
providing certain operational, clerical, recordkeeping and/or bookkeeping services. 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 the Administrator’s refusal or failure to comply
with the terms of the Administration Agreement or from the Administrator’s bad faith, negligence,
or willful misconduct in the performance of its duties under the Administration Agreement.
The Distributor
Foreside Fund Services,
LLC (“Distributor”), located at Three Canal Plaza, Portland, Maine 04101, serves as the distributor
of Creation Units for the Trust on an agency basis. The Trust has entered into a distribution agreement
with the Distributor (“Distribution Agreement”), under which the Distributor, as agent, reviews
and approves orders by Authorized Participants to create and redeem shares in Creation Units. The Distributor
is a broker-dealer registered under the 1934 Act and a member of the Financial Industry Regulatory Authority,
Inc. (“FINRA”). Shares will be continuously offered for sale only in Creation Units. The Distributor
will deliver a prospectus to Authorized Participants purchasing Shares in Creation Units and will maintain
records of confirmations of acceptance furnished by it to Authorized Participants. The Distributor has
no role in determining the investment policies of the Fund or which securities are to be purchased or
sold by the Fund. No compensation is payable by the Trust to the Distributor for such distribution services.
However, the Adviser has entered into an agreement with the Distributor under which it makes payments
to the Distributor in consideration for its services under the Distribution Agreement. The payments made
by the Adviser to the Distributor do not represent an additional expense to the Trust, the Fund or its
shareholders.
The Distributor may also enter into agreements with securities dealers (“Dealers”)
who will assist in the distribution of Shares. The Distributor will only enter into agreements with firms
wishing to purchase Creation Units if the firm qualifies as an Authorized Participant (as discussed in
“Procedures for Purchase 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.
The Adviser or its affiliates, out of its own resources and not out of Fund assets
(i.e., without additional cost to the Fund or its shareholders), may pay certain broker dealers, banks
and other financial intermediaries (“Intermediaries”) for certain activities related to the
Fund, including participation in activities that are designed to make Intermediaries more knowledgeable
about exchange traded products, including the Fund, or for other activities, such as marketing and educational
training or support. These arrangements are not financed by the Fund and, thus, do not result in increased
Fund expenses. They
31
are
not reflected in the fees and expenses listed in the fees and expenses sections of the Fund’s Prospectus
and they do not change the price paid by investors for the purchase of Shares or the amount received
by a shareholder as proceeds from the redemption of Shares. Such compensation may be paid to Intermediaries
that provide services to the Fund, including marketing and education support (such as through conferences,
webinars and printed communications). The Adviser periodically assesses the advisability of continuing
to make these payments. Payments to an Intermediary may be significant to the Intermediary, and amounts
that Intermediaries pay to your adviser, broker or other investment professional, if any, may also be
significant to such adviser, broker or investment professional. Because an Intermediary may make decisions
about what investment options it will make available or recommend, and what services to provide in connection
with various products, based on payments it receives or is eligible to receive, such payments create
conflicts of interest between the Intermediary and its clients. For example, these financial incentives
may cause the Intermediary to recommend the Fund over other investments. The same conflict of interest
exists with respect to your financial adviser, broker or investment professional if he or she receives
similar payments from his or her Intermediary firm.
Intermediary information is current only as
of the date of this SAI. Please contact your adviser, broker or other investment professional for more
information regarding any payments his or her Intermediary firm may receive.
Any payments made by the
Adviser or its affiliates to an Intermediary may create the incentive for an Intermediary to encourage
customers to buy Shares.
Counsel
Thompson Hine LLP is counsel to the Trust, including the Fund and the Trustees that
are not interested persons of the Trust, as that term is defined in the 1940 Act.
Independent Registered Public
Accounting Firm
Deloitte & Touche serves as the Trust’s independent registered public accounting
firm and audits the Fund’s financial statements and performs other related audit services.
PORTFOLIO HOLDINGS DISCLOSURE
The Fund’s portfolio
holdings are publicly disseminated each day the Fund is open for business through financial reporting
and news services, including publicly accessible Internet web sites. In addition, a basket composition
file, which includes the security names and share quantities to deliver in exchange for Creation Units,
together with estimates and actual Cash Amounts is publicly disseminated daily prior to the opening of
the Exchange via the National Securities Clearing Corporation (“NSCC”), a clearing agency that
is registered with the SEC. The basket represents one Creation Unit of the Fund. The Trust, the Adviser,
Administrator, Custodian and Distributor will not disseminate non-public information concerning the Trust.
QUARTERLY PORTFOLIO SCHEDULE
The Trust is required to
disclose, after its first and third fiscal quarters, the complete schedule of the Fund’s portfolio
holdings with the SEC on Form N-Q. Form N-Q for the Fund will be available on the SEC’s website
at http://www.sec.gov. The Fund’s Form N-Q may also be reviewed and copied at the SEC’s Public
Reference Room in Washington, D.C. and information on the operation of the Public Reference Room may
be obtained by calling 202.551.8090.
CODE OF ETHICS
The Trust and the Adviser have each adopted codes of ethics pursuant to Rule 17j-1
of the 1940 Act. These codes of ethics are designed to prevent affiliated persons of the Trust and the
Adviser from engaging in deceptive, manipulative or fraudulent activities in connection with securities
held or to be
32
acquired
by the Fund (which may also be held by persons subject to the codes of ethics). Each Code of Ethics permits
personnel subject to that Code of Ethics to invest in securities for their personal investment accounts,
subject to certain limitations, including limitations related to securities that may be purchased or
held by the Fund. The Distributor (as defined below) relies on the principal underwriters exception under
Rule 17j-1(c)(3), specifically where the Distributor is not affiliated with the Trust and the Adviser,
and no officer, director, or general partner of the Distributor serves as an officer, director, or general
partner of the Trust or the Adviser.
There can be no assurance that the codes of ethics will be effective
in preventing such activities. Each code of ethics may be examined at the office of the SEC in Washington,
D.C. or on the Internet at the SEC’s website at http://www.sec.gov.
PROXY VOTING POLICIES AND PROCEDURES
Information regarding how
the Fund voted proxies related to portfolio securities during the most recent 12-month period ended June
30 is available, without charge, upon request, by calling (866) 933-2398 or on the Fund’s website,
and on the SEC’s website at http://www.sec.gov. Proxies for the Fund’s portfolio securities
are voted in accordance with the Adviser’s and/or sub-adviser’s proxy voting policies and procedures,
which are set forth in Appendix A to this SAI.
The Trust is required to disclose annually the Fund’s complete
proxy voting record on Form N-PX covering the period July 1 through June 30 and file it with the SEC
no later than August 31. Form N-PX for the Fund is available by writing to the Trust, c/o Foreside Fund
Services, LLC at 3 Canal Plaza, Suite 100, Portland, ME 04101. The Fund’s Form N-PX will also be
available on the SEC’s website at www.sec.gov.
BROKERAGE TRANSACTIONS
The policy of the Trust regarding purchases and sales of securities
for the 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 Trust’s policy is to pay commissions that 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 the Fund and the Sub-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 Sub-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 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.
33
Subject
to the foregoing policies, brokers or dealers selected to execute the Fund’s portfolio transactions
may include the Fund’s Authorized Participants (as discussed in “Procedures for Purchase of
Creation Units” below) or their affiliates. An Authorized Participant or its affiliates may be selected
to execute the Fund’s portfolio transactions in conjunction with an all-cash creation unit order
or an order including “cash-in-lieu” (as described below under “Purchase and Redemption
of Shares in Creation Units”), so long as such selection is in keeping with the foregoing policies.
As described below under “Purchase and Redemption of Shares in Creation Units—Creation Transaction
Fee” and “—Redemption Transaction Fee”, the Fund may determine to not charge a variable
fee on certain orders when the Adviser has determined that doing so is in the best interests of Fund
shareholders, e.g., for creation orders that facilitate the rebalance of the Fund’s portfolio in
a more tax efficient manner than could be achieved without such order, even if the decision to not charge
a variable fee could be viewed as benefiting the Authorized Participant or its affiliate selected to
executed the Fund’s portfolio transactions in connection with such orders.
The Fund may deal with affiliates
in principal transactions to the extent permitted by exemptive order or applicable rule or regulation.
The
Adviser is responsible, subject to oversight by the Board, for placing orders on behalf of the Fund for
the purchase or sale of portfolio securities. If purchases or sales of portfolio securities of the Fund
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 Fund 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 Fund. The primary consideration is prompt execution of orders at the most favorable net price.
In
certain instances, the Adviser may find it efficient for purposes of seeking to obtain best execution,
to aggregate or “bunch” certain contemporaneous purchases or sale orders of its advisory accounts
and advisory accounts of affiliates. In general, all contemporaneous trades for client accounts under
management by the same portfolio manager or investment team will be bunched in a single order if the
trader believes the bunched trade would provide each client with an opportunity to achieve a more favorable
execution at a potentially lower execution cost. The costs associated with a bunched order will be shared
pro rata among the clients in the bunched order. Generally, if an order for a particular portfolio manager
or management team is filled at several different prices through multiple trades, all accounts participating
in the order will receive the average price (except in the case of certain international markets where
average pricing is not permitted). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Fund are concerned, in other cases it could be
beneficial to the Fund. Transactions effected by the Adviser or the other affiliates on behalf of more
than one of its clients during the same period may increase the demand for securities being purchased
or the supply of securities being sold, causing an adverse effect on price. The trader will give the
bunched order to the broker-dealer that the trader has identified as being able to provide the best execution
of the order. Orders for purchase or sale of securities will be placed within a reasonable amount of
time of the order receipt and bunched orders will be kept bunched only long enough to execute the order.
The
Fund's purchase and sale orders for securities may be combined with those of other investment companies,
clients or accounts that the Adviser manages or advises. If purchases or sales of portfolio securities
of the Fund and one or more other accounts managed or advised by the Adviser are considered at or about
the same time, transactions in such securities are allocated among the Fund and the other accounts in
a manner deemed equitable to all by Adviser. In some cases, this procedure could have a detrimental effect
on the price or volume of the security as far as the Fund is concerned. However, in other cases, it is
possible that the ability to participate in volume transactions and to negotiate lower transaction costs
will be beneficial to the Fund. The Adviser may deal, trade and invest for its own account in the types
of securities in which the Fund may invest. The Adviser may, from time to time, effect trades on behalf
of and for the account of the Fund with brokers or dealers that are affiliated with BFA, in conformity
with the 1940 Act and SEC rules and regulations. Under these provisions, any commissions
34
paid
to affiliated brokers or dealers must be reasonable and fair compared to the commissions charged by other
brokers or dealers in comparable transactions. The Fund will not deal with affiliates in principal transactions
unless permitted by applicable SEC rules or regulations, or by SEC exemptive order.
Portfolio turnover may vary
from year to year, as well as within a year. High turnover rates may result in comparatively greater
brokerage expenses.
As permitted by Section 28(e) of the 1934 Act, the Sub-Adviser may cause the Fund
to pay a broker-dealer which provides “brokerage and research services” (as defined in the
1934 Act) to the Sub-Adviser an amount of disclosed commission or spread (sometimes called “soft
dollars”) for effecting a securities transaction for the Trust in excess of the commission or spread
which another broker-dealer would have charged for effecting that transaction, if the Sub-Adviser determines
in good faith that the commission is reasonable given the brokerage and/or research services provided
by the broker-dealer.
In selecting broker-dealers that provide research or brokerage services that are
paid for with soft dollars, potential conflicts of interest may arise between the Sub-Adviser and the
Trust because the Sub-Adviser does not produce or pay for these research or brokerage services, but rather
uses brokerage commissions generated by Fund transactions to pay for them. In addition, the Sub-Adviser
may have an incentive to select a broker-dealer based upon the broker-dealer’s research or brokerage
services instead of the broker-dealer’s ability to achieve best execution.
BOOK ENTRY ONLY SYSTEM
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled “Shareholder Information—Buying and Selling Exchange-Traded
Shares.”
The Depository Trust Company (“DTC”) acts as securities depositary for
the Shares. Shares of the Fund are represented by securities registered in the name of DTC or its nominee
and deposited with, or on behalf of, DTC. Certificates will not be issued for Shares.
DTC, a limited-purpose trust
company, was created to hold securities of its participants (“DTC Participants”) and to facilitate
the clearance and settlement of securities transactions among the DTC Participants in such securities
through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need
for physical movement of securities certificates. DTC Participants include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their
representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by
the New York Stock Exchange ("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 (“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.
Conveyance of all notices, statements and other communications to Beneficial Owners
is effected as follows. Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required
to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the
Shares holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the
number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The
Trust shall provide each such DTC Participant with copies of such notice, statement or other communication,
in such form, number and at such place as such DTC Participant may reasonably request, in order that
such
35
notice,
statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such
Beneficial Owners. In addition, the Trust shall pay to each such DTC Participant a fair and reasonable
amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory
and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the registered
holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately
DTC Participants’ accounts with payments in amounts proportionate to their respective beneficial
interests in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect
Participants and Beneficial Owners of Shares held through such DTC Participants will be governed by standing
instructions and customary practices, as is now the case with securities held for the accounts of customers
in bearer form or registered in a “street name,” and will be the responsibility of such DTC
Participants.
The Trust has no responsibility or liability for any aspects of the records relating
to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in
such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship
between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such
DTC Participants.
DTC may determine to discontinue providing its service with respect to the Shares
at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect
thereto under applicable law. Under such circumstances, the Trust shall take action either to find a
replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable,
to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other
arrangements with respect thereto satisfactory to the Exchange.
CREATION AND REDEMPTION OF CREATION UNITS
General
The Fund will issue and sell Shares only in
Creation Units on a continuous basis, without an initial sales load, at their NAV next determined after
receipt, on any Business Day (as defined herein), of an order in proper form. An Authorized Participant
(defined below) that is not “qualified institutional buyer,” as such term is defined under
Rule 144A of the Securities Act, will not be able to receive, as part of a redemption, restricted securities
eligible for resale under Rule 144A.
A “Business Day” with respect to the Fund is any day
on which the NYSE is open for business. As of the date of the Prospectus, the NYSE observes the following
holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day (Washington’s Birthday),
Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Fund
Deposit
The
consideration for purchase of a Creation Unit of the 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
Fund’s 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, the Fund may
incur additional costs associated with the acquisition of Deposit Securities that would otherwise be
provided by an in-kind purchaser.
36
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 the Fund. The “Cash Component” is an amount equal to the difference between the NAV of Shares
(per Creation Unit) and the value of the Deposit Securities or Deposit Cash, as applicable. If the Cash
Component is a positive number (i.e., the NAV per Creation Unit exceeds the 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 NAV per Creation Unit is less than the 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 NAV per Creation Unit and the 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.
The Fund, through NSCC,
makes available on each Business Day, 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 the Fund. Such Fund Deposit is subject to
any applicable adjustments as described below, to effect purchases of Creation Units of the 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 the Fund changes as rebalancing
adjustments and corporate action events are reflected from time to time by the Adviser with a view to
the investment objective of the Fund.
The Trust reserves the right to permit or require the substitution
of Deposit Cash to replace any Deposit Security, which shall be added to 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
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 a Fund Deposit, in the composition of the subject Index being
tracked by the Fund or resulting from certain corporate actions.
Procedures for Purchase of Creation Units
To
be eligible to place orders with the Transfer Agent to purchase a Creation Unit of the 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, with respect to purchases and redemptions of Creation Units. Each Authorized Participant
will agree, pursuant to the terms of a Participant Agreement, on behalf of itself or any investor on
whose behalf it will act, to certain conditions, including that it will pay to the Trust, an amount of
cash sufficient to pay the Cash Component together with the creation transaction fee (described below),
if applicable, and any other applicable fees and taxes.
37
Purchases
and redemptions of Creation Units may be made in whole or in part on a cash basis, rather than in-kind,
solely under the following circumstances:
1.
to the extent
there is a Cash Amount;
2.
if, on a given Business Day, the
Fund announces before the open of trading that all purchases, all redemptions, or all purchases and redemptions
on that day will be made entirely in cash;
3.
if, upon receiving
a purchase or redemption order from an Authorized Participant, the Fund determines to require the purchase
or redemption, as applicable, to be made entirely in cash;
4.
if,
on a given Business Day, the Fund requires all Authorized Participants purchasing or redeeming Fund shares
on that day to deposit or receive (as applicable) cash in lieu of some or all of the in-kind securities
deposited or redeemed, respectively, solely because: (i) such securities are not eligible for transfer
through either the Clearing Process (defined below) or DTC Process; or (ii) in the case of the Fund holding
foreign instruments, such instruments are not eligible for trading due to local trading restrictions,
local restrictions on securities transfers or other similar circumstances; or
5.
if
the Fund permits an Authorized Participant to deposit or receive (as applicable) cash in lieu of some
or all of the in-kind securities deposited or redeemed, respectively, solely because: (i) such securities
are, in the case of the purchase of a Creation Unit, not available in sufficient quantity; (ii) such
securities are not eligible for trading by an Authorized Participant or the investor on whose behalf
the Authorized Participant is acting; or (iii) a holder of shares of the Fund holding foreign instruments
would be subject to unfavorable income tax treatment if the holder receives redemption proceeds in kind.
All
orders to purchase Shares directly from the 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 order
cut-off time for the Fund for orders to purchase Creation Units is expected to be 4:00 p.m. Eastern Time,
which time may be modified by the Fund from time-to-time by amendment to the Participant Agreement and/or
applicable order form. In the case of custom orders, the order must be received by the Transfer Agent
no later than 3:00 p.m. Eastern Time or such earlier time as may be designated by the Fund and disclosed
to Authorized Participants. 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.” In all circumstances, any early cut-off time will be after: (1) the NAV is calculated for
the day prior to the Order Placement Date and (2) the portfolio holdings or basket information is published
on 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 the Fund in Creation Units have to be placed
by the investor’s broker through an Authorized Participant that has executed a Participant Agreement.
In such cases there may be additional charges to such investor. At any given time, there may be only
a limited number of broker-dealers that have executed a Participant Agreement and only a small number
of such Authorized Participants may have international capabilities.
On days when the Exchange
closes earlier than normal, the Fund may require orders to create Creation Units to be placed earlier
in the day. In addition, if a market or markets on which the Fund’s investments are primarily traded
is closed, the Fund will also generally not accept orders on such day(s). Orders must be transmitted
by an Authorized Participant by telephone or other transmission method acceptable to the Transfer Agent
pursuant to procedures set forth in the Participant Agreement and in accordance with the applicable order
form. On behalf of the Fund, the Transfer Agent will notify the Custodian of such order. The Custodian
will then provide such information to the appropriate local sub-custodian(s). Those placing orders through
an Authorized Participant should allow sufficient time to permit proper submission of the purchase order
to the Transfer Agent by the cut-off time on such Business Day. Economic or market
38
disruptions
or changes, or telephone or other communication failure may impede the ability to reach the Transfer
Agent 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), through a sub-custody
agent (for foreign securities) and/or through such other arrangements allowed by the Trust or its agents.
With respect to foreign Deposit Securities, the Custodian shall cause the sub-custodian of the 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 (or Deposit Cash for all or a part of such securities,
as permitted or required), with any appropriate adjustments as advised by the Trust. Foreign Deposit
Securities must be delivered to an account maintained at the applicable local sub-custodian. A 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 the Fund
or its agents by no later than 12:00 p.m. Eastern Time (or such other time as specified by the Trust)
on the Settlement Date. If the Fund or its agents do not receive all of the Deposit Securities, or the
required Deposit Cash in lieu thereof, by such time, then the order may be deemed rejected and the Authorized
Participant shall be liable to the Fund for losses, if any, resulting therefrom. The “Settlement
Date” for the Fund is generally the second 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 the Custodian in a timely manner by the Settlement Date, the creation order may be
cancelled. Upon written notice to the Transfer Agent, such canceled order may be resubmitted the following
Business Day using the Fund Deposit as newly constituted to reflect the then current NAV of the applicable
Fund.
The order shall be deemed to be received on the Business Day on which the order is
placed provided that the order is placed in proper form prior to the applicable cut-off time and the
federal funds in the appropriate amount are deposited by 2:00 p.m. or 3:00 p.m., Eastern Time (as set
forth on the applicable order form), with the Custodian on the Settlement Date. If the order is not placed
in proper form as required, or federal funds in the appropriate amount are not received by 2:00 p.m.
or 3:00 p.m., Eastern Time (as set forth on the applicable order form) on the Settlement Date, then the
order may be deemed to be rejected and the Authorized Participant shall be liable to the Fund for losses,
if any, resulting therefrom. A creation request is considered to be in “proper form” if all
procedures set forth in the Participant Agreement, order form and this SAI are properly followed.
Issuance
of a Creation Unit
Except as provided in this SAI, Creation Units will not be issued until the transfer
of good title to the Fund of the Deposit Securities or payment of Deposit Cash, as applicable, and the
payment of the Cash Component have been completed. When the sub-custodian has confirmed to the Custodian
that the required Deposit Securities (or the cash value thereof) have been delivered to the account of
the relevant sub-custodian or sub-custodians, the Transfer Agent and the Adviser shall be notified of
such delivery, and the Fund will issue and cause the delivery of the Creation Units. The delivery of
Creation Units so created generally will occur no later than the second Business Day following the day
on which the purchase order is deemed received by the Transfer Agent. The Authorized Participant shall
be liable to the Fund for losses, if any, resulting from unsettled orders.
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 NAV of Shares on
the date the order is placed in proper form since, in addition to available Deposit Securities, cash
must be deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) an additional amount
of cash equal to a percentage of the value as set forth in the Participant Agreement, of the undelivered
Deposit Securities (the “Additional Cash Deposit”), which shall be
39
maintained
in a separate non-interest bearing collateral account. The Authorized Participant must deposit with the
Custodian the Additional Cash Deposit, as applicable, by 12:00 p.m. Eastern Time (or such other time
as specified by the Trust) on the Settlement Date. If the Fund or its agents do not receive the Additional
Cash Deposit in the appropriate amount, by such time, then the order may be deemed rejected and the Authorized
Participant shall be liable to the Fund for losses, if any, resulting therefrom. An additional amount
of cash shall be required to be deposited with the Fund, pending delivery of the missing Deposit Securities
to the extent necessary to maintain the Additional Cash Deposit with the Fund in an amount at least equal
to the applicable percentage, as set forth in the Participant Agreement, of the daily 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 value of such Deposit Securities
on the day the purchase order was deemed received by the Transfer Agent plus the brokerage and related
transaction costs associated with such purchases.
The Fund 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 described below under “Creation
Transaction Fee,” may be charged. The delivery of Creation Units so created generally will occur
no later than the Settlement Date.
Acceptance of Orders of Creation Units
The Trust and the Distributor
reserves the absolute right to reject an order for Creation Units transmitted to it by the Transfer Agent
with respect to the 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
Shares ordered, would own 80% or more of the currently outstanding Shares; (d) acceptance of the Deposit
Securities would have certain adverse tax consequences to the Fund; (e) the acceptance of a Fund Deposit
would, in the opinion of counsel, be unlawful; (f) the acceptance of a 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, a sub-custodian,
the Transfer Agent, DTC, NSCC, Federal Reserve System, or any other participant in the creation process,
and other extraordinary events. The Transfer Agent 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, any sub-custodian and the
Distributor are under no duty, however, to give notification of any defects or irregularities in the
delivery of Fund Deposits nor shall 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 Trust’s determination
shall be final and binding.
Creation Transaction Fee
A fixed purchase (i.e., creation) transaction fee, payable to
the Fund’s custodian, may be imposed for the transfer and other transaction costs associated with
the purchase of Creation Units (“Creation Order
40
Costs”).
The standard fixed creation transaction fee for the Fund is $500, regardless of the number of Creation
Units created in the transaction. The Fund may adjust the standard fixed creation transaction fee from
time to time. The fixed creation fee may be waived on certain orders if the Fund’s Custodian has
determined to waive some or all of the Creation Order Costs associated with the order or another party,
such as the Adviser, has agreed to pay such fee.
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
fixed costs of transferring the Fund Securities from the Trust to their account or on their order.
Risks
of Purchasing Creation Units
There are certain legal risks unique to investors purchasing Creation Units directly
from the Fund. Because 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. For example, a 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
person’s 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 Shares as part of an “unsold allotment” within the meaning of Section
4(a)(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption
provided by Section 4(a)(3) of the Securities Act.
Redemption.
Shares may be redeemed only in Creation Units at their NAV next
determined after receipt of a redemption request in proper form by the Fund through the Transfer Agent
and only on a Business Day. Except upon liquidation of the 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 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 the Fund,
the Custodian, through the NSCC, makes available 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 the Fund’s
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 the 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 NAV of 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 applicable, as set forth below. In the event
that the Fund Securities have a value greater than the NAV of 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 Trust’s 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.
41
Redemption
Transaction Fee
A fixed redemption transaction fee, payable to the Fund’s custodian, may be
imposed for the transfer and other transaction costs associated with the redemption of Creation Units
(“Redemption Order Costs”). The standard fixed redemption transaction fee for the Fund is $500
regardless of the number of Creation Units redeemed in the transaction. The Fund may adjust the redemption
transaction fee from time to time. The fixed redemption fee may be waived on certain orders if the Fund’s
custodian has determined to waive some or all of the Redemption Order Costs associated with the order
or another party, such as the Adviser, has agreed to pay such fee.
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 fixed costs of transferring the Fund Securities from the Trust to their account or on their order.
Procedures
for Redemption of Creation Units
Orders to redeem Creation Units must be submitted in proper form
to the Transfer Agent prior to 4:00 p.m. Eastern Time. A redemption request is considered to be in “proper
form” if (i) an Authorized Participant has transferred or caused to be transferred to the Trust’s
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 investor’s shares through DTC’s 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 investor’s 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 Trust’s
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.
Additional Redemption Procedures
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 two business days of the trade date.
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 next determined after the redemption request is received in proper
form (minus a redemption transaction fee, if applicable, and additional charge for requested cash redemptions
specified above, to offset the Trust’s brokerage and other transaction costs associated with the
disposition of Fund Securities). The Fund may also, in its sole discretion, upon request of a shareholder,
provide such redeemer a portfolio of securities that differs from the exact composition of the Fund Securities
but does not differ in NAV.
42
Redemptions
of Shares for Fund Securities will be subject to compliance with applicable federal and state securities
laws and the 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 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
to receive Fund Securities.
The right of redemption may be suspended or the date of payment postponed with respect
to the 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 Shares or determination
of the NAV of Shares is not reasonably practicable; or (4) in such other circumstance as is permitted
by the SEC.
For every occurrence of one or more intervening holidays in the applicable foreign
market that are not holidays observed in the U.S. equity market, the redemption settlement cycle will
be extended by the number of such intervening holidays. In addition to holidays, other unforeseeable
closings in a foreign market due to emergencies may also prevent the Trust from delivering securities
within normal settlement period.
The securities delivery cycles currently practicable for transferring
portfolio securities to redeeming investors, coupled with foreign market holiday schedules, will require,
in certain circumstances, a delivery process longer than seven calendar days for the Fund. Although certain
holidays may occur on different dates in subsequent years, the number of days required to deliver redemption
proceeds in any given year is not expected to exceed the maximum number of days listed below for the
Fund. The proclamation of new holidays, the treatment by market participants of certain days as “informal
holidays” (e.g., days on which no or limited securities transactions occur, as a result of substantially
shortened trading hours), the elimination of existing holidays, or changes in local securities delivery
practices, could affect the information set forth herein at some time in the future.
DETERMINATION OF NET ASSET VALUE
NAV for the Fund is computed by dividing the
value of the net assets of the Fund (i.e., the value of its total assets less total liabilities) by the
total number of Shares outstanding, 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 the 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 the Fund’s net asset value per Share, the Fund’s 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 fund’s 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 service’s
valuation matrix may be considered a market valuation. Any assets or liabilities denominated in currencies
other than the U.S.
43
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 Trust’s pricing procedures require the Valuation Committee
to determine a security’s fair value. In determining such value, the Valuation 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. In these cases, the Fund’s
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.
With respect to securities that are primarily listed on foreign exchanges, the value of the Fund’s
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 “Shareholder
Information—Distributions.”
General Policies
The Fund expects to declare and distribute
all of its net investment income, if any, to shareholders as dividends at least semi-annually. The Fund
may distribute such income dividends and capital gains more frequently, if necessary, in order to reduce
or eliminate federal excise or income taxes on the Fund.
Dividend Distributions
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.
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 the 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 the 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.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
The Trust does not have
information concerning the beneficial ownership of shares held in the names of Depository Trust Company
(“DTC”) participants.
TAXES
The following is a summary of certain additional tax considerations generally affecting
the Fund and its shareholders that are not described in the Prospectus. No attempt is made to present
a detailed
44
explanation
of the tax treatment of the Fund or its shareholders, and the discussion here and in the Prospectus is
not intended as a substitute for careful tax planning.
This “Taxes” section is based on
the Code and applicable regulations in effect on the date of this SAI. Future legislative, regulatory
or administrative changes, including provisions of current law that sunset and thereafter no longer apply,
or court decisions may significantly change the tax rules applicable to the Fund and its shareholders.
Any of these changes or court decisions may have a retroactive effect.
This is for general information
only and not tax advice. All investors should consult their own tax advisors as to the federal, state,
local and foreign tax provisions applicable to them.
Taxation of the Fund
The Fund will elect and
intends to qualify each year to be treated as a separate RIC under the Code. As such, the Fund should
not be subject to federal income taxes on its net investment income and capital gains, if any, to the
extent that it timely distributes such income and capital gains to its shareholders. To qualify for treatment
as a RIC, the Fund must distribute annually to its shareholders at least the sum of 90% of its net investment
income (generally including the excess of net short-term capital gains over net long-term capital losses)
and 90% of its net tax-exempt interest income, if any (the “Distribution Requirement”) and
also must meet several additional requirements. Among these requirements are the following: (i) at least
90% of the Fund’s gross income each taxable year must be derived from dividends, interest, payments
with respect to certain securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, or other income derived with respect to its business of investing in such stock,
securities or foreign currencies and net income derived from interests in qualified publicly traded partnerships
(the “Qualifying Income Requirement”); and (ii) at the end of each quarter of the Fund’s
taxable year, the Fund’s assets must be diversified so that (a) at least 50% of the value of the
Fund’s total assets is represented by cash and cash items, U.S. government securities, securities
of other RICs, and other securities, with such other securities limited, in respect to any one issuer,
to an amount not greater in value than 5% of the value of the Fund’s total assets and to not more
than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified
publicly traded partnership, and (b) not more than 25% of the value of its total assets is invested,
including through corporations in which the Fund owns a 20% or more voting stock interest, in the securities
(other than U.S. government securities or securities of other RICs) of any one issuer, the securities
(other than securities of other RICs) of two or more issuers 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 partnerships (the “Diversification Requirement”).
It may not be possible for the Fund to fully
implement a replication strategy or a representative sampling strategy while satisfying the Diversification
Requirement. The Fund’s efforts to satisfy the Diversification Requirement may affect the Fund’s
execution of its investment strategy and may cause the Fund’s return to deviate from that of the
Index, and the Fund’s efforts to represent the Index using a sampling strategy, if such a strategy
is used at any point, may cause it inadvertently to fail to satisfy the Diversification Requirement.
To
the extent the Fund makes investments that may generate income that is not qualifying income, including
certain derivatives, the Fund will seek to restrict the resulting income from such investments so that
the Fund’s non-qualifying income does not exceed 10% of its gross income.
Although the Fund intends
to distribute substantially all of its net investment income and may distribute its capital gains for
any taxable year, the Fund will be subject to federal income taxation to the extent any such income or
gains are not distributed. The Fund is treated as a separate corporation for federal income tax purposes.
The Fund therefore is considered to be a separate entity in determining its treatment under the rules
for RICs described herein. The requirements (other than certain organizational requirements) for qualifying
RIC status are determined at the Fund level rather than at the Trust level.
45
If
the Fund fails to satisfy the Qualifying Income Requirement or the Diversification Requirement in any
taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause
and not willful neglect, and if a penalty tax is paid with respect to each failure to satisfy the applicable
requirements. Additionally, relief is provided for certain de minimis failures of the Diversification
Requirement where the Fund corrects the failure within a specified period of time. To be eligible for
the relief provisions with respect to a failure to meet the Diversification Requirement, the Fund may
be required to dispose of certain assets. If these relief provisions were not available to the Fund and
it were to fail to qualify for treatment as a RIC for a taxable year, all of its taxable income would
be subject to tax at regular corporate rates without any deduction for distributions to shareholders,
and its distributions (including capital gains distributions) generally would be taxable to the shareholders
of the Fund as ordinary income dividends, subject to the dividends received deduction for corporate shareholders
and the lower tax rates on qualified dividend income received by non-corporate shareholders, subject
to certain limitations. To requalify for treatment as a RIC in a subsequent taxable year, the Fund would
be required to satisfy the RIC qualification requirements for that year and to distribute any earnings
and profits from any year in which the Fund failed to qualify for tax treatment as a RIC. If the Fund
failed to qualify as a RIC for a period greater than two taxable years, it would generally be required
to pay a fund-level tax on certain net built in gains recognized with respect to certain of its assets
upon disposition of such assets within five years of qualifying as a RIC in a subsequent year. The Board
reserves the right not to maintain the qualification of the Fund for treatment as a RIC if it determines
such course of action to be beneficial to shareholders. If the Fund determines that it will not qualify
as a RIC, the Fund will establish procedures to reflect the anticipated tax liability in the Fund’s
NAV.
The
Fund may elect to treat part or all of any “qualified late year loss” as if it had been incurred
in the succeeding taxable year in determining the Fund’s taxable income, net capital gain, net short-term
capital gain, and earnings and profits. The effect of this election is to treat any such “qualified
late year loss” as if it had been incurred in the succeeding taxable year in characterizing Fund
distributions for any calendar year. A “qualified late year loss” generally includes net capital
loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current
taxable year (commonly referred to as “post-October losses”) and certain other late-year losses.
Capital
losses in excess of capital gains (“net capital losses”) are not permitted to be deducted against
a RIC’s net investment income. Instead, for U.S. federal income tax purposes, potentially subject
to certain limitations, the Fund may carry a net capital loss from any taxable year forward indefinitely
to offset its capital gains, if any, in years following the year of the loss. To the extent subsequent
capital gains are offset by such losses, they will not result in U.S. federal income tax liability to
the Fund and may not be distributed as capital gains to its shareholders. Generally, the Fund may not
carry forward any losses other than net capital losses. The carryover of capital losses may be limited
under the general loss limitation rules if the Fund experiences an ownership change as defined in the
Code.
The
Fund will be subject to a nondeductible 4% federal excise tax on certain undistributed income if it does
not distribute to its shareholders in each calendar year an amount at least equal to 98% of its ordinary
income for the calendar year plus 98.2% of its capital gain net income for the one-year period ending
on October 31 of that year, subject to an increase for any shortfall in the prior year’s distribution.
In order to qualify as a regulated investment company, and avoid being subject to federal income or excise
taxes at the fund level, the Fund intends to distribute substantially all of its net investment income
and net realized capital gains within each calendar year as well as on a fiscal year basis (if the fiscal
year is other than the calendar year), and intends to comply with other tax rules applicable to regulated
investment companies.
If the Fund meets the Distribution Requirement but retains some or all of its income
or gains, it will be subject to federal income tax to the extent any such income or gains are not distributed.
The Fund may designate certain amounts retained as undistributed net capital gain in a notice to its
shareholders, who (i) will be required to include in income for U.S. federal income tax purposes, as
long-term capital gain, their proportionate shares of the undistributed amount so designated, (ii) will
be entitled to credit their proportionate shares of the income tax paid by the Fund on that undistributed
amount against their federal income tax liabilities and to claim refunds to the extent such credits exceed
their tax liabilities, and
46
(iii) will be entitled to increase their tax basis, for federal income tax purposes, in their Shares
by an amount equal to the excess of the amount of undistributed net capital gain included in their respective
income over their respective income tax credits.
Taxation of Shareholders – Distributions
The Fund intends to distribute
annually to its shareholders substantially all of its investment company taxable income (computed without
regard to the deduction for dividends paid), its net tax-exempt income, if any, and any net capital gain
(net recognized long-term capital gains in excess of net recognized short-term capital losses, taking
into account any capital loss carryforwards). The distribution of investment company taxable income (as
so computed) and net capital gain will be taxable to Fund shareholders regardless of whether the shareholder
receives these distributions in cash or reinvests them in additional Shares.
The Fund (or your broker)
will report to shareholders annually the amounts of dividends paid from ordinary income, the amount of
distributions of net capital gain, the portion of dividends which may qualify for the dividends received
deduction for corporations, and the portion of dividends which may qualify for treatment as qualified
dividend income, which is taxable to non-corporate shareholders at rates of up to 20%.
Distributions from the Fund’s
net capital gain will be taxable to shareholders at long-term capital gains rates, regardless of how
long shareholders have held their Shares.
Qualified dividend income includes, in general and subject to
certain holding period and other requirements, dividend income from taxable domestic corporations and
certain foreign corporations. Subject to certain limitations, eligible foreign corporations include those
incorporated in possessions of the United States, those incorporated in certain countries with comprehensive
tax treaties with the United States, and other foreign corporations if the stock with respect to which
the dividends are paid is readily tradable on an established securities market in the United States.
Dividends received by the Fund from an ETF or an underlying fund taxable as a RIC or a REIT may be treated
as qualified dividend income generally only to the extent so reported by such ETF, underlying fund or
REIT. If 95% or more of the Fund’s gross income (calculated without taking into account net capital
gain derived from sales or other dispositions of stock or securities) consists of qualified dividend
income, the Fund may report all distributions of such income as qualified dividend income.
Fund dividends will not
be treated as qualified dividend income if the Fund does not meet holding period and other requirements
with respect to dividend paying stocks in its portfolio, and the shareholder does not meet holding period
and other requirements with respect to the Shares on which the dividends were paid. Distributions by
the Fund of its net short-term capital gains will be taxable as ordinary income. Distributions from the
Fund’s net capital gain will be taxable to shareholders at long-term capital gains rates, regardless
of how long shareholders have held their Shares. Distributions may be subject to state and local taxes.
In
the case of corporate shareholders, certain dividends received by the Fund from U.S. corporations (generally,
dividends received by the Fund in respect of any share of stock (1) with a tax holding period of at least
46 days during the 91-day period beginning on the date that is 45 days before the date on which the stock
becomes ex-dividend as to that dividend and (2) that is held in an unleveraged position) and distributed
and appropriately so reported by the Fund may be eligible for the 70% dividends-received deduction. Certain
preferred stock must have a holding period of at least 91 days during the 181-day period beginning on
the date that is 90 days before the date on which the stock becomes ex-dividend as to that dividend in
order to be eligible. Capital gain dividends distributed to the Fund from other RICs are not eligible
for the dividends-received deduction. In order to qualify for the deduction, corporate shareholders must
meet the minimum holding period requirement stated above with respect to their Shares, taking into account
any holding period reductions from certain hedging or other transactions or positions that diminish their
risk of loss with respect to their Shares, and, if they borrow to acquire or
47
otherwise
incur debt attributable to Shares, they may be denied a portion of the dividends-received deduction with
respect to those Shares.
Although dividends generally will be treated as distributed when paid, any dividend
declared by the Fund in October, November or December and payable to shareholders of record in such a
month that is paid during the following January will be treated for U.S. federal income tax purposes
as received by shareholders on December 31 of the calendar year in which it was declared.
U.S. individuals with adjusted
gross income (subject to certain adjustments) exceeding certain threshold amounts ($250,000 if married
filing jointly or if considered a “surviving spouse” for federal income tax purposes, $125,000
if married filing separately, and $200,000 in other cases) are subject to a 3.8% Medicare contribution
tax on all or a portion of their “net investment income,” which includes taxable interest,
dividends, and certain capital gains (generally including capital gain distributions and capital gains
realized on the sale of Shares). This 3.8% tax also applies to all or a portion of the undistributed
net investment income of certain shareholders that are estates and trusts.
Shareholders who have not
held Shares for a full year should be aware that the Fund may report and distribute, as ordinary dividends
or capital gain dividends, a percentage of income that is not equal to the percentage of the Fund’s
ordinary income or net capital gain, respectively, actually earned during the applicable shareholder’s
period of investment in the Fund. A taxable shareholder may wish to avoid investing in the Fund shortly
before a dividend or other distribution, because the distribution will generally be taxable even though
it may economically represent a return of a portion of the shareholder’s investment.
To the extent that the Fund
makes a distribution of income received by the Fund in lieu of dividends (a “substitute payment”)
with respect to securities on loan pursuant to a securities lending transaction, such income will not
constitute qualified dividend income to individual shareholders and will not be eligible for the dividends
received deduction for corporate shareholders.
If the Fund’s distributions exceed its earnings and profits,
all or a portion of the distributions made for a taxable year may be recharacterized as a return of capital
to shareholders. A return of capital distribution will generally not be taxable, but will reduce each
shareholder’s cost basis in the Fund and result in a higher capital gain or lower capital loss when
Shares on which the distribution was received are sold. After a shareholder’s basis in Shares has
been reduced to zero, distributions in excess of earnings and profits will be treated as gain from the
sale of the shareholder’s Shares.
Taxation of Shareholders – Sale of Shares
A sale, redemption, or exchange
of Shares 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 Shares have been held for more than 12
months. Otherwise, the gain or loss on the taxable disposition of Shares will generally be treated as
short-term capital gain or loss. Any loss realized upon a taxable disposition of Shares held for six
months or less will be treated as long-term capital loss, rather than short-term capital loss, to the
extent of any amounts treated as distributions to the shareholder of long-term capital gain (including
any amounts credited to the shareholder as undistributed capital gains). All or a portion of any loss
realized upon a taxable disposition of Shares may be disallowed if substantially identical Shares are
acquired (through the reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the disposition. In such a case, the basis of the newly acquired Shares
will be adjusted to reflect the disallowed loss.
The cost basis of Shares acquired by purchase will generally
be based on the amount paid for Shares and then may be subsequently adjusted for other applicable transactions
as required by the Code. The difference between the selling price and the cost basis of Shares generally
determines the amount of the capital gain or loss realized on the sale or exchange of Shares. Contact
the broker through whom you purchased your Shares to obtain information with respect to the available
cost basis reporting methods and elections for your account. An Authorized Participant who exchanges
securities for Creation Units
48
generally
will recognize a gain or a loss. The gain or loss will be equal to the difference between the market
value of the Creation Units at the time and the sum of the exchanger’s aggregate basis in the securities
surrendered plus the amount of cash paid for such Creation Units. A person who redeems Creation Units
will generally recognize a gain or loss equal to the difference between the exchanger’s basis in
the Creation Units and the sum of the aggregate market value of any securities received plus the amount
of any cash received for such Creation Units. The Internal Revenue Service (the “IRS”), however,
may assert that a loss realized upon an exchange of securities for Creation Units cannot currently be
deducted under the rules governing “wash sales” (for a person who does not mark-to-market its
portfolio) 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 Shares comprising the Creation Units have been held for more than one year. Otherwise,
such capital gains or losses will generally be treated as short-term capital gains or losses. Any loss
upon a redemption of Creation Units held for six months or less may be treated as long-term capital loss
to the extent of any amounts treated as distributions to the applicable Authorized Participant of long-term
capital gain with respect to the Creation Units (including any amounts credited to the Authorized Participant
as undistributed capital gains).
The Trust, on behalf of the Fund, has the right to reject an
order for Creation Units if the purchaser (or a group of purchasers) would, upon obtaining the Creation
Units so ordered, own 80% or more of the outstanding Shares and if, pursuant to Section 351 of the Code,
the Fund would have a basis in the deposit securities different from the market value of such securities
on the date of deposit. The Trust also has the right to require the provision of information necessary
to determine beneficial Share ownership for purposes of the 80% determination. If the Fund does issue
Creation Units to a purchaser (or a group of purchasers) that would, upon obtaining the Creation Units
so ordered, own 80% or more of the outstanding Shares, the purchaser (or a group of purchasers) will
not recognize gain or loss upon the exchange of securities for Creation Units.
Persons purchasing or redeeming
Creation Units should consult their own tax advisers with respect to the tax treatment of any creation
or redemption transaction and whether the wash sales rule applies and when a loss may be deductible.
Taxation
of Fund Investments
Certain of the Fund’s investments may be subject to complex provisions of the
Code (including provisions relating to hedging transactions, straddles, integrated transactions, foreign
currency contracts, forward foreign currency contracts, and notional principal contracts) that, among
other things, may affect the Fund’s ability to qualify as a RIC, affect the character of gains and
losses realized by the Fund (e.g., may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer losses. These rules could therefore affect the character,
amount and timing of distributions to shareholders. These provisions also may require the Fund to mark
to market certain types of positions in its portfolio (i.e., treat them as if they were closed out) which
may cause the Fund to recognize income without the Fund receiving cash with which to make distributions
in amounts sufficient to enable the Fund to satisfy the RIC distribution requirements for avoiding income
and excise taxes. The Fund intends to monitor its transactions, intends to make appropriate tax elections,
and intends to make appropriate entries in its books and records in order to mitigate the effect of these
rules and preserve the Fund’s qualification for treatment as a RIC. To the extent the Fund invests
in an underlying fund that is taxable as a RIC, the rules applicable to the tax treatment of complex
securities will also apply to the underlying funds that also invest in such complex securities and investments.
Backup
Withholding
The Fund will be required in certain cases to withhold (as “backup withholding”)
on amounts payable to any shareholder who (1) fails to provide a correct taxpayer identification number
certified under penalty of
49
perjury;
(2) is subject to backup withholding by the IRS 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). The backup withholding rate is 24%. Backup withholding is not an additional tax
and any amounts withheld may be credited against the shareholder’s ultimate U.S. tax liability.
Backup withholding will not be applied to payments that have been subject to the 30% withholding tax
on shareholders who are neither citizens nor permanent residents of the United States.
Foreign Shareholders
Any non-U.S. investors in
the Fund may be subject to U.S. withholding and estate tax and shareholders are encouraged to consult
their tax advisors prior to investing in the Fund. 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 taxable ordinary income.
The Fund may, under certain circumstances, report all or a portion of a dividend as an “interest-related
dividend” or a “short-term capital gain dividend,” which would generally be exempt from
this 30% U.S. withholding tax, provided certain other requirements are met. Short-term capital gain dividends
received by a nonresident alien individual who is present in the U.S. for a period or periods aggregating
183 days or more during the taxable year are not exempt from this 30% withholding tax. Gains realized
by foreign shareholders from the sale or other disposition of Shares generally are not subject to U.S.
taxation, unless the recipient is an individual who is physically present in the U.S. for 183 days or
more per year. Foreign shareholders who fail to provide an applicable IRS form may be subject to backup
withholding on certain payments from the Fund. Backup withholding will not be applied to payments that
are subject to the 30% (or lower applicable treaty rate) withholding tax described in this paragraph.
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.
Unless certain non-U.S. entities that hold
Shares comply with IRS requirements that will generally require them to report information regarding
U.S. persons investing in, or holding accounts with, such entities, a 30% withholding tax may apply to
Fund distributions payable to such entities and with respect to redemptions and certain capital gain
dividends payable to such entities after December 31, 2018. A non-U.S. shareholder may be exempt from
the withholding described in this paragraph under an applicable intergovernmental agreement between the
U.S. and a foreign government, provided that the shareholder and the applicable foreign government comply
with the terms of the agreement.
For foreign shareholders to qualify for an exemption from backup
withholding, described above, the foreign shareholder must comply with special certification and filing
requirements. Foreign shareholders in the Fund should consult their tax advisors in this regard.
Tax-Exempt
Shareholders
Certain tax-exempt shareholders, including qualified pension plans, individual retirement
accounts, salary deferral arrangements, 401(k) plans, and other tax-exempt entities, generally are exempt
from federal income taxation except with respect to their unrelated business taxable income (“UBTI”).
Under current law, the Fund generally serves to block UBTI from being realized by its tax-exempt shareholders
with respect to their shares of Fund income. However, notwithstanding the foregoing, tax-exempt shareholders
could realize UBTI by virtue of their investment in the Fund if, for example, (i) the Fund invests in
residual interests of Real Estate Mortgage Investment Conduits (“REMICs”), (ii) the Fund invests
in a REIT that is a taxable mortgage pool (“TMP”) or that has a subsidiary that is a TMP or
that invests in the residual interest of a REMIC, or (iii) Shares constitute debt-financed property in
the hands of the tax-exempt shareholders within the meaning of section 514(b) of the Code. Charitable
remainder trusts are subject to special rules and should consult their tax advisers. The IRS has issued
guidance with respect to these issues and prospective shareholders, especially charitable remainder trusts,
are strongly encouraged to consult with their tax advisers regarding these issues.
50
Certain
Potential Tax Reporting Requirements
Under U.S. Treasury regulations, if a shareholder recognizes
a loss on disposition of Shares of $2 million or more for an individual shareholder or $10 million or
more for a corporate shareholder (or certain greater amounts over a combination of years), the shareholder
must file with the IRS a disclosure statement on IRS Form 8886. Direct shareholders of portfolio securities
are in many cases excepted from this reporting requirement, but under current guidance, shareholders
of a RIC are not excepted. Significant penalties may be imposed for the failure to comply with the reporting
requirements. The fact that a loss is reportable under these regulations does not affect the legal determination
of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax
advisers to determine the applicability of these regulations in light of their individual circumstances.
State
Tax
In
those states that have income tax laws, the tax treatment of the Fund and of Fund shareholders with respect
to distributions by the Fund may differ from federal tax treatment.
Tax Treatment of Portfolio Transactions
Set forth below is a general
description of the tax treatment of certain types of securities, investment techniques and transactions
that may apply to the Fund and, in turn, affect the amount, character and timing of dividends and distributions
payable by the fund to its shareholders. This section should be read in conjunction with the discussion
above under “Description of Permitted Investments” for a detailed description of the various
types of securities and investment techniques that apply to the Fund.
In General.
In general, gain or loss recognized
by the Fund on the sale or other disposition of portfolio investments will be a capital gain or loss.
Such capital gain and loss may be long-term or short-term depending, in general, upon the length of time
a particular investment position is maintained and, in some cases, upon the nature of the transaction.
Property held for more than one year generally will be eligible for long-term capital gain or loss treatment.
The application of certain rules described below may serve to alter the manner in which the holding period
for a security is determined or may otherwise affect the characterization as long-term or short-term,
and also the timing of the realization and/or character, of certain gains or losses.
Options, Futures, Forward Contracts and Hedging Transactions.
In general, option premiums received by the Fund are not immediately included in the income of the fund.
Instead, the premiums are recognized when the option contract expires, the option is exercised by the
holder, or the fund transfers or otherwise terminates the option (e.g., through a closing transaction).
If an option written by the Fund is exercised and the fund sells or delivers the underlying stock, the
fund generally will recognize capital gain or loss equal to (a) the sum of the strike price and the option
premium received by the fund minus (b) the fund’s basis in the stock. Such gain or loss generally
will be short-term or long-term depending upon the holding period of the underlying stock. If securities
are purchased by the Fund pursuant to the exercise of a put option written by it, the fund generally
will subtract the premium received from its cost basis in the securities purchased. The gain or loss
with respect to any termination of the Fund’s obligation under an option other than through the
exercise of the option and related sale or delivery of the underlying stock generally will be short-term
gain or loss depending on whether the premium income received by the fund is greater or less than the
amount paid by the fund (if any) in terminating the transaction. Thus, for example, if an option written
by the Fund expires unexercised, the fund generally will recognize short-term gain equal to the premium
received.
The
tax treatment of certain futures contracts entered into by the Fund as well as listed non-equity options
written or purchased by the Fund on U.S. exchanges (including options on futures contracts, broad-based
equity indices and debt securities) may be governed by section 1256 of the Code (“section 1256 contracts”).
Gains or losses on section 1256 contracts generally are considered 60% long-term and 40% short-term capital
gains or losses (“60/40”), although certain foreign currency gains and losses from such contracts
may be treated as ordinary in character. Also, any section 1256 contracts held by the Fund at
51
the
end of each taxable year (and, for purposes of the 4% excise tax, on certain other dates as prescribed
under the Code) are “marked to market” with the result that unrealized gains or losses are
treated as though they were realized and the resulting gain or loss is treated as ordinary or 60/40 gain
or loss, as applicable.
In addition to the special rules described above in respect of options and futures
transactions, the Fund’s transactions in other derivative instruments (including options and forward
contracts) as well as its other hedging, short sale, or similar transactions, may be subject to one or
more special tax rules (including the constructive sale, notional principal contract, straddle, wash
sale and short sale rules). These rules may affect whether gains and losses recognized by the Fund are
treated as ordinary or capital or as short-term or long-term, accelerate the recognition of income or
gains to the fund, defer losses to the fund, and cause adjustments in the holding periods of the fund’s
securities. These rules, therefore, could affect the amount, timing and/or character of distributions
to shareholders. Moreover, because the tax rules applicable to derivative financial instruments are in
some cases uncertain under current law, an adverse determination or future guidance by the IRS with respect
to these rules (which determination or guidance could be retroactive) may affect whether the Fund has
made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification
as a regulated investment company and avoid the Fund-level tax.
Certain of the Fund’s investments in
derivatives and foreign currency-denominated instruments, and the Fund’s transactions in foreign
currencies and hedging activities, may produce a difference between its book income and its taxable income.
If the Fund’s book income is less than the sum of its taxable income and net tax-exempt income (if
any), the fund could be required to make distributions exceeding book income to qualify as a regulated
investment company. If the Fund’s book income exceeds the sum of its taxable income and net tax-exempt
income (if any), the distribution of any such excess will be treated as (i) a dividend to the extent
of the fund’s remaining earnings and profits (including current earnings and profits arising from
tax-exempt income, reduced by related deductions), (ii) thereafter, as a return of capital to the extent
of the recipient’s basis in the Shares, and (iii) thereafter, as gain from the sale or exchange
of a capital asset.
Foreign
Currency Transactions.
The Fund’s transactions in foreign currencies, foreign currency-denominated
debt obligations and certain foreign currency options, futures contracts and forward contracts (and similar
instruments) may give rise to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned. This treatment could increase or decrease
the Fund’s ordinary income distributions to you, and may cause some or all of the fund’s previously
distributed income to be classified as a return of capital. In certain cases, the Fund may make an election
to treat such gain or loss as capital.
PFIC
Investments.
The Fund may invest in securities of foreign companies that may be classified under
the Code as PFICs. In general, a foreign company is classified as a PFIC if at least one-half of its
assets constitute investment-type assets or 75% or more of its gross income is investment-type income.
When investing in PFIC securities, the Fund intends to mark-to-market these securities under certain
provisions of the Code and recognize any unrealized gains as ordinary income at the end of the fund’s
fiscal and excise tax years. Deductions for losses are allowable only to the extent of any current or
previously recognized gains. These gains (reduced by allowable losses) are treated as ordinary income
that the Fund is required to distribute, even though it has not sold or received dividends from these
securities. You should also be aware that the designation of a foreign security as a PFIC security will
cause its income dividends to fall outside of the definition of qualified foreign corporation dividends.
These dividends generally will not qualify for the reduced rate of taxation on qualified dividends when
distributed to you by the Fund. Foreign companies are not required to identify themselves as PFICs. Due
to various complexities in identifying PFICs, the Fund can give no assurances that it will be able to
identify portfolio securities in foreign corporations that are PFICs in time for the fund to make a mark-to-market
election. If the Fund is unable to identify an investment as a PFIC and thus does not make a mark-to-market
election, the fund may be subject to U.S. federal income tax on a portion of any “excess distribution”
or gain from the disposition of such shares even if such income is distributed as a taxable dividend
by the
52
fund
to its shareholders. Additional charges in the nature of interest may be imposed on the Fund in respect
of deferred taxes arising from such distributions or gains.
Securities Lending.
While securities are loaned out by the Fund, the
Fund generally will receive from the borrower amounts equal to any dividends or interest paid on the
borrowed securities. For federal income tax purposes, payments made “in lieu of” dividends
are not considered dividend income. These distributions will neither qualify for the reduced rate of
taxation for individuals on qualified dividends nor the 70% dividends received deduction for corporations.
Also, any foreign tax withheld on payments made “in lieu of” dividends or interest will not
qualify for the pass-through of foreign tax credits to shareholders.
Investments in Securities of Uncertain Tax Character.
The Fund may invest in securities the U.S. federal income tax treatment of which may not be clear or
may be subject to recharacterization by the IRS. To the extent the tax treatment of such securities or
the income from such securities differs from the tax treatment expected by the Fund, it could affect
the timing or character of income recognized by the fund, requiring the fund to purchase or sell securities,
or otherwise change its portfolio, in order to comply with the tax rules applicable to regulated investment
companies under the Code.
CAPITAL
STOCK
The
Trust currently is comprised of one investment fund. The Trust issues Shares of beneficial interest with
no par value. The Board may designate additional series of the Trust.
Each Share issued by the
Trust has a pro rata interest in the assets of the corresponding Fund. Shares have no pre-emptive, exchange,
subscription or conversion rights and are freely transferable. Each Share is entitled to participate
equally in dividends and distributions declared by the Board with respect to the relevant Fund, and in
the net distributable assets of such Fund on liquidation.
Each Share has one vote with respect to matters
upon which a shareholder vote is required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder and each fractional Share has a proportional fractional vote. Shares of all Fund
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
Fund, that fund will vote separately on such matter. Under Delaware law, the Trust is not required to
hold an annual meeting of shareholders unless required to do so under the 1940 Act. The policy of the
Trust is not to hold an annual meeting of shareholders unless required to do so under the 1940 Act. All
Shares of the Trust have noncumulative voting rights for the election of Trustees. Under Delaware law,
Trustees of the Trust may be removed by vote of the shareholders.
Under Delaware law, shareholders of a statutory
trust may have similar limitations on liability as shareholders of a corporation.
SHAREHOLDER REPORTS
The Trust will issue through DTC Participants to its shareholders
semi-annual reports containing unaudited financial statements and annual reports containing financial
statements audited by an independent auditor approved by the Trust’s Trustees and by the shareholders
when meetings are held and such other information as may be required by applicable laws, rules and regulations.
Beneficial Owners also receive annually notification as to the tax status of the Trust’s distributions.
Shareholder
inquiries may be made by writing to the Trust at c/o Foreside Fund Services, LLC, 3 Canal Plaza, Suite
100, Portland, ME 04101.
53
FINANCIAL STATEMENTS
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of Pacific Global ETF Trust:
Opinion
on the Financial Statements
We have audited the accompanying statement of assets and liabilities
of Pacific Global ETF Trust (the “Trust”), as of December 19, 2018. In our opinion, the statement
of assets and liabilities present fairly, in all material respects, the financial position of the Trust
as of December 19, 2018, in conformity with accounting principles generally accepted in the United States
of America.
Basis for Opinion
This statement of assets and liabilities is the
responsibility of the Trust’s management. Our responsibility is to express an opinion on the Trust’s
statement of assets and liabilities based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent
with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted
our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the statement of assets and liabilities is free
of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing
procedures to assess the risks of material misstatement of the statements of assets and liabilities,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the statement
of assets and liabilities. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the statement of assets
and liabilities. We believe that our audits provide a reasonable basis for our opinion.
DELOITTE & TOUCHE LLP
Costa
Mesa, California
January 4, 2019
We have served as the auditor of the Trust since
2018.
54
PACIFIC
GLOBAL ETF TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 19, 2018
|
|
|
|
|
|
|
|
|
|
|
Pacific
Global US Equity Income ETF
|
|
ASSETS
|
|
|
|
|
|
Cash
|
|
|
|
$100,000
|
|
Total
Assets
|
|
|
|
100,000
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Total
Liabilities
|
|
|
|
-
|
|
NET
ASSETS
|
|
|
|
$100,000
|
|
|
|
|
|
|
|
NET
ASSETS CONSIST OF:
|
|
|
|
|
|
Paid-in Capital (No Par Value)
|
|
|
|
$100,000
|
|
NET
ASSETS
|
|
|
|
$100,000
|
|
|
|
|
|
|
|
NET
ASSET VALUE PER SHARE:
|
|
|
|
|
|
Net Assets
|
|
|
|
$100,000
|
|
Shares
of Beneficial Interest Outstanding (Unlimited Shares Authorized)
|
|
|
|
4,000
|
|
Net
Asset Value, Offering and Redemption Price per Share
|
|
|
|
$
25.00
|
The accompanying
notes are an integral part of this financial statement.
PACIFIC GLOBAL ETF TRUST
NOTES TO FINANCIAL STATEMENTS
1.
ORGANIZATION
Pacific
Global ETF Trust (which may be referred to as “Pacific ETFs” or the “Trust”), organized
as a Delaware statutory trust is registered under the Investment Company Act of 1940 (the “1940
Act”), as amended, as an open-ended management investment company, and is authorized to issue an
unlimited number of shares in one or more series of funds. As of December 19, 2018, the Trust was comprised
of one diversified fund, Pacific Global US Equity Income ETF (“USDY” or the “Fund”).
The Fund represents a beneficial interest in a separate portfolio of securities and other assets, with
its own investment objectives and policies. As of December 19, 2018, the Fund has no operations other
than those related to organizational matters and the initial issuance of 4,000 shares to Pacific Life
Insurance Company (“PLIC”) which represented the initial capital of $25 per share.
The investment
objective of the Fund is to seek income and long-term growth of capital.
The Fund
intends to list and principally trade its shares on NYSE Arca, Inc. (“NYSE” or the “Exchange”).
Shares of the Fund trade on the Exchange at market prices that may be below, at, or above the Fund’s
net asset value (“NAV”). The Fund will issue and redeem shares on a continuous basis at NAV
only in large blocks of shares, typically 50,000 shares (“Creation Units”), and only with authorized
participants (“Authorized Participants”) which are financial institutions that have entered
into contractual arrangements with the Fund’s distributor, Foreside Fund Services, LLC (the “Distributor).
Specifically, an Authorized Participant is either (i) a broker-dealer or other participant in the clearing
process through the Continuous Net Settlement System of the National Securities Clearing Corporation
or (ii) a DTC
55
participant
and, in each case, must have executed a Participant Agreement with the Distributor. Creation Units will
be issued and redeemed principally in-kind for securities included in a specified universe. Once created,
shares generally will trade in the secondary market at market prices that change throughout the day in
amounts less than a Creation Unit. Except when aggregated in Creation Units, shares are not individually
redeemable from the Fund. Most retail investors will not qualify as Authorized Participants or have the
resources to buy and sell whole Creation Units. Therefore, they will be unable to purchase or redeem
the shares directly from the Fund. Rather, most retail investors will purchase shares in the secondary
market with the assistance of a broker and will be subject to customary brokerage commissions or fees.
The
Fund currently offers one class of shares, which has no front-end sales load, no deferred sales charge,
and no redemption fee. A fixed transaction fee of $500 is imposed for the transfer and other transaction
costs associated with the purchase or sale of Creation Units. The Fund may issue an unlimited number
of shares of beneficial interest, with no par value. All shares of the Fund have equal rights and privileges.
2.
SIGNIFICANT ACCOUNTING
POLICIES
The Fund is an investment company that applies the accounting and reporting guidance
issued in Topic 946, “Financial Services – Investment Companies”, by the Financial Accounting
Standards Board (“FASB”). The following is a summary of the significant accounting policies
followed by the Trust in the preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP’).
A.
SECURITY VALUATION
All equity securities, including
domestic and foreign common stocks, preferred stocks, and exchange traded funds that are traded on a
national securities exchange, except those listed on the Nasdaq Global Market
®
, Nasdaq
Global Select Market
®
and Nasdaq Capital Market Exchange
®
(collectively
“Nasdaq”), are valued at the last reported sale price on the exchange on which the security
is principally traded. Securities traded on Nasdaq will be valued at the Nasdaq Official Closing Price
(“NOCP”). If, on a particular day, an exchange traded or Nasdaq security does not trade, then
the mean between the most recent quoted bid and asked prices will be used. All equity securities that
are not traded on a listed exchange are valued at the last sale price in the over-the-counter market.
If a non-exchange traded security does not trade on a particular day, then the mean between the last
quoted closing bid and asked price will be used. Prices denominated in foreign currencies are converted
to U.S. dollar equivalents at the current exchange rate, which approximates fair value.
Short-term
securities, including repurchase agreements, that have maturities of less than 60 days at the time of
purchase, are valued at amortized cost, which, when combined with accrued interest, approximates fair
value.
Securities for which quotations are not readily available are valued at their respective
fair values in accordance with pricing procedures adopted by the Fund’s Board of Trustees (the “Board”).
When a security is “fair valued,” consideration is given to the facts and circumstances relevant
to the particular situation, including a review of various factors set forth in the pricing procedures
adopted by the Board. The use of fair value pricing by the Fund may cause the NAV of its shares to differ
significantly from the NAV that would be calculated without regard to such considerations.
B.
USE OF ESTIMATES
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
56
C.
FEDERAL INCOME
TAXES
The Fund has elected to be taxed as a “regulated investment company” and
intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated
investment companies and will distribute substantially all taxable income and capital gains to shareholders.
Therefore, no federal income or excise tax provision has been made.
D.
ORGANIZATIONAL AND OFFERING COSTS
All organizational
and offering costs incurred to establish the Fund will be paid by the Adviser and are not subject to
reimbursement.
E.
CASH
Cash includes non-interest bearing non-restricted cash
with one institution.
3.
AGREEMENTS
On
December 11, 2018, the Trust held an organization meeting of the Board, at which time the following agreements
were approved.
Pacific Global Advisors LLC (the “Adviser”) serves as
the investment adviser to the Fund. Pursuant to management agreement (“Management Agreement”)
between the Trust, on behalf of the Fund, and the Adviser, the Adviser will provide investment advice
to the Fund and will oversee the day-to-day operations of the Fund, subject to the direction and control
of the Board and the officers of the Trust. The Adviser is wholly owned by Pacific Global Asset Management
LLC. Cadence Capital Management LLC serves as the Sub-Adviser (the “Sub-Adviser”) for the
Fund. The Sub-Adviser is a direct subsidiary of Pacific Global Asset Management LLC. Under the Management
Agreement, the Adviser will also be responsible for arranging, transfer agency, custody, fund administration,
securities lending and accounting, and other non-distribution related services necessary for the Fund
to operate. Under the Management Agreement, the Adviser has agreed to pay all expenses of the Fund, except
for: the fee paid to the Adviser pursuant to the Management Agreement, interest charges on any borrowings,
taxes, brokerage commissions and other expenses incurred in placing orders for the purchase and sale
of securities and other investment instruments, acquired fund fees and expenses, accrued deferred tax
liability, extraordinary expenses and distribution (12b-1) fees and expenses. As compensation for services
provided to the Fund, the Fund will pay the Adviser 0.29% at an annual rate based on the Fund’s
average daily net assets.
The Board has adopted a Distribution and Service Plan (the “Plan”)
pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Plan, the Fund is authorized to pay
an amount up to 0.25% of its average daily net assets each year for certain distribution related activities
and shareholder services. No Rule 12b-1 fees are currently paid by the Fund, and there are no plans
to impose these fees.
U.S. Bancorp Fund Services, LLC (“Fund Services” or the
“Administrator”) doing business as U.S. Bank Global Fund Services, serves as the Fund’s
fund accountant, administrator and transfer agent pursuant to certain fund accounting servicing, fund
administration servicing and transfer agent servicing agreements. U.S. Bank N.A., an affiliate of Fund
Services, serves as the Fund’s custodian pursuant to a custody agreement.
Foreside
Fund Services, LLC, serves as the Fund’s distributor pursuant to a distribution agreement.
4.
BENEFICIAL OWNERSHIP
57
The beneficial ownership, either directly or indirectly, of more than 25% of the
voting securities of a fund creates a presumption of control of the fund, under Section 2(a)(9) of the
1940 Act. As of December 19, 2018, PLIC owned 100% of the outstanding shares of the Fund.
5.
GUARANTEES AND INDEMNIFICATIONS
In the
normal course of business, the Fund enters into contracts with third-party service providers that contain
a variety of representations and warranties and that provide general indemnifications. Additionally,
under the Fund organizational documents, the officers and Trustees are indemnified against certain liabilities
arising out of the performance of their duties to the Fund. The Fund’s maximum exposure under these
arrangements is unknown, as it involves possible future claims that may or may not be made against the
Fund. The Adviser is of the view that the risk of loss to the Fund in connection with the Fund indemnification
obligations is remote; however, there can be no assurance that such obligations will not result in material
liabilities that adversely affect the Fund.
6.
SUBSEQUENT
EVENTS
The Fund has
evaluated events and transactions occurring through the date the financial statement was issued. Such
evaluation resulted in no adjustments to the accompanying financial statement.
DISCLAIMERS
Shares of the Trust are not sponsored, endorsed, or promoted
by NYSE Arca, Inc. NYSE Arca, Inc. makes no representation or warranty, express or implied, to the owners
of the Shares of the Fund. NYSE Arca, Inc. is not responsible for, nor has it participated in, the determination
of the timing of, prices of, or quantities of the Shares of the Fund to be issued, or in the determination
or calculation of the equation by which the Shares are redeemable. NYSE Arca, Inc. has no obligation
or liability to owners of the Shares of the Fund in connection with the administration, marketing, or
trading of the Shares of the Fund. Without limiting any of the foregoing, in no event shall NYSE Arca,
Inc. have any liability for any lost profits or indirect, punitive, special, or consequential damages
even if notified of the possibility thereof.
58
PART
C: OTHER INFORMATION
Item 28. Exhibits
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(a)
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(1)(A)
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Certificate of Trust dated
June 26, 2018, as filed with the State of Delaware on June 26, 2018, for Pacific Global ETF Trust (the
“Registrant” or “Trust”)
1
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(2)(A)
|
Agreement and Declaration of
Trust of the Registrant
1
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|
(b)
|
(1)
|
By-Laws of the Registrant
1
|
|
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|
(c)
|
Not Applicable.
|
|
|
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|
|
(d)
|
(1)
|
Form
of Management Agreement between the Registrant and Pacific Global Advisors LLC (the “Adviser”)
2
|
|
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|
(2)
|
Form of Investment Sub-Advisory
Agreement between the Adviser and Cadence Capital Management LLC
2
|
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(e)
|
(1)
|
Form
of Distribution Agreement between the Registrant and Foreside Fund Services, LLC
2
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(f)
|
Not Applicable.
|
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(g)
|
(1) Form of Custody Agreement between Registrant
and U.S. Bank National Association
2
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|
(2) Form of Fund Accounting and Servicing Agreement between Registrant
and U.S. Bancorp Fund Services, LLC d/b/a U.S. Bank Global Fund Services
2
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|
|
(3) Form of Fund Administration Servicing Agreement between Registrant
and U.S. Bancorp Fund Services, LLC d/b/a U.S. Bank Global Fund Services
2
|
|
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|
|
|
|
(4) Form of Transfer Agent Servicing Agreement between Registrant
and U.S. Bancorp Fund Services, LLC d/b/a U.S. Bank Global Fund Services
2
|
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|
|
|
|
(h)
|
|
Form of Authorized Participation
Agreement
2
|
|
|
|
|
|
(i)
|
(1)
|
Opinion and Consent of Counsel
3
|
|
|
(2)
|
Private
Offering (Seed Money) Agreement
3
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|
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|
(j)
|
|
Consent of Independent Registered
Public Accounting Firm
3
|
|
(k)
|
|
Not Applicable.
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|
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(l)
|
|
Not Applicable.
|
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|
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|
|
(m)
|
|
Distribution and Service Plan
2
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|
|
|
|
|
(n)
|
|
Not Applicable.
|
|
|
|
|
|
(o)
|
|
Not Applicable.
|
|
|
|
|
|
(p)
|
(1)
|
Code of Ethics of the Registrant
2
|
|
|
|
|
|
|
(2)
|
Code of Ethics of Pacific Global
Advisors LLC and Cadence Capital Management LLC
2
|
|
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|
|
|
|
(3)
|
Code of Ethics of Foreside
Fund Services, LLC
2
|
|
|
|
|
|
(q)
|
|
Powers of Attorney
3
|
Other Exhibits:
|
|
|
|
|
1
|
|
Incorporated herein by reference to the corresponding
exhibit of the Registrant’s Registration Statement, SEC File No. 333-227097, filed August 29, 2018,
accession number 0001104659-18-054109.
|
|
2
|
|
Incorporated herein by reference to the corresponding exhibit of the Registrant’s
Registration Statement, SEC File No. 333-227097, filed December 11, 2018, accession number 0001104659-18-072400.
|
|
3
|
|
Is filed herewith.
|
Item
29. Persons Controlled by or Under Common Control with the Fund
Not applicable.
Item 30. Indemnification
Pursuant
to Section to section 6.1 of the Agreement and Declaration of Trust (the “Declaration”), every
person who is, or has been, a Trustee, officer, or employee of the Trust, including persons who serve
at the request of the Trust as directors, trustees, officers, employees or agents of another organization
in which the Trust has an interest as a shareholder, creditor or otherwise (“Covered Person”),
shall be indemnified by the Trust to the fullest extent permitted by law against liability and against
all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding
in which he becomes involved as a party or otherwise by virtue of his being or having been such a Trustee,
director, officer, employee or agent and against amounts paid or incurred by him in settlement thereof.
No
indemnification shall be provided under the Declaration to a Covered Person to the extent such indemnification
is prohibited by applicable federal law.
Item 31. Business and Other Connections of the Investment Adviser
See
“Management” in the Statement of Additional Information. Information as to the directors and
officers of the Adviser is included in its Form ADV filed with the SEC and is incorporated herein by
reference thereto.
Item 32. Principal Underwriters
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(a)
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Foreside Fund Services, LLC
(the “Distributor”) serves as principal underwriter for the following investment companies
registered under the Investment Company Act of 1940, as amended:
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1.
ABS Long/Short Strategies Fund
2.
Absolute Shares Trust
3.
Active Weighting Funds ETF Trust
4.
AdvisorShares Trust
5.
American Century ETF Trust
6.
ARK ETF Trust
7.
Braddock Multi-Strategy Income Fund, Series of Investment Managers
Series Trust
8.
Bridgeway
Funds, Inc.
9.
Brinker
Capital Destinations Trust
10.
Calvert
Ultra-Short Duration Income NextShares, Series of Calvert Management Series
11.
Center Coast Brookfield MLP & Energy Infrastructure Fund
12.
CornerCap Group
of Funds
13.
Davis Fundamental
ETF Trust
14.
Direxion Shares
ETF Trust
15.
Eaton Vance NextShares
Trust
16.
Eaton Vance NextShares
Trust II
17.
EIP Investment
Trust
18.
EntrepreneurShares
Series Trust
19.
Evanston
Alternative Opportunities Fund
20.
Exchange
Listed Funds Trust
(f/k/a Exchange
Traded Concepts Trust II)
21.
FEG
Absolute Access Fund I LLC
22.
Fiera
Capital Series Trust
23.
FlexShares
Trust
24.
Forum Funds
25.
Forum Funds II
26.
FQF Trust
27.
Friess Small Cap
Growth Fund, Series of Managed Portfolio Series
28.
GraniteShares
ETF Trust
29.
Guinness Atkinson
Funds
30.
Horizons
ETF Trust I
(f/k/a Recon Capital Series Trust)
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31.
Infinity Core Alternative Fund
32.
Innovator ETFs Trust
33.
Innovator ETFs Trust II
(f/k/a Elkhorn ETF Trust)
34.
Ironwood Institutional Multi-Strategy Fund LLC
35.
Ironwood Multi-Strategy Fund LLC
36.
John Hancock Exchange-Traded Fund Trust
37.
Manor Investment Funds
38.
Miller/Howard Funds Trust
39.
Miller/Howard High Income Equity Fund
40.
Moerus Worldwide Value Fund, Series of Northern Lights Fund Trust
IV
41.
Morningstar Funds
Trust
42.
MProved Systematic
Long-Short Fund, Series Portfolios Trust
43.
MProved
Systematic Merger Arbitrage Fund, Series Portfolios Trust
44.
MProved Systematic Multi-Strategy Fund, Series Portfolios Trust
45.
NYSE
®
Pickens Oil Response™ ETF, Series of ETF
Series Solutions
46.
OSI
ETF Trust
47.
Palmer Square
Opportunistic Income Fund
48.
Partners
Group Private Income Opportunities, LLC
49.
PENN
Capital Funds Trust
50.
Performance
Trust Mutual Funds, Series of Trust for Professional Managers
51.
Plan Investment Fund, Inc.
52.
PMC Funds, Series of Trust for Professional Managers
53.
Point Bridge GOP Stock Tracker ETF, Series of ETF Series Solutions
54.
Quaker Investment
Trust
55.
Ranger Funds Investment
Trust
56.
Renaissance Capital
Greenwich Funds
57.
RMB
Investors Trust
(f/k/a Burnham
Investors Trust)
58.
Robinson
Opportunistic Income Fund, Series of Investment Managers Series Trust
59.
Robinson Tax Advantaged Income Fund, Series of Investment Managers
Series Trust
60.
Salient
MF Trust
61.
SharesPost 100
Fund
62.
Six Circles Trust
63.
Sound Shore Fund,
Inc.
64.
Steben Alternative
Investment Funds
65.
Steben
Select Multi-Strategy Fund
66.
Strategy
Shares
67.
The 504 Fund
(f/k/a The Pennant 504 Fund)
68.
The Chartwell
Funds
69.
The Community
Development Fund
70.
The
Relative Value Fund
71.
Third
Avenue Trust
72.
Third
Avenue Variable Series Trust
73.
TIFF
Investment Program
74.
Transamerica
ETF Trust
75.
U.S. Global Investors
Funds
76.
Variant Alternative
Income Fund
77.
VictoryShares
Developed Enhanced Volatility Wtd ETF, Series of Victory Portfolios II
78.
VictoryShares Dividend Accelerator ETF, Series of Victory Portfolios
II
79.
VictoryShares
Emerging Market High Div Volatility Wtd ETF, Series of Victory Portfolios II
80.
VictoryShares Emerging Market Volatility Wtd ETF, Series of Victory
Portfolios II
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81.
VictoryShares International High Div Volatility Wtd ETF, Series
of Victory Portfolios II
82.
VictoryShares
International Volatility Wtd ETF, Series of Victory Portfolios II
83.
VictoryShares US 500 Enhanced Volatility Wtd ETF, Series of Victory
Portfolios II
84.
VictoryShares
US 500 Volatility Wtd ETF, Series of Victory Portfolios II
85.
VictoryShares US Discovery Enhanced Volatility Wtd ETF, Series
of Victory Portfolios II
86.
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF, Series of Victory Portfolios II
87.
VictoryShares US Large Cap High Div Volatility Wtd ETF, Series
of Victory Portfolios II
88.
VictoryShares
US Multi-Factor Minimum Volatility ETF, Series of Victory Portfolios II
89.
VictoryShares US Small Cap High Div Volatility Wtd ETF, Series
of Victory Portfolios II
90.
VictoryShares
US Small Cap Volatility Wtd ETF, Series of Victory Portfolios II
91.
Vivaldi Opportunities Fund
92.
West Loop Realty Fund, Series of Investment Managers Series Trust
(f/k/a Chilton Realty Income &
Growth Fund)
93.
Wintergreen
Fund, Inc.
94.
WisdomTree Trust
95.
WST Investment Trust
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(b)
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The following are the Officers
and Manager of the Distributor, the Registrant’s underwriter. The Distributor’s main business
address is Three Canal Plaza, Suite 100, Portland, Maine 04101.
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Name
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Address
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Position with Underwriter
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Position
with Registrant
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Richard J. Berthy
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Three Canal Plaza,
Suite 100, Portland, ME 04101
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President, Treasurer and Manager
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None
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Mark A. Fairbanks
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Three Canal Plaza,
Suite 100, Portland, ME 04101
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Vice President
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None
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Jennifer K. DiValerio
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899 Cassatt Road, 400 Berwyn Park, Suite 110, Berwyn, PA 19312
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Vice President
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None
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Nanette K. Chern
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Three Canal Plaza,
Suite 100, Portland, ME
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Vice President and Chief Compliance
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None
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04101
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Officer
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Jennifer E. Hoopes
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Three Canal Plaza,
Suite 100, Portland, ME 04101
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Secretary
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None
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Item 33. Location of Accounts and Records
The books, accounts and other documents required
by Section 31(a) under the Investment Company Act of 1940, as amended, and the rules promulgated thereunder
are maintained in the physical possession of Pacific Global Advisors LLC, 840 Newport Center Drive, 7
th
Floor, Newport
Beach, CA 92660, U.S. Bancorp Fund Services, LLC, 777 East Wisconsin Avenue, Milwaukee, WI 53202. Foreside
Fund Services, LLC maintains all records relating to its services as Distributor of the Registrant at
Three Canal Plaza, Suite 100, Portland, Maine 04101
Item 34. Management Services
Not applicable.
Item 35. Undertakings
None.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Boston, and State of Massachusetts, on the 31st day of January 2019.
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Pacific Global ETF Trust
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(Registrant)
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By:
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/s/ Michael Skillman
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Name:
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Michael
Skillman
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Title:
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President and CEO
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Pursuant to the requirements of the Securities Act, this Registration Statement has
been signed below by the following person in the capacities indicated on January 31, 2019.
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Signature
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Title
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Date
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/s/
Michael Skillman
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President
and Chief Executive Officer
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January
31, 2019
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Michael Skillman
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/s/ Kevin Byrne*
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Trustee and Chairman of the Board
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January 31, 2019
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Kevin
Byrne
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/s/
Sharon Cheever*
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Trustee
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January 31, 2019
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Sharon Cheever
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/s/ D. Robinson Cluck*
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Trustee
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January 31, 2019
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D.
Robinson Cluck
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/s/ Robert J. Blattenberg*
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Trustee
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January 31, 2019
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Robert
J. Blattenberg
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/s/
John C. Siciliano*
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Trustee
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January 31, 2019
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John C. Siciliano
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/s/ Joshua Schwab
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Treasurer and Chief Financial Officer
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January 31, 2019
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Joshua
Schwab
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*By:
/s/ J.G. Lallande
J.G. Lallande
*Attorney-in-Fact,
pursuant to Powers of Attorney filed herewith.
Exhibit Index
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(i)(1)
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Opinion and Consent of Counsel
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(i)(2)
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Private Offering (Seed Money)
Agreement
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(j)
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Consent of Independent Registered Public Accounting Firm
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Other
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Powers of Attorney
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