Table of Contents
As filed with the Securities and
Exchange Commission on May 16, 2016
File
Nos. 033-31894
811-05954
811-05954
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 103
[X]
and
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 104
[X]
THE CHARLES SCHWAB FAMILY OF FUNDS
(Exact Name of Registrant as Specified in Charter)
211 Main Street
San Francisco, California 94105
(Address of Principal Executive Offices)
(800) 648-5300
(Registrant’s Telephone Number, including Area
Code)
Marie Chandoha
211 Main Street
211 Main Street
San Francisco, California 94105
(Name and Address of Agent for Service)
Copies of communications to:
|
Douglas
P. Dick, Esq.
Dechert LLP 1900 K Street, N.W. Washington, DC 20006 |
John
M. Loder, Esq.
Ropes & Gray LLP 800 Boylston Street Boston, MA 02199-3600 |
David
J. Lekich, Esq.
Charles Schwab Investment Management, Inc. 211 Main Street SF211MN-05-491 San Francisco, CA 94105 |
It is proposed that this filing will become
effective (check appropriate box):
[X]
Immediately upon filing pursuant to paragraph (b)
[ ] On (date) pursuant to paragraph
(b)
[ ] 60 days after filing
pursuant to paragraph (a)(1)
[ ]
On (date) pursuant to paragraph (a)(1)
[
] 75 days after filing pursuant to paragraph (a)(2)
[ ] On (date) pursuant to paragraph
(a)(2) of Rule 485
If appropriate, check the
following box:
[ ] This
post-effective amendment designates a new effective date for a previously filed post-effective amendment.
Table of Contents
Schwab Retirement Government Money Fund™
Prospectus
May 16,
2016
| Schwab Retirement Government Money Fund™ (SNRXX) |
As with all mutual funds, the Securities and Exchange Commission (SEC) has
not approved these securities or passed on whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime.
Schwab Retirement Government Money
Fund™
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Schwab Retirement Government Money
Fund™
| Ticker Symbol: | SNRXX |
Investment objective
The fund’s goal is to seek current
income consistent with stability of capital and liquidity.
Fund fees and expenses
This table describes the fees and expenses you
may pay if you buy and hold shares of the fund.
| 1 | “Other expenses” are based on estimated amounts for the current fiscal period. |
| 2 | The investment adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.20% through April 29, 2018 (contractual expense limitation agreement). This contractual expense limitation agreement may only be amended or terminated with the approval of the fund's Board of Trustees. |
Example
This example is
intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of
those time periods. The example also assumes that your investment has a 5% return each year and that the fund's operating expenses remain the same. The figures are based on total annual fund operating expenses after expense reduction. The expenses
would be the same whether you stayed in the fund or sold your shares at the end of each period. Your actual costs may be higher or lower.
Expenses on a $10,000 investment
| 1 year | 3 years |
| $20 | $95 |
Principal investment
strategies
To pursue its goal, the fund
invests in U.S. government securities, such as:
•U.S. Treasury bills
and notes
•other obligations
that are issued by the U.S. government, its agencies or instrumentalities, including obligations that are not fully guaranteed by the U.S. Treasury, such as those issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks
•repurchase
agreements that are collateralized fully by cash and/or U.S. government securities
•obligations that are
issued by private issuers that are guaranteed as to principal or interest by the U.S. government, its agencies or instrumentalities
The fund intends to operate as
a government money market fund under the regulations governing money market funds. The fund will invest at least 99.5% of its total assets in cash, U.S. government securities and/or repurchase agreements that are collateralized fully by cash and/or
U.S. government securities; under normal circumstances, at least 80% of the fund’s net assets (plus the amount of any borrowing for investment purposes) will be invested solely in U.S. government securities including repurchase agreements that
are collateralized fully by U.S. government securities (excluding cash). With respect to the 80% policy, the fund will notify its shareholders at least 60 days before changing the policy.
In choosing securities, the fund’s
manager seeks to maximize current income within the limits of the fund’s investment objective and credit, maturity and diversification policies. Some of these policies may be stricter than the federal regulations that apply to all money market
funds.
The investment
adviser’s credit research department analyzes and monitors the securities that the fund owns or is considering buying. The manager may adjust the fund’s holdings or its average maturity based on actual or anticipated changes in interest
rates or credit
Schwab Retirement Government Money Fund™
1
quality. To preserve its investors’ capital, the fund
seeks to maintain a stable $1.00 share price.
As a government money market fund, the
fund’s Board of Trustees (the Board) has determined not to subject the fund to a liquidity fee and/or a redemption gate on fund redemptions. Please note that the Board has reserved its ability to change this determination with respect to
liquidity fees and/or redemption gates, but only after providing appropriate prior notice to shareholders.
Principal risks
The fund is subject to risks, any of which
could cause an investor to lose money. The fund's principal risks include:
Investment Risk.
You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund’s sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial
support to the fund at any time.
Interest Rate Risk.
Interest rates rise and fall over time. As with any investment whose yield reflects current interest rates, the fund’s yield will change over time. During periods when interest rates are low, the fund’s
yield (and total return) also will be low or may even be negative, which may make it difficult for the fund to pay expenses out of fund assets or maintain a stable $1.00 share price. Because interest rates in the United States are near historically
low levels, a change in a central bank’s monetary policy or improving economic conditions may result in an increase in interest rates. A sudden or unpredictable rise in interest rates may cause volatility in the market and may decrease
liquidity in the money market securities markets, making it more difficult for the fund to sell its money market investments at a time when the investment adviser might wish to sell such investments. Decreased market liquidity also may make it more
difficult to value some or all of the fund’s money market securities holdings.
Stable Net Asset Value Risk.
If the fund or another money market fund fails to maintain a stable net asset value (or such perception exists in the market place), the fund could experience increased redemptions, which may adversely impact the
fund’s share price. The fund is permitted, among other things, to reduce or withhold any income and/or gains generated from its portfolio to maintain a stable $1.00 share price.
Repurchase Agreements Risk.
When the fund enters into a repurchase agreement, the fund is exposed to the risk that the other party (i.e., the counter-party) will not fulfill its contractual obligation. In a repurchase agreement, there exists the
risk that, when the fund buys a security from a counter-party that agrees to repurchase the security at an agreed upon price (usually higher) and time, the counter-party will not repurchase the security.
Credit Risk.
The fund is subject to the risk that a decline in the credit quality of a portfolio investment could cause the fund to lose money or underperform. The fund could lose money if the issuer of a portfolio investment fails to make timely principal or
interest payments or if a guarantor, liquidity provider or counterparty of a portfolio investment fails to honor its obligations. Even though the fund’s investments in repurchase agreements are collateralized at all
times, there is some risk to the fund if the other party should
default on its obligations and the fund is delayed or prevented from recovering or disposing of the collateral. Negative perceptions of the ability of an issuer, guarantor, liquidity provider or counterparty to make payments or otherwise honor its
obligations, as applicable, could also cause the price of that investment to decline. The credit quality of the fund’s portfolio holdings can change rapidly in certain market environments and any downgrade or default on the part of a single
portfolio investment could cause the fund’s share price or yield to fall.
Certain of the U.S. government
securities that the fund invests in are not backed by the full faith and credit of the U.S. government, which means they are neither issued nor guaranteed by the U.S. Treasury. Although maintained in conservatorship by the Federal Housing Finance
Agency since September 2008, Fannie Mae (FNMA) and Freddie Mac (FHLMC) maintain only lines of credit with the U.S. Treasury. The Federal Home Loan Banks (FHLB) maintain limited access to credit lines from the U.S. Treasury. Other
securities, such as obligations issued by the Federal Farm Credit Banks Funding Corporation (FFCB), are supported solely by the credit of the issuer. There can be no assurance that the U.S. government will provide financial support to securities of
its agencies and instrumentalities if it is not obligated to do so under law. Also, any government guarantees on securities the fund owns do not extend to the shares of the fund itself.
Management Risk.
Any actively managed mutual fund is subject to the risk that its investment adviser will select investments or allocate assets in a manner that could cause the fund to underperform or otherwise not meet its objective.
The fund’s investment adviser applies its own investment techniques and risk analyses in making investment decisions for the fund, but there can be no guarantee that they will produce the desired results. The investment adviser’s
maturity decisions will also affect the fund’s yield, and potentially could affect its share price. To the extent that the investment adviser anticipates interest rate trends imprecisely, the fund’s yield at times could lag the yields of
other money market funds.
Redemption Risk.
The fund may experience periods of heavy redemptions that could cause the fund to liquidate its assets at inopportune times or at a loss or depressed value, particularly during periods of declining or illiquid markets.
Redemptions by a few large investors in the fund may have a significant adverse effect on the fund’s ability to maintain a stable $1.00 share price. In the event any money market fund fails to maintain a stable net asset value, other money
market funds, including the fund, could face a market-wide risk of increased redemption pressures, potentially jeopardizing the stability of their $1.00 share prices.
Money Market Fund Risk.
The fund is not designed to offer capital appreciation. In exchange for their emphasis on stability and liquidity, money market investments may offer lower long-term performance than stock or bond
investments.
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Schwab
Retirement Government Money Fund™
Performance
The fund is new so performance
information is not yet available. Once the fund has completed a full calendar year of operations, a bar chart and table will be included that will provide some indication of the risks of investment in the fund by showing the variability of the
fund’s returns. For current performance information as it becomes available, please see www.csimfunds.com/schwabfunds_prospectus or call toll-free 1-800-435-4000 for the fund’s current seven-day yield.
Investment adviser
Charles Schwab Investment Management,
Inc.
Purchase and sale of fund shares
The fund is open for business each day that
the New York Stock Exchange (NYSE) is open except when the following federal holidays are observed: Columbus Day and Veterans Day. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for
business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally
scheduled close of regular trading on the NYSE for that day.
The fund is generally available
only to employer-sponsored retirement plans (including profit sharing, 401(k), 403(b), 457(b), and similar plans), defined benefit plans and non-qualified employer sponsored retirement plans. The fund is generally not available to non-retirement
accounts, traditional and Roth Individual Retirement Accounts (IRAs), Coverdell Education Savings Accounts, SEPs, SARSEPs, SIMPLE IRAs, individual 403(b) accounts that are not part of an employer's 403(b) plan, or qualified tuition programs. Set
forth below are the investment minimums for the fund. These minimums may be waived for certain investors or in the fund’s sole discretion.
| Minimum initial investment | Minimum additional investments | Minimum balance |
| $10,000,000 | $1 | $10,000,000 |
Tax information
Distributions received from the fund will
generally be taxable as ordinary income or capital gains, unless you are investing through an IRA, 401(k) or other tax-advantaged account.
Payments to financial intermediaries
If you purchase shares of the fund through a
broker-dealer or other financial intermediary (such as a bank), the fund and its related companies may pay the intermediary for the sale of fund shares and related services. These payments may create a conflict of interest by influencing the
broker-dealer or other financial intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
Schwab Retirement Government Money Fund™
3
Fund details
The fund invests exclusively in
money market instruments. There can be no assurance that the fund will achieve its objective. Except as explicitly described otherwise, the objective, strategies and policies of the fund may be changed without shareholder approval.
Money fund regulations
Money market funds in the United States are
subject to rules governing their operation:
•Credit quality:
money funds must invest exclusively in high-quality securities.
•Diversification:
requirements for diversification limit the fund’s exposure to any given issuer, guarantor or liquidity provider.
•Maturity: money
funds must maintain a dollar-weighted average portfolio maturity of no more than 60 days and a dollar-weighted average life to maturity of no more than 120 days. In addition, money funds cannot invest in any security whose effective maturity is
longer than 397 days (approximately 13 months).
•Liquidity: taxable
money funds are subject to a minimum liquidity requirement that prohibits a fund from acquiring certain types of securities, if immediately after the acquisition, the fund’s investments in daily liquid assets would be below 10% or 30%,
respectively, of the fund’s total assets.
Portfolio holdings
A description of the fund’s policies and
procedures with respect to the disclosure of the fund’s portfolio securities is available in the fund’s SAI. The fund posts on its website at www.csimfunds.com/schwabfunds_prospectus a list of the securities held by the fund as of the
last business day of the most recent month. This list is updated within 5 business days after the end of the month and will remain available online for at least 6 months after the initial posting. In addition, not later than 5 business days after
the end of each calendar month, the fund will file a schedule of information regarding its portfolio holdings and other information about the fund as of the last day of that month with the SEC on Form N-MFP. These filings will be publicly available
immediately upon filing on the SEC’s website at www.sec.gov. A link to the fund’s Form N-MFP filings on the SEC’s website will also be available at www.csimfunds.com/schwabfunds_prospectus.
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Fund details
Financial highlights
The
fund is newly organized and therefore has not yet had any operations as of the date of this prospectus.
Financial
highlights
5
Fund management
The investment adviser for the
fund is Charles Schwab Investment Management, Inc. (CSIM), 211 Main Street, San Francisco, CA 94105. CSIM was founded in 1989 and as of April 29, 2016, CSIM managed approximately $282.4 billion in assets.
As the investment adviser, CSIM oversees the
asset management and administration of the fund. As compensation for these services, CSIM receives a graduated annual management fee of 0.35% of the fund's average daily net assets for the first $1 billion, 0.32% of such assets more than $1 billion
but not exceeding $10 billion, 0.30% of such assets more than $10 billion but not exceeding $20 billion, 0.27% of such assets more than $20 billion but not exceeding $40 billion, and 0.25% of such assets over $40 billion.
The contractual expense limitation agreement
is described in the Fund summary section. In addition to the contractual expense limitation, the investment adviser and/or its affiliates also may voluntarily waive and/or reimburse expenses in excess of their current fee waiver and reimbursement
commitment to the extent necessary to maintain a non-negative net yield for the fund.
A discussion regarding the basis for the Board
of Trustees’ approval of the fund's investment advisory agreement will be available in the fund's 2016 semi-annual report, which will cover the period from the fund's inception through June 30, 2016.
6
Fund management
Investing in the fund
Investing
through a financial intermediary
Shares of the fund are sold on
a continuous no load basis and are currently available exclusively for employer-sponsored retirement plans (including profit sharing, 401(k), 403(b), 457(b), and similar plans), defined benefit plans and non-qualified employer sponsored retirement
plans. The fund is generally not available to nonretirement accounts, traditional and Roth Individual Retirement Accounts (IRAs), Coverdell Education Savings Accounts, SEPs, SARSEPs, SIMPLE IRAs, individual 403(b) accounts that are not part of an
employer’s 403(b) plan, or qualified tuition programs.
When you place orders through Schwab or other
intermediary, you are not placing your orders directly with the fund, and you must follow Schwab’s or the other intermediary’s transaction procedures. Your intermediary may impose different or additional conditions than the fund on
purchases, redemptions and exchanges of fund shares. These differences may include initial, subsequent and maintenance investment requirements, exchange policies, fund choices, cut-off times for investment and trading restrictions. Your intermediary
may independently establish and charge its customers transaction fees, account fees and other fees in addition to the fees charged by the fund. These additional fees may vary over time and would increase the cost of your investment and lower
investment returns. You should consult your intermediary directly for information regarding these conditions and fees. The fund is not responsible for the failure of your intermediary to carry out its responsibilities.
Only certain intermediaries are authorized to
accept orders on behalf of the fund. If your fund shares are no longer held by an authorized intermediary, the fund may impose restrictions on your ability to manage or maintain your shares. For example, you will not be able to place orders to
purchase additional shares. To remove these restrictions, you may move your shares to Schwab or another intermediary that is authorized to accept fund orders. If you do not exercise this option within 90 days, the fund reserves the right to redeem
your shares.
Buying, selling and exchanging shares
through an intermediary
To purchase,
redeem or exchange shares held in your Schwab account or in your account at another intermediary, you must place your orders with the intermediary that holds your shares. You may not purchase, redeem or exchange shares held in your intermediary
account directly with the fund.
When
selling or exchanging shares, you should be aware of the following fund policies:
•The fund may take up
to seven days to pay sale proceeds.
•The fund reserves
the right to honor redemptions in liquid portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of the fund’s assets, whichever is less. You may incur transaction expenses in converting these
securities to cash.
•Exchange orders are
limited to other Schwab Funds
®
that are not Sweep Investments
®
or Laudus MarketMasters Funds
®
and must meet the
minimum investment and other requirements for the fund and share class into which you are exchanging.
•You must read the
prospectus for the fund into which you are exchanging prior to placing your order.
Share price
The fund is open for business each day that
the NYSE is open except when the following federal holidays are observed: Columbus Day and Veterans Day. The fund calculates its share price each business day, as of the close of the NYSE (generally 4:00 p.m. Eastern time). If the NYSE is closed due
to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an unscheduled early closing on a day it has opened for business, the fund reserves the right to treat such day as a business day and
accept purchase and redemption orders and calculate its share price as of the normally scheduled close of regular trading on the NYSE for that day.
The fund’s share price is its net asset
value per share, or NAV, which is the fund’s net assets divided by the number of its shares outstanding. The fund seeks to maintain a stable NAV of $1.00.
Orders that are received in good order are
executed at the next NAV to be calculated. Orders to buy shares that are accepted no later than the close of the fund (generally 4 p.m. Eastern time) generally will receive the next business day’s dividend. Orders to sell or exchange shares
that are accepted and executed no later than the close of the fund on a given day generally will receive that day’s dividend.
The fund values its investment
holdings on the basis of amortized cost (cost plus any discount, or minus any premium, accrued since purchase). Many money market funds use this method to calculate NAV.
Investing in the
fund
7
Additional policies affecting your investment
Investment minimums
The fund is generally available
only to employer-sponsored retirement plans (including profit sharing, 401(k), 403(b), 457(b), and similar plans), defined benefit plans and non-qualified employer sponsored retirement plans. The fund is generally not available to non-retirement
accounts, traditional and Roth Individual Retirement Accounts (IRAs), Coverdell Education Savings Accounts, SEPs, SARSEPs, SIMPLE IRAs, individual 403(b) accounts that are not part of an employer's 403(b) plan, or qualified tuition programs
.
| Minimum initial investment | Minimum additional investment | Minimum balance |
| $10,000,000 | $1 | $10,000,000 |
These minimums may
be waived for certain retirement plans and plan participants, and for certain investment programs, or in the fund’s sole discretion. In addition, the fund, in its sole discretion, may permit an investor to aggregate accounts to meet the
minimum investment amounts or to meet the minimum investment amounts over a reasonable period of time.
Choose an option for fund distributions.
You will select from the options for fund distributions provided by your intermediary. You should consult with your financial intermediary to discuss available options.
| Option | Feature |
| Reinvestment | All dividends and capital gain distributions are invested automatically in shares of the fund. |
| Cash | You receive payment for all dividends and capital gain distributions. |
The fund reserves certain rights, including the
following:
•To
automatically redeem your shares upon 60 days written notice if the value of your investment in the fund falls below the stated minimum balance requirement for the fund or share class, as applicable.
•To temporarily
reduce or suspend dividend payments in an effort to maintain the fund’s stable $1.00 share price.
•To materially modify
or terminate the exchange privilege upon 60 days’ written notice to shareholders.
•To change or waive
the fund’s investment minimums.
•To suspend the right
to sell shares back to the fund, and delay sending proceeds, during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the SEC, such as to facilitate an orderly liquidation of the fund.
•To withdraw or
suspend any part of the offering made by this prospectus.
Information on liquidity fees and redemption gates
As a government money market fund, the fund is
not required to impose a liquidity fee and/or a redemption gate on fund redemptions. The Board has determined not to subject the fund to a liquidity fee and/or a redemption gate on fund redemptions. Please note that the Board has reserved its
ability to change this determination with respect to liquidity fees and/or redemption gates, but only after providing appropriate prior notice to shareholders.
Payments by the investment adviser or its affiliates
The investment adviser or its affiliates may
make cash payments out of their own resources, or provide products and services at a discount, to certain brokerage firms, banks, retirement plan service providers and other financial intermediaries that perform shareholder, recordkeeping,
sub-accounting and other administrative services in connection with investments in fund shares. These payments or discounts are separate from, and may be in addition to, any shareholder service fees or other administrative fees the fund may pay to
those intermediaries. The investment adviser or its affiliates may also make cash payments out of their own resources, or provide products and services at a discount, to certain financial intermediaries that perform distribution, marketing,
promotional or other distribution-related services. The payments or discounts described by this paragraph may be substantial; however, distribution-related services provided by such intermediaries are paid by the investment adviser or its
affiliates, not by the fund or its shareholders.
Policy regarding short-term or excessive trading
The fund's Board of Trustees has adopted
policies and procedures with respect to frequent purchases and redemptions of fund shares. However, the fund is a money market fund and seeks to provide shareholders current income, liquidity and a stable net asset value of $1.00 per share. In
addition, the fund is designed to serve as a short-term cash equivalent investment for shareholders and, therefore, expects shareholders to engage in frequent purchases and redemptions. Because of the inherently liquid nature of the fund's
investments, and
8
Investing in the
fund
money market instruments in general, and the fund's intended
purpose to serve as a short-term investment vehicle for shareholders, the fund does not monitor or limit shareholder purchases and redemptions of fund shares. However, the fund's policies and procedures do provide the fund with the right to reject
any purchase or exchange orders by any investor for any reason, including orders which appear to be associated with market timing activities.
Large shareholder redemptions
Certain accounts or Schwab affiliates may from
time to time own (beneficially or of record) or control a significant percentage of the fund’s shares. Redemptions by these shareholders of their holdings in the fund may impact the fund’s liquidity and NAV. These redemptions may also
force the fund to sell securities, which may negatively impact the fund’s brokerage costs.
Customer identification and verification and anti-money
laundering program
Federal law requires
all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you open your account, you will have to provide your name, address, date of birth, identification number and other information
that will allow the fund or your financial intermediary to identify you. This information is subject to verification to ensure the identity of all persons opening an account.
Schwab is required by law to reject your new
account application if the required identifying information is not provided. Schwab may contact you in an attempt to collect any missing information required on the application, and your application may be rejected if it is unable to obtain this
information. In certain instances, Schwab is required to collect documents, which will be used solely to establish and verify your identity.
Your order in the fund will be processed at
the NAV next determined after Schwab receives your application in proper form (or upon receipt of all identifying information required on the application). Schwab, however, reserve the right to close and/or liquidate your account at the then-current
day’s price if it is unable to verify your identity. As a result, you may be subject to a gain or loss on fund shares and will be subject to corresponding tax consequences.
Customer identification and verification is
part of the fund's overall obligation to deter money laundering under Federal law. The fund has adopted an Anti-Money Laundering Compliance Program designed to prevent the fund from being used for money laundering or the financing of terrorist
activities. In this regard, the fund reserves the right to (i) refuse, cancel or rescind any purchase or exchange order; (ii) freeze any account and/or suspend account services; or (iii) involuntarily close your account in cases of threatening
conduct or suspected fraudulent or illegal activity. These actions will be taken when, in the sole discretion of fund management, they are deemed to be in the best interest of the fund or in cases when the fund is requested or compelled to do so by
governmental or law enforcement authority. If your account is closed at the request of governmental or law enforcement authority, you may not receive proceeds of a redemption if the fund are required to withhold such proceeds.
Distributions and taxes
Any investment in the fund typically involves
several tax considerations. The information below is meant as a general summary for U.S. citizens and residents. Please see the SAI for additional information. Because each person’s tax situation is different, you should consult your tax
advisor about the tax implications of your investment in the fund. You also can visit the Internal Revenue Service website at www.irs.gov.
As a shareholder, you are entitled to your
share of the dividends the fund earns. The fund distributes to its shareholders substantially all of its net investment income. The fund declares a dividend every business day, based on its determination of its net investment income. The fund pays
its dividends in cash or fund shares to its shareholders’ Schwab accounts on the 15th of each month (or next business day if the 15th is not a business day), except that in December dividends are paid on the last business day of the month. If
your daily dividend is less than $0.01, you may not receive a dividend payment. Although the fund does not typically intend to distribute any capital gains, it cannot be guaranteed by the fund that it will not make any capital gains distributions
for any given year.
Unless you are
investing through an IRA, 401(k) or other tax-advantaged retirement account, fund dividends generally have tax consequences. The fund’s net investment income is distributed as dividends and dividends are taxable as ordinary income.
Taxable income dividends generally are taxable in the tax year in which they are declared, whether you reinvest them or take them in cash. The sale or exchange of your fund shares may have tax consequences to you if you do not hold your shares in a
tax-advantaged account, but no capital gain or loss to a shareholder is anticipated because the fund seeks to maintain a stable $1.00 share price.
An additional 3.8% Medicare tax is imposed on
certain net investment income (including ordinary dividends and capital gain distributions received from the fund and net gains from redemptions or other taxable dispositions of fund shares) of U.S. individuals, estates and trusts to the extent that
such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds a threshold amount.
Investing in the
fund
9
The fund may be required to withhold U.S.
federal income tax on all distributions payable to shareholders if they fail to provide the fund with their correct taxpayer identification number or to make required certifications, or if they have been notified by the IRS that they are subject to
backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against a shareholder’s U.S. federal income tax liability.
Foreign shareholders may be subject to
different U.S. federal income tax treatment, including withholding tax at the rate of 30% (unless a lower treaty rate applies) on amounts treated as ordinary dividends from the fund, as discussed in more detail in the SAI. Furthermore, the fund is
required to withhold U.S. tax (at a 30% rate) on payments of taxable dividends and (effective January 1, 2019) redemption proceeds and certain capital gain dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with
extensive new reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to the fund to enable the fund to
determine whether withholding is required.
At the beginning of every year, the fund
provides shareholders with information detailing the tax status of any dividend the fund declared during the previous calendar year. Schwab customers also receive information on dividends and transactions in their monthly account statements.
10
Investing in the
fund
Notes
Notes
Notes
To learn more
This prospectus contains important information on the fund
and should be read and kept for reference. You also can obtain more information from the following sources:
Annual and semi-annual reports,
which are mailed to current fund investors contain more information about the fund's holdings and detailed financial information about the fund. Annual reports also contain information from the fund managers about
strategies, recent market conditions and trends and their impact on fund performance.
The
Statement of Additional
Information (SAI)
includes a more detailed discussion of investment policies and the risks associated with various investments. The SAI is incorporated by reference into the prospectus, making it legally part of the prospectus.
For a free copy of any of these documents
or to request other information or ask questions about the fund, call Schwab at 1-800-435-4000. In addition, you may visit www.csimfunds.com/schwabfunds_prospectus for a free copy of a prospectus, SAI or an annual or semi-annual report, when
available.
The SAI, the fund's annual and semi-annual
reports, when available, and other related materials are available from the EDGAR Database on the SEC’s website (http://www.sec.gov). You can obtain copies of this information, after paying a duplicating fee, by sending a request by e-mail to
publicinfo@sec.gov or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-1520. You can also review and copy information about the fund, including the SAI, at the SEC’s Public Reference Room in Washington, D.C. Call
1-202-551-8090 for information on the operation of the SEC’s Public Reference Room.
SEC File Number
| The Charles Schwab Family of Funds | 811-5954 |
REG90710-00 00162446
Schwab Retirement Government Money Fund™
Prospectus
May 16, 2016
Table of Contents
Statement Of Additional Information
| Schwab Retirement Government Money Fund™ — SNRXX |
May 16, 2016
The Statement of Additional Information (SAI) is
not a prospectus. It should be read in conjunction with the fund's prospectus dated May 16, 2016 (as amended from time to time).
For a free copy of these documents or to request
other information or ask questions about the fund, call Schwab Funds
®
at 1-800-435-4000. For TDD service call 1-800-345-2550. In addition, you may
visit Schwab Funds' website at www.csimfunds.com/schwabfunds_prospectus for a free copy of the prospectus or SAI.
The fund is a series of The Charles Schwab Family
of Funds (the Trust). The fund is part of the Schwab complex of funds (Schwab Funds).
REG90711-00 00162447
Table of Contents
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| APPENDIX – RATINGS Of Investment Securities | |
| APPENDIX – PROXY VOTING POLICY AND PROCEDURES |
INVESTMENT OBJECTIVE
The Schwab Retirement Government Money Fund seeks
current income consistent with stability of capital and liquidity.
Change of Investment Objective
The fund’s objective is not fundamental and
therefore may be changed by the fund’s Board of Trustees (Board) without shareholder approval.
The fund operates as a money
market fund and seeks to comply with the requirements of Rule 2a-7 (the Rule) under the Investment Company Act of 1940 (the 1940 Act), as that Rule may be interpreted and amended from time to time. The Rule’s key provisions govern the
maturity, liquidity, quality and diversification of its money market fund investments. For example, with respect to maturity, Rule 2a-7 currently provides that money funds limit their investments to securities with remaining maturities of 397 days
or less, and maintain dollar-weighted average maturities of 60 days or less and a dollar-weighted average life to maturity of 120 days or less, all calculated as described in the Rule or any interpretation thereunder. Taxable money funds are subject
to minimum liquidity requirements that prohibit a fund from acquiring certain types of securities if, immediately after the acquisition, the fund’s investments in daily or weekly liquid assets, as defined in the Rule, would be below 10% or
30%, respectively, of the fund’s total assets. In addition, money funds may only invest in high quality securities. The fund is also subject to strict diversification requirements under Rule 2a-7.
The following investment strategies, securities,
risks and limitations supplement those set forth in the prospectuses and may be changed without shareholder approval unless otherwise noted. Also, policies and limitations that state a maximum percentage of assets that may be invested in a security
or other asset, or that set forth a quality standard, shall be measured immediately after and as a result of the fund's acquisition of such security or asset unless otherwise noted. Additionally, for purposes of calculating any restriction, an
issuer shall be the entity deemed to be ultimately responsible for payments of interest and principal on the security pursuant to Rule 2a-7 under the 1940 Act unless otherwise noted.
Investment Strategies
The Schwab Retirement Government
Money Fund will invest at least 99.5% of its total assets in cash, U.S. government securities and/or repurchase agreements that are collateralized fully by cash and/or U.S. government securities; under normal circumstances, 80% of its net assets
must be invested solely in U.S. government securities including repurchase agreements (excluding cash). With respect to the 80% policy, the fund will notify its shareholders at least 60 days before changing the policy. Also, for purposes of the
policy, net assets means net assets plus any borrowings for investment purposes.
Investments, Securities And Risks
Not all investment securities or techniques
discussed below are eligible investments for the fund. The fund will invest in securities or engage in techniques that are intended to help achieve its investment objective.
Borrowing
may
subject the fund to interest costs, which may exceed the interest received on the securities purchased with the borrowed funds. The fund normally may borrow at times to meet redemption requests rather than sell portfolio securities to raise the
necessary cash. Borrowing can involve leveraging when securities are purchased with the borrowed money. To avoid this, the fund will not purchase securities while borrowings are outstanding or will earmark or segregate assets to cover such
borrowings in accordance with positions of the Securities and Exchange Commission (SEC).
Concentration
means
that substantial amounts of assets are invested in a particular industry or group of industries. Concentration increases investment exposure to industry risk. For example, the automobile industry may have a greater exposure to a single factor, such
as an increase in the price of oil, which may adversely affect the sale of automobiles and, as a result, the value of the industry's securities.
1
Credit and Liquidity Supports or Enhancements
may be employed by issuers to reduce the credit risk of their securities. Credit supports include letters of credit, insurance and guarantees provided by foreign and domestic financial institutions. Liquidity supports
include puts, demand features, and lines of credit. Most of these arrangements move the credit risk of an investment from the issuer of the security to the support provider. The investment adviser may rely on its evaluation of the credit and
liquidity of the credit support provider in determining whether to purchase or hold a security enhanced by such a support. Changes in the credit quality of a support provider could cause losses to the fund.
Debt Securities
are
obligations issued by domestic and foreign entities, including governments and corporations, in order to raise money. They are basically “IOUs,” but are commonly referred to as bonds or money market securities. These securities normally
require the issuer to pay a fixed-, variable- or floating-rate of interest on the amount of money borrowed (the principal) until it is paid back upon maturity.
Debt securities experience price changes when
interest rates change. For example, when interest rates fall, the prices of debt securities generally rise. Conversely, when interest rates rise, the prices of debt securities generally fall.
Certain debt securities have call features that
allow the issuer to redeem their outstanding debts prior to final maturity. Depending on the call feature, an issuer may pre-pay its outstanding debts and issue new ones paying lower interest rates. If an issuer redeems its debt securities prior to
final maturity, the fund may have to replace these securities with lower yielding securities, which could result in a lower return This is more likely to occur in a falling interest rate environment. In a rising interest rate environment, prepayment
on outstanding debt securities is less likely to occur. This is known as extension risk and may cause the value of debt securities to depreciate as a result of the higher market interest rates. Typically, longer-maturity securities react to interest
rate changes more severely than shorter-term securities (all things being equal), but generally offer greater rates of interest.
A change in the Federal Reserve's monetary policy
(or that of other central banks) or improving economic conditions, among other things, may lead to an increase in interest rates, which could significantly impact the value of debt securities in which the fund invests. Some debt securities are more
sensitive to interest rate changes than others and may experience an immediate and considerable reduction in value if interest rates rise. Longer duration securities tend to be more volatile than shorter duration securities. As the values of debt
securities in the fund’s portfolio adjust to a rise in interest rates, the fund’s share price may fall. In the event that the fund holds a large portion of its portfolio in longer duration securities when interest rates increase, the
share price of the fund may fall significantly.
Debt securities also are subject to the risk that
the issuers will not make timely interest and/or principal payments or fail to make them at all. This is called credit risk. Corporate debt securities (bonds) tend to have higher credit risk generally than U.S. government debt securities. Debt
securities also may be subject to price volatility due to market perception of future interest rates, the creditworthiness of the issuer and general market liquidity (market risk).
Corporate bonds are debt securities issued by
corporations. Although a higher return is expected from corporate bonds, these securities, while subject to the same general risks as U.S. government securities, are subject to greater credit risk than U.S. government securities. Their prices may be
affected by the perceived credit quality of their issuer.
Delayed-Delivery Transactions
include purchasing and selling securities on a delayed-delivery or when-issued basis. These transactions involve a commitment to buy or sell specific securities at a predetermined price or yield, with payment and
delivery taking place after the customary settlement period for that type of security. When purchasing securities on a delayed-delivery basis, the fund assumes the rights and risks of ownership, including the risk of price and yield fluctuations.
Typically, no interest will accrue to the fund until the security is delivered. The fund will earmark or segregate appropriate liquid assets to cover its delayed-delivery purchase obligations. When the fund sells a security on a delayed-delivery
basis, the fund does not participate in further gains or losses with respect to that security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, the fund could suffer losses.
Diversification
involves investing in a wide range of securities and thereby spreading and reducing the risks of investment. The fund is a diversified mutual fund. The fund also follows the regulations set forth by the SEC in Rule 2a-7 that dictate the
diversification requirements for money market mutual funds, as such regulations may be amended
2
or interpreted from time to time.
The fund may invest up to 25% of its assets in securities of a single issuer for a period of up to three business days.
Illiquid Securities
generally are any securities that cannot be disposed of in the ordinary course of business within seven calendar days at approximately the amount at which the fund has valued the instruments. The liquidity of the
fund’s investments is monitored under the supervision and direction of the Board. Investments currently not considered liquid include repurchase agreements not maturing within seven days that are not subject to a demand feature of seven days
or less and certain restricted securities.
Interfund Borrowing and Lending.
The SEC has granted an exemption to the fund that permits the fund to borrow money from and/or lend money to other funds in the Fund Complex, as defined under “Management of the Funds”. All loans are for
temporary or emergency purposes and the interest rates to be charged will be the average of the overnight repurchase agreement rate and the short-term bank loan rate. All loans are subject to numerous conditions designed to ensure fair and equitable
treatment of all participating funds. The interfund lending facility is subject to the oversight and periodic review of the Board of the Schwab
Funds
®
.
Securities Lending
of portfolio securities is a common practice in the securities industry. The fund may engage in security lending arrangements with the primary objective of increasing its income. For example, the fund may receive cash collateral and it may invest it
in short-term, interest-bearing obligations, but will do so only to the extent that it will not lose the tax treatment available to regulated investment companies. Lending portfolio securities involves risks that the borrower may fail to return the
securities or provide additional collateral. Also, voting rights with respect to the loaned securities may pass with the lending of the securities and efforts to re-call such securities promptly may be unsuccessful, especially for foreign
securities. Securities lending involves the risk of loss of rights in the collateral, or delay in recovery of the collateral, if the borrower fails to return the security loaned or becomes insolvent. The fund will also bear the risk of any decline
in value of securities acquired with cash collateral.
The fund may lend portfolio securities to qualified
broker-dealers or other institutional investors provided that: (1) the loan is secured continuously by collateral consisting of U.S. government securities, letters of credit, cash or cash equivalents or other appropriate instruments maintained on a
daily marked-to-market basis in an amount at least equal to the current market value of the securities loaned; (2) the fund may at any time call the loan and obtain the return of the securities loaned; (3) the fund will receive any interest or
dividends paid on the loaned securities; and (4) the aggregate market value of securities loaned will not at any time exceed one-third of the total assets of the fund, including collateral received from the loan (at market value computed at the time
of the loan).
Although voting rights with
respect to loaned securities pass to the borrower, the lender retains the right to recall a security (or terminate a loan) for the purpose of exercising the security’s voting rights. Efforts to recall such securities promptly may be
unsuccessful, especially for foreign securities or thinly traded securities such as small-cap stocks. In addition, because recalling a security may involve expenses to the fund, it is expected that the fund will do so only where the items being
voted upon are, in the judgment of the investment adviser, either are material to the economic value of the security or threaten to materially impact the issuer’s corporate governance policies or structure.
To the extent the fund participates in securities
lending under the current securities lending agreements with the unaffiliated lending agents, costs and expenses, including agent fees, associated with securities lending activities under the securities lending program paid to the lending agent are
approximately 10% of the gross lending revenues (with the ability to reach further breakpoints). All remaining revenue is retained by the fund, as applicable. No portion of the lending revenue is paid to or retained by Charles Schwab Investment
Management, Inc. (CSIM or the investment adviser) or any affiliate of CSIM.
Maturity of Investments
generally will be determined using the portfolio securities’ final maturity dates or a shorter period as permitted by Rule 2a-7. For a government security that is a variable-rate security where the variable rate of
interest is readjusted at least every 397 calendar days, the maturity is deemed to be equal to the period remaining until the next readjustment of the interest rate. A government security that is a floating-rate security is deemed to have a maturity
of one day. A short-term variable-rate security is deemed to have a maturity equal to the earlier of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through
demand. A long-term variable-rate security that is subject to a demand feature is deemed to have a
3
maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand. A short-term floating-rate security is deemed to have a maturity of one day. A long-term floating-rate security that is subject to
a demand feature is deemed to have a maturity equal to the period remaining until the principal amount can be recovered through demand. A repurchase agreement is deemed to have a maturity equal to the period remaining until the date on the
repurchase of the underlying securities is scheduled to occur, or, where the agreement is subject to a demand, the notice period applicable to the demand for repurchase of the securities. A securities lending agreement will be treated as having a
maturity equal to the period remaining until the date on which the loaned securities are scheduled to be returned, or where the agreement is subject to demand, the notice period applicable to a demand for the return of the loaned securities.
Money Market Securities
are high-quality, short-term debt securities that may be issued by entities such as the U.S. government, municipalities, corporations and financial institutions (like banks). Money market securities include, but are not
limited to, commercial paper, promissory notes, certificates of deposit, bankers’ acceptances, notes and time deposits.
Money market securities pay fixed-, variable- or
floating-rates of interest and are generally subject to credit and interest rate risks. The maturity date or price of and financial assets collateralizing a security may be structured in order to make it qualify as or act like a money market
security. These securities may be subject to greater credit and interest rate risks than other money market securities because of their structure. A money market security may be issued with a put (agreement that allows the buyer of the security to
sell it at a specified price) or without a put.
Promissory Notes
are written agreements committing the maker or issuer to pay the payee a specified amount either on demand or at a fixed date in the future, with or without interest. These are sometimes called negotiable notes or instruments and are subject to
credit risk. Bank notes are notes used to represent obligations issued by banks in large denominations.
Puts
sometimes
called demand features or guarantees, are agreements that allow the buyer of the put to sell a security at a specified price and time to the seller or “put provider.” When the fund buys a security with a put feature, losses could occur
if the put provider does not perform as agreed. Standby commitments are types of puts.
Quality of Investments.
The fund follows regulations set forth by the SEC that dictate the quality requirements for investments made by money market mutual funds, as such regulations may be amended or interpreted from time to time. These
regulations require the fund to invest exclusively in high-quality securities. Generally, high-quality securities are securities that present minimal credit risks and,
under current regulations, are rated in
one of the two highest short-term rating categories by two nationally recognized statistical rating organizations (NRSROs), or by one if only one NRSRO has rated the securities, or, if unrated, determined to be of comparable quality by the
investment adviser pursuant to guidelines adopted by the Board. High-quality securities may be “first tier” or “second tier” securities. First tier securities may be rated within the highest short-term rating category or
determined to be of comparable quality by the investment adviser. Money market fund shares and U.S. government securities also are first tier securities. Second tier securities generally are rated within the second-highest short-term rating
category.
Should a
security’s high-quality rating change after purchase by the fund, the investment adviser would take such action, including no action, as determined to be in the best interest of the fund by the Board and as required by Rule 2a-7. For more
information about the ratings assigned by some NRSROs, refer to the Appendix section of the SAI.
In September 2015, the SEC adopted
rule amendments that remove references to NRSRO credit ratings in Rule 2a-7 under the 1940 Act. Under the amended rule, money market funds will be required to limit their investments to “eligible securities,” which are defined to mean
securities with a remaining maturity of 397 calendar days or less that a fund’s board of directors (or its delegate) determines presents minimal credit risks to the fund. The amended rule requires a money market fund’s board, or an
appropriate delegate, to consider a series of factors that money market funds have traditionally used to evaluate the creditworthiness of a portfolio security, including the issuer’s or guarantor’s: (i) financial condition, (ii) sources
of liquidity; (iii) ability to react to market-wide and issuer- or guarantor-specific events, including the ability to repay debt in a highly adverse situation; and (iv) position within its industry, as well as industry strength within the economy
and relative economic trends. Therefore, effective October
4
14, 2016, the compliance date, all references to NRSRO credit
ratings in Rule 2a-7 will no longer be applicable, and the fund’s board or its delegate will consider the factors above in connection with making the minimal credit risk determination.
Repurchase Agreements
involve the fund buying securities from a seller and simultaneously agreeing to sell them back at an agreed-upon price (usually higher) and time. When the fund enters into a repurchase agreement, the fund is exposed to
the risk that the other party (i.e., the counterparty) will not fulfill its contractual obligation. In a repurchase agreement, there exists the risk that, when the fund buys a security from a counterparty that agrees to repurchase the security at an
agreed upon price (usually higher) and time, the counterparty will not repurchase the security. Repurchase agreements entered into by the fund (other than those where the U.S. government, one of its agencies or one of its instrumentalities is a
counterparty, which may include the Federal Reserve Bank of New York) will provide that the underlying collateral, which may be in the form of cash, U.S. government securities, fixed-income securities, equity securities or other types of securities,
including securities that are rated below investment grade, shall at all times have a value at least equal to 100% of the resale price stated in the agreement. Repurchase agreements where the U.S. government, one of its agencies or one of its
instrumentalities is a counterparty will provide that the underlying collateral shall have a value at least equal to 100% of the sale price stated in the agreement. Repurchase agreements with the Federal Reserve Bank of New York are deemed to be
investments in U.S. government securities. Repurchase agreements collateralized entirely by cash or U.S. government securities may be deemed to be collateralized fully pursuant to Rule 2a-7 and may be deemed to be investments in the underlying
securities.
Reduced participation in
the repurchase agreement market by counterparties, particularly the Federal Reserve Bank of New York, due to regulatory or market conditions may affect the fund’s investment strategies, operations and/or performance.
Restricted Securities
are securities that are subject to legal restrictions on their sale. For example, tender option bonds, commercial paper and other promissory notes may be issued under Section 4(a)(2) of the Securities Act of 1933, as
amended (the “1933 Act”), and may be sold only to qualified institutional buyers, such as the fund, under Securities Act Rule 144A. Securities purchased through a private placement offering are also restricted securities.
Certain restricted securities such as Section
4(a)(2) commercial paper and Rule 144A securities under the 1933 Act, may be considered to be liquid if they meet the criteria for liquidity established by the Board. To the extent the fund invests in restricted securities that are deemed liquid,
the general level of illiquidity in the fund’s portfolio may increase if buyers in that market become unwilling to purchase the securities.
Reverse Repurchase Agreements.
In a reverse repurchase agreement, the fund would sell a security in exchange for cash and enter into an agreement to repurchase the security at a specified future date and price. The fund generally retains the right to
interest and principal payments on the security. If the fund uses the cash it obtains to invest in other securities, this may be considered a form of leverage and may expose the fund to greater risk. Leverage tends to magnify the effect of any
decrease or increase in the value of the fund’s portfolio securities. Because the fund receives cash upon entering into a reverse repurchase agreement, it may be considered a borrowing. When required by guidelines of the SEC, the fund will set
aside permissible liquid assets earmarked or in a segregated account to secure its obligations to repurchase the security.
Securities of Other Investment Companies.
Investment companies generally offer investors the advantages of diversification and professional investment management by combining shareholders’ money and investing it in securities such as stocks, bonds and
money market instruments. Investment companies include: (1) open-end funds (commonly called mutual funds) that issue and redeem their shares on a continuous basis; (2) closed-end funds that offer a fixed number of shares, and are usually listed on
an exchange; and (3) unit investment trusts that generally offer a fixed number of redeemable shares. Certain open-end funds, closed-end funds and unit investment trusts are traded on exchanges (see the section entitled “Exchange Traded
Funds” for more information).
Investment companies may make investments and use
techniques designed to enhance their performance. These may include delayed-delivery and when-issued securities transactions; swap agreements; buying and selling futures contracts, illiquid, and/or restricted securities and repurchase agreements;
and borrowing or lending money and/or
5
portfolio securities. The risks of investing in a particular
investment company will generally reflect the risks of the securities in which it invests and the investment techniques it employs. Also, investment companies charge fees and incur expenses.
Federal law restricts the ability of one registered
investment company to invest in another. As a result, the extent to which the fund may invest in another investment company may be limited. With respect to investments in other mutual funds, the SEC has granted the Schwab Funds
®
an exemption from the limitations of the 1940 Act that restrict the amount of securities of underlying mutual funds a Schwab Fund may hold, provided
that certain conditions are met. The conditions imposed by the SEC were designed to address certain abuses perceived to be associated with “funds of funds”, including unnecessary costs (such as sales loads, advisory fees and
administrative costs), and undue influence by the investing fund over the underlying fund. The conditions apply only when a Schwab fund and its affiliates in the aggregate own more than 3% of the outstanding shares of any one underlying fund.
Under the terms of the exemptive order, the fund
and its affiliates may not control a non-affiliated underlying fund. Under the 1940 Act, any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of a company is assumed to
control that company. This limitation is measured at the time the investment is made. The fund does not currently intend to take advantage of this exemptive order because the fund is not a “fund of funds.
Stripped Securities
are securities whose income and principal components are detached and sold separately. While the risks associated with stripped securities are similar to other money market securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that have been stripped by the Federal Reserve Bank are obligations of the U.S. Treasury. Privately stripped government securities are created when a dealer deposits a U.S.
Treasury security or other U.S. Government security with a custodian for safekeeping; the custodian issues separate receipts for the coupon payments and the principal payment, which the dealer then sells. There are two types of stripped securities:
coupon strips, which refer to the zero coupon bonds that are backed by the coupon payments; and principal strips, which are backed by the final repayments of principal. Unlike coupon strips, principal strips do not accrue a coupon payment. They are
sold at a discounted price and accrete up to par. An investor in a principal strip would only need to pay capital gains tax on the principal strip.
The fund may invest in U.S. Treasury bonds that
have been stripped of their unmatured interest coupons, the coupons themselves, and receipts or certificates representing interests in such stripped debt obligations and coupons. Interest on zero coupon bonds is accrued and paid at maturity rather
than during the term of the security. Such obligations have greater price volatility than coupon obligations and other normal interest-paying securities, and the value of zero coupon securities reacts more quickly to changes in interest rates than
do coupon bonds. Because dividend income is accrued throughout the term of the zero coupon obligation, but it is not actually received until maturity, the fund may have to sell other securities to pay accrued dividends prior to the maturity of the
zero coupon obligation.
Unlike regular U.S.
Treasury bonds which pay semi-annual interest, U.S. Treasury zero coupon bonds do not generate semi-annual coupon payments. Instead, zero coupon bonds are purchased at a substantial discount from the maturity of such securities. The discount
reflects the current value of the deferred interest and is amortized as interest income over the life of the securities; it is taxable even though there is no cash return until maturity.
Zero coupon U.S. Treasury issues originally were
created by government bond dealers who bought U.S. Treasury bonds and issued receipts representing an ownership interest in the interest coupons or the principal portion of the bonds. Subsequently, the U.S. Treasury began directly issuing zero
coupon bonds with the introduction of the Separate Trading of Registered Interest and Principal of Securities (STRIPS) program. Under the STRIPS program, the principal and interest components are separately issued by the U.S. Treasury at the request
of depository financial institutions, which then trade the component parts separately.
While zero coupon bonds eliminate the reinvestment
risk of regular coupon issues, i.e., the risk of subsequently investing the periodic interest payments at a lower rate than that of the security currently held, zero coupon bonds fluctuate much more sharply than regular coupon-bearing bonds. Thus,
when interest rates rise, the value of zero coupon bonds will decrease to a greater extent than will the value of regular bonds having the same interest rate.
6
U.S. Government Securities.
are issued by the U.S. Treasury or issued or guaranteed by the U.S. government or any of its agencies or instrumentalities. Not all U.S. government securities are backed by the full faith and credit of the U.S.
government. Some U.S. government securities, such as those issued by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), the Student Loan Marketing Association (Sallie Mae), and the
Federal Home Loan Banks, are supported by a line of credit the issuing entity has with the U.S. Treasury. Securities issued by other issuers are supported solely by the credit of the issuing agency or instrumentality such as obligations issued by
the Federal Farm Credit Banks Funding Corporation. There can be no assurance that the U.S. government will provide financial support to U.S. government securities of its agencies and instrumentalities if it is not obligated to do so under law. U.S.
government securities, including U.S. Treasury securities, are among the safest securities, however, not unlike other debt securities, they are still sensitive to interest rate changes, which will cause their yields and prices to
fluctuate.
On September 7, 2008, the
U.S. Treasury announced a federal takeover of Fannie Mae and Freddie Mac, placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each
instrumentality and obtained warrants for the purchase of common stock of each instrumentality. Under these Senior Preferred Stock Purchase Agreements (SPAs), the U.S. Treasury has pledged to provide up to $100 billion per instrumentality as needed,
including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets. On May 6, 2009, the U.S. Treasury increased its maximum commitment to each instrumentality under the SPAs to $200 billion per
instrumentality. On December 24, 2009, the U.S. Treasury further amended the SPAs to allow the cap on the U.S. Treasury’s funding commitment to increase as necessary to accommodate any cumulative reduction in Fannie Mae’s and Freddie
Mac’s net worth through the end of 2012. On August 17, 2012, the U.S. Treasury announced that it was again amending the SPAs to terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% dividend annually on all amounts received
under the funding commitment. Instead, they will transfer to the U.S. Treasury on a quarterly basis all profits earned during a quarter that exceed a capital reserve amount of $3 billion. It is anticipated that the new amendment would put Fannie Mae
and Freddie Mac in a better position to service their debt. At the start of 2013, the unlimited support the U.S. Treasury extended to the two companies expired
–
Fannie Mae’s bailout is capped at $125 billion and Freddie Mac has a limit of $149 billion.
The actions of the U.S. Treasury
are intended to ensure that Fannie Mae and Freddie Mac maintain a positive net worth and meet their financial obligations preventing mandatory triggering of receivership. No assurance can be given that the U.S. Treasury initiatives will be
successful. In addition, the future for Fannie Mae and Freddie Mac remains uncertain. The U.S. Congress has recently considered proposals to reduce the U.S. government’s role in the mortgage market and to wind down or restructure the
operations of both Fannie Mae and Freddie Mac. Should the federal government adopt any such proposal, the value of the fund’s investments in securities issued by Fannie Mae or Freddie Mac would be impacted.
Although the risk of default with U.S. government
securities is considered unlikely, any default on the part of a portfolio investment could cause the fund’s share price or yield to fall.
U.S. Treasury Securities
are obligations of the U.S. Treasury and include bills, notes and bonds. U.S. Treasury securities are backed by the full faith and credit of the United States government.
Variable and Floating Rate Debt Securities
pay an interest rate, which is adjusted either periodically or at specific intervals or which floats continuously according to a formula or benchmark. Although these structures generally are intended to minimize the
fluctuations in value that occur when interest rates rise and fall, some structures may be linked to a benchmark in such a way as to cause greater volatility to the security’s value.
Some variable rate securities may be combined with
a put or demand feature (variable rate demand securities) that entitles the holder to the right to demand repayment in full or to resell at a specific price and/or time. While the demand feature is intended to reduce credit risks, it is not always
unconditional and may be subject to termination if the issuer’s credit rating falls below investment grade or if the issuer fails to make payments on other debt. While most variable-rate demand securities allow the fund to exercise its demand
rights at any time, some such securities may only allow the fund to exercise its demand rights at certain times, which reduces the liquidity usually associated
7
with this type of security. There may also be a period of time
between when the fund exercises its demand rights and when the demand feature provider is obligated to pay. The fund could suffer losses in the event that the demand feature provider, usually a bank, fails to meet its obligation to pay the
demand.
INVESTMENT LIMITATIONS
The following investment limitations may be changed
only by a vote of a majority of the fund's outstanding shares.
The Fund may not:
| (1) | Purchase securities of an issuer, except as consistent with the maintenance of its status as an open-end diversified company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (2) | Concentrate investments in a particular industry or group of industries, as concentration is defined under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (3) | Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (4) | Make loans to other persons, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (5) | Borrow money, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (6) | Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (7) | Issue senior securities, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (8) | Purchase securities or make investments other than in accordance with its investment objectives and policies. |
The following descriptions of the 1940 Act may assist
investors in understanding the above fundamental policies and restrictions.
Diversification
. Under the 1940 Act, a diversified fund, with respect to 75% of its total assets, may not purchase securities (other than U.S. government securities or securities of other investment companies) if, as a result, more than 5% of its total
assets would be invested in the securities of such issuer or it would own more than 10% of such issuer’s outstanding voting securities. Money market funds that satisfy the applicable diversification requirements of Rule 2a-7 of the 1940 Act
are deemed to satisfy the diversification requirements set forth above.
Borrowing
.
The 1940 Act presently restricts the fund from borrowing (including pledging, mortgaging or hypothecating assets) in excess of 33 1/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets).
Lending
.
Under the 1940 Act, the fund may only make loans if expressly permitted by its investment policies.
8
Concentration
. The SEC presently defines concentration as investing 25% or more of the fund’s net assets in an industry or group of industries, with certain exceptions. Municipal securities are not deemed to be issued by an issuer from a single
industry or group of industries.
Underwriting.
Under the 1940 Act, underwriting securities involves the fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity
either directly or indirectly. Under the 1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its outstanding underwriting commitments, plus the value of its investments in securities of
issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets.
Senior
Securities.
Senior securities may include any obligation or instrument issued by the fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it provides allowances for certain borrowings
and certain other investments, such as short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligations.
Real
Estate.
The 1940 Act does not directly restrict the fund’s ability to invest in real estate, but does require that every fund have a fundamental investment policy governing such investments. The fund has adopted a fundamental policy
that would permit direct investment in real estate. However, the fund has a non-fundamental investment limitation that prohibits it from investing directly in real estate. This non-fundamental policy may be changed only by vote of the fund's
Board.
The following are non-fundamental
investment policies and restrictions, and may be changed by the Board.
The fund may not:
| (1) | Purchase securities (other than securities issued or guaranteed by the U.S. government, its agencies or instrumentalities) if, as a result of such purchase, 25% or more of the value of its total assets would be invested in any industry or group of industries. |
| (2) | Purchase or sell commodities, commodity contracts or real estate, including interests in real estate limited partnerships, provided that the fund may (i) purchase securities of companies that deal in real estate or interests therein (including REITs), (ii) purchase or sell futures contracts, options contracts, equity index participations and index participation contracts, and (iii) purchase securities of companies that deal in precious metals or interests therein. |
| (3) | Invest more than 5% of its total assets in illiquid securities. |
| (4) | Purchase securities of other investment companies, except as permitted by the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. |
| (5) | Lend any security or make any other loan if, as a result, more than 33 1/3% of its total assets would be lent to other parties (this restriction does not apply to purchases of debt securities or repurchase agreements). |
| (6) | Borrow money except that the fund may (i) borrow money from banks or through an interfund lending facility, if any, only for temporary or emergency purposes (and not for leveraging) and (ii) engage in reverse repurchase agreements with any party; provided that (i) and (ii) in combination do not exceed 33 1/3% of its total assets (any borrowings that come to exceed this amount will be reduced to the extent necessary to comply with the limitation within three business days). |
| (7) | Sell securities short unless it owns the security or the right to obtain the security or equivalent securities, or unless it covers such short sale as required by current SEC rules and interpretations (transactions in futures contracts, options and other derivative instruments are not considered selling securities short). |
9
| (8) | Purchase securities on margin, except such short-term credits as may be necessary for the clearance of purchases and sales of securities and provided that margin deposits in connection with futures contracts, options on futures or other derivative instruments shall not constitute purchasing securities on margin. |
Policies and investment limitations that state a
maximum percentage of assets that may be invested in a security or other asset, or that set forth a quality standard shall be measured immediately after and as a result of the fund’s acquisition of such security or asset, unless otherwise
noted. Except with respect to limitations on borrowing, any subsequent change in net assets or other circumstances does not require the fund to sell an investment if it could not then make the same investment. With respect to the limitation on
illiquid securities, in the event that a subsequent change in total assets or other circumstances cause the fund to exceed its limitation, the fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as
soon as reasonably practicable.
Management of the FUND
The fund is overseen by a Board. The trustees are
responsible for protecting shareholder interests. The trustees regularly meet to review the investment activities, contractual arrangements and the investment performance of the fund. The fund is new, and therefore, the trustees did not meet with
respect to the fund during the most recent fiscal year.
Certain trustees are
“interested persons.” A trustee is considered an interested person of the Trust under the 1940 Act if he or she is an officer, director, or an employee of CSIM or Charles Schwab & Co., Inc. (Schwab). A trustee also may be considered
an interested person of the Trust under the 1940 Act if he or she owns stock of The Charles Schwab Corporation, a publicly traded company and the parent company of CSIM and Schwab.
As used herein the terms “Fund Complex”
and “Family of Investment Companies” each refer collectively to The Charles Schwab Family of Funds, Schwab Investments, Schwab Annuity Portfolios, Schwab Capital Trust, Schwab Strategic Trust and Laudus Trust which, as of May 1, 2016,
included 97 funds. As used herein, the term “Schwab Funds” refers collectively to The Charles Schwab Family of Funds, Schwab Investments, Schwab Annuity Portfolios and Schwab Capital Trust; the term “Laudus Funds” refers to
Laudus Trust; and the term “Schwab ETFs” refers to Schwab Strategic Trust.
Each of the officers and/or trustees also serves in
the same capacity, unless otherwise noted, for The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust. The tables below provide information about the trustees
and officers for the Trust, which includes funds in this SAI. The address of each individual listed below is 211 Main Street, San Francisco, California 94105.
|
NAME,
YEAR OF BIRTH, AND
POSITION(S) WITH THE TRUST; (TERM OF OFFICE AND LENGTH OF TIME SERVED 1 ) |
PRINCIPAL
OCCUPATIONS
DURING THE PAST FIVE YEARS |
NUMBER
OF
PORTFOLIOS IN FUND COMPLEX OVERSEEN BY THE TRUSTEE |
OTHER
DIRECTORSHIPS DURING THE PAST FIVE YEARS |
| INDEPENDENT TRUSTEES | |||
|
Robert
W. Burns
1959 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
Retired/Private Investor (Jan. 2009-present). Formerly, Managing Director, Pacific Investment Management Company, LLC (PIMCO) and President, PIMCO Funds. | 97 | Director, PS Business Parks, Inc. (2005-2012) |
10
11
|
NAME,
YEAR OF BIRTH, AND
POSITION(S) WITH THE TRUST; (TERM OF OFFICE AND LENGTH OF TIME SERVED 1 ) |
PRINCIPAL
OCCUPATIONS
DURING THE PAST FIVE YEARS |
NUMBER
OF
PORTFOLIOS IN FUND COMPLEX OVERSEEN BY THE TRUSTEE |
OTHER
DIRECTORSHIPS DURING THE PAST FIVE YEARS |
| INDEPENDENT TRUSTEES | |||
|
Gerald
B. Smith
1950 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2000; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990-present). | 97 |
Director,
Eaton (2012-present)
Director and Chairman of the Audit Committee, Oneok Partners LP (2003-2013) Director, Oneok, Inc. (2009-2013) Lead Independent Director, Board of Cooper Industries (2002-2012) |
|
Joseph
H. Wender
1944 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008-present); Partner, Colgin Partners, LLC (vineyards) (Feb. 1998-present). | 97 |
Board
Member and Chairman of the Audit Committee, Isis Pharmaceuticals (1994-present)
Lead Independent Director and Chair of Audit Committee, OUTFRONT Media Inc. (2014-present) |
| INTERESTED TRUSTEES | |||
|
Walter
W. Bettinger II
2
1960 Chairman and Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Schwab Strategic Trust since 2009; Laudus Trust since 2010) |
Director, President and Chief Executive Officer, The Charles Schwab Corporation (Oct. 2008-present); President and Chief Executive Officer (Oct. 2008-present), Director (May 2008-present), Charles Schwab & Co., Inc.; Director, Charles Schwab Bank (Apr. 2006-present); and Director, Schwab Holdings, Inc. (May 2008-present). | 97 | Director, The Charles Schwab Corporation (2008-present) |
12
13
| 1 | Each Trustee shall hold office until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. The retirement policy requires that each independent trustee retire by December 31 of the year in which the |
14
| Trustee turns 74 or the Trustee’s twentieth year of service as an independent trustee on any trust in the Fund Complex, whichever occurs first. | |
| 2 | Mr. Bettinger, Ms. Chandoha and Mr. Martinetto are Interested Trustees because they own stock of The Charles Schwab Corporation, the parent company of the investment adviser. |
| 3 | The President, Treasurer and Secretary/Clerk hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each of the other officers serves at the pleasure of the Boards. |
Board Leadership
Structure
The Chairman of the Board, Walter
W. Bettinger II, is Chief Executive Officer and a member of the Board of Directors of The Charles Schwab Corporation and an interested person of the Trust as that term is defined in the Investment Company Act of 1940 Act. The Board is comprised of a
super-majority (75 percent) of trustees who are not interested persons of the Trust (i.e., “independent trustees”). The Trust does not have a single lead independent trustee. There are three primary committees of the Board: the Audit,
Compliance and Valuation Committee; the Governance Committee; and the Investment Oversight Committee. Each of the Committees is chaired by an independent trustee, and each Committee is comprised solely of independent trustees. The Committee chairs
preside at Committee meetings, participate in formulating agendas for those meetings, and coordinate with management to serve as a liaison between the independent trustees and management on matters within the scope of the responsibilities of each
Committee as set forth in its Board-approved charter. The Board has determined that this leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Board made this determination in consideration of,
among other things, the fact that the independent trustees of the Trust constitute a super-majority of the Board, the fact that Committee chairs are independent trustees, the number of funds (and classes) overseen by the Board, and the total number
of trustees on the Board.
Board
Oversight of Risk Management
Like most investment companies,
fund management and its other service providers have responsibility for day-to-day risk management for the fund. The Board's duties, as part of its risk oversight of the Trust, consist of monitoring risks identified during regular and special
reports to the Committees of the Board, as well as regular and special reports to the full Board. In addition to monitoring such risks, the Committees and the Board oversee efforts of fund management and service providers to manage risks to which
the funds of the Trust may be exposed. For example, the Investment Oversight Committee meets with portfolio managers and receives regular reports regarding investment risk and credit risk of the fund’s portfolio. The Audit, Compliance and
Valuation Committee meets with the fund's Chief Compliance Officer and Chief Financial Officer and receives regular reports regarding compliance risks, operational risks and risks related to the valuation and liquidity of portfolio securities. From
its review of these reports and discussions with management, each Committee receives information about the material risks of the funds of the Trust and about how management and service providers mitigate those risks, enabling the independent
Committee chairs and other independent members of the Committees to discuss these risks with the full Board.
The Board recognizes that not all risks that may
affect the fund can be identified nor can processes and controls be developed to eliminate or mitigate the occurrence or effects of certain risks; some risks are simply beyond the reasonable control of the fund, its management, and service
providers. Although the risk oversight functions of the Board, and the risk management policies of fund management and fund service providers, are designed to be effective, there is no guarantee that they will eliminate or mitigate all risks. In
addition, it may be necessary to bear certain risks (such as investment-related risks) to achieve the fund’s investment objective. As a result of the foregoing and other factors, the fund's ability to manage risk is subject to significant
limitations.
Individual Trustee
Qualifications
The Board has concluded that
each of the trustees should initially and continue to serve on the Board because of (i) his or her ability to review and understand information about the Trust provided to them by management, to identify and request other information they may deem
relevant to the performance of their duties, to question management regarding material factors bearing on the management of the Trust, and to exercise their business judgment in a manner that serves the best interests of the Trust's shareholders and
(ii) the trustee’s experience, qualifications, attributes or skills as described below.
15
The Board has concluded that Mr. Bettinger should
serve as trustee of the Trust because of the experience he gained as president and chief executive officer of The Charles Schwab Corporation, his knowledge of and experience in the financial services industry, and the experience he has gained
serving as trustee of the Schwab Funds since 2008, the Schwab ETFs since 2009, and the Laudus Funds since 2010.
The Board has concluded that Mr. Burns should serve
as trustee of the Trust because of the experience he gained as managing director of Pacific Investment Management Company, LLC (PIMCO) and president of PIMCO Funds as well as the experience he has gained serving as trustee of the Schwab ETFs since
2009, and his experience serving as chair of the Schwab ETFs’ Audit, Compliance and Valuation Committee until December 2015.
The Board has concluded that Ms. Chandoha should
serve as trustee of the Trust because of the experience she gained as president and chief executive officer of Charles Schwab Investment Management, Inc., the Schwab Funds, Schwab ETFs and Laudus Funds, as well as her knowledge of and experience of
financial and investment management services.
The Board has concluded that Mr. Cogan should serve
as trustee of the Trust because of the experience he has gained serving as a senior fellow and professor of public policy at a university and his former service in government, the experience he has gained serving as trustee of the Schwab Funds since
2008 and Laudus Funds since 2010, and his service on other public company boards.
The Board has concluded that Mr. Kochis should
serve as trustee of the Trust because of the experience he gained serving as chair and chief executive officer of Aspiriant, LLC, an advisory firm, as well as his knowledge of and experience in wealth management consulting and the experience he has
gained serving as trustee of the Schwab ETFs since 2012.
The Board has concluded that Mr. Mahoney should
serve as trustee of the Trust because of the experience he gained serving as trustee of the Schwab Funds and Laudus Funds since 2011, as co-chief executive officer of a healthcare services company, and his service on other public company
boards.
The Board has concluded that Mr.
Martinetto should serve as trustee of the Trust because of his experience serving as senior executive vice president and chief financial officer of The Charles Schwab Corporation and Charles Schwab & Co., Inc.
The Board has concluded that Mr. Patel should serve
as trustee of the Trust because of the experience he gained serving as trustee of the Schwab Funds and Laudus Funds since 2011, as executive vice president, general manager and chief financial officer of a software company, his service on other
public company boards, and his experience serving as chair of the Schwab Funds and Laudus Funds’ Audit, Compliance and Valuation Committee.
The Board has concluded that Ms. Patmore should
serve as trustee of the Trust because of her experience serving as chief financial officer and executive vice president of First Data Payment Business and First Data Corporation, as well as her knowledge of and experience in management
consulting.
The Board has concluded that Mr.
Ruffel should serve as trustee of the Trust because of the experience he gained as the founder and former chief executive officer of a publisher and information services firm specializing in the retirement plan industry, his experience in and
knowledge of the financial services industry, and the experience he has gained serving as trustee of the Schwab ETFs since 2009, and his experience serving as chair of the Schwab ETFs’ Investment Oversight Committee until December 2015.
The Board has concluded that Mr. Smith should serve
as trustee of the Trust because of the experience he has gained as managing partner of his own investment advisory firm, the experience he has gained serving as trustee of the Schwab Funds since 2000, as trustee of the Laudus Funds since 2010, his
service on other public company boards, and his experience serving as chair of the Schwab Funds’ and Laudus Funds’ Investment Oversight Committee.
The Board has concluded that Mr. Wender should
serve as trustee of the Trust because of the experience he gained serving as former partner and head of the financial institutions group of an investment bank, the experience he has
16
gained serving as trustee of the Schwab Funds since 2008, as
trustee of the Laudus Funds since 2010, and his service on other public company boards.
Trustee Committees
The Board has established certain committees and
adopted Committee charters with respect to those committees, each as described below:
•The
Audit, Compliance and Valuation Committee reviews the integrity of the Trust’s financial reporting processes and compliance policies, procedures and processes, and the Trust’s overall system of internal controls. The Audit, Compliance
and Valuation Committee also reviews and evaluates the qualifications, independence and performance of the Trust’s independent auditors, and the implementation and operation of the Trust’s valuation policies and procedures. This
Committee is comprised of at least three independent trustees and currently has the following members: Kiran M. Patel (Chairman), Robert W. Burns, John F. Cogan and Kimberly S. Patmore. The Committee met 4 times during the most recent fiscal
year.
•The
Governance Committee reviews and makes recommendations to the Board regarding Trust governancerelated matters, including but not limited to Board compensation practices, retirement policies and term limits, Board self-evaluations, the effectiveness
and allocation of assignments and functions by the Board, the composition of Committees of the Board, and the training of Trustees. The Governance Committee is responsible for selecting and nominating candidates to serve as Trustees. The Governance
Committee does not have a written policy with respect to consideration of candidates for Trustee submitted by shareholders. However, if the Governance Committee determined that it would be in the best interests of the Trust to fill a vacancy on the
Board, and a shareholder submitted a candidate for consideration by the Board to fill the vacancy, the Governance Committee would evaluate that candidate in the same manner as it evaluates nominees identified by the Governance Committee. Nominee
recommendations may be submitted to the Secretary of the Trust at the Trust’s principal business address. This Committee is comprised of at least three independent trustees and currently has the following members: John F. Cogan (Chairman),
Stephen Timothy Kochis, David L. Mahoney and Joseph H. Wender. The Committee met 4 times during the most recent fiscal year.
•The Investment Oversight
Committee reviews the investment activities of the Trust and the performance of the Fund's investment adviser. This Committee is comprised of at least three Trustees (at least two-thirds of whom shall be independent trustees) and currently has the
following members: Gerald B. Smith (Chairman), Stephen Timothy Kochis, David L. Mahoney, Charles A. Ruffel and Joseph H. Wender. The Committee met 5 times during the most recent fiscal year.
17
Trustee Compensation
The following table provides
estimated trustee compensation from the fund for the fiscal year ending December 31, 2016, and the actual total compensation from the fund complex for the fiscal year ended December 31, 2015.
| Name of Trustee |
Estimated
Aggregate
Compensation from the Fund 1 |
Pension
or Retirement
Benefits Accrued as Part of Fund Expenses |
Total
Compensation from the
Fund and Fund Complex Paid to Trustees 2 |
| Interested Trustees | |||
| Walter W. Bettinger II | None | N/A | None |
| Marie A. Chandoha 3 | None | N/A | None |
| Joseph R. Martinetto 3 | None | N/A | None |
| Independent Trustees | |||
| Robert W. Burns 3 | $1,710 | N/A | $134,000 |
| Mariann Byerwalter 4 | $0 | N/A | $77,000 |
| John F. Cogan | $1,840 | N/A | $286,000 |
| Stephen Timothy Kochis 3 | $1,710 | N/A | $124,000 |
| David L. Mahoney | $1,710 | N/A | $286,000 |
| Kiran M. Patel | $1,840 | N/A | $300,000 |
| Kimberly S. Patmore 3 | $1,710 | N/A | $0 |
| Charles A. Ruffel 5 | $1,710 | N/A | $389,960 |
| Gerald B. Smith | $1,840 | N/A | $300,000 |
| Joseph H. Wender | $1,710 | N/A | $286,000 |
| 1 | Estimated aggregate compensation from the fund from the fund’s commencement of operations to the fiscal year ending December 31, 2016. |
| 2 | Actual total compensation from the fund complex for the fiscal year ended December 31, 2015. |
| 3 | Ms. Chandoha, Mr. Martinetto, Mr. Burns, Mr. Kochis and Ms. Patmore joined the Board effective January 1, 2016. |
| 4 | Ms. Byerwalter resigned effective March 9, 2015. |
| 5 | Mr. Ruffel joined the Board effective February 6, 2015. |
18
Securities Beneficially Owned by Each Trustee
The following table provides each Trustee’s
equity ownership of the fund and ownership of all registered investment companies overseen by each trustee in the Family of Investment Companies as of December 31, 2015.
| Name of Trustee | Dollar Range of Trustee Ownership of the Fund | Aggregate Dollar Range of Trustee Ownership in the Family of Investment Companies |
| Interested Trustees | ||
| Walter W. Bettinger II | Schwab Retirement Government Money Fund None | Over $100,000 |
| Marie A. Chandoha 1 | Schwab Retirement Government Money Fund None | Over $100,000 |
| Joseph R. Martinetto 1 | Schwab Retirement Government Money Fund None | Over $100,000 |
| Independent Trustees | ||
| Robert W. Burns 1 | Schwab Retirement Government Money Fund None | Over $100,000 |
| John F. Cogan | Schwab Retirement Government Money Fund None | Over $100,000 |
| Stephen Timothy Kochis 1 | Schwab Retirement Government Money Fund None | Over $100,000 |
| David L. Mahoney | Schwab Retirement Government Money Fund None | Over $100,000 |
| Kiran M. Patel | Schwab Retirement Government Money Fund None | Over $100,000 |
| Kimberly S. Patmore 1 | Schwab Retirement Government Money Fund None | Over $100,000 |
| Charles A. Ruffel | Schwab Retirement Government Money Fund None | Over $100,000 |
| Gerald B. Smith | Schwab Retirement Government Money Fund None | Over $100,000 |
| Joseph H. Wender | Schwab Retirement Government Money Fund None | Over $100,000 |
| 1 | Trustee joined the Board effective January 1, 2016. |
As of December 31, 2015, none of the Independent
Trustees or their immediate family members owned beneficially or of record any securities of CSIM or Schwab, or in a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with
CSIM or Schwab, except as follows: Kimberly S. Patmore may have been deemed to be a beneficial owner of securities issued by The Charles Schwab Corporation (CSC) as a result of beneficial ownership of common stock of CSC by an immediate family
member and an estate planning entity. As of December 31, 2015, the holdings of CSC common stock had a market value of $6,274.56 and represented substantially less than one percent of the common stock of CSC. The securities were disposed of after
December 31, 2015 and prior to the date of this SAI. CSC is the parent company of CSIM and Schwab.
Deferred Compensation Plan
Independent trustees may enter
into a fee deferral plan. Under this plan, deferred fees will be credited to an account established by the Trust as of the date that such fees would have been paid to the trustee. The value of this account will equal the value that the account would
have if the fees credited to the account had been invested in the shares of Schwab Funds
®
selected by the trustee. Currently, none of the
Independent Trustees has elected to participate in this plan.
Code of Ethics
The fund, its investment adviser and Schwab have
adopted a Code of Ethics as required under the 1940 Act. Subject to certain conditions or restrictions, the Code of Ethics permits the trustees, directors, officers or advisory representatives of the fund or the investment adviser or the directors
or officers of Schwab to buy or sell directly or indirectly securities for their own accounts. This includes securities that may be purchased or held by the fund. Securities transactions by some of these individuals may be subject to prior approval
of the investment adviser’s Chief Compliance Officer or alternate. Most securities transactions are subject to quarterly reporting and review requirements.
19
Control Persons And Principal Holders Of
Securities
As of May 16, 2016, the officers
and trustees of the Trust, as a group, owned of record or beneficially, none of the outstanding voting securities of the fund.
As of May 16, 2016, no persons or entities owned,
of record or beneficially, 5% or more of the outstanding voting securities of any class of the fund.
Persons who own of record or beneficially more than
25% of the fund’s outstanding shares may be deemed to control the fund within the meaning of the 1940 Act. Shareholders controlling the fund could have the ability to vote a majority of the shares of the fund on any matter requiring the
approval of shareholders of the fund.
Investment Advisory and Other Services
Investment Adviser
CSIM, a wholly owned subsidiary of The Charles
Schwab Corporation, 211 Main Street, San Francisco, CA 94105, serves as the fund's investment adviser and administrator pursuant to an Investment Advisory and Administration Agreement (Advisory Agreement) between it and the Trust. Schwab is an
affiliate of the investment adviser and is the Trust’s distributor. Charles R. Schwab is the founder, Chairman and Director of The Charles Schwab Corporation. As a result of his ownership of and interests in The Charles Schwab Corporation, Mr.
Schwab may be deemed to be a controlling person of the investment adviser and Schwab.
Advisory Agreement
After an initial two-year term, the continuation of
the fund’s Advisory Agreement must be specifically approved at least annually (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment
advisory agreement or “interested persons” of any party (the Independent Trustees), cast in person at a meeting called for the purpose of voting on such approval.
Each year, the Board calls and holds a meeting to
decide whether to renew the Advisory Agreement between the Trust and CSIM with respect to existing funds in the Trust. In preparation for the meeting, the Board requests and reviews a wide variety of materials provided by the fund’s investment
adviser, as well as extensive data provided by third parties, and the Independent Trustees receive advice from counsel to the Independent Trustees.
For its advisory and administrative services to the
fund, the investment adviser is entitled to receive a graduated annual fee payable monthly based on the fund’s average daily net assets as described below.
The investment
adviser and its affiliates have agreed to limit the total annual fund operating expenses (excluding interest, taxes and certain non-routine expenses) of the fund to 0.20% through April 29, 2018 (contractual expense limitation agreement).
The fund’s contractual expense limitation
agreement may only be amended or terminated with the approval of the fund’s Board. The contractual expense limitation agreement is applied prior to and without regard to the voluntary yield waiver discussed below and may not be recaptured by
the investment adviser. A contractual expense limitation agreement, where applicable, is not intended to cover all fund expenses, and the fund’s expenses may exceed the amount of the expense limitation set forth in a contractual expense
limitation agreement. For example, the contractual expense limitation agreement does not cover investment-related expenses, such as brokerage commissions, interest,
20
taxes and the fees and expenses of pooled investment vehicles, such
as other investment companies, nor does it cover extraordinary or non-routine expenses, if any, such as shareholder meeting costs.
The investment adviser and/or its affiliates also
may, if applicable, voluntarily waive and/or reimburse expenses in excess of their current fee waiver and reimbursement commitment to the extent necessary to maintain a non-negative net yield for the fund (the voluntary yield waiver).
In addition, the investment adviser and Schwab have
agreed to reduce future net total operating expenses for certain classes of certain funds as a group when aggregate assets of the group exceed certain levels.
Distributor
Pursuant to a Second Amended and Restated
Distribution Agreement between Schwab and the Trust, Schwab, located at 211 Main Street, San Francisco, California, 94105, is the principal underwriter for shares of the fund and is the Trust’s agent for the purpose of the continuous offering
of the fund's shares. The fund pays for prospectuses and shareholder reports to be prepared and delivered to existing shareholders. Schwab pays such costs when the described materials are used in connection with the offering of shares to prospective
investors and for supplemental sales literature and advertising. Schwab receives no fee under the Distribution Agreement.
Transfer Agent
Boston Financial Data Services, Inc. (BFDS), 2000
Crown Colony Drive, Quincy, Massachusetts 02169-0953, serves as the fund's transfer agent. As part of these services, the firm maintains records pertaining to the sale, redemption and transfer of the fund's shares.
Custodian and Fund Accountant
State Street Bank and Trust Company (State Street),
One Lincoln Street, Boston, Massachusetts 02111, serves as custodian and fund accountant for the fund.
The custodian is responsible for the daily
safekeeping of securities and cash held or sold by the fund. The fund accountant maintains the books and records related to the fund's transactions.
Independent Registered Public Accounting Firm
The fund’s independent
registered public accounting firm, PricewaterhouseCoopers LLP (PwC), Three Embarcadero Center, San Francisco, California 94111-4004, audits and reports on the annual financial statements of the fund and reviews certain regulatory reports and the
fund’s federal income tax return. PwC also performs other professional, accounting, auditing, tax and advisory services when the Trust engages them to do so.
Other Expenses
The fund pays other expenses that typically are
connected with the Trust’s operations, and include legal, audit and custodian fees, as well as the costs of accounting and registration of the fund. Expenses not directly attributable to the fund will generally be allocated among the funds in
the Trust on the basis of the fund’s relative net assets at the time the expense is incurred.
Brokerage Allocation And Other Practices
Portfolio Turnover
Because securities with maturities of less than one
year are excluded from required portfolio turnover rate calculations, the fund's portfolio turnover rate for reporting purposes is expected to be near zero.
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Portfolio Holdings Disclosure
The Board has approved policies and procedures that
govern the timing and circumstances regarding the disclosure of fund portfolio holdings information to shareholders and third parties. These policies and procedures are designed to ensure that disclosure of information regarding the fund's portfolio
securities is in the best interests of fund shareholders, and include procedures to address conflicts between the interests of the fund's shareholders, on the one hand, and those of the fund's investment adviser, principal underwriter or any
affiliated person of the fund, its investment adviser, or its principal underwriter, on the other. Pursuant to such procedures, the Board has authorized the President of the Trust to authorize the release of the fund's portfolio holdings, as
necessary, in conformity with the foregoing principles.
The Board exercises on-going oversight of the
disclosure of fund portfolio holdings by overseeing the implementation and enforcement of the fund's policies and procedures by the Chief Compliance Officer and by considering reports and recommendations by the Chief Compliance Officer concerning
any material compliance matters. The Board will receive periodic updates, at least annually, regarding entities which were authorized to be provided “early disclosure” (as defined below) of the fund's portfolio holdings information and
will periodically review any agreements that the Trust has entered into to selectively disclose portfolio holdings.
The fund posts on its website at
www.csimfunds.com/schwabfunds_prospectus a list of the securities held by the fund as of the last business day of the most recent month. This list is updated within 5 business days after the end of the month and will remain available online for at
least 6 months after the initial posting. In addition, not later than five business days after the end of each calendar month, the fund will file a schedule of information regarding its portfolio holdings and other information about the fund as of
the last day of that month with the SEC on Form N-MFP. These filings will be publicly available immediately upon filing on the SEC’s website at www.sec.gov. A link to the fund’s Form N-MFP filings on the SEC’s website will also be
available at www.csimfunds.com/schwabfunds_prospectus.
From time to time the fund may
disclose its full portfolio holdings, the concentration of its portfolio holdings, a sampling of select portfolio holdings, or the fund’s assets under management on its website at www.csimfunds.com. The fund will disclose such information to
the extent that the fund deems the information to be of interest to fund shareholders in light of developments in the financial markets or otherwise. This information will be made publicly available on the website to all categories of persons, and
is typically disclosed subject to a 2 to 3 business day lag. Shareholders are advised to check the Schwab Funds website at www.csimfunds.com from time to time to access this information as it is made available.
The fund may disclose portfolio holdings
information to certain persons and entities prior to and more frequently than the public disclosure of such information (early disclosure). The President of the Trust may authorize early disclosure of portfolio holdings information to such parties
at differing times and/or with different lag times provided that (a) the President of the Trust determines that the disclosure is in the best interests of the fund and that there are no conflicts of interest between the fund's shareholders and
fund's adviser and distributor; and (b) the recipient is, either by contractual agreement or otherwise by law, required to maintain the confidentiality of the information.
Portfolio holdings may be made available on a
selective basis to ratings agencies, certain industry organizations, consultants and other qualified financial professionals when the President of the Trust determines such disclosure meets the requirements noted above and serves a legitimate
business purpose. Agreements entered into with such entities will describe the permitted use of portfolio holdings and provide that, among other customary confidentiality provisions: (i) the portfolio holdings will be kept confidential; (ii) the
person will not trade on the basis of any material non-public information; and (iii) the information will be used only for the purpose described in the agreement.
The fund's service providers including, without
limitation, the investment adviser, distributor, the custodian, fund accountant, transfer agent, counsel, auditor, proxy voting service provider, pricing information vendors, trade execution measurement vendors, securities lending agents, publisher,
printer and mailing agent may receive disclosure of portfolio holdings information as frequently as daily in connection with the services they perform for the fund. The names of those service providers to whom the fund selectively discloses
portfolio holdings information will be disclosed in this SAI. CSIM, Glass, Lewis & Co., LLC and State Street, as service providers to the fund, are currently receiving this information on a daily basis. RR Donnelley, as a service provider to the
fund, is currently receiving this
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information on a quarterly basis. PwC, BFDS and Schwab, as service
providers to the fund, receive this information on an as-needed basis. Service providers are subject to a duty of confidentiality with respect to any portfolio holdings information they receive whether imposed by the confidentiality provisions of
the service providers’ agreements with the Trust or by the nature of its relationship with the Trust. Although certain of the service providers are not under formal confidentiality obligations in connection with disclosure of portfolio
holdings, the fund will not continue to conduct business with a service provider who the fund believes is misusing the disclosed information.
The fund has an ongoing arrangement to make
available information about the fund's portfolio holdings and information derived from the fund's portfolio holdings to iMoneyNet, a rating and ranking organization. Under its arrangement with the fund, iMoneyNet receives information concerning the
fund's net assets, yields, maturities and portfolio compositions on a weekly basis, subject to a 1 business day lag. In addition, iMoneyNet receives monthly dividend reports summarizing the previous 13 months of fund dividends and monthly expense
and asset reports, each subject to a 1 month lag.
iMoneyNet receives this information for disclosure
to its subscribers subject to a confidentiality agreement, which imposes the following conditions on iMoneyNet’s use of such information: (i) iMoneyNet, or any of its employees, must not trade on the non-public information iMoneyNet receives;
(ii) iMoneyNet must safeguard, protect and keep secret the non-public information; (iii) iMoneyNet is limited in the information that it may disclose to third parties prior to public disclosure of the information; and (iv) iMoneyNet must notify the
fund or CSIM in writing of any unauthorized, negligent or inadvertent use or disclosure of the information.
The fund's policies and procedures prohibit the
fund, the fund's investment adviser or any related party from receiving any compensation or other consideration in connection with the disclosure of portfolio holdings information.
The fund may disclose non-material information
including commentary and aggregate information about the characteristics of the fund in connection with or relating to the fund or its portfolio securities to any person if such disclosure is for a legitimate business purpose, such disclosure does
not effectively result in the disclosure of the complete portfolio securities of any fund (which can only be disclosed in accordance with the above requirements), and such information does not constitute material non-public information. Such
disclosure does not fall within the portfolio securities disclosure requirements outlined above.
Whether the information constitutes material
non-public information will be made on a good faith determination, which involves an assessment of the particular facts and circumstances. In most cases commentary or analysis would be immaterial and would not convey any advantage to a recipient in
making a decision concerning the fund. Commentary and analysis include, but are not limited to, the allocation of the fund’s portfolio securities and other investments among various asset classes, sectors, industries, and countries, the
characteristics of the stock components and other investments of the fund, the attribution of fund returns by asset class, sector, industry and country, and the volatility characteristics of the fund.
Portfolio Transactions
The fund is new and therefore has paid no brokerage
commissions.
The investment adviser makes
decisions with respect to the purchase and sale of portfolio securities on behalf of the fund. The investment adviser is responsible for implementing these decisions, including the negotiation of commissions and the allocation of principal business
and portfolio brokerage. The fund generally does not incur any commissions or sales charges when it invests in underlying Schwab Funds or Laudus Funds, but it may incur such costs if it invests directly in other types of securities or in
unaffiliated funds. Purchases and sales of securities on a stock exchange, including ETF shares, or certain riskless principal transactions placed on NASDAQ are typically effected through brokers who charge a commission for their services. Exchange
fees may also apply to transactions effected on an exchange. Purchases and sales of fixed income securities may be transacted with the issuer, the issuer's underwriter, or a dealer. The fund do not usually pay brokerage commissions on purchases and
sales of fixed income securities, although the price of the securities generally includes compensation, in the form of a spread or a mark-up or mark-down, which is not disclosed separately. The prices the fund pays to underwriters of newly-issued
securities usually include a commission paid by the issuer to the underwriter. Transactions placed through dealers who are serving as
23
primary market makers reflect the spread between the bid and asked
prices. The money market securities in which the fund invests are traded primarily in the over-the-counter market on a net basis and do not normally involve either brokerage commissions or transfer taxes. It is expected that the cost of executing
portfolio securities transactions of the fund will primarily consist of dealer spreads and brokerage commissions.
The investment adviser seeks to obtain best
execution for the fund’s portfolio transactions. The investment adviser considers commission rates along with a number of factors relating to the quality of execution. Considered factors may cover the full range and quality of a broker’s
service, including, without limitation, value provided, execution capability, commission rate, financial responsibility and responsiveness to the investment adviser. The investment adviser may also consider brokerage and research services provided
by the broker. The investment adviser does not take into consideration fund sales when selecting a broker to effect a portfolio transaction; however, the investment adviser may execute through brokers that sell shares of funds advised by the
investment adviser.
The investment adviser
generally will not enter into soft-dollar arrangements with brokers to obtain third-party research or other services in exchange for brokerage commissions paid by advised accounts. However, the investment adviser does receive various forms of
eligible proprietary research that is bundled with brokerage services at no additional cost from certain of the brokers with whom the investment adviser executes equity or fixed income trades. These services or products may include: company
financial data and economic data (e.g., unemployment, inflation rates and GDP figures), stock quotes, last sale prices and trading volumes, research reports analyzing the performance of a particular company or stock, access to websites that contain
data about various securities markets, narrowly distributed trade magazines or technical journals covering specific industries, products, or issuers, seminars or conferences registration fees which provide substantive content relating to eligible
research, discussions with research analysts or meetings with corporate executives which provide a means of obtaining oral advice on securities, markets or particular issuers, short-term custody related to effecting particular transactions and
clearance and settlement of those trades, lines between the broker-dealer and order management systems operated by a third party vendor, dedicated lines between the broker-dealer and the investment adviser’s order management system, dedicated
lines providing direct dial-up service between the investment adviser and the trading desk at the broker-dealer, and message services used to transmit orders to broker-dealers for execution.
The investment adviser does not currently cause the
fund to pay a higher commission in return for brokerage or research services or products to obtain research or other products or services. If the investment adviser elected to do so, it would receive a benefit because it would not have to produce or
pay for the research, products or services. Consequently, this may create an incentive for the investment adviser to select or recommend a broker-dealer based on its interest in receiving the research or other products or services.
The investment adviser may purchase new issues of
securities for the fund in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the investment adviser with research services, in accordance with
applicable rules and regulations permitting these types of arrangements.
The investment adviser may place orders directly
with electronic communications networks or other alternative trading systems. Placing orders with electronic communications networks or other alternative trading systems may enable the fund to trade directly with other institutional holders. At
times, this may allow the fund to trade larger blocks than would be possible trading through a single market maker.
In determining when and to what extent to use
Schwab or any other affiliated broker-dealer as its broker for executing orders for the fund, the investment adviser follows procedures, adopted by the Board, that are designed to ensure that affiliated brokerage commissions (if relevant) are
reasonable and fair in comparison to unaffiliated brokerage commissions for comparable transactions.
In certain market circumstances, the investment
adviser may determine that its clients, which include registered investment companies and other advisory clients, are best served by placing one order on behalf of several of them. The investment adviser will not aggregate transactions if it
determines that to do so (i) would be unfair or inequitable in the circumstances; (ii) is impractical; or (iii) is otherwise inappropriate in the circumstances. The fund may pay
24
higher brokerage costs or otherwise receive less favorable prices
or execution if the investment adviser does not aggregate trades when it has an opportunity to do so.
The investment adviser’s aggregation and
allocation guidelines are intended to ensure that trade allocations are timely, that no set of trade allocations is accomplished to unfairly advantage or disadvantage particular clients or types of clients and that, over time, client accounts are
treated fairly and equitably, even though a specific trade may have the effect of benefiting one account against another when viewed in isolation. In connection with the aggregation of purchase and sale orders for two or more client accounts, the
following requirements must be met:
| (1) | the investment adviser shall not receive additional compensation or remuneration of any kind as a result of aggregating transactions for clients. |
| (2) | the investment adviser, for each client, must determine that the purchase or sale of each particular security involved is appropriate for the client and consistent with its investment objectives and its investment guidelines or restrictions. |
| (3) | Each client that participates in a block trade will participate at the average security price with all transaction costs shared on a pro-rata basis. |
| (4) | Client account information at the investment adviser must separately reflect the securities that have been bought, sold and held for each client. |
The investment adviser portfolio management
personnel are responsible for placing orders for fixed income securities transactions with broker-dealers. When orders for the same security for different client accounts are aggregated, they are generally allocated after execution because fixed
income transactions are typically conducted in individually negotiated transactions. For money market fund accounts, allocations among similar client accounts are determined with the general purpose of achieving, as nearly as possible, performance
characteristic parity among such accounts over time. Similar money market fund accounts furthest from achieving performance characteristic parity typically receive priority in allocations. In addition to performance (gross yield), factors considered
may include, but are not limited to: (i) capacity available for a particular name or sector; (ii) cash flow / liquidity; (iii) management of maturities; and (iv) weighted average maturity (or weighted average life). Allocations among dissimilar
money market fund accounts are generally
pro rata
, subject to adjustments to accommodate specific investment guidelines and portfolio characteristics of client accounts. Additional factors considered may
include, but are not limited to: (i) the factors set forth for similar client accounts; (ii) alternative minimum tax; (iii) issuing state; and (iv) tax exempt versus taxable income status. The investment adviser portfolio managers may give priority
to the fund in circumstances where it is necessary to meet that fund’s investment objective.
Proxy Voting
The Board has delegated the responsibility for
voting proxies to CSIM. The Trustees have adopted CSIM’s Proxy Voting Policy and Procedures with respect to proxies voted on behalf of the various Schwab Funds portfolios. A description of CSIM’s Proxy Voting Policy and Procedures is
included in Appendix
–
Proxy Voting Policy and Procedures.
The Trust is required to disclose annually the
fund’s complete proxy voting record on Form N-PX. The fund’s proxy voting record for the most recent 12 month period ended June 30th is available by visiting the Schwab Funds website at www.csimfunds.com/schwabfunds_prospectus. The
fund’s Form N-PX will also be available on the SEC’s website at www.sec.gov.
Description Of The Trust
The fund is a series of The Charles Schwab Family
of Funds, an open-end investment management company organized as a Massachusetts business trust on October 20, 1989.
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The fund may hold special meetings of shareholders,
which may cause the fund to incur non-routine expenses. These meetings may be called for purposes such as electing trustees, changing fundamental policies and amending management contracts. Shareholders are entitled to one vote for each share owned
and may vote by proxy or in person. Proxy materials will be mailed to shareholders prior to any meetings, and will include a voting card and information explaining the matters to be voted upon.
The bylaws of the Trust provide that a majority of
shares entitled to vote shall be a quorum for the transaction of business at a shareholders’ meeting, except that where any provision of law, or of the Declaration of Trust or of the bylaws permits or requires that (1) holders of any series
shall vote as a series, then a majority of the aggregate number of shares of that series entitled to vote shall be necessary to constitute a quorum for the transaction of business by that series, or (2) holders of any class shall vote as a class,
then a majority of the aggregate number of shares of that class entitled to vote shall be necessary to constitute a quorum for the transaction of business by that class. Any lesser number shall be sufficient for adjournments. Any adjourned session
or sessions may be held, within a reasonable time after the date set for the original meeting, without the necessity of further notice. The Declaration of Trust specifically authorizes the Board to terminate the Trust (or any of its investment
portfolios) by notice to the shareholders without shareholder approval.
Under Massachusetts law, shareholders of a
Massachusetts business trust could, under certain circumstances, be held personally liable for the Trust’s obligations. The Declaration of Trust, however, disclaims shareholder liability for the Trust’s acts or obligations and requires
that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Trust or the trustees. In addition, the Declaration of Trust provides for indemnification out of the property of an investment
portfolio in which a shareholder owns or owned shares for all losses and expenses of such shareholder or former shareholder if he or she is held personally liable for the obligations of the Trust solely by reason of being or having been a
shareholder. Moreover, the Trust will be covered by insurance which the trustees consider adequate to cover foreseeable tort claims. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is considered remote,
because it is limited to circumstances in which a disclaimer is inoperative and the Trust itself is unable to meet its obligations. There is a remote possibility that the fund could become liable for a misstatement in the prospectus or SAI about
another fund.
As more fully described in the
Declaration of Trust, the trustees may each year, or more frequently, distribute to the shareholders of each series accrued income less accrued expenses and any net realized capital gains less accrued expenses. Distributions of each year’s
income of each series shall be distributed pro rata to shareholders in proportion to the number of shares of each series held by each of them. Distributions will be paid in cash or shares or a combination thereof as determined by the trustees.
Distributions paid in shares will be paid at the net asset value per share as determined in accordance with the bylaws.
Any series of the Trust may reorganize or merge
with one or more other series of the Trust or of another investment company. Any such reorganization or merger shall be pursuant to the terms and conditions specified in an agreement and plan of reorganization authorized and approved by the Trustees
and entered into by the relevant series in connection therewith. In addition, such reorganization or merger may be authorized by vote of a majority of the Trustees then in office and, to the extent permitted by applicable law, without the approval
of shareholders of any series.
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Purchase, Redemption, delivery of shareholder
documents And Pricing Of Shares
Purchasing and
Redeeming Shares of the Fund
The fund is open for business each
day, except for days on which the New York Stock Exchange (NYSE) is closed and the following federal holiday observances: Columbus Day and Veterans Day. The NYSE’s trading session is normally conducted from 9:30 a.m. until 4:00 p.m. Eastern
time, Monday through Friday, although some days, such as in advance of and following holidays, the NYSE’s trading sessions close early. The following NYSE holiday closings are currently scheduled for 2016-2017: New Year’s Day (observed),
Martin Luther King Jr.’s Birthday, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (observed). Orders that are received in good order by the fund’s transfer agent no later
than the time specified by the Trust will be executed that day at the fund’s share price calculated that day. On any day that the NYSE closes early, the fund reserves the right to advance the time by which purchase, redemption and exchange
orders must be received by the fund's transfer agent that day in order to be executed that day at that day’s share price. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business,
or the NYSE has an unscheduled early closing on a day it has opened for business, the fund reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate its share price as of the normally scheduled
close of regular trading on the NYSE for that day.
As long as the fund or Schwab follows reasonable
procedures to confirm that your telephone or internet order is genuine, they will not be liable for any losses an investor may experience due to unauthorized or fraudulent instructions. These procedures may include requiring a form of personal
identification or other confirmation before acting upon any telephone or internet order, providing written confirmation of telephone or internet orders and tape recording all telephone orders.
Share certificates will not be issued in order to
avoid additional administrative costs, however, share ownership records are maintained by Schwab.
The Trust’s Declaration of Trust provides
that shares may be automatically redeemed if held by a shareholder in an amount less than the minimum required by the fund or share class. The fund’s minimum initial and additional investments and minimum balance requirements, if any, are set
forth in the prospectus. The minimums may be changed without prior notice.
The fund has made an election with the SEC to pay
in cash all redemptions requested by any shareholder of record limited in amount during any 90-day period to the lesser of $250,000 or 1% of its net assets at the beginning of such period. This election is irrevocable without the SEC’s prior
approval. Redemption requests in excess of these limits may be paid, in whole or in part, in investment securities or in cash, as the Board may deem advisable. Payment will be made wholly in cash unless the Board believes that economic or market
conditions exist that would make such payment a detriment to the best interests of the fund. If redemption proceeds are paid in investment securities, such securities will be valued as set forth in “Pricing of Shares.” A redeeming
shareholder would normally incur transaction costs if he or she were to convert the securities to cash.
The fund has authorized one or more brokers to
accept on its behalf purchase and redemption orders. Such brokers have also been authorized to designate other intermediaries to accept purchase and redemption orders on the fund's behalf. The fund will be deemed to have received a purchase or
redemption order when an authorized broker or, if applicable, a broker’s authorized designee, receives such order. Such orders will be priced at the respective fund’s net asset value per share next determined after such orders are
received by an authorized broker or the broker’s authorized designee.
Liquidity Fees and Redemption Gates
As a government money market fund, the fund is not
required to impose a liquidity fee and/or a redemption gate on fund redemptions. The Board has determined not to subject the fund to a liquidity fee and/or a redemption gate on fund redemptions. Please note that the Board has reserved its ability to
change this determination with respect to liquidity fees and/or redemption gates, but only after providing appropriate prior notice to shareholders.
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Exchanging Shares of the Fund
Shares of any Schwab Fund, including any class of
shares, may be sold and the shares of any other Schwab Fund or class purchased, provided the minimum investment and any other requirement of the fund or class purchased are satisfied, including any investor eligibility requirements. Without limiting
this privilege, “an exchange order,” which is a simultaneous order to sell shares of one fund or class and automatically invest the proceeds in another fund or class, may not be executed between shares of Sweep Investments and shares of
non-Sweep Investments. Shares of Sweep Investments may be bought and sold automatically pursuant to the terms and conditions of your Schwab account agreement.
The fund and Schwab reserve certain rights with
regard to exchanging shares of the fund. These rights include the right to: (i) refuse any purchase or exchange order that may negatively impact the fund’s operations; (ii) refuse orders that appear to be associated with short-term trading
activities; and (iii) materially modify or terminate the exchange privilege upon 60 days’ written notice to shareholders.
Pricing of Shares
The fund values its portfolio instruments at
amortized cost, which means they are valued at their acquisition cost, as adjusted for amortization of premium or discount, rather than at current market value. Calculations are made to compare the value of the fund's investments at amortized cost
with market values. Such values are required to be determined in one of two ways: securities for which market quotations are readily available are required to be valued at current market value; and securities for which market quotations are not
readily available are required to be valued at fair value using procedures approved by the Board. If the NYSE is closed due to weather or other extenuating circumstances on a day it would typically be open for business, or the NYSE has an
unscheduled early closing on a day it has opened for business, the fund reserves the right to treat such day as a business day and accept purchase and redemption orders and calculate their share price as of the normally scheduled close of regular
trading on the NYSE for that day. The fund uses approved pricing services to provide values for their portfolio securities. Securities may be fair valued pursuant to procedures approved by the fund’s Board when approved pricing services do not
provide a value for a security, a furnished price appears manifestly incorrect or events occur prior to the close of the NYSE that materially affect the furnished price. The Board regularly reviews fair value determinations made by the fund pursuant
to the procedures.
The amortized cost method
of valuation seeks to maintain a stable net asset value per share (NAV) of $1.00, even where there are fluctuations in interest rates that affect the value of portfolio instruments. Accordingly, this method of valuation can in certain circumstances
lead to a dilution of a shareholder's interest.
If a deviation of 1/2 of 1% or more between the
fund’s NAV calculated using market values and the fund’s $1.00 NAV calculated using amortized cost were to occur or was expected to occur, or if there were any other deviation that the Board believed would result in a material dilution
or other unfair results to shareholders or purchasers, the Board would promptly consider what action, if any, should be initiated, including, without limitation, selling portfolio instruments prior to their maturity to realize capital gains/losses
or to shorten average portfolio maturity; redeeming shares in kind; establishing a NAV by using available market quotations or equivalents; or reducing the number of shares outstanding on a pro rata basis through reverse stock splits or the
assessment of negative dividends to the extent permissible by applicable law and the Trust’s organizational documents. The Board may also consider taking these actions during a negative interest rate environment in an effort to maintain the
fund’s $1.00 NAV to the extent permissible by applicable law and the Trust’s organizational documents. In addition, if the fund’s NAV calculated using market values declined, or was expected to decline, below the fund’s $1.00
NAV calculated using amortized cost, the Board might temporarily reduce or suspend dividend payments in an effort to maintain the fund’s $1.00 NAV. As a result of such reduction or suspension of dividends or other action by the Board, an
investor would receive less income during a given period than if such a reduction or suspension had not taken place. Such action could result in investors receiving no dividend for the period during which they hold their shares and receiving, upon
redemption, a price per share lower than that which they paid. On the other hand, if the fund’s NAV calculated using market values were to increase, or were anticipated to increase above the fund’s $1.00 NAV calculated using amortized
cost, the Board might supplement dividends in an effort to maintain the fund’s $1.00 NAV. The Board may take any of these, or other, actions to the extent permissible by applicable law.
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Delivery of Shareholder Documents
Typically once a year, an updated prospectus will
be mailed to shareholders describing the fund's investment strategies, risks and shareholder policies. Twice a year, financial reports will be mailed to shareholders describing the fund's performance and investment holdings. In order to eliminate
duplicate mailings of shareholder documents, each household may receive one copy of these documents, under certain conditions. This practice is commonly called “householding.” If you want to receive multiple copies, you may write or call
your fund at the address or telephone number on the front of this SAI. Your instructions will be effective within 30 days of receipt by the fund or other date as communicated by the financial intermediary.
Taxation
This discussion of federal income tax consequences
is based on the Internal Revenue Code of 1986 (the Code) and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions
expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
Federal Tax Information for the Fund
It is the fund’s policy to qualify for
taxation as a “regulated investment company” (RIC) by meeting the requirements of Subchapter M of the Code. By qualifying as a RIC, the fund expects to eliminate or reduce to a nominal amount the federal income tax to which it is
subject. If the fund does not qualify as a RIC under the Code, it will be subject to federal income tax on its net investment income and any net realized capital gains.
The fund is treated as a separate
entity for federal income tax purposes and is not combined with the Trust’s other funds. The fund intends to qualify as a RIC so that it will be relieved of federal income tax on that part of its income that is distributed to shareholders. In
order to qualify for treatment as a RIC, the fund must, among other requirements, distribute annually to its shareholders an amount at least equal to the sum of 90% of its investment company taxable income (generally, net investment income plus the
excess, if any, of net short-term capital gain over net long-term capital losses) and 90% of its net tax-exempt income. 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 securities loans, and 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 or
securities or currencies and net income derived from an interest in a qualified publicly traded partnership; (ii) at the close of each quarter of the fund’s taxable year, at least 50% of the value of its total assets must be represented by
cash and cash items, U.S. government securities, securities of other RICs and other securities, with such other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the fund’s assets and that
does not represent more than 10% of the outstanding voting securities of such issuer; and (iii) at the close of each quarter of the fund’s taxable year, not more than 25% of the value of its assets may be invested in securities (other than
U.S. government securities or the securities of other RICs) of any one issuer or of two or more issuers and which are engaged in the same, similar, or related trades or businesses if the fund owns at least 20% of the voting power of such issuers, or
the securities of one or more qualified publicly traded partnerships.
The Code imposes a non-deductible excise tax on
RICs that do not distribute in a calendar year (regardless of whether they otherwise have a non-calendar taxable year) an amount equal to 98% of their “ordinary income” (as defined in the Code) for the calendar year plus 98.2% of their
net capital gain for the one-year period ending on October 31 of such calendar year, plus any undistributed amounts from prior years. The non-deductible excise tax is equal to 4% of the deficiency. For the foregoing purposes, the fund is treated as
having distributed any amount on which it is subject to income tax for any taxable year ending in such calendar year. The fund may in certain circumstances be required to liquidate fund investments in order to make sufficient distributions to avoid
federal excise tax liability at a time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the fund to satisfy the requirements for qualification as a
RIC.
The fund's transactions in futures
contracts, forward contracts, foreign currency exchange transactions, options and certain other investment and hedging activities may be restricted by the Code and are subject to special tax rules. In a
29
given case, these rules may accelerate income to the fund, defer
its losses, cause adjustments in the holding periods of the fund's assets, convert short-term capital losses into long-term capital losses or otherwise affect the character of the fund's income. These rules could therefore affect the amount, timing
and character of distributions to shareholders. The fund will endeavor to make any available elections pertaining to these transactions in a manner believed to be in the best interest of the fund and its shareholders.
With respect to investments in
zero coupon or other securities which are sold at original issue discount and may not make periodic cash interest payments, the fund will be required to include as part of its current income the imputed interest on such obligations even though the
fund has not received any corresponding interest payments on such obligations during that period. Because the fund distributes all of its net investment income to its shareholders, the fund may have to sell fund securities to distribute such imputed
income which may occur at a time when the adviser would not have chosen to sell such securities and which may result in taxable gain or loss.
Federal Income Tax Information for
Shareholders
The discussion of federal income
taxation presented below supplements the discussion in the fund's prospectuses and only summarizes some of the important federal tax considerations generally affecting shareholders of the fund. Accordingly, prospective investors (particularly those
not residing or domiciled in the United States) should consult their own tax advisors regarding the consequences of investing in the fund.
On each business day that the NAV of the fund is
determined, such fund’s net investment income will be declared as of the close of the fund (normally 4:00 p.m. Eastern time) as a daily dividend to shareholders of record. Your daily dividend is calculated each business day by applying the
daily dividend rate by the number of shares owned, and is rounded to the nearest penny. The daily dividend is accrued each business day, and the sum of the daily dividends is paid monthly. Dividends will normally be reinvested monthly in shares of
the fund at the NAV on the 15th day of each month, if a business day, otherwise on the next business day, except in December when dividends are reinvested on the last business day of December. If cash payment is requested, checks will normally be
mailed on the business day following the reinvestment date. The fund will pay shareholders, who redeem all of their shares, all dividends accrued to the time of the redemption within seven days.
The fund calculates its dividends based on its
daily net investment income. For this purpose, the net investment income of the fund generally consists of: (1) accrued interest income, plus or minus amortized discount or premium, minus (2) accrued expenses allocated to that fund. If the fund
realizes any capital gains, they will be distributed at least once during the year as determined by the Board. Any realized capital losses, to the extent not offset by realized capital gains, will be carried forward.
Any dividends declared by the fund in October,
November or December and paid the following January are treated, for tax purposes, as if they were received by shareholders on December 31 of the year in which they were declared. The fund may adjust its schedule for the reinvestment of
distributions for the month of December to assist in complying with the reporting and minimum distribution requirements of the Code.
The fund does not expect to realize any long-term
capital gains. However, long-term capital gains distributions are taxable as long-term capital gains, regardless of how long you have held your shares. If you receive a long-term capital gains distribution with respect to fund shares held for six
months or less, any loss on the sale or exchange of those shares shall, to the extent of the long-term capital gains distribution, be treated as a long-term capital loss. Distributions by the fund also may be subject to state, local and foreign
taxes and their treatment under applicable tax laws may differ from the federal income tax treatment. Note that most states grant tax-exempt status to distributions paid to shareholders from earnings received on direct investment on U.S. government
securities, subject to certain restrictions. For example, some states do not extend this exemption to distributions paid to shareholders from earnings on certain U.S. government agencies, such as Freddie Mac and Fannie Mae.
Under the Regulated Investment Company
Modernization Act of 2010, net capital losses incurred by the fund in taxable years beginning after the effective enactment date, December 22, 2010, will not expire. However, such losses must be utilized prior to the losses incurred in the years
preceding enactment. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. In addition, post-enactment capital
30
losses that are carried forward will retain their character as
either short-term or long-term losses rather than short-term as under previous law.
An additional 3.8% Medicare tax is imposed on
certain net investment income (including ordinary dividends and capital gain distributions received from the fund and net gains from redemptions or other taxable dispositions of fund shares) of U.S. individuals, estates and trusts to the extent that
such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds a threshold amount.
The fund may engage in techniques that may alter
the timing and character of its income. The fund may be restricted in its use of these techniques by rules relating to its qualification as a regulated investment company.
Because the taxable portion of the fund’s
investment income consists primarily of interest, none of its dividends are expected to qualify under the Code for the dividends received deduction for corporations or as qualified dividend income eligible for reduced tax rates for
individuals.
Although not generally expected,
the redemption or exchange of the shares of a fund may result in capital gain or loss to the shareholders. Generally, if a shareholder holds the shares as a capital asset, any gain or loss will be long-term gain or loss if the shares have been held
for more than one year. Capital gains of corporate shareholders are subject to regular corporate tax rates. For non-corporate taxpayers, gain on the sales of shares held for more than one year will generally be taxed at the rate applicable to
long-term capital gains, while gain on the sale of shares held for one year or less will generally be taxed at ordinary income rates.
The fund will be required in certain cases to
withhold at the applicable withholding rate and remit to the U.S. Treasury, the withheld amount of taxable dividends paid to any shareholder who (1) fails to provide a correct taxpayer identification number certified under penalty of perjury; (2) is
subject to withholding by the Internal Revenue Service for failure to properly report all payments of interest or dividends; (3) fails to provide a certified statement that he or she is not subject to “backup withholding;” or (4) fails
to provide a certified statement that he or she is a U.S. person (including a U.S. resident alien). Backup withholding is not an additional tax and any amounts withheld may be credited against the shareholder’s ultimate U.S. tax
liability.
Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and estates) are generally subject to U.S. withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions derived from net investment income and
short-term capital gains; provided, however, that U.S. source interest related dividends and short-term capital gain dividends generally are not subject to U.S. withholding tax if the fund elects to make reports with respect to such dividends.
Distributions to foreign shareholders of such short-term capital gain dividends and of long-term capital gains, and any gains from the sale or other disposition of shares of the fund, generally are not subject to U.S. taxation, unless the recipient
is an individual who either (1) meets the Code’s definition of “resident alien” or (2) who is physically present in the U.S. for 183 days or more per year as determined under certain IRS rules. 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. Foreign
shareholders may also be subject to U.S. estate taxes with respect to shares in the fund.
The fund is required to withhold U.S. tax (at a 30%
rate) on payments of taxable dividends and (effective January 1, 2019) redemption proceeds and certain capital gain dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new reporting and withholding
requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to the fund to enable the fund to determine whether withholding is
required.
31
APPENDIX
–
RATINGS Of Investment Securities
From time to time, the fund may report the
percentage of its assets that fall into the rating categories set forth below, as defined by the ratings agencies.
MOODY’s INVESTORS SERVICE
Global Long-Term Rating Scale
Aaa
: Obligations
rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa : Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A : Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa : Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba : Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B : Obligations rated B are considered speculative and are subject to high credit risk.
Caa : Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca : Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C : Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Aa : Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A : Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa : Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba : Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B : Obligations rated B are considered speculative and are subject to high credit risk.
Caa : Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca : Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C : Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Global Short-Term Rating Scale
P-1
: Issuers (or
supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2 : Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3 : Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
P-2 : Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3 : Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
STANDARD & POOR’S FINANCIAL SERVICES
LLC
Long-Term Issue Credit Ratings
AAA
: An obligation
rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA : An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A : An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB : An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB : An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B : An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC : An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC : An obligation rated 'CC' is currently highly vulnerable to nonpayment. The 'CC' rating is used when a default has not yet occurred, but Standard & Poor's expects default to be a virtual certainty, regardless of the anticipated time to default.
AA : An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A : An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB : An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB : An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B : An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC : An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC : An obligation rated 'CC' is currently highly vulnerable to nonpayment. The 'CC' rating is used when a default has not yet occurred, but Standard & Poor's expects default to be a virtual certainty, regardless of the anticipated time to default.
C
: An obligation rated 'C' is
currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared to obligations that are rated higher.
D : An obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless Standard & Poor's believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to 'D' if it is subject to a distressed exchange offer.
D : An obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless Standard & Poor's believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to 'D' if it is subject to a distressed exchange offer.
Short-Term Issue Credit Ratings
A-1
: A short-term
obligation rated 'A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+).
This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2 : A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3 : A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
A-2 : A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3 : A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
FITCH, INC.
Long-Term Ratings Scales
AAA
: 'AAA' ratings
denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA : 'AA' ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A : 'A' ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB : 'BBB' ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
BB : 'BB' ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments.
B : 'B' ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.
CCC : Default is a real possibility.
CC : Default of some kind appears probable.
C : Default is imminent or inevitable, or the issuer is in standstill. Conditions that are indicative of a 'C' category rating for an issuer include:
AA : 'AA' ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A : 'A' ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB : 'BBB' ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
BB : 'BB' ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments.
B : 'B' ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.
CCC : Default is a real possibility.
CC : Default of some kind appears probable.
C : Default is imminent or inevitable, or the issuer is in standstill. Conditions that are indicative of a 'C' category rating for an issuer include:
a. the issuer has entered into a
grace or cure period following non-payment of a material financial obligation;
b. the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; or
b. the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; or
c. Fitch Ratings otherwise believes a condition
of 'RD' or 'D' to be imminent or inevitable, including through the formal announcement of a distressed debt exchange.
RD
: 'RD' ratings
indicate an issuer that in Fitch Ratings' opinion has experienced an uncured payment default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other
formal winding-up procedure, and which has not otherwise ceased operating. This would include:
a. the selective payment default
on a specific class or currency of debt;
b. the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation;
c. the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or
d. execution of a distressed debt exchange on one or more material financial obligations.
b. the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation;
c. the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or
d. execution of a distressed debt exchange on one or more material financial obligations.
D
: 'D' ratings indicate an issuer that in Fitch Ratings' opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased
business.
Short-Term Ratings
F1
: Indicates the
strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.
F2 : Good intrinsic capacity for timely payment of financial commitments.
F3 : The intrinsic capacity for timely payment of financial commitments is adequate.
F2 : Good intrinsic capacity for timely payment of financial commitments.
F3 : The intrinsic capacity for timely payment of financial commitments is adequate.
DBRS
Long Term Obligations Scale
AAA
: Highest credit
quality. The capacity for the payment of financial obligations is exceptionally high and unlikely to be adversely affected by future events.
AA : Superior credit quality. The capacity for the payment of financial obligations is considered high. Credit quality differs from AAA only to a small degree. Unlikely to be significantly vulnerable to future events.
A : Good credit quality. The capacity for the payment of financial obligations is substantial, but of lesser credit quality than AA. May be vulnerable to future events, but qualifying negative factors are considered manageable.
BBB : Adequate credit quality. The capacity for the payment of financial obligations is considered acceptable. May be vulnerable to future events.
BB : Speculative, non-investment grade credit quality. The capacity for the payment of financial obligations is uncertain. Vulnerable to future events.
B : Highly speculative credit quality. There is a high level of uncertainty as to the capacity to meet financial obligations.
CCC / CC / C : Very highly speculative credit quality. In danger of defaulting on financial obligations. There is little difference between these three categories, although CC and C ratings are normally applied to obligations that are seen as highly likely to default, or subordinated to obligations rated in the CCC to B range. Obligations in respect of which default has not technically taken place but is considered inevitable may be rated in the C category.
D : When the issuer has filed under any applicable bankruptcy, insolvency or winding up statute or there is a failure to satisfy an obligation after the exhaustion of grace periods, a downgrade to D may occur. DBRS may also use SD (Selective Default) in cases where only some securities are impacted, such as the case of a “distressed exchange”. See Default Definition for more information.
AA : Superior credit quality. The capacity for the payment of financial obligations is considered high. Credit quality differs from AAA only to a small degree. Unlikely to be significantly vulnerable to future events.
A : Good credit quality. The capacity for the payment of financial obligations is substantial, but of lesser credit quality than AA. May be vulnerable to future events, but qualifying negative factors are considered manageable.
BBB : Adequate credit quality. The capacity for the payment of financial obligations is considered acceptable. May be vulnerable to future events.
BB : Speculative, non-investment grade credit quality. The capacity for the payment of financial obligations is uncertain. Vulnerable to future events.
B : Highly speculative credit quality. There is a high level of uncertainty as to the capacity to meet financial obligations.
CCC / CC / C : Very highly speculative credit quality. In danger of defaulting on financial obligations. There is little difference between these three categories, although CC and C ratings are normally applied to obligations that are seen as highly likely to default, or subordinated to obligations rated in the CCC to B range. Obligations in respect of which default has not technically taken place but is considered inevitable may be rated in the C category.
D : When the issuer has filed under any applicable bankruptcy, insolvency or winding up statute or there is a failure to satisfy an obligation after the exhaustion of grace periods, a downgrade to D may occur. DBRS may also use SD (Selective Default) in cases where only some securities are impacted, such as the case of a “distressed exchange”. See Default Definition for more information.
Commercial Paper and Short-Term Debt Rating
Scale
R-1
(high): Highest credit quality. The capacity for the payment of short-term financial obligations as they fall due is exceptionally high. Unlikely to be adversely affected by future events.
R-1 (middle): Superior credit quality. The capacity for the payment of short-term financial obligations as they fall due
R-1 (middle): Superior credit quality. The capacity for the payment of short-term financial obligations as they fall due
is very high. Differs from R-1 (high) by a relatively modest
degree. Unlikely to be significantly vulnerable to future events.
R-1 (low): Good credit quality. The capacity for the payment of short-term financial obligations as they fall due is substantial. Overall strength is not as favorable as higher rating categories. May be vulnerable to future events, but qualifying negative factors are considered manageable.
R-2 (high): Upper end of adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future events.
R-2 (middle): Adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future events or may be exposed to other factors that could reduce credit quality.
R-2 (low): Lower end of adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future events. A number of challenges are present that could affect the issuer’s ability to meet such obligations.
R-3 : Lowest end of adequate credit quality. There is a capacity for the payment of short-term financial obligations as they fall due. May be vulnerable to future events and the certainty of meeting such obligations could be impacted by a variety of developments.
R-1 (low): Good credit quality. The capacity for the payment of short-term financial obligations as they fall due is substantial. Overall strength is not as favorable as higher rating categories. May be vulnerable to future events, but qualifying negative factors are considered manageable.
R-2 (high): Upper end of adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future events.
R-2 (middle): Adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future events or may be exposed to other factors that could reduce credit quality.
R-2 (low): Lower end of adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future events. A number of challenges are present that could affect the issuer’s ability to meet such obligations.
R-3 : Lowest end of adequate credit quality. There is a capacity for the payment of short-term financial obligations as they fall due. May be vulnerable to future events and the certainty of meeting such obligations could be impacted by a variety of developments.
Charles Schwab Investment Management, Inc.
The Charles Schwab Family of Funds
Schwab Investments
The Charles Schwab Family of Funds
Schwab Investments
Schwab Capital
Trust
Schwab Annuity Portfolios
Laudus Trust
Laudus Trust
Schwab Strategic Trust
PROXY VOTING POLICY AND PROCEDURES
AS OF MARCH, 2016
AS OF MARCH, 2016
| I. | INTRODUCTION |
Charles Schwab
Investment Management, Inc. (“CSIM”), as an investment adviser, is generally responsible for voting proxies with respect to the securities held in accounts of investment companies and other clients for which it provides discretionary
investment management services. CSIM’s Proxy Committee exercises and documents CSIM’s responsibility with regard to voting of client proxies (the “Proxy Committee”). The Proxy Committee is composed of representatives of
CSIM’s Fund Administration, Portfolio Management, and Legal Departments, and chaired by CSIM’s Chief Investment Officer, Equities or his/her delegate. The Proxy Committee reviews and may amend periodically these policies. The policies
stated in these Proxy Voting Policy and Procedures (the “Proxy Policies”) pertain to all of CSIM’s clients.
The Boards of Trustees (the
“Board”) of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, and Schwab Annuity Portfolios (“Schwab Funds”), Laudus Trust (“Laudus Funds”) and Schwab Strategic Trust (“Schwab
ETFs”; collectively with the Schwab Funds and Laudus Funds, the “Funds”) have delegated the responsibility for voting proxies to CSIM through their respective investment advisory agreements. The Board has adopted these Proxy
Policies with respect to proxies voted on behalf of the various series of the Schwab Funds, Laudus Funds, and Schwab ETFs. CSIM will present amendments to the Board for approval. However, there may be circumstances where the Proxy Committee deems it
advisable to amend these Proxy Policies between regular Schwab Funds, Laudus Funds and Schwab ETFs Board meetings. In such cases, the Board will be asked to ratify any changes at the next regular meeting of the Board.
To assist CSIM in its responsibility for
voting proxies and the overall proxy voting process, CSIM has retained Glass Lewis & Co. (“Glass Lewis”) as an expert in the proxy voting and corporate governance area. The services provided by Glass Lewis include in-depth research,
global issuer analysis, and voting recommendations as well as vote execution, reporting and record keeping. CSIM may also retain additional experts in the proxy voting and corporate governance area.
The Proxy Committee has the ultimate
responsibility for making the determination of how to vote the shares to seek to maximize the value of that particular holding.
| II. | PHILOSOPHY |
CSIM believes that its role as a
fiduciary is of utmost importance. In voting proxy ballots, CSIM’s ultimate objective is to maximize the value of our clients’ investments by protecting the long-term best interests of shareholders. CSIM believes that directors, as
shareholders’ elected representatives, are best positioned to oversee the management of companies in which CSIM’s clients invest, thereby promoting and protecting its clients’ long-term interests. Therefore, CSIM will generally
support a board of directors’ recommendations unless concerns arise, such as the board’s performance, accountability or management of conflicts of interests.
1
CSIM invests on behalf of its clients in
companies domiciled all over the world. Since corporate governance standards and best practices differ by country and jurisdiction, the market context is taken into account in the analysis of proposals. Furthermore, there are instances where CSIM
may determine that voting is not in the best interests of its clients (typically due to costs or to trading restrictions) and will refrain from submitting votes.
| III. | PROXY VOTING GUIDELINES |
The Proxy
Committee receives and reviews Glass Lewis’ written proxy voting policies and procedures (“Glass Lewis’ Proxy Policies”). Positions on proposals are evaluated by the Proxy Committee in the long-term best interests of
shareholders. Below is a description of CSIM’s guidelines on key proposals for votes on U.S. and Canadian companies. In other circumstances, CSIM generally will utilize the Glass Lewis’ Proxy Policies (which are posted on the
Funds’ website).
| A. | DIRECTORS AND AUDITORS |
| i. | Directors |
As a starting point, CSIM expects the
board to be composed of a majority of independent directors and to be responsive to shareholders. CSIM also expects directors that serve on a company’s nominating, compensation or audit committee to be independent.
Factors that may result in a vote against
one or more directors:
• The board is not
majority independent
• Non-independent
directors serve on the nominating, compensation or audit committees
•
Director recently failed to attend at least 75% of meetings or serves on an excessive number of publically traded company boards
•
Directors approved executive compensation schemes that appear misaligned with shareholders’ interests
•
Director recently acted in a manner inconsistent with these Proxy Policies or failed to be responsive to concerns of a majority of shareholders
| ii. | Auditors |
CSIM typically supports the ratification
of auditors unless CSIM believes that the auditors’ independence may have been compromised.
Factors that may result in a vote against
the ratification of auditors:
• Audit-related fees are
less than half of the total fees paid by the company to the audit firm
• A recent material
restatement of annual financial statements
| B. | BOARD MATTERS |
| i. | Classified Boards |
CSIM generally defers to
management’s recommendation for classified board proposals unless CSIM has particular concerns regarding the board’s accountability or responsiveness to shareholders.
Factors that may result in a vote
supporting a shareholder proposal to de-classify a board:
•
The company did not implement a shareholder proposal that was passed by shareholders at two previous shareholder meetings
•
The company nominated directors for election that did not receive a majority of shareholder support at the previous shareholder meeting
2
• The company had
material financial statement restatements
•
The company’s board adopted a shareholder rights plan (also known as a “Poison Pill”) during the past year and did not submit it to shareholders for approval
| ii. | Majority Voting |
CSIM generally supports majority voting
proposals when they call for plurality voting standards in contested elections.
| iii. | Cumulative Voting |
CSIM typically supports the concept of
voting rights being proportional to shareholders’ economic stake in the company. Therefore, CSIM will generally not support cumulative voting proposals unless the company has a controlling shareholder or shareholder group and has plurality
voting standards.
| iv. | Proxy Access |
CSIM typically does not support proxy
access proposals unless CSIM has particular concerns regarding the board’s accountability or responsiveness to shareholders.
Factors that may result in a vote
supporting proxy access:
•
The company did not implement a shareholder proposal that was passed by shareholders at two previous shareholder meetings
•
The company nominated directors for election that did not receive a majority of shareholder support at the previous shareholder meeting
• The company had
material financial statement restatements
•
The company’s board adopted a Poison Pill during the past year and did not submit it to shareholders for approval
| v. | Independent Chair |
CSIM believes that the board is typically
best positioned to determine its leadership structure. Therefore, CSIM will typically not support proposals requiring an independent chair unless CSIM has concerns regarding the board’s accountability or responsiveness to shareholders.
Factors that may result in a vote
supporting a shareholder proposal requiring an independent chair:
•
The company did not implement a shareholder proposal that was passed by shareholders at two previous shareholder meetings
•
The company nominated directors for election that did not receive a majority of shareholder support at the previous shareholder meeting
• The company had
material financial statement restatements
•
The company’s board adopted a Poison Pill during the past year and did not submit it to shareholders for approval
| C. | COMPENSATION |
| i. | Advisory Vote on Executive Compensation and Frequency |
CSIM generally supports advisory votes on
executive compensation (also known as “Say-On-Pay”) when the compensation scheme appears aligned with shareholder economic interests and lacks problematic features.
Factors that may result in a vote against
Say-On-Pay:
3
•
Executive compensation is out of line with industry peers considering the company’s performance over time
•
Executive compensation plan includes significant guaranteed bonuses or has a low amount of compensation at risk
•
Executive compensation plan offers excessive perquisites, tax-gross up provisions, or golden parachutes
CSIM typically supports annual advisory
votes on executive compensation.
| ii. | Equity Compensation Plans |
CSIM generally supports stock-based
compensation plans when they do not overly dilute shareholders by providing participants with excessive awards and lack problematic features.
Factors that may result in a vote against
Equity Compensation Plans:
• Plan’s total
potential dilution appears excessive
• Plan’s burn rate
appears excessive compared to industry peers
• Plan allows for the
re-pricing of options without shareholder approval
• Plan has an evergreen
feature
| iii. | Employee Stock Purchase Plans |
CSIM supports the concept of broad
employee participation in a company’s equity. Therefore, CSIM typically supports employee stock purchase plans when the shares can be purchased at 85% or more of the shares’ market value.
| iv. | Re-price/Exchange Option Plans |
CSIM generally only supports
management’s proposals to re-price options when the plan excludes senior management and directors, does not excessively dilute shareholders, and the company has not significantly underperformed its industry peers over time.
| D. | ANTI-TAKEOVER |
| i. | Shareholder Rights Plans (“Poison Pills”) |
Poison Pills constrain a potential
acquirer’s ability to buy shares in a company above a certain threshold without the approval of the company’s board of directors. While a Poison Pill may help a company in achieving a higher bid, it may also entrench the incumbent
management and board. CSIM believes that shareholders should have the right to approve a Poison Pill within a year of its adoption. CSIM generally votes against Poison Pills that do not have safeguards to protect shareholder interests.
Factors that may result in a vote against
Poison Pills:
•
Plan does not expire in a relatively short time horizon
•
Plan does not have a well-crafted permitted bid or qualified offer feature that mandates shareholder votes in certain situations
• Plan automatically
renews without shareholder approval
• Company’s
corporate governance profile
| ii. | Right to Call Special Meeting |
CSIM generally votes against the right of
shareholders to call a special meeting unless the threshold to call a special meeting is 25% or more of shares outstanding to avoid wasting corporate resources.
4
| iii. | Right to Act by Written Consent |
CSIM generally votes against the right of
shareholders to act by written consent if the company already offers shareholders the right the call special meetings. CSIM expects appropriate mechanisms for implementation, including that the threshold to call a special meeting is 25% or more of
shares outstanding.
| iv. | Supermajority Voting |
CSIM generally supports the concept of
simple majority standards to pass proposals.
| E. | CAPITAL STRUCTURE, MERGERS AND ACQUISITIONS |
| i. | Increase in Authorized Common Shares |
CSIM typically supports proposals to
increase the authorized shares unless the company does not sufficiently justify the need for the use of the proposed shares.
| ii. | Preferred Shares |
CSIM generally supports proposals to
create a class of preferred shares with specific voting, dividend, conversion and other rights.
| iii. | Mergers and Acquisitions |
CSIM generally supports transactions that
appear to maximize shareholder value. In assessing the proposals, CSIM considers the proposed transaction’s strategic rationale, the offer premium, the board’s oversight of the sales process, and other pertinent factors.
| F. | ENVIRONMENTAL AND SOCIAL PROPOSALS |
Environmental and Social shareholder
proposals typically request companies to change their business practices or to enhance their disclosures. CSIM believes that in most instances, the board is best positioned to evaluate the impact of these proposals on the company’s business.
Therefore, CSIM generally defers to the board’s recommendation unless the proposal has successfully articulated a demonstrable tangible economic impact on shareholder value.
| i. | Political Contribution Proposals |
CSIM expects the board of directors to
have an oversight process for political contributions and lobbying proposals. CSIM generally votes against political contribution shareholder proposals unless there is no evidence of board oversight.
| IV. | ADMINISTRATION |
| A. | CONFLICTS OF INTERESTS |
With respect to
proxies of an underlying affiliated Fund, the Proxy Committee will vote such proxies in the same proportion as the vote of all other shareholders of such Fund (i.e., “echo vote”), unless otherwise required by law. When required by law or
applicable exemptive order, the Proxy Committee will also “echo vote” proxies of an unaffiliated mutual fund or exchange traded fund (“ETF”). For example, certain exemptive orders issued to the Funds by the Securities and
Exchange Commission and Section 12(d)(1)(F) of the Investment Company Act of 1940, as amended, require the Funds, under certain circumstances, to “echo vote” proxies of registered investment companies that serve as underlying investments
of the Funds.
5
In addition, with respect to holdings of
The Charles Schwab Corporation (“CSC”) (ticker symbol: SCHW), the Proxy Committee will vote such proxies in the same proportion as the vote of all other shareholders of CSC (i.e., “echo vote”), unless otherwise required by
law.
Other than proxies that will be
“echo voted”, proxy issues that present material conflicts of interest between CSIM, and/or any of its affiliates, and CSIM’s clients will be delegated to Glass Lewis to be voted in accordance with CSIM’s Proxy Voting
Guidelines.
| B. | FOREIGN SECURITIES/SHAREBLOCKING |
CSIM has arrangements with Glass Lewis for
the execution of proxy votes. However, voting proxies with respect to shares of foreign securities may involve significantly greater effort and corresponding cost than voting proxies with respect to domestic securities, due to the variety of
regulatory schemes and corporate practices in foreign countries with respect to proxy voting. Problems voting foreign proxies may include the following:
• proxy statements and
ballots written in a foreign language;
• untimely and/or
inadequate notice of shareholder meetings;
• restrictions of
foreigner’s ability to exercise votes;
• requirements to vote
proxies in person;
• requirements to
provide local agents with power of attorney to facilitate CSIM’s voting instructions.
In consideration of the foregoing issues,
Glass Lewis uses its best efforts to vote foreign proxies. As part of its ongoing oversight, the Proxy Committee will monitor the voting of foreign proxies to determine whether all reasonable steps are taken to vote foreign proxies. If the Proxy
Committee determines that the cost associated with the attempt to vote outweighs the potential benefits clients may derive from voting, the Proxy Committee may decide not to attempt to vote. In addition, certain foreign countries impose restrictions
on the sale of securities for a period of time before and/or after the shareholder meeting. To avoid these trading restrictions, the Proxy Committee instructs Glass Lewis not to vote such foreign proxies.
| C. | SECURITIES LENDING |
Certain of the
Funds enter into securities lending arrangements with lending agents to generate additional revenue for their portfolios. In securities lending arrangements, any voting rights that accompany the loaned securities generally pass to the borrower of
the securities, but the lender retains the right to recall a security and may then exercise the security’s voting rights. In order to vote the proxies of securities out on loan, the securities must be recalled prior to the established record
date. CSIM will use its best efforts to recall a Fund’s securities on loan and vote such securities’ proxies if (a) the proxy relates to a special meeting of shareholders of the issuer (as opposed to the issuer's annual meeting of
shareholders), or (b) the Fund owns more than 5% of the outstanding shares of the issuer. Further, it is CSIM's policy to use its best efforts to recall securities on loan and vote such securities’ proxies if CSIM determines that the proxies
involve a material event affecting the loaned securities. CSIM may utilize third-party service providers to assist it in identifying and evaluating whether an event is material. CSIM may also recall securities on loan and vote such securities’
proxies in its discretion.
| D. | SUB-ADVISORY RELATIONSHIPS |
Where CSIM has
delegated day-to-day investment management responsibilities to an investment sub-adviser, CSIM may (but generally does not) delegate proxy voting responsibility to such investment sub-adviser. Each sub-adviser to whom proxy voting responsibility has
been delegated will be required to review all proxy solicitation material and to exercise the voting rights associated with the securities it has been allocated in the best interest of each investment company and its shareholders, or other client.
Prior to
6
delegating the proxy voting responsibility, CSIM will
review each sub-adviser’s proxy voting policy to determine whether it believes that each sub-adviser’s proxy voting policy is generally consistent with the maximization of the value of CSIM’s clients’ investments by
protecting the long-term best interest of shareholders.
| E. | REPORTING AND RECORD RETENTION |
CSIM
will maintain, or cause Glass Lewis to maintain, records that identify the manner in which proxies have been voted (or not voted) on behalf of CSIM clients. CSIM will comply with all applicable rules and regulations regarding disclosure of its or
its clients’ proxy voting records and procedures.
CSIM will retain all proxy voting materials
and supporting documentation as required under the Investment Advisers Act of 1940 and the rules and regulations thereunder.
7
Table of Contents
The Charles Schwab Family of
Funds
PEA No. 103
PEA No. 103
Part C: Other
Information
| ITEM 28. | EXHIBITS. |
| (a) | Amended and Restated Agreement and Declaration of Trust, dated May 9, 1995, is incorporated herein by reference to Exhibit (1) of Post-Effective Amendment No. 33 to Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on February 13, 1998 (hereinafter referred to as PEA No. 33). |
| (b) | Amended and Restated Bylaws of the Registrant, adopted November 16, 2004, are incorporated herein by reference to Exhibit (b) of Post-Effective Amendment No. 58 to Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on April 28, 2005 (hereinafter referred to as PEA No. 58). |
| (c)(i) | Article III, Sections 4 and 5; Article IV, Section 1; Article V; Article VI, Section 2; Article VIII, Section 4; and Article IX, Sections 1, 4 and 7 of the Amended and Restated Agreement and Declaration of Trust, dated as of May 9, 1995, are incorporated herein by reference to Exhibit (1) of PEA No. 33. |
| (c)(ii) | Article 9 and Article 11 of the Amended and Restated Bylaws, dated as of November 16, 2004, are incorporated herein by reference to Exhibit (b) of PEA No. 58. |
| (d)(i) | Investment Advisory and Administration Agreement between Registrant and Charles Schwab Investment Management, Inc. (the Investment Adviser) with respect to Schwab Money Market Fund, Schwab Government Money Fund and Schwab Municipal Money Fund, dated June 1, 2001, is incorporated herein by reference to Exhibit (d)(i) of Post-Effective Amendment No. 65 to Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on April 25, 2007 (hereinafter referred to as PEA No. 65). |
| (d)(ii) | Amendment, dated January 1, 2007, to the Investment Advisory and Administration Agreement between Registrant and Investment Adviser with respect to Schwab Money Market Fund, Schwab Government Money Fund and Schwab Municipal Money Fund, dated June 1, 2001, is incorporated herein by reference to Exhibit (d)(ii) of PEA No. 65. |
| (d)(iii) | Amendment, dated June 5, 2007, to the Investment Advisory and Administration Agreement between Registrant and Investment Adviser with respect to Schwab Money Market Fund, Schwab Government Money Fund and Schwab Municipal Money Fund, dated June 1, 2001, is incorporated herein by reference to Exhibit (d)(iii) of Post-Effective Amendment No. 80 to Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on April 6, 2012. |
| (d)(iv) | Investment Advisory and Administration Agreement between Registrant and the Investment Adviser, with respect to the funds listed on Schedule A thereto, as amended, dated June 15, 1994, is incorporated herein by reference to Exhibit (5)(d) of Post-Effective Amendment No. 27 to Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on April 30, 1997. |
| (d)(v) | Schedule A, dated as of May 16, 2016, to the Investment Advisory and Administration Agreement between Registrant and the Investment Adviser, dated June 15, 1994, is filed herein as Exhibit (d)(v). |
| (d)(vi) | Schedule B, to the Investment Advisory and Administration Agreement between Registrant and the Investment Adviser, dated June 15, 1994, is incorporated herein by reference to Exhibit (d)(v) of PEA No. 65. |
| (d)(vii) | Schedule C, to the Investment Advisory and Administration Agreement between Registrant and the Investment Adviser, dated June 15, 1994, is incorporated herein by reference to Exhibit (d)(vi) of PEA No. 65. |
| (d)(viii) | Schedule D, dated as of May 16, 2016, to the Investment Advisory and Administration Agreement between Registrant and the Investment Adviser, dated June 15, 1994, is filed herein as Exhibit (d)(viii). |
| (d)(ix) | Letter of Agreement between Registrant, the Investment Adviser and Charles Schwab & Co., Inc. (Schwab), dated May 16, 2016, is filed herein as Exhibit (d)(ix). |
| (d)(x) | Expense Limitation Agreement, on behalf of the Funds listed on Schedule A, between the Investment Adviser, Schwab and Registrant, dated as of May 2, 2007, is incorporated herein by reference to Exhibit (d)(xii) of Post-Effective Amendment No. 66 to Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on July 18, 2007. |
| (d)(xi) | Schedule A, dated as of January 20, 2016, to the Expense Limitation Agreement between the Investment Adviser, Schwab and Registrant, dated May 2, 2007, is incorporated herein by reference to Exhibit (d)(xi) of Post-Effective Amendment No. 97 to Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on January 20, 2016 (hereinafter referred to as PEA No. 97). |
| ITEM 28. | EXHIBITS. |
| (e)(i) | Second Amended and Restated Distribution Agreement between Registrant and Schwab, dated December 11, 2015, is incorporated herein by reference to Exhibit (e)(i) of PEA No. 97. |
| (e)(ii) | Amended Schedule A, dated May 16, 2016, to the Distribution Agreement between Registrant and Schwab, dated July 1, 2009, is filed herein as Exhibit (e)(ii). |
| (f) | Inapplicable. |
| (g)(i) | Amended and Restated Master Custodian Agreement between Registrant and State Street Bank and Trust Company, dated October 17, 2005, is incorporated herein by reference to Exhibit (g)(ii) of Post-Effective Amendment No. 59 to Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on April 28, 2006 (hereinafter referred to as PEA No. 59). |
| (g)(ii) | Amended Appendix A, dated May 16, 2016, to the Amended and Restated Master Custodian Agreement between Registrant and State Street Bank and Trust Company, dated October 17, 2005, is filed herein as Exhibit (g)(ii). |
| (h)(i) | Transfer Agency and Service Agreement between Registrant and Boston Financial Data Services, Inc., dated July 1, 2009, is incorporated herein by reference to Exhibit (h)(i) of Post-Effective Amendment No. 73 to Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on February 4, 2010. |
| (h)(ii) | Amended Schedule A, dated May 16, 2016, to the Transfer Agency and Service Agreement between Registrant and Boston Financial Data Services, Inc., dated July 1, 2009, is filed herein as Exhibit (h)(ii). |
| (h)(iii) | Amended and Restated Shareholder Servicing and Sweep Administration Plan, dated December 11, 2015, is incorporated herein by reference to Exhibit (h)(iii) of PEA No. 97. |
| (h)(iv) | Amended Schedule A, dated December 11, 2015, to the Shareholder Servicing and Sweep Administration Plan, dated July 1, 2009, is incorporated herein by reference to Exhibit (h)(iv) of PEA No. 97. |
| (h)(v) | Amended Schedule B, dated December 11, 2015, to the Shareholder Servicing and Sweep Administration Plan, dated July 1, 2009, is incorporated herein by reference to Exhibit (h)(v) of PEA No. 97. |
| (h)(vi) | Master Fund Accounting and Services Agreement between Registrant and State Street Bank and Trust Company, dated October 1, 2005, is incorporated herein by reference to Exhibit (g)(ix) of PEA No. 59. |
| (h)(vii) | Amended Schedule A, dated May 16, 2016, to the Master Fund Accounting and Services Agreement between Registrant and State Street Bank and Trust Company, dated October 1, 2005 is filed herein as Exhibit (h)(vii). |
| (i) | Opinion and Consent of Counsel is filed herein as Exhibit (i). |
| (j)(i) | Not applicable. |
| (j)(ii) | Power of Attorney executed by Walter W. Bettinger II, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(ii) of Post-Effective Amendment No. 95 to the Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on January 12, 2016 (hereinafter referred to as PEA No. 95). |
| (j)(iii) | Power of Attorney executed by Marie A. Chandoha, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(iii) of PEA No. 95. |
| (j)(iv) | Power of Attorney executed by Joseph R. Martinetto, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(iv) of PEA No. 95. |
| (j)(v) | Power of Attorney executed by Robert W. Burns, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(v) of PEA No. 95. |
| (j)(vi) | Power of Attorney executed by John F. Cogan, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(vi) of PEA No. 95. |
| (j)(vii) | Power of Attorney executed by Stephen Timothy Kochis, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(vii) of PEA No. 95. |
| (j)(viii) | Power of Attorney executed by David L. Mahoney, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(viii) of PEA No. 95. |
| (j)(ix) | Power of Attorney executed by Kiran M. Patel, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(ix) of PEA No. 97. |
| (j)(x) | Power of Attorney executed by Kimberly S. Patmore, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(x) of PEA No. 95. |
| ITEM 28. | EXHIBITS. |
| (j)(xi) | Power of Attorney executed by Charles A. Ruffel, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(xi) of PEA No. 95. |
| (j)(xii) | Power of Attorney executed by Gerald B. Smith, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(xii) of PEA No. 95. |
| (j)(xiii) | Power of Attorney executed by Joseph H. Wender, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(xiii) of PEA No. 95. |
| (j)(xiv) | Power of Attorney executed by Mark D. Fischer, dated January 1, 2016 is incorporated herein by reference to Exhibit (j)(xiv) of PEA No. 95. |
| (k) | Inapplicable. |
| (l) | Inapplicable. |
| (m) | Inapplicable. |
| (n)(i) | Amended and Restated Multiple Class Plan, adopted on October 20, 1989, amended and restated as of December 10, 2014, is incorporated herein by reference to Exhibit (n)(i) of Post-Effective Amendment No. 90 to Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on January 20, 2015. |
| (n)(ii) | Amended Schedule A, dated January 20, 2016, to the Amended and Restated Multiple Class Plan, adopted on October 20, 1989, amended and restated as of December 10, 2014, is incorporated herein by reference to Exhibit (n)(ii) of PEA No. 97. |
| (o) | Inapplicable. |
| (p) | Registrant, Investment Adviser and Schwab Code of Ethics, dated June 14, 2013, is incorporated herein by reference to Exhibit (p) of Post-Effective Amendment No. 86 to Registrant’s Registration Statement on Form N-1A (File No. 811-5954), electronically filed with the SEC on April 25, 2014. |
ITEM
29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Board of Trustees of the
Registrant is identical to the boards of trustees of Schwab Strategic Trust, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust. Each such trust has Charles Schwab Investment Management, Inc. as its investment
adviser. In addition, the officers of the Registrant are also identical to those of each such other trust, with the exception of the Chief Legal Officer and Secretary/Clerk. As a result, the above-named trusts may be deemed to be under common
control with the Registrant. Nonetheless, the Registrant takes the position that it is not under common control with such other trusts because the power residing in the respective trusts’ boards and officers arises as a result of an official
position with each such trust.
ITEM
30. INDEMNIFICATION.
Article VIII of Registrant’s Amended and
Restated Agreement and Declaration of Trust (Exhibit (a) hereto, which is incorporated herein by reference) provides in effect that Registrant will indemnify its officers and trustees against all liabilities and expenses, including but not limited
to amounts paid in satisfaction of judgments, in compromise, or as fines and penalties, and counsel fees reasonably incurred by any such officer or trustee in connection with the defense or disposition of any action, suit, or other proceeding.
However, in accordance with Section 17(h) and 17(i) of the 1940 Act and its own terms, said Agreement and Declaration of Trust does not protect any person against any liability to Registrant or its shareholders to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. In any event, Registrant will comply with 1940 Act Releases Nos. 7221 and 11330 respecting the
permissible boundaries of indemnification by an investment company of its officers and trustees.
Insofar as indemnification for liability arising
under the Securities Act of 1933, as amended (the 1933 Act), may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue.
ITEM 31.
BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Registrant’s investment adviser, Charles
Schwab Investment Management, Inc., a Delaware corporation, organized in October 1989 to serve as investment manager to Registrant, also serves as the investment manager to Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab
Strategic Trust and Laudus Trust, each an open-end management investment company. The principal place of business of the investment adviser is 211 Main Street, San Francisco, California 94105. The only business in which the investment adviser
engages is that of investment adviser and administrator to Registrant, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Schwab Strategic Trust, investment adviser to Laudus Trust and any other investment companies that Schwab
may sponsor in the future and an investment adviser to certain non-investment company clients.
The business, profession, vocation or employment of
a substantial nature in which each director and/or senior or executive officer of the investment adviser (CSIM) is or has been engaged during the past two fiscal years is listed below. The name of any company for which any director and/or senior or
executive officer of the investment adviser serves as director, officer, employee, partner or trustee is also listed below.
| Name and Position with Adviser | Name of Other Company | Capacity | ||
| Charles R. Schwab, Chairman and Director | Charles Schwab & Co., Inc. | Chairman and Director | ||
| Charles Schwab Bank | Chairman and Director | |||
| The Charles Schwab Corporation | Chairman and Director | |||
| Schwab Holdings, Inc. | Chairman, Chief Executive Officer and Director | |||
| Schwab International Holdings, Inc. | Chairman and Chief Executive Officer | |||
| Schwab (SIS) Holdings, Inc. I | Chairman and Chief Executive Officer | |||
| Charles Schwab Foundation | Director | |||
| JustAnswer Corp. | Director | |||
| Museum of American Finance | Advisory Board | |||
| San Francisco Museum of Modern Art | Board of Trustees | |||
| Charles and Helen Schwab Foundation | Director | |||
| Marie Chandoha, Director, President and Chief Executive Officer | Schwab Funds | Trustee, President and Chief Executive Officer | ||
| Laudus Funds | Trustee, President and Chief Executive Officer | |||
| Schwab ETFs | Trustee, President and Chief Executive Officer | |||
| Charles Schwab Worldwide Funds, plc | Director | |||
| Charles Schwab Asset Management (Ireland) Limited | Director | |||
| Omar Aguilar, Senior Vice President and Chief Investment Officer – Equities | Schwab Funds | Senior Vice President and Chief Investment Officer – Equities | ||
| Laudus Funds | Senior Vice President and Chief Investment Officer – Equities | |||
| Schwab ETFs | Senior Vice President and Chief Investment Officer – Equities | |||
| Brett Wander, Senior Vice President and Chief Investment Officer – Fixed Income | Schwab Funds | Senior Vice President and Chief Investment Officer – Fixed Income | ||
| Laudus Funds | Senior Vice President and Chief Investment Officer – Fixed Income | |||
| Schwab ETFs | Senior Vice President and Chief Investment Officer – Fixed Income |
| Name and Position with Adviser | Name of Other Company | Capacity | ||
| David Lekich, Chief Counsel and Senior Vice President | Charles Schwab & Co., Inc. | Senior Vice President and Associate General Counsel | ||
| Schwab Funds | Secretary and Chief Legal Officer | |||
| Laudus Funds | Vice President and Assistant Clerk | |||
| Schwab ETFs | Secretary and Chief Legal Officer | |||
| Michael Hogan, Chief Compliance Officer and Senior Vice President | Schwab Funds | Chief Compliance Officer | ||
| Schwab ETFs | Chief Compliance Officer | |||
| Laudus Funds | Chief Compliance Officer | |||
| Charles Schwab & Co., Inc. | Senior Vice President | |||
| George Pereira, Senior Vice President, Chief Financial Officer and Chief Operating Officer | Schwab Funds | Senior Vice President and Chief Operating Officer | ||
| Laudus Funds | Senior Vice President and Chief Operating Officer | |||
| Schwab ETFs | Senior Vice President and Chief Operating Officer | |||
| Charles Schwab Worldwide Funds, plc | Director | |||
| Charles Schwab Asset Management (Ireland) Limited | Director |
ITEM 32.
PRINCIPAL UNDERWRITERS.
(a) Schwab acts as principal
underwriter and distributor of Registrant’s shares. Schwab also acts as principal underwriter for the Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios and may act as such for any other investment company which Schwab may
sponsor in the future.
(b)
Information with respect to Schwab’s directors and officers is as follows:
| Name | Position and Offices with the Underwriter | Position and Offices with the Registrant | ||
| Charles R. Schwab | Chairman and Director | None | ||
| Walter W. Bettinger II | President, Chief Executive Officer and Director | Chairman and Trustee | ||
| Steven H. Anderson | Executive Vice President, Schwab Retirement Plan Services | None | ||
| Ron Carter | Executive Vice President, Operational Services | None | ||
| Bernard J. Clark | Executive Vice President and Head of Advisor Services | None | ||
| Jonathan M. Craig | Executive Vice President and Chief Marketing Officer | None | ||
| Peter B. Crawford | Executive Vice President, Finance | None | ||
| David R. Garfield | Executive Vice President, General Counsel and Corporate Secretary | None | ||
| G. Andrew Gill | Executive Vice President, Client Solutions | None | ||
| Lisa Kidd Hunt | Executive Vice President, International Services and Business Development | None |
| Name | Position and Offices with the Underwriter | Position and Offices with the Registrant | ||
| Terri R. Kallsen | Executive Vice President, Investor Services | None | ||
| Mitch Mantua | Executive Vice President, Internal Audit | None | ||
| Joseph R. Martinetto | Senior Executive Vice President, Chief Financial Officer and Director | Trustee | ||
| James D. McCool | Executive Vice President, Corporate Initiatives | None | ||
| James F. McGuire | Executive Vice President and Chief Information Officer | None | ||
| Nigel J. Murtagh | Executive Vice President, Corporate Risk | None | ||
| Martha D. Tuma | Executive Vice President, Human Resources | None |
The principal business
address of all directors and officers of Schwab is 211 Main Street, San Francisco, CA 94105.
(c) None.
ITEM 33.
LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to
be maintained pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of: Registrant and Registrant’s investment adviser and administrator, Charles Schwab Investment Management, Inc., 211 Main Street,
San Francisco, California 94105; Registrant’s principal underwriter, Charles Schwab & Co., Inc., 211 Main Street, San Francisco, California, 94105; Registrant’s Custodian/Fund Accountant: State Street Bank and Trust Company, One
Lincoln Street, Boston, Massachusetts 02111.
ITEM 34.
MANAGEMENT SERVICES.
None.
ITEM 35.
UNDERTAKINGS.
Not applicable.
Table of Contents
SIGNATURES
Pursuant to
the requirements of the Securities Act of 1933, as amended (the “1933 Act”), and the Investment Company Act of 1940, as amended, Registrant certifies that it meets all of the requirements for the effectiveness of this Post-Effective
Amendment No. 103 to Registrant’s Registration Statement on Form N-1A pursuant to Rule 485(b) under the 1933 Act and has duly caused this Post-Effective Amendment No. 103 to be signed on its behalf by the undersigned, thereto duly authorized,
in the City of Washington in the District of Columbia, on the 16th day of May, 2016.
| THE CHARLES SCHWAB FAMILY OF FUNDS |
| Registrant |
| Marie A. Chandoha* |
| Marie A. Chandoha, President and Chief Executive Officer |
Pursuant to the
requirements of the 1933 Act, this Post-Effective Amendment No. 103 to Registrant’s Registration Statement on Form N-1A has been signed below by the following persons in the capacities indicated this 16th day of May, 2016.
| Signature | Title | |
|
Walter
W. Bettinger II*
Walter W. Bettinger II |
Chairman and Trustee | |
|
Marie
A. Chandoha*
Marie A. Chandoha |
Trustee, President and Chief Executive Officer | |
|
Joseph
R. Martinetto*
Joseph R. Martinetto |
Trustee | |
|
Robert
W. Burns*
Robert W. Burns |
Trustee | |
|
John
F. Cogan*
John F. Cogan |
Trustee | |
|
Stephen
Timothy Kochis*
Stephen Timothy Kochis |
Trustee | |
|
David
L. Mahoney*
David L. Mahoney |
Trustee | |
|
Kiran
M. Patel*
Kiran M. Patel |
Trustee | |
|
Kimberly
S. Patmore*
Kimberly S. Patmore |
Trustee | |
|
Charles
A. Ruffel*
Charles A. Ruffel |
Trustee | |
|
Gerald
B. Smith*
Gerald B. Smith |
Trustee | |
|
Joseph
H. Wender*
Joseph H. Wender |
Trustee |
| Signature | Title | |
|
Mark
D. Fischer*
Mark D. Fischer |
Treasurer and Chief Financial Officer |
| *By: |
/s/
Douglas P. Dick
Douglas P. Dick, Attorney-in-Fact Pursuant to Power of Attorney |
Table of Contents
EXHIBIT INDEX
| (d)(v) | Schedule A, dated as of May 16, 2016, to the Investment Advisory and Administration Agreement between Registrant and the Investment Adviser, dated June 15, 1994 |
| (d)(viii) | Schedule D, dated as of May 16, 2016, to the Investment Advisory and Administration Agreement between Registrant and the Investment Adviser, dated June 15, 1994 |
| (d)(ix) | Letter of Agreement between Registrant, the Investment Adviser and Charles Schwab & Co., Inc. (Schwab), dated May 16, 2016 |
| (e)(ii) | Amended Schedule A, dated May 16, 2016, to the Distribution Agreement between Registrant and Schwab, dated July 1, 2009 |
| (g)(ii) | Amended Appendix A, dated May 16, 2016, to the Amended and Restated Master Custodian Agreement between Registrant and State Street Bank and Trust Company, dated October 17, 2005 |
| (h)(ii) | Amended Schedule A, dated May 16, 2016, to the Transfer Agency and Service Agreement between Registrant and Boston Financial Data Services, Inc., dated July 1, 2009 |
| (h)(vii) | Amended Schedule A, dated May 16, 2016, to the Master Fund Accounting and Services Agreement between Registrant and State Street Bank and Trust Company, dated October 1, 2005 |
| (i) | Opinion and Consent of Counsel |
