As filed with the Securities and Exchange Commission on April 27, 2017
Securities Act of 1933 Registration No. 333-132400
Investment Company Act of 1940 Registration No. 811-21866
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 |
||||
Pre-Effective Amendment No. | ||||
Post-Effective Amendment No. 81 | ☒ | |||
and/or | ||||
REGISTRATION STATEMENT | ||||
Under the Investment Company Act Of 1940 |
||||
Amendment No. 84 | ☒ |
HIGHLAND FUNDS I
(Exact Name of Registrant as Specified in Charter)
c/o Highland Capital Management Fund Advisors, L.P.
200 Crescent Court, Suite 700
Dallas, Texas 75201
(Address of Principal Executive Offices, including Zip Code)
Registrants Telephone Number, Including Area Code: 1-877-665-1287
(Name and Address of Agent for Service) | Copies to: | |
Mr. Dustin Norris c/o Highland Capital Management Fund Advisors, L.P. 200 Crescent Court, Suite 700 Dallas, Texas 75201 |
Brian McCabe Ropes & Gray LLP Prudential Tower 800 Boylston Street Boston, Massachusetts 02199-3600 |
It is proposed that this filing will become effective: (check appropriate box)
☐ | immediately upon filing pursuant to paragraph (b); or |
☒ | on April 30, 2017 pursuant to paragraph (b); or |
☐ | 60 days after filing pursuant to paragraph (a)(1); or |
☐ | on pursuant to paragraph (a)(1); or |
☐ | 75 days after filing pursuant to paragraph (a)(2); or |
☐ | on 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. |
Class A | Class C | Class Z | |
Highland Merger Arbitrage Fund | HMEAX | HMECX | HMEZX |
Class A | Class C | Class Z | |
Maximum Sales Charge (Load) Imposed On Purchases (as a % of offering price) | 5.50% | None | None |
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other Distributions (as a % of offering price) | None | None | None |
Maximum Deferred Sales Charge (Load) (as a % of the net asset value at the time of purchase or redemption, whichever is lower) | 1.00% 1 | 1.00% 2 | None |
Redemption Fee | None | None | None |
Class A | Class C | Class Z | |
Management fee | 1.20% | 1.20% | 1.20% |
Distribution and/or Service (12b-1) Fees | 0.35% | 1.00% | None |
Other Expenses | 5.61% | 5.95% | 4.84% |
Interest Payments and Commitment Fees on Borrowed Funds | 1.60% | 1.39% | 0.84% |
Dividend Expense on Short Sales | 1.14% | 1.69% | 1.14% |
Remainder of Other Expenses | 2.87% | 2.87% | 2.86% |
Acquired Fund Fees and Expenses | 0.01% | 0.01% | 0.01% |
Total Annual Fund Operating Expenses | 7.17% | 8.16% | 6.05% |
Expense Reimbursement 3 | 2.54% | 2.53% | 2.54% |
Total Annual Fund Operating Expenses After Expense Reimbursement | 4.63% | 5.63% | 3.51% |
1 | Class A Shares bought without an initial sales charge in accounts aggregating $500,000 or more at the time of purchase are subject to a 1.00% contingent deferred sales charge (“CDSC”) if the shares are sold within 18 months of purchase. |
2 | Class C Shares are subject to a 1% CDSC for redemptions of shares within one year of purchase. This CDSC does not apply to redemptions under a systematic withdrawal plan. |
3 | Highland Capital Management Fund Advisors, L.P. (”HCMFA” or the “Adviser”) has contractually agreed to limit the total annual operating expenses (exclusive of fees paid by the Fund pursuant to its distribution plan under Rule 12b-1 under the Investment Company Act of 1940, as amended (the “1940 Act”), taxes, dividend expenses on short sales, interest payments, brokerage commissions and other transaction costs, acquired fund fees and expenses, and extraordinary expenses (collectively, the “Excluded Expenses”)) of the Fund to 1.50% of average daily net assets attributable to any class of the Fund (the “Expense Cap”). The Expense Cap will continue through at least May 1, 2018 and may not be terminated prior to this date without the action or consent of the Fund’s Board of Trustees. Under the expense limitation agreement, the Adviser may recoup waived and/or reimbursed amounts with respect to the Fund within thirty-six months of the date such amounts were waived or reimbursed, provided the Fund’s total annual operating expenses, including such recoupment, do not exceed the Expense Cap in effect at the time of such waiver/reimbursement. |
1 Year | 3 Years | 5 Years | 10 Years | |
Class A | $988 | $2,319 | $3,593 | $6,543 |
Class C | ||||
if you do not sell your shares | $561 | $2,132 | $3,605 | $6,900 |
if you sold all your shares at the end of the period | $661 | $2,132 | $3,605 | $6,900 |
Class Z | $354 | $1,569 | $2,759 | $5,625 |
• | Annualized and absolute returns; |
• | Downside risk if a transaction is terminated; |
• | Proposed financing terms; |
• | Transaction size; |
• | Regulatory approvals needed; |
• | Anti-trust concerns; and |
• | Shareholder voting requirements. |
1 Year |
Since
Inception * |
|
Class Z | ||
Return Before Taxes | 8.10% | 7.40% |
Return After Taxes on Distributions | 8.10% | 7.40% |
Return After Taxes on Distributions and Sale of Fund Shares | 4.59% | 5.68% |
Return Before Taxes | ||
Class A | 1.77% | 3.94% |
Class C | 6.00% | 6.30% |
Barclays US Aggregate Bond Index (reflects no deduction for fees, expenses or taxes) | 2.65% | 0.94% |
Portfolio Managers |
Portfolio
Manager
Experience in this Fund 1 |
Title with Adviser |
James Dondero | 2 years | Portfolio Manager |
Jonathan Lamensdorf | 2 years | Portfolio Manager |
Initial Investment | $2,500 |
Subsequent Investments | $ 50 |
• | Through your Financial Intermediary |
• | By writing to Highland Funds I — Highland Merger Arbitrage Fund, PO Box 8656, Boston, Massachusetts 02266-8656, or |
• | By calling Boston Financial Data Services, Inc. at 1-877-665-1287 |
• | Investment Grade Securities. The Fund may invest in a wide variety of bonds that are rated or determined by the Adviser to be of investment grade quality of varying maturities issued by U.S. corporations and other business entities. Bonds are fixed or variable rate debt obligations, including bills, notes, debentures, money market instruments and similar instruments and securities. Bonds generally are used by corporations and other issuers to borrow money from investors for a |
variety of business purposes. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. | |
• | Below Investment Grade Securities. The Fund may invest in below investment grade securities (also known as “high-yield securities” or “junk securities”). Such securities may be fixed or variable rate obligations and are rated below investment grade (Ba/BB or lower) by a nationally recognized statistical rating organization or are unrated but deemed by the Adviser to be of comparable quality. High-yield debt securities are frequently issued by corporations in the growth stage of their development, but also may be issued by established companies. These bonds are regarded by the rating organizations, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. Such securities also are generally considered to be subject to greater risk than securities with higher ratings with regard to default rates and deterioration of general economic conditions. High-yield securities held by the Fund may include securities received as a result of a corporate reorganization or issued as part of a corporate takeover. |
Method | Instructions |
Through your Financial Advisor | Your Financial Advisor can help you establish your account and buy shares on your behalf. To receive the current trading day’s price, your Financial Advisor must receive your request in good order prior to the close of regular trading on the NYSE, usually 4:00 p.m., Eastern time. Your Financial Advisor may charge you fees for executing the purchase for you. |
By check (new account) (1) | For new accounts, send to the applicable Fund, at the address noted below, (2) a completed application and check made payable to “Highland Funds I — (Fund Name).” All purchases must be in U.S. Dollars and must be drawn on a U.S. bank. Highland Funds I does not accept cash, U.S. savings bonds, traveler’s checks, money orders, California warrant checks, starter checks, third-party checks, or credit card courtesy checks. Checks dated six months old or older and post-dated checks will not be accepted. |
By check (existing account) (1) | For existing accounts, fill out and return to the applicable Fund, at the address noted below, (2) the additional investment stub included in your account statement, or send a letter of instruction, including the applicable Fund name and account number, with a check made payable to “Highland Funds I — (Fund Name).” All purchases must be in U.S. Dollars and must be drawn on a U.S. bank. Highland Funds I does not accept cash, U.S. savings bonds, traveler’s checks, money orders, California warrant checks, starter checks, third-party checks, or credit card courtesy checks. Checks dated six months old or older and post-dated checks will not be accepted. |
By exchange | You or your Financial Advisor may acquire shares of a Fund for your account by exchanging shares you own in certain other funds advised by HCMFA for shares of the same class of a Fund, subject to the conditions described in “Exchange of Shares” below. In addition, you or your Financial Advisor may exchange shares of a class of a Fund you own for shares of a different class of the same Fund, subject to the conditions described in “Exchange of Shares” below. To exchange, send written instructions to the applicable Fund, at the address noted below (2) or call 1-877-665-1287. |
By wire | You may purchase shares of a Fund by wiring money from your bank account to your Fund account. Prior to sending wire transfers, please contact Shareholder Services at 1-877-665-1287 for specific wiring instructions and to facilitate prompt and accurate credit upon receipt of your wire. You can also find the specific wiring instructions at http://highlandfunds.com/literature/#forms. |
To receive the current trading day’s price, your wire, along with a valid account number, must be received in your Fund account prior to the close of regular trading on the NYSE, usually 4:00 p.m., Eastern time. |
Method | Instructions |
If your initial purchase of shares is by wire, you must first complete a new account application and promptly mail it to Highland Funds I — (Fund Name), at the address noted below. (2) After completing a new account application, please call 1-877-665-1287 to obtain your account number. Please include your account number on the wire. | |
By electronic funds transfer via an automated clearing house (“ACH”) transaction (1) | You may purchase shares of a Fund by electronically transferring money from your bank account to your Fund account by calling 1-877-665-1287. An electronic funds transfer may take up to two business days to settle and be considered in good order. You must set up this feature prior to your telephone request. Be sure to complete the appropriate section of the application. |
Automatic investment plan | You may make monthly or quarterly investments automatically from your bank account to your Fund account. You may select a pre-authorized amount to be sent via electronic funds transfer. For this feature, please call the applicable Fund at 1-877-665-1287 or visit the Funds’ website, (http://highlandfunds.com/literature/#forms), where you may obtain a copy of the “Account Options Form.” |
(1) | The redemption of shares purchased by check or an automated clearing house (“ACH”) transaction is subject to certain limitations (see “Redemption of Shares”). Any purchase by check or ACH transaction that does not clear may be cancelled, and the investor will be responsible for any associated expenses and losses to the applicable Fund. |
(2) | Regular Mail: Send to “Highland Funds I — (Fund Name),” PO Box 8656, Boston, MA 02266-8656. Overnight Mail: Send to “Highland Funds I — (Fund Name),” 30 Dan Road, Suite #8656, Canton, MA 02021-2809. |
Initial Investment | $2,500 |
Subsequent Investments | $ 50 |
Automatic Investment Plan** | $ 50 |
* | For retirement plans, the investment minimum is $50 for each of the initial investment, subsequent investments and the automatic investment plan. |
** | Your account must already be established and satisfy the initial investment minimum. |
Sales Charge | |||
Amount Invested | As a % of the Public Offering Price | As a % of Your Net Investment | % of Offering Price Paid to Financial Advisor |
Less than $50,000 | 5.50% | 5.82% | 4.75% |
$50,000 to $99,999 | 4.25% | 4.44% | 3.75% |
$100,000 to $249,999 | 3.25% | 3.36% | 2.75% |
$250,000 to $499,999 | 2.25% | 2.30% | 1.75% |
$500,000 or more** | None | None | *** |
* | Information on sales charges for Class A Shares of the Highland Long/Short Equity Fund, the Highland Long/Short Healthcare Fund, the Highland Opportunistic Credit Fund and the Highland Floating Rate Opportunities Fund are provided in the applicable Fund’s prospectus. |
** | Class A Shares bought without an initial sales charge in accounts aggregating $500,000 or more at the time of purchase are subject to a 1.00% CDSC if the shares are sold within 18 months of purchase. Subsequent Class A Share purchases that bring your account value above $500,000 are not subject to a front-end sales charge, but are subject to a CDSC if redeemed within 18 months of purchase. The 18-month period begins on the day the purchase is made. The CDSC does not apply to load waived shares purchased for certain retirement plans or other eligible fee-based programs. |
*** | For Class A Share purchases of $500,000 or more, Financial Advisors receive a cumulative commission from the Underwriter as follows: |
Amount Purchased | % Offering Price Paid to Financial Advisor |
Less than $5 million | 1.00% |
$5 million to less than $25 million | 0.40% |
$25 million or more | 0.25% |
• | Clients of broker-dealers or registered investment advisers that both recommend the purchase of Fund shares and charge clients an asset-based fee; |
• | A retirement plan (or the custodian for such plan) with aggregate plan assets of at least $5 million at the time of purchase and that purchases shares directly from the Fund or through a third party broker-dealer; |
• | Any insurance company, trust company or bank purchasing shares for its own account; |
• | Any endowment, investment company or foundation; and |
• | Any trustee of the Fund, any employee of HCMFA and any family member of any such trustee or employee. |
Highland Merger Arbitrage Fund | ||
Distribution Fee | Service Fee | |
Class A | 0.10% | 0.25% |
Class C | 0.75% | 0.25% |
Class Z | None | None |
Method | Instructions |
By letter | You may mail a letter requesting redemption of shares to: “Highland Funds I – (Fund Name),” P.O. Box 8656, Boston, Massachusetts 02266-8656. Your letter should state the name of the Fund, the share class, the dollar amount or number of shares you are redeeming and your account number. You must sign the letter in exactly the same way the account is registered. If there is more than one owner of shares, all must sign. A Medallion signature guarantee is required for each signature on your redemption letter. You can obtain a Medallion signature guarantee from financial institutions, such as commercial banks, brokers, dealers and savings associations. A notary public cannot provide a Medallion signature guarantee. If the account is registered to a corporation, trust or other entity, additional documentation may be needed. Please call 1-877-665-1287 for further details. |
By telephone or internet | Unless you have requested that telephone redemptions from your account not be permitted, you may redeem your shares in an account (excluding an IRA) directly registered with the Transfer Agent by calling 1-877-665-1287. If the Transfer Agent acts on telephone or Internet instructions after following reasonable procedures to protect against unauthorized transactions, neither the Transfer Agent nor the Fund will be responsible for any losses due to unauthorized telephone transactions and instead you would be responsible. You may request that proceeds from telephone redemptions be mailed to you by check (if your address has not changed in the prior 30 days) or forwarded to you by bank wire. If you would like to request that such proceeds be invested in shares of other Highland funds or other registered, open-end investment companies advised by the Adviser and distributed by the Underwriters, please see “Exchange of Shares” below. Among the procedures the Transfer Agent may use are passwords or verification of personal information. The Fund may impose limitations from time to time on telephone redemptions. |
Proceeds by check | The Fund will make checks payable to the name(s) in which the account is registered and normally will mail the check to the address of record within seven days. |
Proceeds by bank wire | The Fund accepts telephone or Internet requests for wire redemption in amounts of at least $1,000. The Fund will send a wire to either a bank designated on your new account application or on a subsequent letter in good order as described above under the instructions for redeeming shares “By letter.” The proceeds are normally wired on the next business day. |
• | Portfolio securities for which market quotations are readily available are valued at their current market value. |
• | Foreign securities listed on foreign exchanges are valued based on quotations from the primary market in which they are traded and are translated from the local currency into U.S. dollars using current exchange rates. Foreign securities may trade on weekends or other days when the Fund does not calculate NAV. As a result, the market value of these investments may change on days when you cannot buy or redeem shares of the Fund. |
• | Investments by the Fund in any other mutual fund are valued at their respective NAVs as determined by those mutual funds each business day. The prospectuses for those mutual funds explain the circumstances under which those funds will use fair value pricing and the effects of using fair value pricing. |
• | All other portfolio securities, including derivatives and cases where market quotations are not readily available, |
or when the market price is determined to be unreliable, are valued at fair value as determined in good faith pursuant to procedures established by the Board subject to approval or ratification by the Board at its next regularly scheduled quarterly meeting. Pursuant to the Fund’s pricing procedures, securities for which market quotations are not readily available or for which the market price is determined to be unreliable, may include, but are not limited to, securities that are subject to legal or contractual restrictions on resale, securities for which no or limited trading activity has occurred for a period of time, or securities that are otherwise deemed to be illiquid ( i.e. , securities that cannot be disposed of within seven days at approximately the price at which the security is currently priced by the Fund which holds the security). Market quotations may also be not “readily available” if a significant event occurs after the close of the principal exchange on which a portfolio security trades (but before the time for calculation of the Fund’s NAV) if that event affects or is likely to affect (more than minimally) the NAV per share of the Fund. In determining the fair value price of a security, HCMFA may use a number of other methodologies, including those based on discounted cash flows, multiples, recovery rates, yield to maturity or discounts to public comparables. | |
• | Fair value pricing involves judgments that are inherently subjective and inexact; as a result, there can be no assurance that fair value pricing will reflect actual market value, and it is possible that the fair value determined for a security will be materially different from the value that actually could be or is realized upon the sale of that asset. |
Fund | Distribution Schedule |
Merger Arbitrage Fund |
•
Dividends of investment income are typically declared and paid at least annually.
• Dividends of short-term and long-term capital gains, if any, are typically declared and paid annually. |
For
the
Period Ended December 31, 2016 (a) |
|
Net Asset Value, Beginning of Period | $20.00 |
Income from Investment Operations: | |
Net investment loss (b) | (0.22) |
Net realized and unrealized gain | 0.75 |
Total from investment operations | 0.53 |
Less Distributions Declared to Shareholders: | |
From net realized gains (c) | — |
Total distributions declared to shareholders (c) | — |
Net Asset Value, End of Period (d) | $20.53 |
Total return (d)(e)(f) | 2.66% |
Ratios to Average Net Assets (g) /Supplemental Data: | |
Net assets, end of period (in 000’s) | $ 121 |
Gross operating expenses (h) | 7.16% |
Net investment loss | (3.00)% |
Portfolio turnover rate (f) | 718% |
(a) | Class commenced operations on August 19, 2016. |
(b) | Net investment income per share is based on average shares outstanding during the period. |
(c) | Represents less than $0.005 per share. |
(d) | The Net Asset Value per share and total return have been calculated based on net assets which include adjustments made in accordance with U.S. Generally Accepted Accounting Principles required at period end for financial reporting purposes. These figures do not necessarily reflect the Net Asset Value per share or total return experienced by the shareholder at period end. |
(e) | Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. |
(f) | Not annualized. |
(g) | All ratios for the period have been annualized, unless otherwise indicated. |
(h) | Supplemental expense ratios are shown below: |
For
the
Period Ended December 31, 2016 |
||
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses) | 4.62% | |
Interest expense | 1.60% | |
Dividends and fees on securities sold short | 1.14% |
For
the
Period Ended December 31, 2016 (a) |
|
Net Asset Value, Beginning of Period | $20.00 |
Income from Investment Operations: | |
Net investment loss (b) | (0.28) |
Net realized and unrealized gain | 0.76 |
Total from investment operations | 0.48 |
Less Distributions Declared to Shareholders: | |
From net realized gains (c) | — |
Total distributions declared to shareholders (c) | — |
Net Asset Value, End of Period (d) | $20.48 |
Total Return (d)(e)(f) | 2.41% |
Ratios to Average Net Assets (g) /Supplemental Data: | |
Net assets, end of period (in 000’s) | $ 96 |
Gross operating expenses (h) | 8.15% |
Net investment loss | (3.93)% |
Portfolio turnover rate (f) | 718% |
(a) | Class commenced operations on August 19, 2016. |
(b) | Net investment income per share is based on average shares outstanding during the period. |
(c) | Represents less than $0.005 per share. |
(d) | The Net Asset Value per share and total return have been calculated based on net assets which include adjustments made in accordance with U.S. Generally Accepted Accounting Principles required at period end for financial reporting purposes. These figures do not necessarily reflect the Net Asset Value per share or total return experienced by the shareholder at period end. |
(e) | Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. |
(f) | Not annualized. |
(g) | All ratios for the period have been annualized, unless otherwise indicated. |
(h) | Supplemental expense ratios are shown below: |
For
the
Period Ended December 31, 2016 |
||
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses) | 5.62% | |
Interest expense | 1.39% | |
Dividends and fees on securities sold short | 1.69% |
For
the
Period Ended December 31, 2016 (a) |
|
Net Asset Value, Beginning of Period | $ 20.05 |
Income from Investment Operations: | |
Net investment loss (b) | (0.12) |
Net realized and unrealized gain | 0.67 |
Total from investment operations | 0.55 |
Less Distributions Declared to Shareholders: | |
From net investment income (c) | — |
From net realized gains (c) | — |
Total distributions declared to shareholders (c) | — |
Net Asset Value, End of Period (d) | $ 20.60 |
Total Return (d)(e)(f) | 2.76% |
Ratios to Average Net Assets (g) /Supplemental Data: | |
Net assets, end of period (in 000’s) | $22,393 |
Gross operating expenses (h) | 6.04% |
Net investment loss | (1.68)% |
Portfolio turnover rate (f) | 718% |
(a) | Class commenced operations on August 19, 2016. |
(b) | Net investment income per share is based on average shares outstanding during the period. |
(c) | Represents less than $0.005 per share. |
(d) | The Net Asset Value per share and total return have been calculated based on net assets which include adjustments made in accordance with U.S. Generally Accepted Accounting Principles required at period end for financial reporting purposes. These figures do not necessarily reflect the Net Asset Value per share or total return experienced by the shareholder at period end. |
(e) | Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. |
(f) | Not annualized. |
(g) | All ratios for the period have been annualized, unless otherwise indicated. |
(h) | Supplemental expense ratios are shown below: |
For
the
Period Ended December 31, 2016 |
||
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses) | 3.50% | |
Interest expense | 0.84% | |
Dividends and fees on securities sold short | 1.14% |
Appendix
Intermediary Sales Charge Discounts and Waivers
As described in the Prospectus, Class A and Class T Shares of the Fund are subject to an initial sales charge and Class C Shares are subject to a contingent deferred sales charge (CDSC). Class A and Class T shares purchased through certain financial intermediaries may be subject to different initial sales charges or the initial sales charge or CDSC may be waived in certain circumstances. This Appendix details the variations in sales charge waivers for Class A and Class T shares purchased through certain specified financial intermediaries.
You should consult your financial representative for assistance in determining whether you may qualify for a particular sales charge waiver or discount.
The information in this Appendix is part of, and incorporated in, the Funds Prospectus.
Front-End Sales Charge Schedule for Class T Shares
(Morgan Stanley, Wells Fargo and RBC)
Front-End Sales Charge |
Maximum Dealers
Reallowance |
|||||
Your Investment |
(As a % of
Purchase Price) |
(As a % of Your
Net Investment ) |
(As a % of
Purchase Price) |
|||
Less than $250,000 |
2.50% | 2.56% | 2.50% | |||
$250,000 but less than $500,000 |
2.00% | 2.04% | 2.00% | |||
$500,000 but less than $1,000,000 |
1.50% | 1.52% | 1.50% | |||
$1,000,000 or more |
1.00% | 1.01% | 1.00% |
1
Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch):
Effective April 10, 2017, if you purchase Fund shares through a Merrill Lynch platform or account held at Merrill Lynch, you will be eligible only for the following sales charge waivers (front-end sales charge waivers and CDSC waivers) and discounts, which may differ from those disclosed elsewhere in this Funds Prospectus or SAI. It is your responsibility to notify your financial representative at the time of purchase of any relationship or other facts qualifying you for sales charge waivers or discounts.
Front-End Sales Charge Waivers on Class A Shares available at Merrill Lynch
| Employer-sponsored retirement, deferred compensation and employee benefit plans (including health savings accounts) and trusts used to fund those plans, provided that the shares are not held in a commission-based brokerage account and shares are held for the benefit of the plan |
| Shares purchased by or through a 529 Plan |
| Shares purchased through a Merrill Lynch affiliated investment advisory program |
| Shares purchased by third party investment advisors on behalf of their advisory clients through Merrill Lynchs platform |
| Shares of funds purchased through the Merrill Edge Self-Directed platform (if applicable) |
| Shares purchased through reinvestment of capital gains distributions and dividend reinvestment when purchasing shares of the same fund (but not any other fund within the fund family) |
| Shares exchanged from Class C ( i.e. level-load) shares of the same fund in the month of or following the 10-year anniversary of the purchase date |
| Employees and registered representatives of Merrill Lynch or its affiliates and their family members |
| Directors or Trustees of the Fund, and employees of the Funds investment adviser or any of its affiliates, as described in the this Prospectus |
| Shares purchased from the proceeds of redemptions within the same fund family, provided (1) the repurchase occurs within 90 days following the redemption, (2) the redemption and purchase occur in the same account, and (3) redeemed shares were subject to a front-end or deferred sales charge (known as Rights of Reinstatement) |
CDSC Waivers on Class A and C Shares available at Merrill Lynch
| Death or disability of the shareholder |
| Shares sold as part of a systematic withdrawal plan as described in the Funds Prospectus |
| Return of excess contributions from an IRA Account |
| Shares sold as part of a required minimum distribution for IRA and retirement accounts due to the shareholder reaching age 70 1 ⁄ 2 |
| Shares sold to pay Merrill Lynch fees but only if the transaction is initiated by Merrill Lynch |
2
| Shares acquired through a right of reinstatement |
| Shares held in retirement brokerage accounts, that are exchanged for a lower cost share class due to transfer to certain fee based account or platform (applicable to A and C shares only) |
Front-End Sales Charge Discounts Available at Merrill Lynch: Breakpoints, Rights of Accumulation & Letters of Intent (All share classes other than Class T Shares)
| Breakpoints as described in this Prospectus. |
| Rights of Accumulation (ROA) which entitle shareholders to sales charge discounts will be automatically calculated based on the aggregated holding of fund family assets held by accounts within the purchasers household at Merrill Lynch. Eligible fund family assets not held at Merrill Lynch may be included in the ROA calculation only if the shareholder notifies his or her financial advisor about such assets |
| Letters of Intent (LOI) which allow for sales charge discounts based on anticipated purchases within a fund family, through Merrill Lynch, over a 13-month period of time (if applicable) |
Morgan Stanley Wealth Management
Class T Sales Charge Waivers
Class T shares are available for purchase by Morgan Stanley Wealth Management clients with the front-end sales charge waived as follows:
| Employer-sponsored retirement plans (e.g., 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit sharing and money purchase pension plans and defined benefit plans). For purposes of this provision, employer-sponsored retirement plans do not include SEP IRAs, Simple IRAs, SAR-SEPs or Keogh plans; however these plans are eligible to purchase Class T shares through a transactional brokerage account. |
| Morgan Stanley Wealth Management employee and employee-related accounts according to Morgan Stanleys account linking rules. |
| Shares purchased through reinvestment of dividends and capital gains distributions when purchasing shares of the same fund. |
| Mutual fund shares exchanged from an existing position in the same fund as part of a share class conversion instituted by Morgan Stanley Wealth Management. |
Unless specifically described above, no other front-end sales charge waivers are available to mutual fund purchases by Morgan Stanley Wealth Management clients in transactional brokerage accounts.
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HIGHLAND FUNDS I
STATEMENT OF ADDITIONAL INFORMATION
April 30, 2017
200 Crescent Court, Suite 700,
Dallas, Texas 75201
For information, call 1-877-665-1287
HIGHLAND FLOATING RATE OPPORTUNITIES FUND
Class/Ticker: A/HFRAX, C/HFRCX, Z/HFRZX
HIGHLAND LONG/SHORT EQUITY FUND
Class/Ticker: A/HEOAX, C/HEOCX, Z/HEOZX
HIGHLAND LONG/SHORT HEALTHCARE FUND
Class/Ticker: A/HHCAX, C/HHCCX, Z/HHCZX
HIGHLAND MERGER ARBITRAGE FUND
Class/Ticker: A/HMEAX, C/HMECX, Z/HMEZX
HIGHLAND OPPORTUNISTIC CREDIT FUND
Class/Ticker: A/HNRAX, C/HNRCX, Z/HNRZX
This Statement of Additional Information (SAI) supplements the information contained in the Statutory Prospectus of Highland Funds I (the Trust) dated April 30, 2017, as amended (the Prospectus), and should be read in conjunction with the Prospectus. The Trust is an open-end management investment company issuing shares in six separate publicly offered series, five of which are described herein. This SAI, although not a Prospectus, is incorporated in its entirety by reference into the Prospectus. Copies of the Prospectus describing each series of the Trust described above (each a Fund and collectively the Funds or Highland Funds) may be obtained without charge by calling the Trust at the telephone number listed above.
On May 12, 2016, Highland Merger Arbitrage Fund acquired the assets of Highland Merger Arbitrage Fund, L.P., a Delaware limited partnership (the Merger Arbitrage Predecessor Fund). Highland Merger Arbitrage Fund is the successor to the performance information of the Merger Arbitrage Predecessor Fund.
On July 1, 2014, Highland Opportunistic Credit Fund acquired the assets of Highland Special Situations Fund, a Delaware statutory trust and closed-end fund (the HSSF Predecessor Fund). Highland Opportunistic Credit Fund is the successor to the accounting and performance information of the HSSF Predecessor Fund.
The Highland Floating Rate Opportunities Funds, Highland Long/Short Equity Funds, Highland Long/Short Healthcare Funds and Highland Opportunistic Credit Funds financial statements and notes thereto and financial highlights for the fiscal year ended June 30, 2016, including the independent registered public accounting firms report thereon, are incorporated by reference from the Funds Annual Report and have been so incorporated in reliance upon the report of the independent registered public accounting firm, given on its authority as an expert in auditing and accounting. No other parts of the Funds Annual Report or Semi-Annual Report are incorporated by reference.
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The Highland Merger Arbitrage Funds financial statements and notes thereto and financial highlights for the fiscal period ended December 31, 2016, including the independent registered public accounting firms report thereon, are incorporated by reference from the Funds Annual Report and have been so incorporated in reliance upon the report of the independent registered public accounting firm, given on its authority as an expert in auditing and accounting. No other parts of the Funds Annual Report or Semi-Annual Report are incorporated by reference.
For a free copy of the Funds Annual or Semi-Annual Reports, please call 1-877-665-1287. Information regarding the status of shareholder accounts may be obtained by calling the Trust at the telephone number listed above or by writing the Trust at Boston Financial Data Services Inc., P.O. Box 8656, Boston, Massachusetts, 02266-8656. Terms that are defined in the Prospectus shall have the same meanings in this SAI.
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APPENDIX B HIGHLAND CAPITAL MANAGEMENT FUND ADVISORS, L.P. PROXY VOTING POLICY |
B-1 |
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Highland Floating Rate Opportunities Fund (Floating Rate Opportunities Fund), Highland Long/Short Equity Fund (Long/Short Equity Fund), Highland Long/Short Healthcare Fund (Long/Short Healthcare Fund), Highland Opportunistic Credit Fund (Opportunistic Credit Fund) and Highland Merger Arbitrage Fund (Merger Arbitrage Fund) are each non-diversified series of Highland Funds I (the Trust), an open-end management investment company organized as a Delaware statutory trust on February 28, 2006. Floating Rate Opportunities Fund, Long/Short Equity Fund, Long/Short Healthcare Fund, Opportunistic Credit Fund and Merger Arbitrage Fund commenced investment operations on January 1, 2000 (commencement of operations of Predecessor Fund), December 5, 2006, May 5, 2008, April 12, 2005 (commencement of operations of HSSF Predecessor Fund) and January 20, 2015 (commencement of operations of Merger Arbitrage Predecessor Fund, as defined herein) respectively. Each Fund offers three classes of shares: Class A, Class C and Class Z.
Floating Rate Opportunities Fund acquired the assets and liabilities of Highland Floating Rate Advantage Fund and Highland Floating Rate Fund, each a Delaware statutory trust, on June 13, 2011 (the Reorganization). Following the Reorganization, Highland Floating Rate Advantage Fund (the Predecessor Fund) was the accounting survivor and therefore certain information for periods prior to the date of this SAI relate to the Predecessor Fund. In the Reorganization, shareholders of each of the Predecessor Fund and Highland Floating Rate Fund received Class A, Class C and Class Z Shares of the Floating Rate Opportunities Fund.
The name of the Trust was changed from Highland Funds I to Pyxis Funds I effective January 9, 2012. The name of the Trust was changed from Pyxis Funds I to Highland Funds I effective February 8, 2013.
On July 1, 2014, Opportunistic Credit Fund acquired the assets of Highland Special Situations Fund, a Delaware statutory trust and closed-end fund (the HSSF Predecessor Fund). Opportunistic Credit Fund is the successor to the accounting and performance information of the HSSF Predecessor Fund.
Merger Arbitrage Fund acquired the assets and liabilities of Highland Merger Arbitrage Fund, L.P. a Delaware limited partnership (the Merger Arbitrage Predecessor Fund), on May 12, 2016 (the Merger Arbitrage Reorganization). Following the Merger Arbitrage Reorganization, the Merger Arbitrage Predecessor Fund was the performance survivor and therefore certain information for periods prior to the date of this SAI relate to the Merger Arbitrage Predecessor Fund. In the Reorganization, shareholders of the Merger Arbitrage Predecessor Fund received Class Z Shares of the Merger Arbitrage Fund.
DESCRIPTION OF NON-PRINCIPAL INVESTMENTS AND RISK FACTORS
The principal investment objective or objectives of each Fund are not fundamental and can be changed without the approval of a majority of the outstanding voting shares of beneficial interest of that Fund. Certain investment restrictions are fundamental and cannot be changed without shareholder approval. In contrast, certain other investment restrictions, as well as the investment policies, of each Fund are not fundamental and may be changed by the Trusts Board of Trustees (the Board) without shareholder approval.
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There can be no assurance that any of the Funds will achieve their investment objective or objectives. Investors should not consider any one Fund alone to be a complete investment program. All of the Funds are subject to the risk of changing economic conditions, as well as the risk inherent in the ability of the portfolio manager to make changes in the composition of the Fund in anticipation of changes in economic, business and financial conditions. As with any security, a risk of loss is inherent in an investment in the shares of any of the Funds. The securities, investments, and investment practices used by each Fund all have attendant risks of varying degrees. For example, with respect to equity securities, there can be no assurance of capital appreciation and there is a substantial risk of decline. With respect to debt securities, there exists the risk that the issuer of a security may not be able to meet its obligations on interest or principal payments at the time required by the instrument. In addition, the value of debt instruments generally rise and fall inversely with prevailing current interest rates. As described below, an investment in certain of the Funds entails special additional risks as a result of their ability to invest a substantial portion of their assets in foreign securities.
In addition to the investment strategies implemented by the portfolio managers of the Funds described in the Prospectus and herein, the portfolio managers of certain Funds may also give trading desk personnel of the Adviser general authorization to enter into a limited amount of short-term trades (purchases expected to be sold within 15 business days) in debt instruments on behalf of such Funds. Over time, it is expected that these trades will not exceed 2% of each such Funds assets.
Supplemental information concerning certain of the securities and other instruments in which the Funds may invest, the investment policies and strategies that the Funds may utilize and certain risks attendant to those investments, policies and strategies is provided below. The following is a combined description of investment strategies and risks for the Funds, and certain strategies and risks described below may not apply to each Fund. Unless otherwise indicated, all Funds are permitted to engage in the following investment strategies and techniques. The Funds are not obligated to pursue the following strategies or techniques and do not represent that these strategies or techniques are available now or will be available at any time in the future. A Fund will not purchase all of the following types of securities or employ all of the following strategies unless doing so is consistent with its investment objective.
In addition to the principal investments described in the Prospectus, Highland Capital Management Fund Advisors, L.P. (formerly Pyxis Capital, L.P) (HCMFA or the Adviser), may also invest some of the Funds assets in short-term U.S. government obligations, certificates of deposit, commercial paper and other money market instruments, including repurchase agreements with respect to such obligations, to enable the Funds to make investments quickly and to serve as collateral with respect to certain of their investments. However, if the Adviser believes that a defensive position is appropriate because of expected economic or business conditions or the outlook for security prices, a greater percentage of a Funds assets may be invested in such obligations. A Fund may purchase securities on a when-issued or forward commitment basis, engage in securities lending activities, and invest up to 33 1/3% of its total assets in reverse repurchase agreements when aggregated with all other borrowings (other than temporary borrowings). Each Fund may also invest its assets (up to 20% of Long/Short Equity Funds assets and up to 100% of Floating Rate Opportunities Funds, Long/Short Healthcare Funds and Opportunistic Credit Funds assets) in high yield bonds (also known as junk bonds) which are bonds typically rated below investment grade by one or more nationally recognized statistical ratings organizations (NRSROs). NRSROs generally regard high-yield debt securities as predominately speculative with respect to ability to pay interest and repay principal and riskier than higher-rated debt securities. Appendix A contains additional information concerning the characteristics of the ratings used by certain NRSROs. From time to time, in the sole discretion of the Adviser, cash balances of the Funds may be placed in a money market fund or investments may be made in shares of other investment companies, subject to the applicable limits under the Investment Company Act of 1940, as amended (the 1940 Act).
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Limited Role in Affairs of Portfolio Companies. Although the Adviser does not take an active role in the affairs of the companies in which the Funds have positions other than voting proxies with respect to the Funds portfolio holdings, it will be the policy of each Fund to take such steps as are necessary to protect its economic interests. If the opportunity presents itself, the Adviser reserves the option for any of its investment personnel to accept a role on the board of directors of any company, regardless of whether a Fund holds any of the companys securities.
Financial Futures. The Funds are sponsored by the Adviser, which is registered as a commodity pool operator and commodity trading adviser under the Commodity Exchange Act (CEA). However, pursuant to Commodity Futures Trading Commission (the CFTC) Rule 4.5, the Adviser has claimed an exclusion from the definition of the term commodity pool operator under the CEA; therefore, the Adviser, with respect to the Funds, is not subject to registration or regulation as a commodity pool operator under the CEA. To remain eligible for the exclusion under CFTC Rule 4.5, the Funds will be limited in their ability to use certain derivative instruments regulated under the CEA (commodity interests), including futures, swaps and options on futures. In the event that a Funds investments in commodity interests exceed a certain threshold, the Adviser may be required to register as a commodity pool operator and/or commodity trading advisor with the CFTC with respect to that Fund. The Advisers eligibility to claim the exclusion with respect to a Fund will be based upon the level and scope of such Funds investment in commodity interests, the purposes of such investments and the manner in which that Fund holds out its use of commodity interests. For example, CFTC Rule 4.5 requires a fund with respect to which the sponsor is claiming the exclusion to, among other things, satisfy one of the two following trading thresholds: (i) the aggregate initial margin and premiums required to establish positions in commodity interests cannot exceed 5% of the liquidation value of the funds portfolio, after taking into account unrealized profits and unrealized losses; or (ii) the aggregate net notional value of commodity interests not used solely for bona fide hedging purposes, determined at the time the most recent position was established, cannot generally exceed 100% of the liquidation value of the funds portfolio, after taking into account unrealized profits and unrealized losses on any such positions it has entered into. In the event a Fund becomes unable to rely on the exclusion in Rule 4.5 and the Adviser is required to register with the CFTC as a commodity pool operator with respect to that Fund, the Funds expenses may increase.
The CFTC and certain futures exchanges have established limits, referred to as position limits, on the maximum net long or net short positions which any person may hold or control in particular options and futures contracts; those position limits may in the future also apply to certain other derivatives positions a Fund may wish to take. All positions owned or controlled by the same person or entity, even if in different accounts, may in the future be aggregated for purposes of determining whether the applicable position limits have been exceeded. Thus, even if a Fund does not intend to exceed applicable position limits, it is possible that different clients managed by the Adviser and its affiliates may be aggregated for this purpose. Therefore, it is possible that in the future the trading decisions of the Adviser may have to be modified and that positions held by a Fund may have to be liquidated in order to avoid exceeding such limits. The modification of investment decisions or the elimination of open positions, if it occurs, may adversely affect the performance of a Fund.
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Fixed-Income and Other Debt Securities
Fixed-income and other debt instrument securities include all bonds, high yield or junk bonds, municipal bonds, debentures, U.S. Government securities, mortgage-related securities, zero coupon securities and custodial receipts. The market value of fixed-income obligations of a Fund will be affected by general changes in interest rates, which will result in increases or decreases in the value of the obligations held by a Fund. The market value of the fixed-income obligations held by a Fund can be expected to vary inversely to changes in prevailing interest rates. As a result, shareholders should anticipate that the market value of the fixed-income obligations held by a Fund generally will increase when prevailing interest rates are declining and generally will decrease when prevailing interest rates are rising. Shareholders also should recognize that, in periods of declining interest rates, a Funds yield will tend to be somewhat higher than prevailing market rates and, in periods of rising interest rates, a Funds yield will tend to be somewhat lower. Also, when interest rates are falling, the inflow of net new money to a Fund from the continuous sale of its shares will tend to be invested in instruments producing lower yields than the balance of its portfolio, thereby reducing a Funds current yield. In periods of rising interest rates, the opposite can be expected to occur. In addition, securities in which a Fund may invest may not yield as high a level of current income as might be achieved by investing in securities with less liquidity, less creditworthiness or longer maturities.
Ratings made available by NRSROs are relative and subjective and are not absolute standards of quality. Although these ratings are initial criteria for selection of portfolio investments, the Adviser also will make its own evaluation of these securities. Among the factors that will be considered are the long-term ability of the issuers to pay principal and interest and general economic trends.
Fixed-income securities may be purchased on a when-issued or delayed-delivery basis. See When-Issued Securities and Forward Commitments below.
Commercial Paper. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender pursuant to which the lender may determine to invest varying amounts.
Medium-, Lower-Rated and Unrated Securities . Securities rated in the fourth highest category by a NRSRO, although considered investment grade, may possess speculative characteristics, and changes in economic or other conditions are more likely to impair the ability of issuers of these securities to make interest and principal payments than is the case with respect to issuers of higher grade bonds.
Generally, medium- or lower-rated securities and unrated securities of comparable quality, sometimes referred to as junk bonds, offer a higher current yield than is offered by higher rated securities, but also (i) will likely have some quality and protective characteristics that, in the judgment of the rating organizations, are outweighed by large uncertainties or major risk exposures to adverse conditions and (ii) are predominantly speculative with respect to the issuers capacity to pay interest and repay principal in accordance with the terms of the obligation. The yield of junk bonds will fluctuate over time.
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The market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher quality bonds. In addition, medium- and lower-rated securities and comparable unrated securities generally present a higher degree of credit risk. The risk of loss due to default by these issuers is significantly greater because medium- and lower-rated securities, and unrated securities of comparable quality, generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. Since the risk of default is higher for lower-rated debt securities, the Advisers research and credit analysis are an especially important part of managing securities of this type held by a Fund.
In addition, the market for securities in lower-rated categories is more volatile than that for higher-rated securities, and the markets in which medium- and lower-rated or unrated securities are traded are more limited than those in which higher-rated securities are traded. The existence of limited markets may make it more difficult for the Fund to obtain accurate market quotations for purposes of valuing its portfolio and calculating its net asset value. Moreover, the lack of a liquid trading market may restrict the availability of securities for a Fund to purchase and may also have the effect of limiting the ability of a Fund to sell securities at their fair value either to meet redemption requests or to respond to changes in the economy or the financial markets.
Lower-rated debt obligations also present risks based on payment expectations. If an issuer calls the obligation for redemption, a Fund may have to replace the security with a lower yielding security, resulting in a decreased return for shareholders. Also, as the principal value of bonds moves inversely with movements in interest rates, in the event of rising interest rates the value of the securities held by a Fund may decline relatively proportionately more than a portfolio consisting of higher rated securities. If a Fund experiences unexpected net redemptions, it may be forced to sell its higher rated bonds, resulting in a decline in the overall credit quality of the securities held by a Fund and increasing the exposure of a Fund to the risks of lower rated securities. Investments in zero coupon bonds may be more speculative and subject to greater fluctuations in value due to changes in interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Fund, an issue of securities may cease to be rated or its rating may be reduced. Neither event will require sale of these securities by the Fund, but the Adviser will consider this event in its determination of whether a Fund should continue to hold the securities.
The market for lower-rated debt securities may be thinner and less active than that for higher rated debt securities, which can adversely affect the prices at which the former are sold. If market quotations are not available, lower-rated debt securities will be valued in accordance with procedures established by the Board, including the use of outside pricing services. Judgment plays a greater role in valuing high yield corporate debt securities than is the case for securities for which more external sources for quotations and last sale information is available. Adverse publicity and changing investor perception may affect the ability of outside pricing services to value lower-rated debt securities and the ability to dispose of these securities.
In considering investments for a Fund, the Adviser will attempt to identify those issuers of high yielding debt securities whose financial condition is adequate to meet future obligations or has improved or is expected to improve in the future. The analysis of the Adviser focuses on relative values based on such factors as interest or dividend coverage, asset coverage, earnings prospects and the experience and managerial strength of the issuer.
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A Fund may choose, at its expense or in conjunction with others, to pursue litigation or otherwise exercise its rights as a security holder to seek to protect the interest of security holders if it determines this to be in the best interest of the Fund.
Investments in high-yield debt obligations or other debt obligations that are at risk of, or are in, default present special tax issues for a Fund investing in or holding such securities. See Income Tax Considerations below.
Certificates of Deposit, Bankers Acceptances and Time Deposits. Certificates of deposit are receipts issued by a depository institution in exchange for the deposit of funds. The issuer agrees to pay the amount deposited plus interest to the bearer of the receipt on the date specified on the certificate. The certificate usually can be traded in the secondary market prior to maturity. Bankers acceptances typically arise from short-term credit arrangements designed to enable businesses to obtain funds to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then accepted by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an earning asset or it may be sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be as long as 270 days, most acceptances have maturities of six months or less.
Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Investments in time deposits maturing in more than seven days will be subject to the U.S. Securities and Exchange Commissions (SEC) restrictions that limit investments in illiquid securities to no more than 15% of the value of a Funds net assets.
U.S. Government Securities. U.S. Government securities are obligations issued or guaranteed by the U.S. Government, its agencies, authorities or instrumentalities. Some U.S. Government securities, such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ only in their interest rates, maturities and times of issuance, are supported by the full faith and credit of the United States. Others are supported by: (i) the right of the issuer to borrow from the U.S. Treasury, such as securities of the Federal Home Loan Banks; (ii) the discretionary authority of the U.S. Government to purchase the agencys obligations, such as securities of the Federal National Mortgage Association or (iii) only the credit of the issuer, such as securities of the Student Loan Marketing Association. No assurance can be given that the U.S. Government will provide financial support in the future to U.S. Government agencies, authorities or instrumentalities that are not supported by the full faith and credit of the United States. To the extent a Fund invests in U.S. Government securities that are not backed by the full faith and credit of the U.S. Treasury, such investments may involve a greater risk of loss of principal and interest since a Fund must look principally or solely to the issuing or guaranteeing agency or instrumentality for repayment.
Securities guaranteed as to principal and interest by the U.S. Government, its agencies, authorities or instrumentalities include: (i) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. Government or any of its agencies, authorities or instrumentalities; and (ii) participation interests in loans made to foreign governments or other entities that are so guaranteed. The secondary market for certain of these participation interests is limited and, therefore, may be regarded as illiquid.
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U.S. Treasury Bills . U.S. Treasury Bills are issued with maturities of up to one year. Three month bills are currently offered by the Treasury on a 13-week cycle and are auctioned each week by the Treasury. Bills are issued in bearer form only and are sold only on a discount basis, and the difference between the purchase price and the maturity value (or the resale price if they are sold before maturity) constitutes the interest income for the investor.
Mortgage-Related Securities. There are several risks associated with mortgage-related securities. One is that the monthly cash inflow from the underlying loans may not be sufficient to meet the monthly payment requirements of the mortgage-related security. Prepayment of principal by mortgagors or mortgage foreclosures will shorten the term of the underlying mortgage pool for a mortgage-related security. Early returns of principal will affect the average life of the mortgage-related securities remaining in a Fund. The occurrence of mortgage prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. In periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the average life of a pool of mortgage-related securities. Conversely, in periods of falling interest rates, the rate of prepayment tends to increase, thereby shortening the average life of a pool. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield of a Fund. Because prepayments of principal generally occur when interest rates are declining, it is likely that a Fund will have to reinvest the proceeds of prepayments at lower interest rates than those at which the assets were previously invested. If this occurs, a Funds yield will correspondingly decline. Thus, mortgage-related securities may have less potential for capital appreciation in periods of falling interest rates than other fixed-income securities of comparable maturity, although these securities may have a comparable risk of decline in market value in periods of rising interest rates. To the extent that the Fund purchases mortgage-related securities at a premium, unscheduled prepayments, which are made at par, will result in a loss equal to any unamortized premium.
Collateralized Mortgage Obligations (CMOs) are obligations fully collateralized by a portfolio of mortgages or mortgage-related securities. Payments of principal and interest on the mortgages are passed through to the holders of the CMOs on the same schedule as they are received, although certain classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-related securities.
Mortgage-related securities may not be readily marketable. To the extent any of these securities are not readily marketable in the judgment of the Adviser, a Funds restrictions on investments in illiquid instruments will apply.
Zero Coupon Securities. Zero coupon U.S. Government securities are debt obligations that are issued or purchased at a significant discount from face value. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity or the particular interest payment date at a rate of interest reflecting the market rate of the security at the time of issuance. Zero coupon securities do not require the periodic payment of interest. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash. These investments may experience greater volatility in market value than U.S. Government securities that make regular payments of interest. A Fund accrues income on these investments for tax and accounting purposes, which must be distributed to shareholders
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in order to avoid taxation. Because no cash is received at the time of accrual, a Fund may be required to liquidate other portfolio securities (including when it is not advantageous to do so) to satisfy a Funds distribution obligations (see Income Tax Considerations below), in which case a Fund will forego the purchase of additional income producing assets. Zero coupon securities include Separately Traded Registered Interest and Principal Securities (STRIPS). STRIPS are securities underwritten by securities dealers or banks that evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. Government, its agencies, authorities or instrumentalities. They also include Coupons Under Book Entry Safekeeping (CUBES), which are component parts of U.S. Treasury bonds and represent scheduled interest and principal payments on the bonds.
Custodial Receipts . Custodial receipts or certificates include Certificates of Accrual on Treasury Securities (CATS), Treasury Investment Growth Receipts (TIGRs) and Financial Corporation certificates (FICO Strips). CATS, TIGRs and FICO Strips are securities underwritten by securities dealers or banks that evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. Government, its agencies, authorities or instrumentalities. The underwriters of these certificates or receipts purchase a U.S. Government security and deposit the security in an irrevocable trust or custodial account with a custodian bank, which then issues receipts or certificates that evidence ownership of the periodic unmatured coupon payments and the final principal payment on the U.S. Government security. Custodial receipts evidencing specific coupon or principal payments have the same general attributes as zero coupon U.S. Government securities, described above. Although typically under the terms of a custodial receipt a Fund is authorized to assert its rights directly against the issuer of the underlying obligation, a Fund may be required to assert through the custodian bank such rights as may exist against the underlying issuer. Thus, if the underlying issuer fails to pay principal and/or interest when due, a Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if a Fund had purchased a direct obligation of the issuer. In addition, if the trust or custodial account in which the underlying security has been deposited were determined to be an association taxable as a corporation, instead of a non-taxable entity, the yield on the underlying security would be reduced in respect of any taxes paid.
Loans and Other Direct Debt Instruments. These are instruments in amounts owed by a corporate, governmental or other borrower to another party. They may represent amounts owed to lenders or lending syndicates (loans and loan participations), to suppliers of goods or services (trade claims or other receivables) or to other parties. Direct debt instruments purchased by a Fund may have a maturity of any number of days or years, may be secured or unsecured, and may be of any credit quality. Direct debt instruments involve the risk of loss in the case of default or insolvency of the borrower. Direct debt instruments may offer less legal protection to a Fund in the event of fraud or misrepresentation. In addition, loan participations involve a risk of insolvency of the lending bank or other financial intermediary. Direct debt instruments also may include standby financing commitments that obligate a Fund to supply additional cash to the borrower on demand at a time when a Fund would not have otherwise done so, even if the borrowers condition makes it unlikely that the amount will ever be repaid.
These instruments will be considered illiquid securities and so will be limited in accordance with a Funds restrictions on illiquid securities.
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Because loans are not ordinarily registered with the SEC or any state securities commission or listed on any securities exchange, there is usually less publicly available information about such instruments. In addition, loans may not be considered securities for purposes of the anti-fraud provisions under the federal securities laws and, as a result, as a purchaser of these instruments, a Fund may not be entitled to the anti-fraud protections of the federal securities laws. In the course of investing in such instruments, a Fund may come into possession of material nonpublic information and, because of prohibitions on trading in securities of issuers while in possession of such information, the Fund may be unable to enter into a transaction in a publicly-traded security of that issuer when it would otherwise be advantageous for the Fund to do so. Alternatively, a Fund may choose not to receive material nonpublic information about an issuer of such loans, with the result that the Fund may have less information about such issuers than other investors who transact in such assets.
Illiquid Securities
Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the 1933 Act), securities that are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities that have not been registered under the 1933 Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Investment companies do not typically hold a significant amount of these restricted securities or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and an investment company might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. An investment company might also have to register such restricted securities in order to dispose of them, which would result in additional expense and delay. Adverse market conditions could impede such a public offering of securities. A Fund may not acquire any illiquid securities if, as a result thereof, more than 15% of the market value of such Funds net assets would be in investments that are illiquid or otherwise not readily marketable.
In recent years, however, a large institutional market has developed for certain securities that are not registered under the 1933 Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuers ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale of such investments to the general public or to certain institutions may not be indicative of their liquidity.
| Rule 144A Securities. The SEC has adopted Rule 144A, which allows a broader institutional trading market for securities otherwise subject to restriction on their resale to the general public. Rule 144A establishes a safe harbor from the registration requirements of the 1933 Act on resales of certain securities to qualified institutional buyers. The Adviser will monitor the liquidity of Rule 144A securities in a Funds portfolio under the oversight of the Board. In reaching liquidity decisions, the Adviser will consider, among other things, the following factors: (1) the frequency of trades and quotes for the security; (2) the number of dealers and other potential purchasers wishing to purchase or sell the security; (3) dealer undertakings to make a market in the security; and (4) the nature of the security and of the marketplace trades ( e.g. , the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer). |
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A Fund may purchase securities in the United States that are not registered for sale under federal securities laws but which can be resold to institutions under Rule 144A or under an exemption from such laws. Provided that a dealer or institutional trading market in such securities exists, these restricted securities or Rule 144A securities are treated as exempt from the Funds limit on illiquid securities. The Board, with advice and information from the Adviser will determine the liquidity of restricted securities or Rule 144A securities by looking at factors such as trading activity and the availability of reliable price information and, through reports from the Adviser, the Board will monitor trading activity in restricted securities. If institutional trading in restricted securities or Rule 144A securities were to decline, a Funds illiquidity could increase and the Fund could be adversely affected.
| Section 4(a)(2) Commercial Paper. A Fund may invest in commercial paper issued in reliance on the exemption from registration afforded by Section 4(a)(2) of the 1933 Act. Section 4(a)(2) commercial paper is restricted as to disposition under federal securities laws and is generally sold to institutional investors who agree that they are purchasing the paper for investment purposes and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. Section 4(a)(2) commercial paper is normally resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in Section 4(a)(2) commercial paper, thus providing liquidity. The Adviser believes that Section 4(a)(2) commercial paper and possibly certain other restricted securities that meet the criteria for liquidity established by the Board are quite liquid. The Funds intend therefore, to treat the restricted securities which meet the criteria for liquidity established by the Board, including Section 4(a)(2) commercial paper, as determined by the Adviser as liquid and not subject to the investment limitation applicable to illiquid securities. In addition, because Section 4(a)(2) commercial paper is liquid, the Funds do not intend to subject such paper to the limitation applicable to restricted securities. Each Fund will not invest more than 10% of its total assets in restricted securities (excluding Rule 144A securities). |
Borrowing and Lending
Borrowing. Each Fund may borrow money from banks (including their custodian bank) or from other lenders to the extent permitted under applicable law. The 1940 Act requires a Fund maintain asset coverage of at least 300% for all such borrowings, and should such asset coverage at any time fall below 300%, the Fund would be required to reduce its borrowings within three days to the extent necessary to meet the requirements of the 1940 Act. No Fund will make any borrowing that would cause its outstanding borrowings to exceed one-third of the value of its total assets. To reduce its borrowings, a Fund might be required to sell securities at a time when it would be disadvantageous to do so. In addition, because interest on money borrowed is a Fund expense that it would not otherwise incur, the Fund may have less net investment income during periods when its borrowings are substantial. The interest paid by the Fund on borrowings may be more or less than the yield on the securities purchased with borrowed funds, depending on prevailing market conditions.
Securities Loans . Each Fund may seek additional income by making secured loans of its portfolio securities through its custodian, State Street Bank and Trust Company (State Street). Such loans will be in an amount not greater than one-third of the value of the Funds total assets. State Street will charge a Fund fees based on a percentage of the securities lending income. The Funds will receive collateral consisting of cash (U.S. and foreign currency), securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, sovereign debt, convertible bonds, irrevocable bank letters of credit or such
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other collateral as may be agreed on by the parties to a securities lending arrangement, initially with a value of 102% or 105% of the market value of the loaned securities and thereafter maintained at a value of 100% of the market value of the loaned securities. If the collateral consists of non-cash collateral, the borrower will pay the Fund a loan premium fee. If the collateral consists of cash, State Street will reinvest the cash. Although voting rights, or rights to consent, with respect to the loaned securities pass to the borrower, the Fund will recall the loaned securities upon reasonable notice in order that the securities may be voted by the Fund if the holders of such securities are asked to vote upon or consent to matters materially affecting the investment. The Fund also may call such loans in order to sell the securities involved.
The risks in lending portfolio securities, as with other extensions of credit, consist of possible delays in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. A Fund also bears the risk that the value of investments made with collateral may decline. Although a Fund has the right to call loans at any time on reasonable notice and will do so if holders of a loaned security are asked to vote upon or consent to material matters, the Fund bears the risk of delay in the return of the security, impairing the Funds ability to vote on such matters.
Securities lending also exposes a Fund to counterparty risk, as the borrower of the Funds securities may be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. There can be no assurance that a counterparty will meet its obligations, especially during unusually adverse market conditions. If the counterparty defaults, the Fund will have contractual remedies, but the Fund may be unable to enforce its contractual rights.
Derivatives
Each Fund may invest in various instruments that are commonly known as derivatives to any extent deemed by the Adviser to be in the best interest of the Funds, and to the extent permitted by the 1940 Act. Generally, a derivative is a financial arrangement, the value of which is based on, or derived from, a traditional security, asset or market index. There are, in fact, many different types of derivatives and many different ways to use them. There is a range of risks associated with those uses. Futures and options are commonly used for traditional hedging purposes to attempt to protect a Fund from exposure to changing interest rates, securities prices or currency exchange rates and as a low cost method of gaining exposure to a particular securities market without investing directly in those securities. However, some derivatives are used for leverage, which tends to magnify the effects of an instruments price changes as market conditions change. Leverage involves the use of a small amount of money to control a large amount of financial assets, and can in some circumstances lead to significant losses.
In addition, the SEC recently proposed a rule under the 1940 Act regulating the use by registered investment companies of derivatives and many related instruments. That rule, if adopted as proposed, would, among other things, restrict a Funds ability to engage in derivatives transactions or so increase the cost of derivatives transactions that a Fund would be unable to implement its investment strategy.
Options. An option on a security is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option at a specified exercise or strike price.
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The Funds may write (sell) covered call and put options (covered options) on stocks, securities, futures contracts, non-physical commodities, indices and foreign currencies in an attempt to increase income. When a Fund writes a covered call option, it gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security at the price specified in the option (the exercise price) by exercising the option at any time during the option period. If the option expires unexercised, the Fund will realize income in an amount equal to the premium received for writing the option. If the option is exercised, a decision over which the Fund has no control, the Fund must sell the underlying security to the option holder at the exercise price. By writing a covered call option, a Fund foregoes, in exchange for the premium less the commission (net premium), the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price.
When a Fund writes a covered put option, it gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security to the Fund at the specified exercise price at any time during the option period. If the option expires unexercised, the Fund will realize income in the amount of the premium received for writing the option. If the put option is exercised, a decision over which the Fund has no control, the Fund must purchase the underlying security from the option holder at the exercise price. By writing a covered put option, the Fund, in exchange for the net premium received, accepts the risk of a decline in the market value of the underlying security below the exercise price.
A Fund may terminate its obligation as the writer of a call or put option by purchasing an option with the same exercise price and expiration date as the option previously written. This transaction is called a closing purchase transaction. With respect to writing covered options, the Fund will realize a profit or loss for a closing purchase transaction if the amount paid to purchase an option is less or more, as the case may be, than the amount received from the sale thereof. To close out a position as a purchaser of an option, the Fund may make a closing sale transaction which involves liquidating the Funds position by selling the option previously purchased. Where the Fund cannot effect a closing purchase transaction, it may be forced to incur brokerage commissions or dealer spreads in selling securities it receives or it may be forced to hold underlying securities until an option is exercised or expires.
When a Fund writes a call option, it will cover its obligation by owning and earmarking the underlying security or other assets on the books of the Funds custodian. When a Fund writes a put option, it will cover its obligation by earmarking assets at the Funds custodian.
A Fund may purchase call and put options on any securities in which it may invest. A Fund would normally purchase a call option in anticipation of an increase in the market value of such securities. The purchase of a call option would entitle the Fund, in exchange for the premium paid, to purchase a security at a specified price during the option period. The Fund would ordinarily have an economic gain if the value of the securities increased above the exercise price sufficiently to cover the premium and would have an economic loss if the value of the securities remained at or below the exercise price during the option period.
A Fund would normally purchase put options in anticipation of a decline in the market value of securities in its portfolio (protective puts) or securities of the type in which it is permitted to invest. The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell a security, which may or may not be held in the Funds portfolio, at a specified price during the option period. The purchase of protective puts is designed merely to offset or hedge against a decline in the market value of a Funds portfolio securities. Put options also may be purchased by the Fund for the purpose of affirmatively benefiting from a
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decline in the price of securities which the Fund does not own. Upon exercise, the Fund would ordinarily realize a gain if the value of the securities decreased below the exercise price sufficiently to cover the premium and would realize a loss if the value of the securities remained at or above the exercise price. Gains and losses on the purchase of protective put options would tend to be offset by countervailing changes in the value of underlying portfolio securities.
Options on Securities Indices . A Fund may purchase and write put and call options on securities indices listed on domestic and on foreign exchanges. Such options give the holder the right to receive a cash settlement during the term of the option based upon the difference between the exercise price and the value of the index. Options on securities indices entail risks in addition to the risks of options on securities. The absence of a liquid secondary market to close out options positions on securities indices is more likely to occur. Use of options on securities indices also entails the risk that trading in such options may be interrupted if trading in certain securities included in the index is interrupted.
Because options on securities indices require settlement in cash, the Adviser may be forced to liquidate portfolio securities to meet settlement obligations. When a Fund writes a put or call option on a securities index, it will cover the position by earmarking assets with the Funds custodian.
Options on Foreign Currencies . A Fund may write covered put and call options and purchase put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of portfolio securities and against increases in the dollar cost of securities to be acquired. For example, a decline in the dollar value of a foreign currency in which portfolio securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of portfolio securities, a Fund may purchase put options on the foreign currency. If the value of the currency does decline, a Fund will have the right to sell such currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities to be acquired are denominated is projected, thereby increasing the cost of such securities, a Fund may purchase call options thereon. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates. As in the case of other types of options, however, the benefit to a Fund derived from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Fund could sustain losses on transactions in foreign currency options that would require it to forego a portion or all of the benefits of advantageous changes in such rates.
As in the case of forward contracts, certain options on foreign currencies are traded over-the-counter and involve liquidity and credit risks that may not be present in the case of exchange-traded currency options. A Funds ability to terminate over-the-counter options (OTC Options) will be more limited than the exchange-traded options. It is also possible that broker-dealers participating in OTC Options transactions will not fulfill their obligations. Until such time as the staff of the SEC changes its position, the Funds will treat purchased OTC Options and assets used to cover written OTC Options as illiquid securities. With respect to options written with primary dealers in U.S. Government securities pursuant to an agreement requiring a closing purchase transaction at a formula price, the amount of illiquid securities may be calculated with reference to the repurchase formula.
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Forward Currency Contracts. Because, when investing in foreign securities, a Fund buys and sells securities denominated in currencies other than the U.S. dollar and receives interest, dividends and sale proceeds in currencies other than the U.S. dollar, the Fund from time to time may enter into forward currency transactions to convert to and from different foreign currencies and to convert foreign currencies to and from the U.S. dollar. The Fund either enters into these transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market or uses forward currency contracts to purchase or sell foreign currencies.
A forward currency contract is an obligation by a Fund to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract. Forward currency contracts establish an exchange rate at a future date. These contracts are transferable in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward currency contract generally has no deposit requirement and is traded at a net price without commission. The Fund earmarks liquid securities at its custodian in an amount at least equal to its obligations under each forward currency contract. Neither spot transactions nor forward currency contracts eliminate fluctuations in the prices of the Funds securities or in foreign exchange rates, or prevent loss if the prices of these securities should decline.
A Fund may enter into foreign currency hedging transactions in an attempt to protect against changes in foreign currency exchange rates between the trade and settlement dates of specific securities transactions or changes in foreign currency exchange rates that would adversely affect a portfolio position or an anticipated investment position. Although these transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of the hedged currency increase. The precise matching of the forward currency contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of such securities between the date the forward currency contract is entered into and the date it matures. The projection of currency market movements is extremely difficult, and the successful execution of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may in the future assert authority to regulate forward currency contracts. In such event a Funds ability to utilize forward currency contracts may be restricted. Forward currency contracts may reduce the potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not entered into such contracts. The use of forward currency contracts may not eliminate fluctuations in the underlying U.S. dollar equivalent value of the prices of or rates of return on the Funds foreign currency denominated portfolio securities and the use of such techniques will subject the Fund to certain risks.
The matching of the increase in value of a forward currency contract and the decline in the U.S. dollar equivalent value of the foreign currency denominated asset that is the subject of the hedge generally will not be precise. In addition, a Fund may not always be able to enter into forward currency contracts at attractive prices and this will limit the Funds ability to use such contract to hedge or cross-hedge its assets. Also, with regard to the Funds use of cross-hedges, there can be no assurance that historical correlations between the movements of certain foreign currencies relative to the U.S. dollar will continue. Thus, at any time poor
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correlation may exist between movements in the exchange rates of the foreign currencies underlying the Funds cross-hedges and the movements in the exchange rates of the foreign currencies in which the Funds assets that are the subject of such cross-hedges are denominated.
Futures Contracts and Related Options. To the extent consistent with applicable law, each Fund may invest in futures contracts on, among other things, individual equity securities, securities indices, interest rates, currencies, non-physical commodities and inflation indices. The sale of a futures contract creates an obligation by a Fund, as seller, to deliver the specific type of financial instrument called for in the contract at a specified future time for a specified price. At the time a futures contract is purchased or sold, a Fund must allocate cash or securities as a deposit payment (initial margin). It is expected that the initial margin that the Fund will pay may range from approximately 1% to approximately 5% of the value of the securities or commodities underlying the contract. In certain circumstances, however, such as periods of high volatility, a Fund may be required by an exchange to increase the level of its initial margin payment. Certain futures contracts are physically settled (i.e., involve the making and taking of delivery of a specified amount of an underlying security or other asset). Some futures contracts, however, are cash settled, which means that the purchase price is subtracted from the current market value of the instrument and the net amount, if positive, is paid to the purchaser by the seller of the futures contract and, if negative, is paid by the purchaser to the seller of the futures contract.
Options on futures contracts are similar to options on securities except that an option on a futures contract gives the purchaser the right in return for the premium paid to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put).
Futures contracts and related options involve costs and may result in losses in excess of the amount invested in the futures contract or related option. If a futures contract is used for hedging, an imperfect correlation between movements in the price of the futures contract and the price of the security, currency, or other investment being hedged creates risk. Correlation is higher when the investment being hedged underlies the futures contract. Correlation is lower when the investment being hedged is different than the instrument underlying the futures contract, such as when a futures contract on one security or commodity is used to hedge a different security or commodity or when a futures contract in one currency is used to hedge a security denominated in another currency. In the event of an imperfect correlation between a futures position and the portfolio position (or anticipated position) intended to be protected, the Fund may realize a loss on the futures contract and/or on the portfolio position intended to be protected. The risk of imperfect correlation generally tends to diminish as the maturity date of the futures contract approaches. To compensate for imperfect correlations, a Fund may purchase or sell futures contracts in a greater amount than the hedged investments if the volatility of the price of the hedged investments is historically greater than the volatility of the futures contracts. Conversely, a Fund may purchase or sell fewer futures contracts if the volatility of the price of the hedged investments is historically less than that of the futures contract.
The Funds ability to engage in the futures and options on futures strategies depends on the liquidity of the markets in those instruments. Trading interest in various types of futures and options on futures cannot be predicted. Therefore, no assurance can be given that a Fund will be able to utilize these instruments effectively. In addition, there can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a futures or option on a futures
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contract position, and that Fund would remain obligated to meet margin requirements until the position is closed. The liquidity of a secondary market in a futures contract may be adversely affected by daily price fluctuation limits established by commodity exchanges to limit the amount of fluctuation in a futures contract price during a single trading day.
A Fund that purchases or sells a futures contract is only required to deposit initial and variation margin as required by relevant regulations and the rules of the contract market. Because the purchase of a futures contract obligates the Fund to purchase the underlying security or other instrument at a set price on a future date, the Funds net asset value will fluctuate with the value of the security or other instrument as if it were already in the Funds portfolio. Futures transactions have the effect of investment leverage to the extent the Fund does not maintain liquid assets equal to the face amount of the contract. If a Fund combines short and long positions, in addition to possible declines in the values of its investment securities, the Fund will incur losses if the index underlying the long futures position underperforms the index underlying the short futures position.
Merger Arbitrage
Although a variety of strategies may be employed depending upon the nature of the reorganizations selected for investment, the simplest form of merger-arbitrage activity involves purchasing the shares of an announced acquisition target at a discount to their expected value upon completion of the acquisition. The size of this discount, known as the arbitrage spread, may represent the Merger Arbitrage Funds potential profit on such an investment. The size of this spread is dependent on a large number of factors, including the status of the negotiations between the two companies (for example, spreads typically narrow as the parties advance from an agreement in principle to a definitive agreement), the complexity of the transaction, the number of regulatory approvals required, the likelihood of government intervention on antitrust or other grounds, the type of consideration to be received and the possibility of competing offers for the target company. The expected gain on an individual arbitrage investment is normally considerably smaller than the possible loss should the transaction be unexpectedly terminated. The expected timing of each transaction is also important since the length of time that the Merger Arbitrage Funds capital must be committed to any given reorganization will affect the rate of return realized by the Merger Arbitrage Fund, and delays can substantially reduce such returns.
Mark-to-market losses on merger-arbitrage positions can occur intra-month even if a particular deal is not breaking-up and such losses may or may not be recouped upon successful consummation of such deal. Further, the consummation of mergers, tender offers and exchange offers can be prevented or delayed by a variety of factors, including: (i) regulatory and antitrust restrictions; (ii) political motivations; (iii) industry weakness; (iv) stock specific events; (v) failed financings; and (vi) general market declines. If the Merger Arbitrage Fund does not hedge against market fluctuations, the Fund may incur losses even if the proposed transaction is consummated. The success of merger-arbitrage strategies also depends on the overall volume of merger activity, which has historically been cyclical in nature. During periods when merger activity is low, it may be difficult or impossible to identify opportunities for profit or to identify a sufficient number of such opportunities to provide diversification among potential merger transactions. This may be due to, among other things, a number of merger-arbitrage advisers and other investors investing in a limited number of potential deals. Also, when market interest rates are relatively low, the spreads on merger-arbitrage positions may be relatively small (i.e., narrow).
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Other Investment Policies
Swap Agreements. To help enhance the value of their portfolio or manage their exposure to different types of investments, the Funds may enter into credit default swap agreements, interest rate, currency and mortgage swap agreements and may purchase and sell interest rate caps, floors and collars.
In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) on different currencies, securities, baskets of currencies or securities, indices or other instruments, which returns are calculated with respect to a notional value, ( i.e. , the designated reference amount of exposure to the underlying instruments). The Funds intend to enter into swaps primarily on a net basis, i.e. , the two payment streams are netted out, with a Fund receiving or paying, as the case may be, only the net amount of the two payments. If the other party to a swap contract entered into on net basis defaults, the Funds risk of loss will consist of the net amount of payments that the Fund is contractually entitled to receive. The net amount of the excess, if any, of the Funds obligations over its entitlements will be maintained in a segregated account by the Funds custodian. The Funds will not enter into swap agreements unless the claims-paying ability of the other party thereto is considered to be an acceptable credit risk to such Fund by the Adviser. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction. Swap instruments are not exchange-listed securities and may be traded only in the over-the-counter market.
In a typical interest rate swap agreement, one party agrees to make regular payments equal to a floating interest rate on a specified amount (the notional principal amount) in return for payments equal to a fixed interest rate on the same amount for a specified period. If a swap agreement provides for payment in different currencies, the parties may also agree to exchange the notional principal amount. Mortgage swap agreements are similar to interest rate swap agreements, except that notional principal amount is tied to a reference pool of mortgages. In a cap or floor, one party agrees, usually in return for a fee, to make payments under particular circumstances. For example, the purchaser of an interest rate cap has the right to receive payments to the extent a specified interest rate exceeds an agreed level; the purchaser of an interest rate floor has the right to receive payments to the extent a specified interest rate falls below an agreed level. A collar entitles the purchaser to receive payments to the extent a specified interest rate falls outside an agreed range.
Investments in swaps involve the exchange by a Fund with another party of their respective commitments. Use of swaps subjects a Fund to risk of default by the counterparty. If there is a default by the counterparty to such a transaction, there may be contractual remedies pursuant to the agreements related to the transaction although contractual remedies may not be sufficient in the event the counterparty is insolvent. However, the swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments which are traded in the interbank market. Swap agreements are sophisticated financial instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. Swaps may involve leverage and can be highly volatile and may have a considerable impact on a Funds performance, as the potential gain or loss on any swap transaction is not necessarily subject to any fixed limit. All swap agreements are considered as illiquid securities and, therefore, will be limited, along with all of the Funds other illiquid securities, to 15% of the Funds net assets.
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The Funds may enter into credit default swap agreements. The buyer in a credit default contract is obligated to pay the seller a periodic stream of payments over the term of the contract provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the par value (full notional value) of the reference obligation in exchange for the reference obligation. A Fund may be either the buyer or seller in the transaction. If a Fund is a buyer and no event of default occurs, the Fund loses its investment and recovers nothing. However, if an event of default occurs, the buyer receives full notional value for a reference obligation that may have little or no value. As a seller, the Fund receives income throughout the term of the contract, which typically is between six months and three years, provided that there is no default event.
Credit default swap agreements are subject to greater risk than direct investment in the reference obligation. Like all swap agreements, credit default swaps are subject to liquidity, credit and counterparty risks. A buyer in a credit default swap contract will lose its investment and recover nothing should no event of default occur. If an event of default were to occur, the value of the reference obligation received by the seller, coupled with the periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. In addition, collateral posting requirements are individually negotiated and there is no regulatory requirement that a counterparty post collateral to secure its obligations under a credit default swap. Furthermore, there is no requirement that a party be informed in advance when a credit default swap agreement is sold. Accordingly, a Fund may have difficulty identifying the party responsible for payment of its claims. The notional value of credit default swaps with respect to a particular investment is often larger than the total par value of such investment outstanding and, in event of a default, there may be difficulties in making the required deliveries of the reference investments, possibly delaying payments.
The market for credit default swaps has become more volatile recently as the creditworthiness of certain counterparties has been questioned and/or downgraded. If a counterpartys credit becomes significantly impaired, multiple requests for collateral posting in a short period of time could increase the risk that a Fund may not receive adequate collateral. A Fund generally may exit its obligations under a credit default swap only by terminating the contract and paying applicable breakage fees, or by entering into an offsetting credit default swap position, which may cause the Fund to incur more losses. If a Fund uses credit default swaps to leverage its portfolio, it will be exposed to additional risks, including the risk that the Funds use of leverage will magnify the effect of any losses the Fund incurs since if an event of default occurs the seller must pay the buyer the full notional value of the reference obligation.
When-Issued Securities and Forward Commitments . Each Fund may enter into forward commitments for the purchase or sale of interests in Senior Loans and other portfolio securities, including on a when-issued or delayed delivery basis in excess of customary settlement periods for the type of security involved. In some cases, a forward commitment may be conditioned upon the occurrence of a subsequent event, such as approval and consummation of a merger, corporate reorganization or debt restructuring ( i.e. , a when, as and if issued security). When such transactions are negotiated, the price is fixed at the time of the commitment, with payment and delivery taking place in the future, generally a month or more after the date of the commitment. While a Fund will only enter into a forward commitment with the intention of actually acquiring the security, the Fund may sell the security before the settlement date if it is deemed advisable. Securities purchased by a Fund under a forward commitment are subject to market fluctuation, and no interest (or dividends) accrues to the Fund prior to the settlement date. For forward commitments that are cash settled, a Fund will designate or segregate liquid assets in an amount equal to the Funds daily marked-to-market value of such commitments.
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Purchases of securities on a forward commitment basis may involve more risk than other types of purchases. Securities purchased on a forward commitment basis and the securities held in a Funds portfolio are subject to changes in value based upon the publics perception of the creditworthiness of the issuer and changes, real or anticipated, in the level of interest rates. Purchasing securities on a forward commitment basis can involve the risk that the yields available in the market when the delivery takes place may actually be higher or lower than those obtained in the transaction itself. On the settlement date of the forward commitment transaction, the Fund will meet its obligations from then available cash flow, sale of securities reserved for payment of the commitment, sale of other securities or, although it would not normally expect to do so, from sale of the forward commitment securities themselves (which may have a value greater or lesser than the Funds payment obligations). The sale of securities to meet such obligations may result in the realization of capital gains or losses. Purchasing securities on a forward commitment basis can also involve the risk of default by the other party on its obligation, delaying or preventing the Fund from recovering the collateral or completing the transaction.
Repurchase Agreements. Floating Rate Opportunities Fund and Merger Arbitrage Fund may enter into repurchase agreements without limitation as part of their investment strategies. Long/Short Healthcare Fund and Opportunistic Credit Fund may each enter into repurchase agreements with respect to up to 33 1/3% of the value of such Funds total assets and Long/Short Equity Fund may enter into repurchase agreements with respect to up to 20% of the value of the Funds total assets. A repurchase agreement is a purchase of, and a simultaneous commitment to resell, a financial instrument at an agreed-upon price on an agreed-upon date. When participating in repurchase agreements, a Fund buys securities from a seller ( e.g. , a bank or brokerage firm) with the agreement that the seller will repurchase the securities at the agreed-upon price at a later date. Repurchase agreements may also be viewed as loans made by a Fund that are collateralized by the securities subject to repurchase. Such transactions afford an opportunity for a Fund to earn a return on available liquid assets at minimal market risk, although a Fund may be subject to various delays and risks of loss if the counterparty is unable to meet its obligation to repurchase. If the counterparty to a repurchase agreement defaults on its repurchase obligation pursuant to the repurchase agreement, a Fund may lose money to the extent proceeds from the sale of collateral are less than the repurchase price. If the member bank or member firm that is the party to the repurchase agreement petitions for bankruptcy or otherwise becomes subject to the Bankruptcy Code, the law regarding the rights of a Fund is unsettled and a Funds realization upon the collateral may be delayed or limited. The Adviser will evaluate the creditworthiness of the repurchase agreement counterparties with whom the Funds do business and will monitor their creditworthiness during the period of any repurchase agreement.
Reverse Repurchase Agreements . Each Fund may enter into reverse repurchase agreements with respect to securities held by the Fund that could otherwise be sold by the Fund. In a reverse repurchase agreement a Fund sells a security held by the Fund and simultaneously obtains the commitment of the purchaser (typically, a commercial bank or a broker or dealer) to sell the security back to the Fund at an agreed-upon price on an agreed-upon date. A Fund will maintain cash or liquid securities in an amount sufficient to cover its obligations with respect to reverse repurchase agreements. A Fund receives payment for such securities only upon physical delivery or evidence of book entry transfer by its custodian. Regulations of the SEC require that, if securities are sold by a Fund under a reverse repurchase
22
agreement, the Fund designate or segregate liquid assets in an amount equal to the Funds daily marked-to-market value of such agreement. Reverse repurchase agreements are considered borrowings of money by the Funds and as such would be subject to the restrictions on issuing senior securities described below under Investment Restrictions.
Reverse repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty, including possible delays or restrictions upon a Funds ability to dispose of the proceeds of the sale received from the counterparty. An additional risk is that the market value of securities sold by a Fund under a reverse repurchase agreement could decline below the price at which the Fund is obligated to repurchase them.
Euro-Related Risk. The global economic crisis brought several small economies in Europe to the brink of bankruptcy and many other economies into recession and weakened the banking and financial sectors of many European countries. For example, the governments of Greece, Spain, Portugal, and the Republic of Ireland have all experienced large public budget deficits, the effects of which are still yet unknown and may slow the overall recovery of the European economies from the global economic crisis. In addition, due to large public deficits, some European countries may be dependent on assistance from other European governments and institutions or other central banks or supranational agencies such as the International Monetary Fund. Assistance may be dependent on a countrys implementation of reforms or reaching a certain level of performance. Failure to reach those objectives or an insufficient level of assistance could result in a deep economic downturn which could significantly affect the value of a Funds European investments.
The Economic and Monetary Union of the European Union (EMU) is comprised of the European Union members that have adopted the euro currency. By adopting the euro as its currency, a member state relinquishes control of its own monetary policies. As a result, European countries are significantly affected by fiscal and monetary policies implemented by the EMU and European Central Bank. The euro currency may not fully reflect the strengths and weaknesses of the various economies that comprise the EMU and Europe generally.
It is possible that one or more EMU member countries could abandon the euro and return to a national currency and/or that the euro will cease to exist as a single currency in its current form. The effects of such an abandonment or a countrys forced expulsion from the euro on that country, the rest of the EMU, and global markets are impossible to predict, but are likely to be negative. The exit of any country out of the euro may have an extremely destabilizing effect on other eurozone countries and their economies and a negative effect on the global economy as a whole. Such an exit by one country may also increase the possibility that additional countries may exit the euro should they face similar financial difficulties. In addition, in the event of one or more countries exit from the euro, it may be difficult to value investments denominated in euros or in a replacement currency. In June 2016, the United Kingdom approved a referendum to leave the EMU. Significant uncertainty remains in the market regarding the ramifications of that development, and the range and potential implications of possible political, regulatory, economic and market outcomes are difficult to predict.
Emerging and Developing Markets . Floating Rate Opportunities Fund and Merger Arbitrage Fund may invest without limitation in emerging market countries. Each of Long/Short Equity Fund and Long/Short Healthcare Fund may invest up to 50% of the value of their total assets in emerging market countries. The Opportunistic Credit Fund may invest without limit in securities of non-U.S. issuers, including investments in the securities of so-called emerging or developing market issuers. Such investment may be denominated in U.S. dollars, non-U.S. currencies or multinational currency units.
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Investing in emerging or developing market countries involves certain risks not typically associated with investing in the United States and imposes risks greater than, or in addition to, risks of investing in more developed foreign countries. These risks include, but are not limited to, the following: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic, and political uncertainty and instability (including amplified risk of war and terrorism); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on a Funds ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging and developing market countries; the fact that companies in emerging and developing market countries may be smaller, less seasoned, and newly organized companies; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; and greater price volatility, substantially less liquidity, and significantly smaller market capitalization of securities markets. Also, any change in the leadership or politics of emerging or developing market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging and developing market countries.
Money Market Instruments. Each Fund may invest in money market instruments. Money market securities are high-quality, dollar-denominated, short-term instruments. They consist of (i) bankers acceptances, certificates of deposit, notes and time deposits of highly-rated U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations and obligations issued or guaranteed by agencies and instrumentalities of the U.S. Government; (iii) high-quality commercial paper issued by U.S. foreign corporations; (iv) debt obligations with a maturity of one year or less issued by corporations with outstanding high-quality commercial paper ratings; and (v) repurchase agreements involving any of the foregoing obligations entered into with highly-rated banks and broker-dealers.
Convertible Securities. Convertible securities may offer higher income than the common stocks into which they are convertible and include fixed-income or zero coupon debt securities, which may be converted or exchanged at a stated or determinable exchange ratio into underlying shares of common stock. Prior to their conversion, convertible securities may have characteristics similar to both non-convertible debt securities and equity securities. While convertible securities generally offer lower yields than non-convertible debt securities of similar quality, their prices may reflect changes in the value of the underlying common stock. Convertible securities entail less credit risk than the issuers common stock.
Asset Coverage. To assure that a Funds use of futures and related options, as well as when issued and delayed-delivery transactions, forward currency contracts and swap transactions, are not used to achieve investment leverage, the Fund will cover such transactions, as required under applicable SEC interpretations, either by owning the underlying securities or by earmarking liquid securities with its custodian in an amount at all times equal to or exceeding the Funds commitment with respect to these instruments or contracts.
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Warrants and Rights. Warrants are options to purchase equity securities at a specified price and are valid for a specific time period. Rights are similar to warrants, but normally have a short duration and are distributed by the issuer to its shareholders. Each of Long/Short Equity Fund and Long/Short Healthcare Fund may purchase warrants and rights, provided that the Funds presently do not intend to invest more than 10% of their respective net assets at the time of purchase in warrants and rights other than those that have been acquired in units or attached to other securities. Floating Rate Opportunities Fund may purchase warrants and rights, provided that the Fund presently does not intend to invest more than 20% of its net assets at the time of purchase in warrants and rights other than those that have been acquired in units or attached to other securities.
Short-Term Trading. Short-term trading involves the selling of securities held for a short time, ranging from several months to less than a day. The object of such short-term trading is to increase the potential for capital appreciation and/or income of a Fund in order to take advantage of what the Adviser believes are changes in market, industry or individual company conditions or outlook. Any such trading would increase the turnover rate of the Fund and its transaction costs, and could result in higher taxes for shareholders if Fund shares are held in a taxable account.
Short Selling. Short selling (also known as shorting or going short) is a strategy in which a Fund sells a security it does not own in anticipation that the market price of that security will decline. When the Fund makes a short sale, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the sale. The Fund will ordinarily have to pay a fee to borrow a security and is often obligated to repay the lender of the security any dividend or interest that accrues on the security during the period of the loan. If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss.
The Fund may sell a security short if it owns at least an equal amount of the security sold short or another security convertible or exchangeable for an equal amount of the security sold short without payment of further compensation (a short sale against-the-box). The Fund also may engage in short sales that are not against-the-box, and will be subject to additional risks to the extent that it engages in short sales that are not against-the-box. The Funds loss on a short sale could be unlimited in cases where the Fund is unable, for whatever reason, to close out its short position.
Short sales by the Fund that are not made against-the-box (that is when the Fund has an offsetting long position in the asset that is selling short) involve unlimited loss potential since the market price of securities sold short may continuously increase. When the Fund engages in a short sale on a security, it must borrow the security sold short and deliver it to the counterparty. The Fund will ordinarily have to pay a fee or premium to borrow particular securities and be obligated to repay the lender of the security any dividends or interest that accrue on the security during the period of the loan. The amount of any gain from a short sale will be decreased, and the amount of any loss increased, by the amount of the premium, dividends, interest or expenses the Fund pays in connection with the short sale. Short selling allows the Fund to profit from declines in market prices to the extent such decline exceeds the transaction costs and the costs of borrowing the securities. However, since the borrowed securities must be replaced by purchases at market prices in order to close out the short position, any appreciation in the price of the borrowed securities would result in a loss. Purchasing securities to close out the short position can itself cause the price of the securities to
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rise further, thereby exacerbating the loss. The Fund may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions, the Fund might have difficulty purchasing securities to meet its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales. See Income Tax Considerations below for special tax considerations associated with engaging in short sales.
Micro Cap Securities. Each Fund may invest in companies whose total market capitalization at the time of investment is generally between $30 million and $500 million, referred to as micro cap companies. Micro cap companies may not be well-known to the investing public, may not have significant institutional ownership and may have cyclical, static or only moderate growth prospects. Micro cap companies may have greater risk and volatility than large companies and may lack the management depth of larger, mature issuers. Micro cap companies may have relatively small revenues and limited product lines, markets, or financial resources, and their securities may trade less frequently and in more limited volume than those of larger, more mature companies. In addition, micro cap companies may be developing or marketing new products or services for which markets are not yet established and may never become established. As a result, the prices of their securities may fluctuate more than those of larger issuers.
Securities of Other Investment Companies. Such investments are subject to limitations prescribed by the 1940 Act unless an SEC exemption is applicable or as may be permitted by rules under the 1940 Act or SEC staff interpretations thereof. The 1940 Act limitations currently provide, in part, that the Funds may not purchase shares of an investment company if (a) such a purchase would cause a Fund to own in the aggregate more than 3% of the total outstanding voting stock of the investment company; (b) such a purchase would cause a Fund to have more than 5% of its total assets invested in the investment company; or (c) more than 10% of a Funds total assets would be invested in the aggregate in all investment companies. A Fund may invest in excess of the foregoing limitations in an exchange traded fund (ETF) that is not part of the same group of investment companies ( e.g. , an unaffiliated ETF) if the ETF has obtained exemptive relief from the SEC and both the ETF and the Fund adhere to the conditions in the exemptive relief.
The Funds may invest in investment companies that are advised by the Adviser or its affiliates, including ETFs, to the extent permitted by applicable law and/or pursuant to exemptive relief from the SEC. These investment companies typically incur fees that are separate from those fees incurred directly by the Fund. The Funds purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying Fund expenses.
Privately-Placed Securities. Each Fund may invest in securities that are neither listed on a stock exchange nor traded over-the-counter, including privately placed securities. Investing in such unlisted securities, including investments in new and early stage companies, may involve a high degree of business and financial risk that can result in substantial losses. As a result of the absence of a public trading market for these securities, they may be less liquid than publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized from these sales could be less than those originally paid by the Fund, or less than what may be considered the fair value of such securities. Further, companies whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that might be applicable if their securities were publicly traded. If such securities are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration.
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Initial Public Offerings (IPOs). Each Fund may invest in IPOs. An IPO presents the risk that the market value of IPO shares will fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading, the small number of shares available for trading and limited information about the issuer. The purchase of IPO shares may involve high transactions costs. IPO shares are subject to market risk and liquidity risk. When a Funds asset base is small, a significant portion of the Funds performance could be attributable to investments in IPOs, because such investments would have a magnified impact on the Fund. As the Funds assets grow, the effect of the Funds investments in IPOs on the Funds performance probably will decline, which could reduce the Funds performance. Because of the price volatility of IPO shares, the Fund may choose to hold IPO shares for a very short period of time. This may increase the turnover of the Fund and may lead to increased expenses to the Fund, such as commissions and transaction costs. By selling IPO shares, the Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. There is no assurance that a Fund will be able to obtain allocable portions of IPO shares. The limited number of shares available for trading in some IPOs may make it more difficult for the Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Investors in IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
The Funds investments in IPO shares may include the securities of unseasoned companies (companies with less than three years of continuous operations), which present risks considerably greater than common stocks of more established companies. These companies may have limited operating histories and their prospects for profitability may be uncertain. These companies may be involved in new and evolving businesses and may be vulnerable to competition and changes in technology, markets and economic conditions. They may be more dependent on key managers and third parties and may have limited products.
Operating Deficits. The expenses of operating a Fund (including the fees payable to the Adviser) may exceed its income, thereby requiring that the difference be paid out of the Funds capital, reducing the Funds investments and potential for profitability.
Accuracy of Public Information. The Adviser selects investments for each Fund, in part, on the basis of information and data filed by issuers with various government regulators or made directly available to the Adviser by the issuers or through sources other than the issuers. Although the Adviser evaluates all such information and data and ordinarily seeks independent corroboration when the Adviser considers it appropriate and when such corroboration is reasonably available, the Adviser is not in a position to confirm the completeness, genuineness or accuracy of such information and data.
Trading Limitations. For all securities listed on a securities exchange, including options listed on a public exchange, the exchange generally has the right to suspend or limit trading under certain circumstances. Such suspensions or limits could render certain strategies difficult to complete or continue and subject the Funds to loss. Also, such a suspension could render it impossible for the Adviser to liquidate positions and thereby expose the Funds to potential losses. Finally, to the extent that advisory personnel of the Adviser acquire material non-public information in the course of service on the board of directors or creditors committee of a company, the Funds may be prevented from buying or selling securities of that company.
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Risks of Interest Only Mortgage-Backed Securities. Interest only mortgage-backed securities present a heightened risk of total loss of investment.
Risks of Inverse Floaters. As interest rates rise, inverse floaters produce less current income. A change in prevailing interest rates will often result in a greater change in the interest rate paid by an inverse floater. As a result, inverse floaters may have a greater degree of volatility than other types of interest-bearing securities of similar credit quality.
The frequency and amount of portfolio purchases and sales (known as the turnover rate) will vary from year to year. The portfolio turnover rate may vary greatly from year to year and will not be a limiting factor when the Adviser deems portfolio changes appropriate. Although the Funds generally do not intend to trade for short-term profits, the securities held by a Fund will be sold whenever the Adviser believes it is appropriate to do so, without regard to the length of time a particular security may have been held. Higher portfolio turnover involves correspondingly greater transaction costs, including any brokerage commissions that a Fund will bear directly, and can cause the Fund to recognize more short-term capital gains (which are taxable to shareholders at higher rates than long-term capital gains). Each Fund may engage in active trading to achieve its investment goals and, as a result, may have substantial portfolio turnover. A 100% turnover rate would occur if all of a Funds portfolio securities were replaced once within a one-year period.
For the fiscal period ended December 31, 2016 the portfolio turnover rate for the Merger Arbitrage Fund was as follows:
Fiscal Period
Ended December 31, 2016 |
||
Merger Arbitrage Fund* |
718% |
* | The Merger Arbitrage Fund commenced operations on August 19, 2016. |
For the past two fiscal years the portfolio turnover rate for each of the Funds was as follows:
Fiscal Year
Ended June 30, 2016 |
Fiscal Year
Ended June 30, 2015 |
|||||||
Floating Rate Opportunities Fund |
53 | % | 55 | % | ||||
Long/Short Equity Fund |
457 | % | 414 | % | ||||
Long/Short Healthcare Fund |
901 | %* | 409 | % | ||||
Opportunistic Credit Fund |
83 | %** | 41 | % |
* | The increase in portfolio turnover in the Fund was attributable to an increase in capital activity as well as rebalancing/repositioning the portfolio during a time of atypical market conditions in the Healthcare industry. |
** | The increase in portfolio turnover in the Fund was attributable to the changing market dynamics throughout the fiscal year most notable in the Energy & Utilities industries. |
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The fundamental investment restrictions below may be changed only with the approval of a vote of a majority of the outstanding voting securities of the Fund. A vote of a majority of the outstanding voting securities of a Fund means the lesser of (i) 67% or more of the shares at a meeting if the holders of more than 50% of the outstanding shares are present or represented by proxy or (ii) more than 50% of the outstanding shares. Except for investment restrictions designated as fundamental in a Funds Prospectus or in this SAI, the investment policies described in this Prospectus or the Funds SAI are not fundamental and may be changed without shareholder approval. If a percentage policy set forth in the Prospectus or one of the following percentage investment restrictions is adhered to at the time a security is purchased, later changes in a percentage will not be considered a violation of the policy or restriction unless any excess or deficiency exists immediately after and as a result of such purchase or pertains to the Fund limitations on borrowing and investment in illiquid securities.
Fundamental Investment Restrictions . The following investment restrictions are fundamental policies and, as such, may not be changed without the approval of a vote of a majority of the outstanding voting securities. A Fund may not:
1. | Purchase any security that would cause such Fund, other than Merger Arbitrage Fund, to concentrate (invest 25% or more of its total assets) in securities of issuers primarily engaged in any particular industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities), except that Long/Short Healthcare Fund will invest more than 25% and may invest up to 100% of its assets in securities of issuers in the industry group consisting of healthcare companies (as defined in the Prospectus). For purposes of this restriction as applied to Floating Rate Opportunities Fund, senior loans and loan participations will be considered investments in the industry of the underlying borrower, rather than that of any agent that administers the senior loan or the seller of the loan participation. With respect to Merger Arbitrage Fund, the Fund will not concentrate its investments within the meaning of the 1940 Act; |
2. | In the case of Floating Rate Opportunities Fund, Long/Short Healthcare Fund and Opportunistic Credit Fund, issue senior securities or borrow in excess of the amounts permitted by the 1940 Act; * |
3. | In the case of Long/Short Equity Fund and Merger Arbitrage Fund, issue senior securities (including borrowing money, including on margin if margin securities are owned, and through entering into reverse repurchase agreements) in excess of 33 1/3% of such Funds total assets (including the amount of senior securities |
* |
Under the 1940 Act, a Fund may not issue senior securities or borrow in excess of 33 1/3% of the Funds total assets (after giving effect to any such borrowing), which amount excludes borrowing for temporary purposes and in an amount not more than 5% of the Funds total assets at the time borrowing is made. |
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issued, but excluding any liabilities and indebtedness not constituting senior securities), except that Long/Short Equity Fund and Merger Arbitrage Fund may borrow up to an additional 5% of its total assets for temporary purposes; or pledge its assets other than to secure such issuances or in connection with hedging transactions, short sales, securities lending, when-issued and forward commitment transactions and similar investment strategies. Long/Short Equity Funds and Merger Arbitrage Funds obligations under the foregoing types of transactions and investment strategies are not treated as senior securities; |
4. | Underwrite securities of other issuers, except to the extent that such Fund, in disposing of Fund securities, may be deemed an underwriter within the meaning of the 1933 Act; |
5. | Purchase or sell real estate, except that a Fund may (a) invest in securities or other instruments directly or indirectly secured by real estate, (b) invest in securities or other instruments issued by issuers that invest in real estate, and (c) hold for prompt sale, real estate or interests in real estate to which it may gain an ownership interest through the forfeiture of collateral securing loans or debt securities held by it; |
6. | Purchase or sell commodities or commodity contracts, but this shall not prevent a Fund from purchasing, selling and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), options on financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts or other derivative instruments that are not related to physical commodities; and |
7. | In the case of Long/Short Equity Fund, Long/Short Healthcare Fund, Merger Arbitrage Fund and Opportunistic Credit Fund, lend any property or make any loan if, as a result, more than 33 1/3% of its total assets would be loaned to other parties, but this limitation does not apply to the purchase of debt securities or to repurchase agreements. |
8. | In the case of Floating Rate Opportunities Fund, lend any property or make any loan if, as a result, more than 33 1/3% of its total assets would be loaned to other parties (including the value of collateral received for loans of portfolio securities), but this limitation does not apply to the purchase of debt securities and other Senior Loans in which it is authorized to invest in accordance with its investment objective and policies or to repurchase agreements. |
For purposes of fundamental investment restriction number 6 above, at the time of the establishment of the restriction, swap contracts on financial instruments or rates were not within the understanding of the terms commodities or commodity contracts, and notwithstanding any federal legislation or regulatory action by the CFTC that subject such swaps to regulation by the CFTC, the Funds will not consider such instruments to be commodities or commodity contracts for purposes of this restriction.
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Non-Fundamental Investment Restrictions . Each Fund is also subject to the following non-fundamental investment restrictions and policies that may be changed by the Board without shareholder approval. A Fund may not:
1. | In the case of Long/Short Healthcare Fund, Merger Arbitrage Fund and Opportunistic Credit Fund, enter into repurchase agreements if, as a result thereof, more than 33 1/3% of such Funds total assets would be invested in repurchase agreements and in the case of Long/Short Equity Fund, as an operating policy and notwithstanding fundamental investment restriction number 7, Long/Short Equity Fund may not acquire debt securities or enter into repurchase agreements if, as a result thereof, more than 20% of Long/Short Equity Funds total assets would be invested in debt securities or repurchase agreements; |
2. | Acquire any illiquid securities, such as repurchase agreements with more than seven calendar days to maturity or fixed time deposits with a duration of over seven calendar days, if, as a result thereof, more than 15% of the market value of such Funds net assets would be in investments that are illiquid; |
3. | Acquire securities of investment companies that are not part of the same group of investment companies (other investment companies), except as permitted by applicable law (currently under the 1940 Act, in addition to any investments permitted by exemptive relief, a Fund may invest up to 10% of its total assets in the aggregate in shares of other investment companies and up to 5% of its total assets in any one other investment company, provided that any investment does not result in a Fund owning more than 3% of the voting stock of the acquired investment company at the time such shares are purchased); |
4. | Borrow on margin, notwithstanding, in the case of Floating Rate Opportunities Fund, Long/Short Healthcare Fund, and Opportunistic Credit Fund, fundamental investment restriction number 2, and in the case of Merger Arbitrage Fund and Long/Short Equity Fund, fundamental investment restriction number 3, unless such activity is permitted by applicable law; and |
5. | In the case of Long/Short Healthcare Fund, engage in any activities described under fundamental investment restriction number 2 pursuant to which the lenders would be able to foreclose on more than 33 1/3% of Long/Short Healthcare Funds total assets. |
6. | In the case of each Fund that is invested in by another series of the Trust or by a series of Highland Funds II, acquire securities of registered open-end investment companies or registered unit investment trusts in reliance on Sections 12(d)(1)(F) or 12(d)(1)(G) of the 1940 Act. |
Other Information. The following commentary is intended to help investors better understand the meaning of the Funds fundamental policies by briefly describing limitations, if any, imposed by the 1940 Act. References to the 1940 Act below may encompass rules, regulations or orders issued by the SEC and, to the extent deemed appropriate by the Fund, interpretations and guidance provided by the SEC staff. These descriptions are intended as brief summaries of such limitations as of the date of this SAI; they are not comprehensive and they are qualified in all cases by reference to the 1940 Act (including any rules, regulations or orders issued by the SEC and any relevant interpretations and guidance provided by the SEC staff). These descriptions are subject to change based on evolving guidance by the appropriate regulatory authority and are not part of the Funds fundamental policies.
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The 1940 Act currently permits an open-end investment company to borrow money from a bank so long as immediately after any such borrowing the ratio that the value of the total assets of the investment company (including the amount of any such borrowing), less the amount of all liabilities and indebtedness (other than such borrowing) of the investment company, bears to the amount of such borrowing is at least 300%. A lender to a Fund may require that the Fund pledge its assets as collateral. If a Fund were to default on a loan secured by pledged assets, the lender would be entitled to foreclose on and dispose of the pledged assets, but the lender could retain only the amount of assets (or the disposition proceeds of such assets) necessary to pay off the defaulted loan.
Under the 1940 Act, a fund may not issue senior securities or borrow in excess of 33 1/3% of the Funds total assets (after giving effect to any such borrowing), which amount excludes borrowing for temporary purposes and in an amount not more than 5% of the Funds total assets at the time the borrowing for temporary purposes is made.
The percentage limitations in the restriction listed above apply at the time of purchases of securities and a later increase or decrease in percentage resulting from a change in value of net assets, or in any ratings, will not be deemed to result in a violation of the restriction. For purposes of investment restriction number 1 above, the Adviser will, on behalf of each Fund, make reasonable determinations as to the appropriate industry classification to assign to each issuer of securities in which the Fund invests. As a general matter, the Adviser relies on the industry classifications provided by the Morgan Stanley Capital International/Standard & Poors Global Industry Classification Standard. An industry is considered to be a group of companies whose principal activities, products or services offered give them a similar economic risk profile vis à vis issuers active in other sectors of the economy. The definition of what constitutes a particular industry is therefore an evolving one. Some issuers could reasonably fall within more than one industry category. To the extent that the Global Industry Classification Standard classifications are so broad that the primary economic characteristics in a single class are materially different, each Fund may further classify issuers in accordance with industry classifications as published by the SEC or relevant SEC staff interpretations. Each Fund may change any source used for determining industry classifications without prior shareholder notice or approval.
For purposes of non-fundamental investment restriction number 2 above, the purchase of Senior Loans, corporate debt securities, and other investment assets with the proceeds of a permitted borrowing, as well as margin payments or other arrangements in connection with transactions in short sales, futures contracts, options, and other financial instruments are not considered to constitute the purchase of securities on margin.
The Board provides broad oversight of the operations and affairs of the Funds and protects the interests of shareholders. The Board has overall responsibility to manage and control the business affairs of the Funds, including the complete and exclusive authority to establish policies regarding the management, conduct and operation of the Funds business. The names and birthdates of the Trustees and officers of the Funds, the year each was first elected or appointed to office, their principal business occupations during the last five years, the number of funds overseen by each Trustee and other directorships or trusteeships they hold are shown below. The business address for each Trustee and officer of the Funds is c/o Highland Capital Management Fund Advisors, L.P., 200 Crescent Court, Suite 700, Dallas, Texas 75201.
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Name and Date of
|
Position(s)
|
Term
of
|
Principal Occupation(s) During the Past Five Years |
Number of
Portfolios in Highland Fund Complex Overseen by the Trustees 2 |
Other Directorships/ Trusteeships Held During the Past Five Years |
Experience, Qualifications, Attributes, Skills for Board Membership |
||||||
INDEPENDENT TRUSTEES | ||||||||||||
Timothy K. Hui (6/13/1948) |
Trustee |
Indefinite Term; Trustee since inception in 2006. |
Dean of Educational Resources since July 2012 and from July 2006 to January 2008, Vice President from February 2008 to June 2012, and Assistant Provost for Graduate Education from July 2004 to June 2006 at Cairn University. | 23 | None | Significant experience on this board of directors/trustees; administrative and managerial experience; legal training and practice. | ||||||
Bryan A. Ward (2/4/1955) |
Trustee | Indefinite Term; Trustee since inception in 2006. | Private Investor, BW Consulting, LLC since 2014; Senior Manager, Accenture, LLP (a consulting firm) from 2002 until retirement in 2014. | 23 | Director of Equity Metrix, LLC. | Significant experience on this and/or other boards of directors/trustees; significant managerial and executive experience; significant experience as a management consultant. | ||||||
Dr. Bob Froehlich (4/28/1953) |
Trustee | Indefinite Term; Trustee since December 2013. | Executive Vice President and Chief Investment Strategist, The Hartford Mutual Funds from 2009 until retirement in 2012; Vice Chairman of Deutsche Asset Management from 2002 to 2009. | 23 |
Trustee of ARC Realty Finance Trust, Inc. (from January 2013 to May 2016); Director of KC Concessions, Inc.; Trustee of Realty Capital Income Funds Trust; Director of American Realty Capital Healthcare Trust II (from January 2013 to June 2016); Director, American Realty Capital Daily Net Asset Value Trust, Inc. (from November 2012 to July 2016); Director of American Sports Enterprise, Inc.; Director of Davidson Investment Advisors (July 2009 to July 2016); Chairman and owner, Kane County Cougars Baseball Club; Advisory Board of Directors, Internet Connectivity Group, Inc. (January 2014 to April 2016); Director of AR Capital Acquisition Corp.; Director of The Midwest League of Professional Baseball Clubs, Inc.; Director of Kane County Cougars Foundation, Inc.; Director of Galen Robotics, Inc. |
Significant experience in the financial industry; significant managerial and executive experience; significant experience on other boards of directors, including as a member of several audit committees. |
33
Name and Date of
|
Position(s)
|
Term
of
|
Principal Occupation(s) During the Past Five Years |
Number of
Portfolios in Highland Fund Complex Overseen by the Trustees 2 |
Other Directorships/ Trusteeships Held During the Past Five Years |
Experience, Qualifications, Attributes, Skills for Board Membership |
||||||
John Honis 3 (6/16/1958) |
Trustee | Indefinite Term; Trustee since July 2013. | President of Rand Advisors, LLC since August 2013; Partner of Highland Capital Management, L.P. (HCM) from February 2007 until his resignation in November 2014. | 23 | Manager of Turtle Bay Resort, LLC | Significant experience in the financial industry; significant managerial and executive experience, including experience as president, chief executive officer or chief restructuring officer of five telecommunication firms; experience on other boards of directors. |
34
Name and Date of
|
Position(s)
|
Term
of
|
Principal Occupation(s) During the Past Five Years |
Number of
Portfolios in Highland Fund Complex Overseen by the Trustees 2 |
Other Directorships/ Trusteeships Held During the Past Five Years |
Experience, Qualifications, Attributes, Skills for Board Membership |
||||||
INTERESTED TRUSTEE | ||||||||||||
Ethan Powell 4 (6/20/1975) |
Trustee; Chairman of the Board | Indefinite Term; Trustee since December 2013; Chairman of the Board since December 2013; Executive Vice President and Principal Executive Officer from June 2012 until December 2015. |
President and Founder of Impact Shares LLC (a registered investment advisor dedicated to building a platform to create better socially responsible investment solutions) since December 2015; Trustee/Director of the Highland Fund Complex from June 2012 until July 2013 and since December 2013; Chief Product Strategist of Highland Capital Management Fund Advisors, L.P. (HCMFA) from 2012 until December 2015; Senior Retail Fund Analyst of HCM from 2007 until December 2015 and HCMFA from its inception until December 2015; Secretary of NexPoint Credit Strategies Fund (NHF) from November 2010 until June 2012; President and Principal Executive Officer of NHF from June 2012 until May 2015; Secretary of NHF from May 2015 until December 2015; Executive Vice President and Principal Executive Officer of Highland Funds I (HFI) and Highland Funds II (HFII) from June 2012 until December 2015; and Secretary of HFI and HFII from November 2010 to May 2015. |
23 | Trustee of Impact Shares Funds I Trust | Significant experience in the financial industry; significant executive experience including past service as an officer of funds in the Highland Fund Complex; significant administrative and managerial experience. |
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OFFICERS
Name and Date of Birth |
Position(s) with the Fund |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
|||
J. Bradley Ross (5/13/59) |
President and Principal Executive Officer |
Indefinite Term; President and Principal Executive Officer since December 2015 | Principal Executive Officer of HFI and HFII since December 2015; President of Highland Capital Funds Distributor, Inc. (HCFD) since February 2014; President of HCMFA since June 2012; Member of the Sales Force Marketing Committee of the Investment Company Institute since 2003; Executive Vice President and National Sales Director of Ivy Funds from 2003 until June 2012. | |||
Brian Mitts (8/26/1970) |
Secretary; Principal Financial Officer and Principal Accounting Officer |
Indefinite Term; Secretary; Principal Financial Officer and Principal Accounting Officer since May 2015. | Chief Financial Officer, Executive Vice President and Treasurer of NexPoint Residential Trust, Inc. since 2014; Principal Financial Officer and Principal Accounting Officer of NHF since November 2010; Executive Vice President, Principal Financial Officer and Principal Accounting Officer of NHF since May 2015; Treasurer of NHF from November 2010 until May 2015; Chief Financial Officer of NexPoint Capital, Inc. from August 2014 until May 2015; Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer of NexPoint Capital, Inc. since May 2015; Principal Financial Officer and Principal Accounting Officer of NexPoint Real Estate Strategies Fund since March 2016; Chief Operating Officer of HCFD since November 2013; Chief Operations Officer of HCMFA since 2012; Secretary of NexPoint Advisors, L.P. from August 2012 until May 2015; Executive Vice President of NexPoint Advisors, L.P. since May 2015; Senior Retail Fund Analyst of HCM since 2007 and HCMFA since its inception; Secretary, Principal Financial Officer and Principal Accounting Officer of HFI and HFII since May 2015; Principal Financial Officer and Principal Accounting Officer of HFI since November 2010 and of HFII since February 2011; Treasurer of HFI from November 2010 until May 2015 and of HFII from February 2011 until May 2015 and Financial and Operations Principal of NexBank Securities, Inc. since 2014. |
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Name and Date of Birth |
Position(s) with the Fund |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
|||
Frank Waterhouse (4/14/1971) |
Treasurer | Indefinite Term; Treasurer since May 2015. | Assistant Treasurer of Acis Capital Management, L.P. from December 2011 until February 2012; Treasurer of Acis Capital Management, L.P. since February 2012; Assistant Treasurer of HCM from November 2011 until April 2012; Treasurer of HCM since April 2012; Assistant Treasurer of HCMFA from December 2011 until October 2012; Treasurer of HCMFA since October 2012; Treasurer of NexPoint Advisors, L.P. since March 2012 and Treasurer of NexPoint Capital, Inc., NHF, HFI, HFII, and NexPoint Real Estate Advisors, L.P. since May 2015 and Treasurer of NexPoint Real Estate Strategies Fund since March 2016. | |||
Clifford Stoops (11/17/1970) |
Assistant Treasurer | Indefinite Term; Assistant Treasurer since March 2017. | Assistant Treasurer of HFI, HFII, NHF, NexPoint Capital, Inc. and NexPoint Real Estate Strategies Fund since March 2017; Chief Accounting Officer at HCM since December 2011. | |||
Dustin Norris (1/6/1984) |
Assistant Secretary | Indefinite Term; Assistant Secretary since March 2017. | Chief Product Strategist at HCMFA since September 2015, Director of Product Strategy at HCMFA from May 2014 to September 2015; Secretary of NHF since December 2015; Assistant Secretary of Highland Funds I since March 2017; Assistant Treasurer of Highland Funds I and Highland Funds II from November 2012 to March 2017; Assistant Treasurer of NHF from November 2012 to December 2015; Secretary of NexPoint Capital, Inc. since 2014; Secretary of NexPoint Real Estate Strategies Fund since March 2016; Senior Accounting Manager at HCMFA from August 2012 to May 2014; and Fund Accountant at HCM from June 2010 to August 2012. |
1 | On an annual basis, as a matter of Board policy, the Governance Committee reviews each Trustees performance and determines whether to extend each such Trustees service for another year. Effective June 2013, the Board adopted a retirement policy wherein the Governance Committee shall not recommend the continued service as a Trustee of a Board member who is older than 80 years of age at the time the Governance Committee reports its findings to the Board. |
2 | The Highland Fund Complex consists of NHF, each series of HFI, each series of HFII, NexPoint Merger Arbitrage Fund, NexPoint Latin American Opportunities Fund, NexPoint Real Estate Strategies Fund, NexPoint Opportunistic Credit Fund, NexPoint Energy and Materials Opportunities Fund, NexPoint Discount Yield Fund, NexPoint Healthcare Opportunities Fund, and NexPoint Capital, Inc., a closed-end management investment company that has elected to be treated as a business development company under the 1940 Act. |
3 | Since May 1, 2015, Mr. Honis has been treated as an Independent Trustee of the Trust. Prior to that date, Mr. Honis was treated as an Interested Trustee because he was a partner of an investment adviser affiliated with the Adviser until his resignation in November 2014. As of August 31, 2016, Mr. Honis was entitled to receive aggregate severance and/or deferred compensation payments of approximately $1.5 million from another affiliate of the Adviser. Mr. Honis also serves as a director of a portfolio company affiliated with the Adviser. During the Trusts last two fiscal years, Mr. Honis aggregate compensation from this portfolio company for his services as a director was approximately $50,000. |
In addition, Mr. Honis serves as a trustee of a trust that owns substantially all of the economic interest in an investment adviser affiliated with the Adviser. Mr. Honis indirectly receives an asset-based fee in respect of such interest, which is projected to range from $100,000-$150,000 annually. In light of these relationships between Mr. Honis and affiliates of the Adviser, it is possible that the SEC might in the future determine Mr. Honis to be an interested person of the Trust. |
4 | Effective December 4, 2015, Mr. Powell resigned from his position with the Adviser. Although the Trust believes that Mr. Powell is technically no longer an interested person of the Trust, in light of his previous employment and the possibility that he may provide consulting services to the Adviser and affiliates of the Adviser, it is possible that the SEC might in the future determine Mr. Powell to be an interested person of the Trust. Therefore, the Trust treats Mr. Powell as an Interested Trustee of the Trust for all purposes other than compensation and the Funds code of ethics (Mr. Powell will be compensated at the same rate as the Independent Trustees) from December 16, 2015 until at least December 4, 2017 (the second anniversary of his resignation). |
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Qualifications of Trustees
The following provides an overview of the considerations that led the Board to conclude that each individual serving as a Trustee of the Trust should so serve. Among the factors the Board considered when concluding that an individual should serve on the Board were the following: (i) the individuals business and professional experience and accomplishments; (ii) the individuals ability to work effectively with the other members of the Board; (iii) the individuals prior experience, if any, serving on company boards (including public companies and, where relevant, other investment companies) and the boards of other complex enterprises and organizations; and (iv) how the individuals skills, experiences and attributes would contribute to an appropriate mix of relevant skills and experience on the Board.
In respect of each current Trustee, the individuals professional accomplishments and prior experience, including, in some cases, in fields related to the operations of the Trust, were a significant factor in the determination that the individual should serve as a Trustee of the Trust. Each Trustees professional experience and additional considerations that contributed to the Boards conclusion that an individual should serve on the Board are summarized in the table above.
Trustees Compensation
The officers of the Trust and those of its Trustees who are interested persons (as defined in the 1940 Act) of the Funds receive no direct remuneration from the Trust. The following table sets forth the aggregate compensation paid to each of the Trustees who is not an interested person (as defined in the 1940 Act) of the Trust (the Independent Trustees) by the Trust and the total compensation paid to each of the Trustees by the Highland Fund Complex for the fiscal year ended December 31, 2016.
Name of Trustee |
Aggregate
Compensation From the Trust |
Pension or
Retirement Benefits Accrued as Part of the Funds Expense |
Estimated
Annual Benefits Upon Retirement |
Total
Compensation From the Highland Fund Complex 1 |
||||||||||||
Interested Trustee |
||||||||||||||||
Ethan Powell 2 |
$ | 65,017 | $ | 0 | $ | 0 | $ | 150,000 | ||||||||
Independent Trustees |
||||||||||||||||
Timothy K. Hui |
$ | 65,017 | $ | 0 | $ | 0 | $ | 150,000 | ||||||||
Bryan A. Ward |
$ | 65,017 | $ | 0 | $ | 0 | $ | 150,000 | ||||||||
Dr. Bob Froehlich |
$ | 65,017 | $ | 0 | $ | 0 | $ | 150,000 | ||||||||
John Honis 3 |
$ | 65,017 | $ | 0 | $ | 0 | $ | 150,000 |
1 | The Highland Fund Complex consists of the NHF, each series of Highland Funds I, each series of Highland Funds II, NexPoint Capital, Inc., a closed-end management investment company that has elected to be treated as a business development company under the 1940 Act, NexPoint Merger Arbitrage Fund, NexPoint Latin American Opportunities Fund, NexPoint Real Estate Strategies Fund, NexPoint Opportunistic Credit Fund, NexPoint Energy and Materials Opportunities Fund, NexPoint Discount Yield Fund and NexPoint Healthcare Opportunities Fund. |
2 | Effective December 16, 2015, Ethan Powell is treated as an Interested Trustee of the Trust for all purposes other than compensation and the Funds code of ethics. |
3 | Effective May 1, 2015, Mr. Honis is treated as an Independent Trustee of the Trust. |
38
Each Independent Trustee receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Highland Fund Complex.
Role of the Board of Trustees, Leadership Structure and Risk Oversight
The Role of the Board
The Board oversees the management and operations of the Trust. Like most registered investment companies, the day-to-day management and operation of the Trust is performed by various service providers to the Trust, such as the Adviser, underwriter, administrator, sub-administrator, custodian, and transfer agent, each of which is discussed in greater detail in this SAI. The Board has appointed senior employees of certain of these service providers as officers of the Trust, with responsibility to monitor and report to the Board on the Trusts operations. The Board receives regular reports from these officers and service providers regarding the Trusts operations. For example, the Treasurer provides reports as to financial reporting matters and investment personnel report on the performance of the Trusts portfolios. The Board has appointed a Chief Compliance Officer who administers the Trusts compliance program and regularly reports to the Board as to compliance matters. Some of these reports are provided as part of formal in person Board meetings which are typically held quarterly, in person, and involve the Boards review of, among other items, recent Trust operations. The Board also periodically holds telephonic meetings as part of its review of the Trusts activities. From time to time one or more members of the Board may also meet with management in less formal settings, between scheduled Board meetings, to discuss various topics. In all cases, however, the role of the Board and of any individual Trustee is one of oversight and not of management of the day-to-day affairs of the Trust and its oversight role does not make the Board a guarantor of the Trusts investments, operations or activities.
Board Structure and Leadership
The Board has structured itself in a manner that it believes allows it to perform its oversight function effectively. The Board consists of five Trustees, four of whom are Independent Trustees. The remaining Trustee, Mr. Powell is an interested person of the Trust (each an Interested Trustee). Mr. Powell is treated as an Interested Trustee because of his previous positions with the Adviser and affiliates of the Adviser and the possibility that he may provide consulting services to the Adviser and affiliates of the Adviser. Mr. Powell also serves as Chairman of the Board. The Trustees meet periodically throughout the year in person and by telephone to oversee the Trusts activities, review contractual arrangements with service providers for the Trust and review the Trusts performance. The Board conducts much of its work through certain standing Committees, each of whose meetings are chaired by an Independent Trustee. On May 12, 2016, the Board approved a restructuring of the Funds standing committees and established an Audit and Qualified Legal Compliance Committee (formerly, the Audit Committee), a Governance Committee (formerly, the Nominating and Governance Committee), a Compliance Committee (formerly, the Litigation Committee), a Distribution Oversight Committee and an Alternatives Oversight Committee, which are discussed in greater detail below.
39
Audit and Qualified Legal Compliance Committee. The members of the Audit and Qualified Legal Compliance Committee (formerly named the Audit Committee) are Messrs. Froehlich, Hui, and Ward each of whom is independent for purposes of the 1940 Act. The Audit and Qualified Legal Compliance Committee is responsible for approving the Trusts independent accountants, reviewing with the Trusts independent accountants the plans and results of the audit engagement and the adequacy of the Trusts internal accounting controls, approving professional services provided by the Trusts independent accountants. The Audit and Qualified Legal Compliance Committee is charged with compliance with Rules 205.2(k) and 205.3(c) of Title 17 of the Code of Federal Regulations regarding alternative reporting procedures for attorneys representing the Trust who appear and practice before the SEC on behalf of the Trust. The Audit and Qualified Legal Compliance Committee is also responsible for reviewing and overseeing the valuation of debt and equity securities that are not publicly traded or for which current market values are not readily available pursuant to policies and procedures adopted by the Board. The Board and Audit and Qualified Legal Compliance Committee will use the services of one or more independent valuation firms to help them determine the fair value of these securities. In addition, each member of the Audit and Qualified Legal Compliance Committee meets the current independence and experience requirements of Rule 10A-3 under the Exchange Act.
The Audit and Qualified Legal Compliance Committee met six times during the fiscal year ended December 31, 2016. Mr. Ward acts as the Chairman of the Audit and Qualified Legal Compliance Committee and as the audit committee financial expert.
Governance Committee. The Trusts Governance Committees function is to oversee and make recommendations to the full Board or the Independent Trustees, as applicable, with respect to the governance of the Trust, selection and nomination of Trustees, compensation of Trustees, and related matters. The Governance Committee is also responsible for at least annually evaluating each Trustee and determining whether to recommend each Trustees continued service in that capacity. The Governance Committee will consider recommendations for Trustee nominees from shareholders sent to the Secretary of the Trust, 300 Crescent Court, Suite 700, Dallas, Texas 75201. A nomination submission must include all information relating to the recommended nominee that is required to be disclosed in solicitations or proxy statements for the election of Trustees, as well as information sufficient to evaluate the recommended nominees ability to meet the responsibilities of a Trustee of the Trust. Nomination submissions must be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected by the shareholders, and such additional information must be provided regarding the recommended nominee as reasonably requested by the Governance Committee. The Governance Committee is currently comprised of Messrs. Hui, Ward and Powell. Mr. Powell serves as the Chairman of the Governance Committee. The Governance Committee met four times during the fiscal year ended December 31, 2016.
Compliance Committee. The Compliance Committees (formerly named the Litigation Committee) function is to oversee and assist Board oversight of the Trusts compliance with legal and regulatory requirements and to seek to address any potential conflicts of interest between the Trust and HCMFA in connection with any potential or existing litigation or other legal proceeding relating to securities held by the Trust and HCMFA or Sub-Adviser or another client of HCMFA. The Compliance Committee is currently comprised of Messrs. Hui, Froehlich and Powell. Mr. Hui acts as the Chairman of the Compliance Committee. The Compliance Committee met six times during the fiscal year ended December 31, 2016.
The Alternatives Oversight Committee. The members of the Alternatives Oversight Committee are Messrs. Honis and Ward. The Alternatives Oversight Committee is responsible for overseeing any Funds that in the Boards determination employ alternative investment strategies. Mr. Honis serves as Chairman of the Alternatives Oversight Committee. The Alternatives Oversight Committee met three times during the fiscal year ended December 31, 2016.
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The Distribution Oversight Committee. The members of the Distribution Oversight Committee are Messrs. Froehlich and Honis. The Distribution Oversight Committee is responsible for overseeing and making recommendations to the Board with respect to the appointment and oversight of sub-advisers to the Funds and Fund payments to financial intermediaries. Mr. Froehlich serves as Chairman of the Distribution Oversight Committee. The Distribution Oversight Committee met four times during the fiscal year ended December 31, 2016.
The Trust does not have a lead Independent Trustee. As noted above, the Boards leadership structure features committees each made up of a majority of Independent Trustees. In addition, although the Independent Trustees recognize that having a lead Independent Trustee may in some circumstances help coordinate communications with management and otherwise assist a board in the exercise of its oversight duties, the Independent Trustees believe that because of the relatively small size of the Board, the ratio of Independent Trustees to Interested Trustees and the good working relationship among the Board members, it has not been necessary to designate a lead Independent Trustee. Additionally, while Mr. Powell is treated as an Interested Trustee, he no longer has an executive role at the Adviser.
The Board periodically reviews its leadership structure, including the role of the Chairman. The Board also completes an annual self-assessment during which it reviews its leadership and Committee structure and considers whether its structure remains appropriate in light of the Trusts current operations. The Board believes that its leadership structure, including the current percentage of the Board who are Independent Trustees, is appropriate given its specific characteristics. These characteristics include: (i) the extent to which the work of the Board is conducted through the standing committees; (ii) the extent to which the Independent Trustees meet as needed, together with their independent legal counsel, in the absence of members of management and members of the Board who are interested persons of the Trust; and (iii) Mr. Powells previous positions with the Adviser and an affiliate of the Adviser and the possibility that he may provide consulting services to the Adviser and affiliates of the Adviser and Mr. Honis previous position with an affiliate of the Adviser, which enhances the Boards understanding of the operations of the Adviser.
Board Oversight of Risk Management
The Boards role is one of oversight, rather than active management. This oversight extends to the Trusts risk management processes. These processes are embedded in the responsibilities of officers of, and service providers to, the Trust. For example, the Adviser and other service providers to the Trust are primarily responsible for the management of the Trusts investment risks. The Board has not established a formal risk oversight committee; however, much of the regular work of the Board and its standing Committees addresses aspects of risk oversight. For example, the Trustees seek to understand the key risks facing the Trust, including those involving conflicts of interest; how management identifies and monitors these risks on an ongoing basis; how management develops and implements controls to mitigate these risks; and how management tests the effectiveness of those controls.
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In the course of providing that oversight, the Board receives a wide range of reports on the Trusts activities from the Adviser and other service providers, including reports regarding the Funds investment portfolios, the compliance of the Funds with applicable laws, and the Funds financial accounting and reporting. The Board also meets periodically with the Trusts Chief Compliance Officer to receive reports regarding the compliance of the Funds with the federal securities laws and the Trusts internal compliance policies and procedures, and meets with the Trusts Chief Compliance Officer periodically, including at least annually, to review the Chief Compliance Officers annual report, including the Chief Compliance Officers risk-based analysis for the Trust. The Boards Audit Committee also meets regularly with the Treasurer and Trusts independent registered public accounting firm to discuss, among other things, the internal control structure of the Trusts financial reporting function. The Board also meets periodically with the portfolio managers of each Fund to receive reports regarding the management of the Fund, including its investment risks.
Share Ownership
The following table shows the dollar range of equity securities beneficially owned by the Trustees in each Fund and the aggregate dollar range of equity securities owned by the Trustees in all funds overseen by the Trustees in the Highland Fund Complex as of December 31, 2016.
Name of Trustee |
Dollar Range of
Equity Securities Owned in Floating Rate Opportunities Fund |
Dollar Range
of Equity Securities Owned in Long/Short Equity Fund |
Dollar Range
of Equity Securities Owned in Long/Short Healthcare Fund |
Dollar Range
of Equity Securities Owned in Opportunistic Credit Fund 1 |
Dollar Range
of Equity Securities Owned in Merger Arbitrage Fund 2 |
Aggregate Dollar
Range of Equity Securities Owned in All Funds Overseen by Trustee in the Highland Fund Complex 3 |
||||||||||||||||||
Interested Trustee |
||||||||||||||||||||||||
Ethan Powell |
$10,001 - $50,001 | $0 | $0 | $0 | $0 | $100,001 - $500,000 | ||||||||||||||||||
Independent Trustees |
||||||||||||||||||||||||
Timothy K. Hui |
$0 | $0 | $0 | $0 | $0 | $50,001 - $100,000 | ||||||||||||||||||
John Honis 4 |
$0 | $0 | $0 | $0 | $0 | None | ||||||||||||||||||
Dr. Bob Froehlich |
$10,001 - $50,001 | $10,001 - $50,001 | $10,001 - $50,001 | $10,001 - $50,001 | $0 | $100,001 - $500,000 | ||||||||||||||||||
Bryan A. Ward |
$0 | $0 | $0 | $0 | $0 | None |
1 | The Opportunistic Credit Fund commenced operations on July 1, 2014. |
2 | The Merger Arbitrage Fund commenced operations on August 19, 2016. |
3 | The Highland Fund Complex consists of the NHF, each series of Highland Funds I, each series of Highland Funds II, NexPoint Capital, Inc., a closed-end management investment company that has elected to be treated as a business development company under the 1940 Act and NexPoint Merger Arbitrage Fund, NexPoint Latin American Opportunities Fund, NexPoint Real Estate Strategies Fund, NexPoint Opportunistic Credit Fund, NexPoint Energy and Materials Opportunities Fund, NexPoint Discount Yield Fund and NexPoint Healthcare Opportunities Fund. |
4 | Effective May 1, 2015, Mr. Honis is treated as an Independent Trustee of the Trust. |
Trustee Positions
As of December 31, 2016, no Independent Trustee or any of his immediate family members owned beneficially or of record any class of securities of the Adviser or Underwriter (as defined below under Underwriter) or any person controlling, controlled by or under common control with any such entities.
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Code of Ethics
The Funds, the Adviser and the Funds principal underwriter, HCFD have each adopted codes of ethics that essentially prohibit certain of their personnel, including the Funds portfolio managers, from engaging in personal investments that compete or interfere with, or attempt to take advantage of a clients, including each Funds, anticipated or actual portfolio transactions, and are designed to assure that the interests of clients, including Fund shareholders, are placed before the interests of personnel in connection with personal investment transactions. Under each of the codes of ethics of the Funds, the Adviser and the Distributor, personal trading is permitted by such persons subject to certain restrictions; however, they are generally required to pre-clear most securities transactions with the appropriate compliance officer and to report all transactions on a regular basis.
Anti-Money Laundering Compliance
The Funds and their service providers may be required to comply with various anti-money laundering laws and regulations. Consequently, a Fund and its service providers may request additional information from you to verify your identity. If at any time a Fund believes a shareholder may be involved in suspicious activity or if certain account information matches information on government lists of suspicious persons, the Fund may choose not to establish a new account or may be required to freeze a shareholders account. A Fund and its service providers also may be required to provide a governmental agency with information about transactions that have occurred in a shareholders account or to transfer monies received to establish a new account, transfer an existing account or transfer the proceeds of an existing account to a governmental agency. In some circumstances, the Fund or its service providers may not be permitted to inform the shareholder that it has taken the actions described above.
Proxy Voting Policies
The Board has delegated the responsibility for voting proxies in respect of each Funds portfolio holdings to the Adviser, to vote each Funds proxies in accordance with the Advisers Proxy Voting Policy. The Board has approved the Proxy Voting Policy. Pursuant to the Proxy Voting Policy, the Adviser will vote proxies related to Fund securities in the best interests of each Fund and its shareholders. The Advisers Proxy Voting Policies are attached as Appendix B.
As applicable, each Funds proxy voting record for the most recent 12-month period ended June 30 is available (i) without charge, upon request, by calling (877) 665-1287 and (ii) on the SECs website (http://www.sec.gov). Information as of June 30 each year will generally be available on or about the following August 31.
Policy on Disclosure of Portfolio Holdings
Each Funds uncertified complete list of portfolio holdings information may be provided regularly pursuant to a standing request, such as on a monthly or quarterly basis, to (i) third party service providers, rating and ranking agencies, Financial Advisors and affiliated persons of the Fund and (ii) clients of the Adviser or its affiliates that invest in the Fund or such clients consultants. No compensation or other consideration is received by the Funds, the Adviser or any other person for these disclosures. Financial Advisors means any financial advisor, broker-dealer or other financial intermediary from which shares of the Funds may be purchased and that has entered into an agreement with the Underwriter or Boston Financial Data Services,
43
Inc., the Funds transfer agent (the Transfer Agent), with respect to the sale of shares of the Funds. A list of the entities that receive the Funds portfolio holdings information on such basis, the earliest frequency with which it may be provided to them and the earliest length of the lag between the date of the information and the date it may be disclosed is provided below:
Company |
Frequency |
Lag |
||
MorningStar Inc. |
Quarterly | 65 days after quarter end | ||
Lipper, Inc. |
Quarterly | 65 days after quarter end | ||
Thomson Financial |
Quarterly | 65 days after quarter end | ||
Bloomberg |
Quarterly | 65 days after quarter end | ||
Factset |
Quarterly | 65 days after quarter end |
The largest five portfolio holdings are published in the Funds Fact Sheets, which are posted to the Trusts website on a quarterly basis. In addition, certain service providers to the Funds, Adviser, Transfer Agent or Underwriter, such as rating and ranking agencies, pricing services, proxy voting service providers, accountants, attorneys, custodians, securities lending agents, brokers in connection with Fund transactions and providing pricing quotations, members of a bank syndicate providing a committed line of credit to the Funds, transfer agents and entities providing contingent deferred sales charge (CDSC) financing, may for legitimate business purposes receive the Funds portfolio holdings information earlier than 30 days after month end. If a Fund redeems a shareholder in kind, the shareholder generally receives its proportionate share of that Funds portfolio holdings and, therefore, the shareholder and its agent may receive such information earlier than 30 days after month end.
Disclosure of a Funds portfolio securities as an exception to the Funds normal business practice requires a Fund officer (other than the Treasurer) to identify a legitimate business purpose for the disclosure and submit the proposal to the Funds Treasurer for approval following business and compliance review. Additionally, no compensation or other consideration is received by the Funds, the Adviser or any other person for these disclosures. The Trustees will review annually a list of such entities that received such information, the frequency of such disclosures and the business purpose therefor. These procedures are designed to address conflicts of interest between the Funds shareholders on the one hand and the Adviser or any affiliated person of the Funds or such entities on the other hand by creating a structured review and approval process that seeks to ensure that disclosure of information about the Funds portfolio securities is in the best interests of the Funds shareholders. There can be no assurance, however, that the Funds policies and procedures with respect to the disclosure of portfolio holdings information will prevent the misuse of such information by individuals or firms in possession of such information.
Holdings are released to all of the persons and entities described above on conditions of confidentiality, which include appropriate trading prohibitions. Conditions of confidentiality include confidentiality terms included in written agreements, implied by the nature of the relationship ( e.g. , attorney-client relationship), or required by fiduciary or regulatory principles ( e.g. , custody services provided by financial institutions).
Portfolio holdings of the Funds are disclosed on a quarterly basis on forms required to be filed with the SEC as follows: (i) portfolio holdings as of the end of each fiscal year will be filed as part of the annual report filed on Form N-CSR; (ii) portfolio holdings as of the end of the first and third fiscal quarters will be filed on Form N-Q; and (iii) portfolio holdings as of the end of the six-month fiscal period will be filed as part of the semi-annual report filed on Form N-CSR. The Trusts Form N-CSRs and Form N-Qs are available on the SECs website at www.sec.gov.
44
Each Funds top five holdings, including the top five long holdings and top five short holdings for the Long/Short Equity Fund and Long/Short Healthcare Fund, are published in the Funds Fact Sheets, which are posted on the Funds website at www.highlandfunds.com no sooner than 15 days after the end of each quarter. The day after this information has been made available to the public by means of posting on that website, it may also be included in other advertising and marketing material concerning the Funds.
Finally, each Fund releases information concerning any and all portfolio holdings when required by law. Such releases may include providing information concerning holdings of a specific security to the issuer of such security.
Highland Capital Management Fund Advisors, L.P. serves as the Funds investment adviser pursuant to separate Investment Advisory Agreements with each Fund. HCMFA is controlled by James Dondero and Mark Okada, by virtue of their respective share ownership, and its general partner, Strand Advisors XVI, Inc., of which Mr. Dondero is the sole stockholder.
Under the Investment Advisory Agreement with Floating Rate Opportunities Fund, HCMFA receives a monthly fee, computed and accrued daily, at the annual rate of 0.65% of the Funds Average Daily Managed Assets for the first $1 billion, 0.60% of the Funds Average Daily Managed Assets for the next $1 billion and 0.55% of the Funds Average Daily Managed Assets over $2 billion.
Under the Investment Advisory Agreements with Long/Short Equity Fund and Long/Short Healthcare Fund, HCMFA receives a monthly fee, computed and accrued daily, at the annual rate of 2.25% and 1.00%, respectively, of the Average Daily Managed Assets of the respective Fund. Average Daily Managed Assets of a Fund means the average daily value of the total assets of that Fund, less all accrued liabilities of that Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage). The Adviser has contractually agreed to waive 1.25% of the Long/Short Equity Funds management fee. This fee waiver will continue through at least October 31, 2017, and may not be terminated prior to this date without the action or consent of the Funds Board.
Under the Investment Advisory Agreement with Merger Arbitrage Fund, HCMFA receives a monthly fee, computed and accrued daily, at the annual rate of 1.20%, of the Average Daily Managed Assets of the Fund. Average Daily Managed Assets of the Fund means the average daily value of the total assets of the Fund, less all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage). The Adviser has contractually agreed to limit the total annual operating expenses (exclusive of fees paid by the Fund pursuant to its distribution plan under Rule 12b-1 under the Investment Company Act of 1940, as amended, taxes, dividend expenses on short sales, interest payments, brokerage commissions and other transaction costs, acquired fund fees and expenses, and extraordinary expenses) to 1.50% of Merger Arbitrage Funds average daily net assets. This expense limitation will continue through at least May 1, 2018, and may not be terminated prior to this date without the action or consent of the Funds Board.
45
Under the Investment Advisory Agreement with the Opportunistic Credit Fund, HCMFA receives a monthly fee, computed and accrued daily, at the annual rate of 1.00% of the Funds Average Daily Managed Assets. The Adviser has contractually agreed to limit the total annual operating expenses (exclusive of fees paid by the Fund pursuant to its distribution plan under Rule 12b-1 under the Investment Company Act of 1940, as amended, taxes, dividend expenses on short sales, interest payments, brokerage commissions and other transaction costs, acquired fund fees and expenses, and extraordinary expenses) to 0.90% of Opportunistic Credit Funds average daily net assets. This expense limitation will continue through at least October 31, 2017, and may not be terminated prior to this date without the action or consent of the Funds Board.
Under each Investment Advisory Agreement, HCMFA, among other things: (i) continuously furnishes an investment program for each Fund; (ii) places orders for the purchase and sale of securities for the accounts of each Fund; and (iii) votes, exercises consents and exercises all other rights pertaining to such securities on behalf of each Fund, or hires a sub-adviser to do so. Pursuant to a separate administration agreement, HCMFA also provides certain administration services to certain of the Funds. See Section Administrator/Sub-Administrator below.
HCMFA carries out its duties under each Investment Advisory Agreement at its own expense. Each Fund pays its own ordinary operating and activity expenses, such as legal and auditing fees, investment advisory fees, administrative fees, custodial fees, transfer agency fees, the cost of communicating with shareholders and registration fees, as well as other operating expenses such as interest, taxes, brokerage, insurance, bonding, compensation of Independent Trustees of the Funds and extraordinary expenses.
Each Investment Advisory Agreement provides that in the absence of willful misfeasance, bad faith or gross negligence in the performance (or reckless disregard) of its obligations or duties thereunder on the part of HCMFA shall not be subject to liability to a Fund for any error of judgment or mistake of law or for any loss suffered by a Fund in connection with the matters to which the Investment Advisory Agreement relates.
Additionally, each Investment Advisory Agreement remains in force for an initial two year period and from year to year thereafter, subject to annual approval by (a) the Board or (b) a vote of the majority of the Funds outstanding voting securities; provided that in either event continuance is also approved by a majority of the Independent Trustees, by a vote cast in person at a meeting called for the purpose of voting such approval. Each Investment Advisory Agreement may be terminated at any time, without payment of any penalty, by vote of the Trusts Board, or by a vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund, or by the Adviser, in each case on not more than 60 days nor less than 30 days prior written notice to the other party. Each Investment Advisory Agreement will automatically terminate in the event of its assignment, as defined by the 1940 Act and the rules thereunder, or upon the termination of the relevant Investment Advisory Agreement.
Conflicts of Interests. HCMFA and/or its general partner, limited partners, officers, affiliates and employees provide investment advice to other parties and manage other accounts and private investment vehicles similar to the Funds. In connection with such other investment management activities, the Adviser and/or its general partner, limited partners, officers, affiliates and employees may decide to invest the funds of one or more other accounts or recommend the investment of funds by other parties, rather than a Funds monies, in a particular security or strategy. In addition, the Adviser and such other persons will determine the allocation of funds from a Fund and such other accounts to investment strategies and techniques on whatever basis they consider appropriate or desirable in their sole and absolute discretion.
46
The Adviser has built a professional working environment, a firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. The Adviser has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, the Adviser furnishes advisory services to numerous clients in addition to the Funds, and the Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts that have performance or higher fees paid to the Adviser or in which portfolio managers have a personal interest in the receipt of such fees) that may be the same as or different from those made to the Funds. In addition, the Adviser, its affiliates and any of their partners, directors, officers, stockholders or employees may or may not have an interest in the securities whose purchase and sale the Adviser recommends to the Funds. Actions with respect to securities of the same kind may be the same as or different from the action that the Adviser, or any of its affiliates, or any of their partners, directors, officers, stockholders or employees or any member of their families may take with respect to the same securities. Moreover, the Adviser may refrain from rendering any advice or services concerning securities of companies of which any of the Advisers (or its affiliates) partners, directors, officers or employees are directors or officers, or companies as to which the Adviser or any of its affiliates or partners, directors, officers and employees of any of them has any substantial economic interest or possesses material non-public information. In addition to its various policies and procedures designed to address these issues, the Adviser includes disclosure regarding these matters to its clients in both its Form ADV and investment advisory agreements.
The Adviser, its affiliates or their partners, directors, officers or employees similarly serve or may serve other entities that operate in the same or related lines of business, including accounts managed by an investment adviser affiliated with the Adviser. Accordingly, these individuals may have obligations to investors in those entities or funds or to other clients, the fulfillment of which might not be in the best interests of the Fund. As a result, the Adviser will face conflicts in the allocation of investment opportunities to the Funds and other funds and clients. In order to enable such affiliates to fulfill their fiduciary duties to each of the clients for which they have responsibility, the Adviser will endeavor to allocate investment opportunities in a fair and equitable manner, pursuant to policies and procedures adopted by the Adviser and its advisory affiliates that are designed to manage potential conflicts of interest, which may, subject to applicable regulatory constraints, involve pro rata co-investment by the Funds and such other clients or may involve a rotation of opportunities among the Funds and such other clients. To mitigate any actual or perceived conflicts of interest, allocation of limited offering securities (such as IPOs and registered secondary offerings) to principal accounts that do not include third party investors may only be made after all other client account orders for the security have been filled. However, there can be no assurance that such policies and procedures will in every case ensure fair and equitable allocations of investment opportunities, particularly when considered in hindsight.
The Adviser and its affiliates have both subjective and objective procedures and policies in place designed to manage potential conflicts of interest involving clients so that, for example, investment opportunities are allocated in a fair and equitable manner among the Funds and such other clients. An investment opportunity that is suitable for multiple clients of the Adviser and its affiliates may not be capable of being shared among some or all of such clients due to the limited scale of the opportunity or other factors, including regulatory restrictions imposed by the 1940 Act. There can be no assurance that the Advisers or its affiliates efforts to allocate any particular investment opportunity fairly among all clients for whom such opportunity is appropriate will result in an allocation of all or part of such opportunity to the Fund. Not all conflicts of interest can be expected to be resolved in favor of the Fund.
47
The table below sets forth the advisory fees paid by the Merger Arbitrage Fund, as well as any fee waivers and/or expense reimbursements, for the fiscal period:
Fiscal Period Ended
December 31, 2016 1 |
||||
Gross Advisory Fee |
$ | 78,594 | ||
Fee Waiver 2 |
$ | (204,077 | ) | |
Net Advisory Fee |
$ | (125,483 | ) |
1 | The Merger Arbitrage Fund commenced operations on August 19, 2016. |
2 | HCMFA had contractually agreed to limit the total annual fund operating expenses of the Fund to 1.50% of average daily net assets attributable to any class of the Fund through May 1, 2018. |
The table below sets forth the advisory fees paid by the Floating Rate Opportunities Fund, as well as any fee waivers and/or expense reimbursements, for the past three fiscal years:
Fiscal Year Ended
June 30, 2016 |
Fiscal Year Ended
June 30, 2015 |
Fiscal Year Ended
June 30, 2014 |
||||||||||
Gross Advisory Fee |
$ | 4,451,860 | $ | 6,001,605 | $ | 7,803,265 | ||||||
Fee Waiver 1 |
$ | (1,754,419 | ) | $ | 132,612 | $ | (112,247 | ) | ||||
Net Advisory Fee |
$ | 2,697,441 | $ | 6,134,217 | $ | 7,691,018 |
1 | HCMFA had contractually agreed to limit the total annual fund operating expenses of the Fund to 0.95% of average daily net assets attributable to any class of the Fund through October 31, 2016. |
The table below sets forth the advisory fees paid by Long/Short Equity Fund, as well as any fee waiver, for the past three fiscal years:
Fiscal Year Ended
June 30, 2016 |
Fiscal Year Ended
June 30, 2015 |
Fiscal Year Ended
June 30, 2014 |
||||||||||
Gross Advisory Fee |
$ | 18,686,241 | $ | 20,684,901 | $ | 22,525,348 | ||||||
Fee Waiver 1 |
$ | (10,381,245 | ) | $ | (11,491,612 | ) | $ | (12,555,300 | ) | |||
Net Advisory Fee |
$ | 8,304,996 | $ | 9,193,289 | $ | 9,970,048 |
1 | Effective October 31, 2016, HCMFA contractually agreed to waive 1.25% of the Funds management fee. This fee waiver will continue through at least October 31, 2017, and may not be terminated prior to this date without the action or consent of the Funds Board. Prior to October 17, 2013, HCMFA voluntarily waived 1.25% of the Funds management fee. |
The table below sets forth the advisory fees paid by Long/Short Healthcare Fund, as well as any fee waiver, for the past three fiscal years:
Fiscal Year Ended
June 30, 2016 |
Fiscal Year Ended
June 30, 2015 |
Fiscal Year Ended
June 30, 2014 |
||||||||||
Gross Advisory Fee |
$ | 5,962,673 | $ | 4,520,807 | $ | 1,259,064 | ||||||
Fee Waiver |
$ | 0 | $ | 0 | $ | 0 | ||||||
Net Advisory Fee |
$ | 5,962,673 | $ | 4,520,807 | $ | 1,259,064 |
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As the Opportunistic Credit Fund commenced operations on July 1, 2014, the table below sets forth the advisory fees paid by the HSSF Predecessor Fund, as well as any fee waivers and/or expense reimbursements, for the fiscal year ended June 30, 2014 and the advisory fees paid by the Opportunistic Credit Fund, as well as any fee waivers and/or expense reimbursements, for the fiscal years ended June 30, 2015 and June 30, 2016:
Fiscal Year Ended
June 30, 2016 |
Fiscal Year Ended
June 30, 2015 |
Fiscal Year Ended
June 30, 2014 1 |
||||||||||
Gross Advisory Fee |
$ | 732,840 | $ | 483,699 | $ | 21,010 | ||||||
Fee Waiver |
$ | (388,222 | ) | $ | (501,010 | ) | $ | (21,010 | ) | |||
Net Advisory Fee |
$ | 344,618 | $ | (17,311 | ) | $ | 0 |
1 | HCMFA agreed to voluntarily waive all of its advisory fees for the HSSF Predecessor Fund effective May 1, 2012. |
INFORMATION REGARDING PORTFOLIO MANAGERS
The portfolio managers of Floating Rate Opportunities Fund are Mark Okada and Chris Mawn. The following tables provide information about funds and accounts, other than the Fund, for which each portfolio manager is primarily responsible for the day-to-day portfolio management.
As of June 30, 2016, Mark Okada managed the following client accounts:
Type of Accounts |
Total
# of Accounts Managed |
Total
Assets (millions) |
# of Accounts
Managed with Performance- Based Advisory Fee |
Total Assets with
Performance- Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Other Pooled Investment Vehicles: |
1 | $ | 11.59 | 1 | $ | 11.59 | ||||||||||
Other Accounts: |
0 | $ | 0 | 0 | $ | 0 |
As of June 30, 2016, Chris Mawn managed the following client accounts:
Type of Accounts |
Total
# of Accounts Managed |
Total
Assets (millions) |
# of Accounts
Managed with Performance- Based Advisory Fee |
Total Assets with
Performance- Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
1 | $ | 391.29 | 0 | $ | 0 | ||||||||||
Other Pooled Investment Vehicles: |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Other Accounts: |
0 | $ | 0 | 0 | $ | 0 |
The portfolio managers of Long/Short Equity Fund are Jonathan Lamensdorf and Michael McLochlin. The following tables provide information about funds and accounts, other than the Fund, for which the portfolio managers are primarily responsible for the day-to-day portfolio management.
49
As of June 30, 2016, Jonathan Lamensdorf managed the following client accounts:
Type of Accounts |
Total
# of Accounts Managed |
Total
Assets (millions) |
# of Accounts
Managed with Performance- Based Advisory Fee |
Total Assets with
Performance- Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
2 | $ | 26.88 | 0 | $ | 0 | ||||||||||
Other Pooled Investment Vehicles: |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Other Accounts: |
0 | $ | 0 | 0 | $ | 0 |
As of June 30, 2016, Michael McLochlin managed the following other client accounts:
Type of Accounts |
Total
# of Accounts Managed |
Total
Assets (millions) |
# of Accounts
Managed with Performance- Based Advisory Fee |
Total Assets with
Performance- Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Other Pooled Investment Vehicles: |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Other Accounts: |
0 | $ | 0 | 0 | $ | 0 |
The portfolio manager of Long/Short Healthcare Fund is Michael D. Gregory. The following table provides information about funds and accounts, other than the Fund, for which the portfolio manager is primarily responsible for the day-to-day portfolio management.
As of June 30, 2016, Michael D. Gregory managed the following client accounts:
Type of Accounts |
Total
# of Accounts Managed |
Total
Assets (millions) |
# of Accounts
Managed with Performance- Based Advisory Fee |
Total Assets with
Performance- Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
5 | $ | 286.71 | 0 | $ | 0 | ||||||||||
Other Pooled Investment Vehicles: |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Other Accounts: |
0 | $ | 0 | 0 | $ | 0 |
The portfolio managers of the Opportunistic Credit Fund are James Dondero and Trey Parker. The following tables provide information about funds and accounts, other than the Fund, for which the portfolio managers are primarily responsible for the day-to-day portfolio management.
As of June 30, 2016, James Dondero managed the following client accounts:
Type of Accounts |
Total
# of Accounts Managed |
Total
Assets (millions) |
# of Accounts
Managed with Performance- Based Advisory Fee |
Total Assets with
Performance- Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
7 | $ | 1,667.06 | 0 | $ | 0 | ||||||||||
Other Pooled Investment Vehicles: |
2 | $ | 451.15 | 2 | $ | 451.15 | ||||||||||
Other Accounts: |
0 | $ | 0 | 0 | $ | 0 |
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As of June 30, 2016, Trey Parker managed the following client accounts:
Type of Accounts |
Total
# of Accounts Managed |
Total
Assets (millions) |
# of Accounts
Managed with Performance- Based Advisory Fee |
Total Assets with
Performance- Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Other Pooled Investment Vehicles: |
3 | $ | 632.60 | 2 | $ | 533.03 | ||||||||||
Other Accounts: |
3 | $ | 737.99 | 1 | $ | 132.24 |
The portfolio managers of Merger Arbitrage Fund are James Dondero and Jonathan Lamensdorf. The following tables provide information about funds and accounts, other than the Fund, for which the portfolio managers are primarily responsible for the day-to-day portfolio management.
As of December 31, 2016, James Dondero managed the following client accounts:
Type of Accounts |
Total
# of Accounts Managed |
Total
Assets (millions) |
# of Accounts
Managed with Performance- Based Advisory Fee |
Total Assets with
Performance- Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
8 | $ | 1,762.27 | 0 | $ | 0 | ||||||||||
Other Pooled Investment Vehicles: |
2 | $ | 505.88 | 2 | $ | 505.88 | ||||||||||
Other Accounts: |
0 | $ | 0 | 0 | $ | 0 |
As of December 31, 2016, Jonathan Lamensdorf managed the following client accounts:
Type of Accounts |
Total
# of Accounts Managed |
Total
Assets (millions) |
# of Accounts
Managed with Performance- Based Advisory Fee |
Total Assets
with Performance- Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
2 | $ | 504.98 | 0 | $ | 0 | ||||||||||
Other Pooled Investment Vehicles: |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Other Accounts: |
0 | $ | 0 | 0 | $ | 0 |
Compensation Structure HCMFA
HCMFAs financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors, including the pre-tax relative performance of a portfolio managers underlying account, the pre-tax combined performance of the portfolio managers underlying accounts, and the pre-tax relative performance of the portfolio managers underlying accounts measured against other employees. The principal components of compensation include a base salary, a discretionary bonus, various retirement benefits and one or more of the incentive compensation programs established by HCMFA, such as its Short-Term Incentive Plan and its Long-Term Incentive Plan, described below.
Base compensation. Generally, portfolio managers receive base compensation based on their seniority and/or their position with HCMFA, which may include the amount of assets supervised and other management roles within HCMFA. Base compensation is determined by taking into account current industry norms and market data to ensure that HCMFA pays a competitive base compensation.
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Discretionary compensation. In addition to base compensation, portfolio managers may receive discretionary compensation, which can be a substantial portion of total compensation. Discretionary compensation can include a discretionary cash bonus paid to recognize specific business contributions and to ensure that the total level of compensation is competitive with the market, as well as participation in incentive plans, including one or more of the following:
Short-Term Incentive PlanThe purpose of this plan is to attract and retain the highest quality employees for positions of substantial responsibility, and to provide additional incentives to a select group of management or highly-compensated employees of HCMFA in order to promote the success of HCMFA.
Long-Term Incentive PlanThe purpose of this plan is to create positive morale and teamwork, to attract and retain key talent and to encourage the achievement of common goals. This plan seeks to reward participating employees based on the increased value of HCMFA.
Because each persons compensation is based on his or her individual performance, HCMFA does not have a typical percentage split among base salary, bonus and other compensation. Senior portfolio managers who perform additional management functions may receive additional compensation in these other capacities. Compensation is structured such that key professionals benefit from remaining with HCMFA.
Conflicts of Interest HCMFA
Because each portfolio manager manages other accounts, including accounts that may pay higher fees, potential conflicts of interest exist, including potential conflicts between the investment strategy of a Fund and the investment strategy of the other accounts managed by the portfolio manager and potential conflicts in the allocation of investment opportunities between a Fund and the other accounts. HCMFA has policies and procedures in place that are reasonably designed to mitigate these conflicts of interest, which are also described below.
HCMFA and/or its general partner, limited partners, officers, affiliates and employees provide investment advice to other parties and manage other accounts and private investment vehicles similar to the Funds. For the purposes of this section, the term Highland shall include HCMFA and its affiliated investment advisors, including Highland Capital Management, L.P. and all affiliates listed on its Form ADV, as filed with the SEC June 28, 2016 (CRD No. 149653). In connection with such other investment management activities, HCMFA and/or its general partner, limited partners, officers, affiliates and employees may decide to invest the funds of one or more other accounts or recommend the investment of funds by other parties, rather than a Funds monies, in a particular security or strategy. In addition, HCMFA and such other persons will determine the allocation of funds from a Fund and such other accounts to investment strategies and techniques on whatever basis they consider appropriate or desirable in their sole and absolute discretion.
HCMFA has built a professional working environment, a firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. HCMFA has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all
52
client accounts are treated equitably over time. Nevertheless, HCMFA furnishes advisory services to numerous clients in addition to the Funds, and HCMFA may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts that have performance or higher fees paid to HCMFA or in which portfolio managers have a personal interest in the receipt of such fees) that may be the same as or different from those made to the Fund. In addition, HCMFA, its affiliates and any of their partners, directors, officers, stockholders or employees may or may not have an interest in the securities whose purchase and sale HCMFA recommends to the Funds. Actions with respect to securities of the same kind may be the same as or different from the action that HCMFA, or any of its affiliates, or any of their partners, directors, officers, stockholders or employees or any member of their families may take with respect to the same securities. Moreover, HCMFA may refrain from rendering any advice or services concerning securities of companies of which any of HCMFAs (or its affiliates) partners, directors, officers or employees are directors or officers, or companies as to which HCMFA or any of its affiliates or partners, directors, officers and employees of any of them has any substantial economic interest or possesses material non-public information. In addition to its various policies and procedures designed to address these issues, HCMFA includes disclosure regarding these matters to its clients in both its Form ADV and investment advisory agreements.
HCMFA, its affiliates or their partners, directors, officers or employees similarly serve or may serve other entities that operate in the same or related lines of business. Accordingly, these individuals may have obligations to investors in those entities or funds or to other clients, the fulfillment of which might not be in the best interests of the Fund. As a result, HCMFA will face conflicts in the allocation of investment opportunities to the Funds and other funds and clients. In order to enable such affiliates to fulfill their fiduciary duties to each of the clients for which they have responsibility, HCMFA will endeavor to allocate investment opportunities in a fair and equitable manner which may, subject to applicable regulatory constraints, involve pro rata co-investment by the Funds and such other clients or may involve a rotation of opportunities among the Funds and such other clients.
Conflicts may arise in cases when clients invest in different parts of an issuers capital structure, including circumstances in which one or more clients own private securities or obligations of an issuer and other clients may own public securities of the same issuer. In addition, one or more clients may invest in securities, or other financial instruments, of an issuer that are senior or junior to securities, or financial instruments, of the same issuer that are held by or acquired for, one or more other clients. For example, if such issuer encounters financial problems, decisions related to such securities (such as over the terms of any workout or proposed waivers and amendments to debt covenants) may raise conflicts of interests. In such a distressed situation, a client holding debt securities of the issuer may be better served by a liquidation of the issuer in which it may be paid in full, whereas a client holding equity securities of the issuer might prefer a reorganization that holds the potential to create value for the equity holders. In the event of conflicting interests within an issuers capital structure, Highland will generally pursue the strategy that Highland believes will maximize value for Highland accounts overall (without regard to the nature of the accounts involved or fees received from such accounts). This strategy may be recommended by one or more Highland investment professionals. A single person may represent more than one part of an issuers capital structure. The recommended course of action will be presented to the conflicts committee for final determination as to how to proceed, Highland may elect, but is not required, to assign different teams to make recommendations for different parts of the capital structure as the conflicts committee determines in its discretion. In the event any Highland personnel serve on the board of the subject company, they generally recuse themselves from voting on any board
53
matter with respect to a transaction that has an asymmetrical impact on the capital structure. Highland personnel board members may still make recommendations to the conflicts committee. If any such persons are also on the conflicts committee, they may recuse themselves from the committees determination. A Portfolio Manager with respect to any applicable Highland registered investment company clients (Retail Accounts) participates in such discussions, but makes an independent determination as to which course of action he or she determines is in the best interest of the applicable Retail Accounts. Highland may use external counsel for guidance and assistance.
HCMFA and its affiliates have both subjective and objective procedures and policies in place designed to manage potential conflicts of interest involving clients so that, for example, investment opportunities are allocated in a fair and equitable manner among the Funds and such other clients. An investment opportunity that is suitable for multiple clients of HCMFA and its affiliates may not be capable of being shared among some or all of such clients due to the limited scale of the opportunity or other factors, including regulatory restrictions imposed by the 1940 Act. There can be no assurance that HCMFAs or its affiliates efforts to allocate any particular investment opportunity fairly among all clients for whom such opportunity is appropriate will result in an allocation of all or part of such opportunity to the Funds. Not all conflicts of interest can be expected to be resolved in favor of the Funds.
Another type of conflict may arise if HCMFA causes one client account of an affiliated advisor to buy a security and another client account to sell or short the same security. Currently, such opposing positions are generally not permitted within the same account without prior trade approval by the Chief Compliance Officer. However, a portfolio manager may enter into opposing positions for different clients to the extent each such client has a different investment objective and each such position is consistent with the investment objective of the applicable client. In addition, transactions in investments by one or more affiliated client accounts may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of other client accounts.
Because certain client accounts may have investment objectives, strategies or legal, contractual, tax or other requirements that differ (such as the need to take tax losses, realize profits, raise cash, diversification, etc.), an affiliated advisor may purchase, sell or continue to hold securities for certain client accounts contrary to other recommendations. In addition, an affiliated advisor may be permitted to sell securities or instruments short for certain client accounts and may not be permitted to do so for other affiliated client accounts.
Ownership of Securities
The following table sets forth the dollar range of equity securities of the Merger Arbitrage Fund beneficially owned by each portfolio manager. This information is provided as of the fiscal year ended December 31, 2016.
Name of Portfolio Manager |
Name of Fund |
Dollar Range of Equity
Securities Beneficially Owned by Portfolio Manager |
||||
James D. Dondero 1 |
Merger Arbitrage Fund | Over $1,000,000 | ||||
Jonathan Lamensdorf |
Merger Arbitrage Fund | None |
1 | Mr. Dondero controls HCM. Through his control of HCM, Mr. Dondero may be viewed as having voting and dispositive power over all of the shares of Merger Arbitrage Funds common stock directly owned by HCM. |
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The following table sets forth the dollar range of equity securities of the Funds (other than the Merger Arbitrage Fund) beneficially owned by each portfolio manager. This information is provided as of the fiscal year ended June 30, 2016.
Name of Portfolio Manager |
Name of Fund |
Dollar Range of
Equity Securities Beneficially Owned by Portfolio Manager 1 |
||||
Mark Okada |
Floating Rate Opportunities Fund | $100,001 - $500,000 | ||||
Chris Mawn |
Floating Rate Opportunities Fund | $100,001 - $500,000 | ||||
Jonathan Lamensdorf |
Long/Short Equity Fund | Over $1,000,000 | ||||
Michael McLochlin |
Long/Short Equity Fund | $100,001 - $500,000 | ||||
Michael D. Gregory |
Long/Short Healthcare Fund | $100,001 - $500,000 | ||||
James D. Dondero |
Opportunistic Credit Fund | Over $1,000,000 | ||||
Trey Parker |
Opportunistic Credit Fund | $50,001 - $100,000 |
1 | Messrs. Mawns, Gregorys and Parkers beneficial ownership of these shares includes the value of deferred compensation payments that are determined as if the amount had been invested, as of the date awarded, in shares of the respective Fund. |
ADMINISTRATOR/SUB-ADMINISTRATOR
HCMFA provides administration services to the Funds, other than the Opportunistic Credit Fund, for a monthly administration fee, computed and accrued daily, at an annual rate of 0.20% of each Funds Average Daily Managed Assets. In such capacity, HCMFA generally assists each Fund in all aspects of its administration and operations. Under a separate sub-administration agreement, HCFMA has delegated certain administrative functions, as of January 14, 2013, to State Street, One Lincoln Street, Boston, Massachusetts 02111, and pays State Street a portion of the fee it receives from the Fund. Under the sub-administration agreement, State Street has agreed to provide corporate secretarial services; prepare and file various reports with the appropriate regulatory agencies; assist in preparing various materials required by the SEC; and prepare various materials required by any state securities commission having jurisdiction over the Funds.
The table below sets forth the administration fees paid by the Merger Arbitrage Fund, as well as any fee waiver or reimbursement, for the fiscal period ended December 31, 2016.
Fiscal Period
Ended December 31, 2016 |
||||
Merger Arbitrage Fund 1 |
||||
Gross Administration Fee |
$ | 0 | ||
Fee Waiver/Reimbursement |
$ | 0 | ||
Net Administration Fee |
$ | 0 |
1 | The Merger Arbitrage Fund commenced operations on August 19, 2016. |
55
The table below sets forth the administration fees paid by the Funds (other than the Merger Arbitrage Fund), as well as any fee waiver or reimbursement, for the past three fiscal years.
Fiscal Year
Ended June 30, 2016 |
Fiscal Year
Ended June 30, 2015 |
Fiscal Year
Ended June 30, 2014 |
||||||||||
Floating Rate Opportunities Fund |
||||||||||||
Gross Administration Fee |
$ | 1,369,803 | $ | 1,848,193 | $ | 2,401,632 | ||||||
Fee Waiver/Reimbursement |
$ | 0 | $ | 0 | $ | 0 | ||||||
Net Administration Fee |
$ | 1,369,803 | $ | 1,848,193 | $ | 2,401,632 | ||||||
Long/Short Equity Fund |
||||||||||||
Gross Administration Fee |
$ | 1,660,999 | $ | 1,838,658 | $ | 1,979,740 | ||||||
Fee Waiver/Reimbursement |
$ | 0 | $ | 0 | $ | 0 | ||||||
Net Administration Fee |
$ | 1,660,999 | $ | 1,838,658 | $ | 1,979,740 | ||||||
Long/Short Healthcare Fund |
||||||||||||
Gross Administration Fee |
$ | 1,192,534 | $ | 904,162 | $ | 251,809 | ||||||
Fee Waiver |
$ | 0 | $ | 0 | $ | 0 | ||||||
Net Administration Fee |
$ | 1,192,534 | $ | 904,162 | $ | 251,809 |
For the fiscal year ended June 30, 2016, June 30, 2015 and June 30, 2014 for all Funds except Merger Arbitrage Fund, HCMFA or its affiliates, as applicable, paid $499,201, $537,989 and $440,087, respectively, to State Street for its services as sub-administrator. For the fiscal period ended December 31, 2016 for Merger Arbitrage Fund, HCMFA or its affiliates, as applicable, paid $1,959 to State Street for its services as sub-administrator.
With respect to the Opportunistic Credit Fund, the Trust has entered into an administration agreement with State Street, One Lincoln Street, Boston, Massachusetts 02111 and pays State Street a fee for administration services. State Street has agreed to provide corporate secretarial services; prepare and file various reports with the appropriate regulatory agencies; assist in preparing various materials required by the SEC; and prepare various materials required by any state securities commission having jurisdiction over the Fund. HCMFA generally assists in all aspects of the Trusts administration and operations and furnishes offices, necessary facilities, equipment and personnel.
The table below sets forth the administration fees paid by Opportunistic Credit Fund, as well as any fee waiver or reimbursement, for the past three fiscal years.
Fiscal Year
Ended June 30, 2016 |
Fiscal Year
Ended June 30, 2015 |
Fiscal Year
Ended June 30, 2014 |
||||||||||
Opportunistic Credit Fund |
||||||||||||
Gross Administration Fee |
$ | 24,319 | $ | 15,621 | $ | 0 | ||||||
Fee Waiver 1 |
$ | 0 | $ | 0 | $ | 0 | ||||||
Net Administration Fee |
$ | 24,319 | $ | 15,621 | $ | 0 |
1 | The Opportunistic Credit Fund commenced operations on July 1, 2014. |
56
Shares of each Fund are offered for sale on a continuous basis through the Funds principal underwriter, HCFD, 200 Crescent Court, Suite 700, Dallas, Texas 75201, an affiliate of the Adviser. Prior to April 1, 2014, Foreside Funds Distributors LLC., 400 Berwyn Park, 899 Cassatt Road, Berwyn, Pennsylvania 19312 (Foreside.) served as the principal underwriter for Floating Rate Opportunities Fund, Long/Short Equity Fund and Long/Short Healthcare Fund. Foreside and HCFD are collectively referred to as the Underwriter. HCFD will use all reasonable efforts in connection with distribution of shares of the Funds.
The Funds have agreed to pay all expenses in connection with registration of their shares with the SEC, auditing and filing fees in connection with registration of their shares under the various state blue sky laws, the cost of preparation of the Prospectus and other expenses.
The Underwriter was paid the following aggregate commissions on sales of Class A Shares and Class C Shares of the Merger Arbitrage Funds during the fiscal period ended December 31, 2016.
Fiscal Period
Ended December 31, 2016 |
||||
Merger Arbitrage Fund 1 |
||||
Class A Shares |
$ | 836.82 | ||
Class C Shares |
$ | 0 |
1 | The Merger Arbitrage Fund commenced operations on August 19, 2016. |
The Underwriter was paid the following aggregate commissions on sales of Class A Shares and Class C Shares of the Funds (other than the Merger Arbitrage Fund) during the past three fiscal years.
Fiscal Year
Ended June 30, 2016 |
Fiscal Year
Ended June 30, 2015 |
Fiscal Year
Ended June 30, 2014 |
||||||||||
Floating Rate Opportunities Fund |
||||||||||||
Class A Shares |
$ | 21,676 | $ | 12,140 | $ | 22,850 | ||||||
Class C Shares |
$ | 0 | $ | 0 | $ | 0 | ||||||
Long/Short Equity Fund |
||||||||||||
Class A Shares |
$ | 18,133 | $ | 10,203 | $ | 14,303 | ||||||
Class C Shares |
$ | 0 | $ | 0 | $ | 0 | ||||||
Long/Short Healthcare Fund |
||||||||||||
Class A Shares |
$ | 118,975 | $ | 153,384 | $ | 46,812 | ||||||
Class C Shares |
$ | 0 | $ | 0 | $ | 0 | ||||||
Opportunistic Credit Fund 1 |
||||||||||||
Class A Shares |
$ | 0 | $ | 0 | $ | 0 | ||||||
Class C Shares |
$ | 0 | $ | 0 | $ | 0 |
1 | The Opportunistic Credit Fund commenced operations on July 1, 2014. The HSSF Predecessor Fund did not pay any commissions for the fiscal year ended June 30, 2014. |
57
HCMFA performs certain services and incurs certain expenses with respect to the promotion and distribution of Fund shares. The Underwriter pays HCMFA for promotion and distribution expenses incurred by it in respect of the Funds (service payments). Such service payments are made out of commissions retained by the Underwriter after it has first been paid its own compensation and been reimbursed for its own expenses (including amounts paid by the Underwriter to financial intermediaries in connection with sales of the Funds) (underwriter concessions), provided that in no event shall the Underwriter be required to use in excess of 50% of the underwriter concessions retained by the Underwriter to make such service payments. During some periods, underwriter concessions received by the Underwriter may be insufficient to pay HCMFA fully for its promotional and distribution expenses. In such cases, the Underwriter agrees to pay such service payments to the extent of the available underwriter concessions and pay the balance of such service payments as the Underwriter receives underwriter concessions in future periods.
Effective May 2, 2013 for the Floating Rate Opportunities Fund, the Underwriter pays Financial Advisors the following increased cumulative commissions for purchases of $500,000 or more of Class A shares: 1.00% for amounts less than $5 million, 0.40% for amounts greater than or equal to $5 million but less than $25 million and 0.25% for amounts greater than or equal to $25 million. The terms and conditions with respect to CDSCs and brokerage commissions for Class A Shares purchased prior to May 2, 2013 are unchanged.
Effective April 21, 2014 for the Long/Short Equity Fund and Long/Short Healthcare Fund, the Underwriter pays Financial Advisors the following increased cumulative commissions for purchases of $500,000 or more of Class A shares: 1.00% for amounts less than $5 million, 0.40% for amounts greater than or equal to $5 million but less than $25 million and 0.25% for amounts greater than or equal to $25 million. The terms and conditions with respect to CDSCs and brokerage commissions for Class A Shares purchased prior to April 21, 2014 are unchanged.
In addition, effective April 21, 2014, Class A Shares of Long/Short Equity Fund and Long/Short Healthcare Fund bought without an initial sales charge in accounts aggregating $500,000 or more at the time of purchase are subject to a 1.00% CDSC if the shares are sold within eighteen months of purchase.
The following table shows the amount of service payments paid by the Underwriter to HCMFA during the past three fiscal years.
Fiscal Period
Ended December 31, 2016 |
||||
Merger Arbitrage Fund 1 |
$ | 0 |
1 | The Merger Arbitrage Fund commenced operations on August 19, 2016. The Underwriter did not pay fees to HCMFA with respect to the Merger Arbitrage Predecessor Fund (which commenced operations on January 20, 2015) during the fiscal years ended December 31, 2015 and December 31, 2014. |
Fiscal Year
Ended June 30, 2016 |
Fiscal Year
Ended June 30, 2015 |
Fiscal Year
Ended June 30, 2014 |
||||||||||
Floating Rate Opportunities Fund |
$ | 0 | $ | 0 | $ | 11,641 | ||||||
Long/Short Equity Fund |
$ | 0 | $ | 0 | $ | 3,274 | ||||||
Long/Short Healthcare Fund |
$ | 0 | $ | 0 | $ | 2,266 | ||||||
Opportunistic Credit Fund 1 |
$ | 0 | $ | 0 | N/A |
1 | The Opportunistic Credit Fund commenced operations on July 1, 2014. The Underwriter did not pay fees to HCMFA with respect to the HSSF Predecessor Fund during the fiscal year ended June 30, 2014. |
58
DISTRIBUTION AND SERVICE FEE PLAN
The Distribution and Service Fee Plan (the Plan) requires the payment of a monthly service fee and distribution fee to the Underwriter.
For Long/Short Equity Fund, Long/Short Healthcare Fund and Merger Arbitrage Fund, the Plan requires the payment of (i) a monthly service fee at the annual rate of 0.25% of the average daily net assets attributable to Class A Shares and 0.25% of average daily net assets attributable to Class C Shares and (ii) a distribution fee at the annual rates of 0.10% of the average daily net assets of its Class A Shares and 0.75% of the average daily net assets of its Class C Shares.
For Floating Rate Opportunities Fund and Opportunistic Credit Fund, the Plan requires the payment of (i) a monthly service fee to the Underwriter at the annual rate of 0.25% of the average daily net assets attributable to Class A Shares and 0.25% of average daily net assets attributable to Class C Shares and (ii) a distribution fee at the annual rates of 0.10% of the average daily net assets of its Class A Shares and 0.60% of the average daily net assets of its Class C Shares, if any.
The Underwriter may pay all or a portion of these fees to Financial Advisors whose clients own shares of the Fund. The Trustees of the Funds have concluded, in the exercise of their reasonable business judgment and in light of their fiduciary duties, that there is a reasonable likelihood that the Plan will benefit the Funds and their shareholders. For instance, asset growth resulting from the Plan can be expected to benefit each Funds shareholders through the realization of economies of scale and potentially lower expense levels.
The Underwriter may pay certain Financial Advisors whose clients own shares of a Fund monthly distribution fees with respect to a given share class at a rate greater than that set forth above, so long as the total payments paid by the Fund to the Underwriter for each share class under a Plan for distribution fees do not exceed the stated percentages. In the event that there are insufficient assets in the Plan to make a contractually required payment to a Financial Advisor, the Adviser has agreed to pay such Financial Advisor at its own expense out of its own financial resources. See Shareowner Guide How to Invest in the Highland FundsDistribution and Service Fees in the Funds Prospectus for additional information on revenue sharing payments. The Underwriter and the Adviser will not agree to make distribution payments to Financial Advisors from assets of the Plan in an amount exceeding the Distribution Fees noted above with respect to each Share class. Any shareholder purchasing shares of a Fund through a Financial Advisor should check with the Financial Advisor to determine the distribution fees it is receiving.
59
The following table sets forth the distribution fees and service fees paid by the Merger Arbitrage Fund to the Underwriter for the fiscal period ended December 31, 2016.
Fiscal Period Ended
December 31, 2016 Distribution and Service Fees |
||||
Merger Arbitrage Fund 1 |
||||
Class A |
$ | 34 | ||
Class C |
$ | 75 |
1 | The Merger Arbitrage Fund commenced operations on August 19, 2016. |
The following table sets forth the distribution fees and service fees paid by the Funds (other than Merger Arbitrage Fund) to the Underwriter for the fiscal year ended June 30, 2016.
Fiscal Year Ended
June 30, 2016 Distribution and Service Fees |
||||
Floating Rate Opportunities Fund |
||||
Class A |
$ | 621,656 | ||
Class C |
$ | 2,184,873 | ||
Long/Short Equity Fund |
||||
Class A |
$ | 241,045 | ||
Class C |
$ | 593,680 | ||
Long/Short Healthcare Fund |
||||
Class A |
$ | 497,542 | ||
Class C |
$ | 805,296 | ||
Opportunistic Credit Fund |
||||
Class A |
$ | 19,668 | ||
Class C |
$ | 1,623 |
During the fiscal period ended December 31, 2016, the Underwriter incurred the following expenses on behalf of the Merger Arbitrage Fund in connection with distributions under the Plan.
Advertising |
Printing and
Mailing of Prospectus to other than Current Shareholders |
Compensation
to Underwriters |
Compensation
to Broker- Dealers |
Compensation
to Sales Personnel |
Interest,
Carrying or other Financing Charges |
|||||||||||||||||||
Merger Arbitrage Fund 1 |
||||||||||||||||||||||||
Class A |
$ | 0 | $ | 0 | $ | 0 | $ | 5.52 | $ | 0 | $ | 0 | ||||||||||||
Class C |
$ | 0.04 | $ | 0.02 | $ | 0 | $ | 0 | $ | 0.46 | $ | 0 |
1 | Merger Arbitrage Fund commenced operations on August 19, 2016. |
60
During the fiscal year ended June 30, 2016, the Underwriter incurred the following expenses on behalf of the Funds (other than the Merger Arbitrage Fund) in connection with distributions under the Plan.
Advertising |
Printing and
Mailing of Prospectus to other than Current Shareholders |
Compensation
to Underwriters |
Compensation
to Broker- Dealers |
Compensation
to Sales Personnel |
Interest,
Carrying or other Financing Charges |
|||||||||||||||||||
Floating Rate Opportunities Fund |
||||||||||||||||||||||||
Class A |
$ | 12,926 | $ | 16,132 | $ | 0 | $ | 527,445 | $ | 117,410 | $ | 0 | ||||||||||||
Class C |
$ | 96,441 | $ | 57,237 | $ | 0 | $ | 2,061,680 | $ | 184,930 | $ | 0 | ||||||||||||
Long/Short Equity Fund |
||||||||||||||||||||||||
Class A |
$ | 2,728 | $ | 7,088 | $ | 0 | $ | 181,410 | $ | 49,817 | $ | 0 | ||||||||||||
Class C |
$ | 73,366 | $ | 23,348 | $ | 0 | $ | 443,171 | $ | 56,059 | $ | 0 | ||||||||||||
Long/Short Healthcare Fund |
||||||||||||||||||||||||
Class A |
$ | 9,800 | $ | 16,137 | $ | 0 | $ | 367,280 | $ | 104,324 | $ | 0 | ||||||||||||
Class C |
$ | 95,857 | $ | 31,780 | $ | 0 | $ | 391,616 | $ | 78,310 | $ | 0 | ||||||||||||
Opportunistic Credit Fund |
||||||||||||||||||||||||
Class A |
$ | 32 | $ | 0 | $ | 0 | $ | 19,985 | $ | 309 | $ | 0 | ||||||||||||
Class C |
$ | 137 | $ | 0 | $ | 0 | $ | 33 | $ | 165 | $ | 0 |
TRANSFER AGENT AND DIVIDEND PAYING AGENT
Boston Financial Data Services Inc. (BFDS), located at 2000 Crown Colony Drive Quincy, Massachusetts 02169-09534, serves as the transfer agent and dividend paying agent of the Funds investments. As transfer agent, BFDS is responsible for processing purchase and redemption requests and crediting dividends to the accounts of shareholders of a Fund. For its services, BFDS receives monthly fees charged to a Fund, plus certain charges for securities transactions.
State Street, located at One Lincoln Street, Boston, Massachusetts 02111, is the custodian for the Funds. State Street is responsible for holding all securities, other investments and cash, receiving and paying for securities purchased, delivering against payment securities sold, receiving and collecting income from investments, making all payments covering expenses and performing other administrative duties, all as directed by authorized persons. State Street does not exercise any supervisory function in such matters as purchase and sale of portfolio securities, payment of dividends or payment of expenses.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm for the Funds is KPMG LLP, located at Two Financial Center, 60 South Street, Boston, Massachusetts 02111. The independent registered public accounting firm audits and reports on the annual financial statements, reviews certain regulatory reports and U.S. federal income tax returns, and performs other professional accounting, auditing and tax services when engaged to do so.
61
PORTFOLIO TRANSACTIONS AND BROKERAGE
Selection of Broker-Dealers; Order Placement
Subject to the overall review of the Funds Board, the Adviser is responsible for decisions to buy and sell securities and other portfolio holdings of the Funds, for selecting the broker or dealer to be used and for negotiating any commission rates paid. In underwritten offerings, securities usually are purchased at a fixed price that includes an amount of compensation to the underwriter, generally referred to as the underwriters concession or discount. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid.
The Adviser and its affiliates manage other accounts, including private funds and individual accounts that invest in Fund investments. Although investment decisions for the Funds are made independently from those of such other accounts, investments of the type the Funds may make also may be made on behalf of such other accounts. When a Fund and one or more other accounts is prepared to invest in, or desires to dispose of, the same investment, available investments or opportunities for each are allocated in a manner believed by the Adviser to be equitable over time. The Adviser may (but is not obligated to) aggregate orders, which may include orders for accounts in which the Adviser or its affiliates have an interest, to purchase and sell securities to obtain favorable execution or lower brokerage commissions, to the extent permitted by applicable laws and regulations. Although the Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should benefit all participating accounts, in some cases these activities may adversely affect the price paid or received or the size of the position obtained by or disposed of for the Funds. Where trades are aggregated, the investments or proceeds, as well as the expenses incurred, will be allocated by the Adviser in a manner designed to be equitable and consistent with the Advisers fiduciary duty to the Funds and its other clients (including its duty to seek to obtain best execution of client trades).
Commission Rates; Brokerage and Research Services
The Adviser seeks to obtain best execution, considering the execution price and overall commission costs paid and other factors. The Adviser routes its orders to various broker-dealers for execution at its discretion. Factors involved in selecting brokerage firms include the size, type and difficulty of the transaction, the nature of the market for the security, the reputation, experience and financial stability of the broker-dealer involved, the quality of service, the quality of research and investment information provided and the firms risk in positioning a block of securities. Within the framework of the policy of obtaining the most favorable price and efficient execution, the Adviser does consider brokerage and research services (as defined in the Securities Exchange Act of 1934, as amended) provided by brokers who effect portfolio transactions with the Adviser or the Funds. Brokerage and research services are services that brokerage houses customarily provide to institutional investors and include statistical and economic data and research reports on particular issuers and industries.
In addition, the investment advisory agreement between the Trust and the Adviser relating to each Fund authorizes the Adviser, on behalf of the Fund, in selecting brokers or dealers to execute a particular transaction and in evaluating the best overall terms available, to consider the brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) provided to the Fund and/or other accounts over which the Adviser or its affiliates exercise investment discretion. The
62
fees under the investment advisory agreement relating to a Fund will not be reduced by reason of the Funds receiving brokerage and research services. Such services include analyses and reports regarding issuers, industries, economic trends, portfolio strategy, and may effect securities transactions and perform certain functions related thereto. In addition, such services may include advice concerning the advisability of investing in, purchasing or selling securities and the availability of particular securities or buyers or sellers of securities. The research services received from broker-dealers that execute transactions on behalf of a Fund may be useful to the Adviser in servicing that Fund as well as all of the Advisers accounts and not all of these services may be used in connection with the particular Fund or Funds generating the commissions. Consistent with limits established by the Federal securities laws, a Fund may pay broker-dealer commissions for agency transactions that exceed the amount of commissions charged by other broker-dealers in recognition of their research and brokerage services.
The following tables show the amount of brokerage commissions paid by the Funds over the past three fiscal years. Variations in the amount of brokerage commissions paid by the Funds from year to year may result from changing asset levels, market conditions or changes in the Advisers outlook.
Fiscal Period
Ended December 31, 2016 |
||||
Merger Arbitrage Fund 1 |
$ | 64,643 |
1 | Merger Arbitrage Fund commenced operations on August 19, 2016. |
Fiscal Year
Ended June 30, 2016 |
Fiscal Year
Ended June 30, 2015 |
Fiscal Year
Ended June 30, 2014 |
||||||||||
Floating Rate Opportunities Fund |
$ | 86,014 | $ | 77,851 | $ | 150,618 | ||||||
Long/Short Equity Fund |
$ | 6,290,261 | $ | 5,072,409 | $ | 4,987,064 | ||||||
Long/Short Healthcare Fund |
$ | 12,877,332 | $ | 4,357,147 | $ | 1,698,981 | ||||||
Opportunistic Credit Fund 1 |
$ | 10,793 | $ | 11,932 | N/A |
1 | The Fund commenced operations on July 1, 2014. |
The following table shows the dollar amount of brokerage commissions paid to firms that provided research and brokerage services and the approximate dollar amount of transactions involved during the fiscal period ended December 31, 2016.
Fund |
Commissions Paid to
Firms for Brokerage and Research Services |
Total Amount of
Transactions to Firms for Brokerage and Research Services |
||||||
Merger Arbitrage Fund 1 |
$ | 64,643 | $ | 247,130,184 |
1 | Merger Arbitrage Fund commenced operations on August 19, 2016. |
63
The following table shows the dollar amount of brokerage commissions paid to each firm that provided research and brokerage services obtained in compliance with Section 28(e) of the Exchange Act and the approximate dollar amount of transactions involved during the fiscal period ended December 31, 2016.
Broker |
Commissions Paid
to Firms for Brokerage and Research Services |
Total Amount of
Transactions to Firms for Brokerage and Research Services |
||||||
Auerbach Grayson & Co. |
$ | 22,856 | $ | 28,375,298 | ||||
Barclays Capital Inc. |
$ | 17,674 | $ | 105,256,783 | ||||
Goldman Sachs |
$ | 9,765 | $ | 67,616,051 | ||||
Morgan Stanley & Co, Inc. |
$ | 3,930 | $ | 24,140,994 | ||||
Sanford C. Bernstein and Co. |
$ | 3,723 | $ | 11,737,966 | ||||
Interactive Brokers |
$ | 2,129 | $ | 5,845,396 | ||||
MKM Partners LLC |
$ | 1,155 | $ | 834,221 | ||||
Liquidnet, Inc. |
$ | 1,041 | $ | 301,145 | ||||
BTIG-BASS TRADING |
$ | 843 | $ | 1,020,574 | ||||
Cantor Fitzgerald & Co. |
$ | 478 | $ | 312,529 | ||||
Bank of America Merrill Lynch |
$ | 355 | $ | 860,300 | ||||
FBR Investments |
$ | 345 | $ | 419,557 | ||||
Knight Equity Markets, LP |
$ | 116 | $ | 181,253 | ||||
Jefferies & Company, Inc. |
$ | 93 | $ | 117,117 | ||||
SG Cowen & Co., LLC |
$ | 50 | $ | 109 | ||||
JPMorgan Chase Bank, N.A. |
$ | 49 | $ | 54,765 | ||||
Citibank, N.A. |
$ | 35 | $ | 45,876 | ||||
RBC Capital Markets |
$ | 2 | $ | 3,422 | ||||
Raymond James and Associates |
$ | 2 | $ | 3,755 | ||||
Robert W. Baird & Co. Incorporated |
$ | 2 | $ | 3,071 |
The following table shows the dollar amount of brokerage commissions paid to firms that provided research and brokerage services and the approximate dollar amount of transactions involved during the fiscal year ended June 30, 2016. Funds that are not listed paid no brokerage commissions to firms that provided such services.
Fund |
Commissions Paid to
Firms for Brokerage and Research Services |
Total Amount of
Transactions to Firms for Brokerage and Research Services |
||||||
Long/Short Equity Fund |
$ | 4,321,488 | $ | 11,518,670,266 | ||||
Long/Short Healthcare Fund |
$ | 11,251,969 | $ | 16,610,443,693 | ||||
Opportunistic Credit Fund |
$ | 10,793 | $ | 6,236,432 |
64
The following table shows the dollar amount of brokerage commissions paid to each firm that provided research and brokerage services obtained in compliance with Section 28(e) of the Exchange Act and the approximate dollar amount of transactions involved during the fiscal year ended June 30, 2016.
Broker |
Commissions Paid
to Firms for Brokerage and Research Services |
Total Amount of
Transactions to Firms for Brokerage and Research Services |
||||||
Bank of America Merrill Lynch |
$ | 1,871,119 | $ | 3,415,874,016 | ||||
JPMorgan Chase Bank, N.A. |
$ | 1,693,081 | $ | 4,269,583,033 | ||||
Goldman Sachs |
$ | 1,509,060 | $ | 4,879,441,758 | ||||
Oppenheimer & Co., Inc. |
$ | 804,931 | $ | 271,481,778 | ||||
Barclays Capital Inc. |
$ | 761,773 | $ | 1,695,269,375 | ||||
Morgan Stanley & Co, Inc. |
$ | 729,743 | $ | 577,804,911 | ||||
Jefferies & Company, Inc. |
$ | 479,228 | $ | 326,160,046 | ||||
Leerink Swann & Co., Inc. |
$ | 613,397 | $ | 742,869,964 | ||||
Citibank, N.A. |
$ | 315,898 | $ | 330,241,254 | ||||
Deutsche Bank AG, New York Branch |
$ | 309,691 | $ | 346,714,878 | ||||
Raymond James and Associates |
$ | 248,145 | $ | 309,227,678 | ||||
RBC Capital Markets |
$ | 224,029 | $ | 277,951,836 | ||||
SunTrust Capital Markets, Inc. |
$ | 209,952 | $ | 261,242,066 | ||||
Stifel Nicolaus |
$ | 205,790 | $ | 277,923,870 | ||||
Robert W. Baird & Co. Incorporated |
$ | 181,547 | $ | 204,962,960 | ||||
Wells Fargo Securities LLC |
$ | 178,170 | $ | 187,008,541 | ||||
Stephens Inc. |
$ | 166,772 | $ | 236,057,449 | ||||
KeyBanc Capital Markets Inc. |
$ | 148,336 | $ | 198,340,875 | ||||
ISI Group, Inc. |
$ | 121,980 | $ | 125,347,993 | ||||
SG Cowen & Co., LLC |
$ | 248,100 | $ | 32,235,832 | ||||
Sanford C. Bernstein and Co. |
$ | 177,662 | $ | 867,576,908 | ||||
Guggenheim |
$ | 162,326 | $ | 202,088,123 | ||||
Piper Jaffray & Co. |
$ | 154,706 | $ | 132,978,674 | ||||
Sandler ONeill & Partners, LP |
$ | 153,467 | $ | 120,445,920 | ||||
Tudor Pickering |
$ | 138,519 | $ | 109,141,092 | ||||
JMP Securities LLC |
$ | 131,620 | $ | 150,257,227 | ||||
William Blair & Company LLC |
$ | 130,014 | $ | 149,627,538 | ||||
Keefe Bruyette and Woods Inc. |
$ | 127,599 | $ | 101,113,604 | ||||
BMO Capital Markets |
$ | 116,960 | $ | 137,295,644 | ||||
FBR Investments |
$ | 78,911 | $ | 42,051,582 | ||||
Wolfe Research |
$ | 69,122 | $ | 82,615,312 | ||||
Height Securities, LLC |
$ | 61,988 | $ | 74,689,240 | ||||
Liquidnet, Inc. |
$ | 663,666 | $ | 1,352,379,837 | ||||
Knight Equity Markets, LP |
$ | 440,555 | $ | 1,033,230,690 | ||||
MKM Partners LLC |
$ | 439,174 | $ | 594,666,747 | ||||
BTIG-BASS TRADING |
$ | 414,253 | $ | 566,066,311 | ||||
Cantor Fitzgerald & Co. |
$ | 376,904 | $ | 566,016,048 | ||||
Wallachbeth Capital LLC |
$ | 323,945 | $ | 2,689,324,305 | ||||
E D & F Man |
$ | 101,375 | $ | 93,221 | ||||
Janney Montgomery |
$ | 62,176 | $ | 95,155,996 | ||||
Macro Risk Advisors |
$ | 53,125 | $ | 98,271 | ||||
Auerbach Grayson & Co. |
$ | 48,043 | $ | 72,739,884 | ||||
Stuart Frankel |
$ | 17,239 | $ | 25,603,113 | ||||
Jones and Associates Inc. |
$ | 8,578 | $ | 8,492,539 | ||||
Maxim Group LLC |
$ | 4,777 | $ | 4,586,661 | ||||
Luminex |
$ | 269 | $ | 3,251,812 |
65
Broker |
Commissions Paid
to Firms for Brokerage and Research Services |
Total Amount of
Transactions to Firms for Brokerage and Research Services |
||||||
Interactive Brokers |
$ | 5,294 | $ | 7,581,193 | ||||
BB&T Investment Services, Inc. |
$ | 25,728 | $ | 10,337,009 | ||||
Cap1 |
$ | 25,239 | $ | 22,827,059 | ||||
Longbow Research |
$ | 24,845 | $ | 47,681,413 | ||||
Stuart Frankel |
$ | 17,239 | $ | 25,603,113 | ||||
CRT Capital Group LLC |
$ | 9,208 | $ | 4,022,012 | ||||
Canaccord Adams |
$ | 8,987 | $ | 6,473,265 | ||||
ITG Inc. |
$ | 2,917 | $ | 8,977,773 |
Certain Affiliations
The Funds, HCMFA and HCFD are currently affiliated with NexBank Securities, Inc. (NexBank), a FINRA member broker-dealer that is indirectly controlled by the principals of HCMFA and HCFD. Absent an exemption from the SEC or other regulatory relief, the Funds are generally precluded from effecting certain principal transactions with affiliated brokers. The Funds may utilize affiliated brokers for agency transactions, subject to compliance with policies and procedures adopted pursuant to the 1940 Act and the rules promulgated thereunder. These policies and procedures are designed to provide that commissions, fees or other remuneration received by any affiliated broker or its affiliates for agency transactions are reasonable and fair compared to the remuneration received by other brokers in comparable transactions.
The Funds did not pay any brokerage commissions on transactions with NexBank for the fiscal year ended June 30, 2016, 2015 or 2014. The HSSF Predecessor Fund did not pay any brokerage commissions for its fiscal year ended June 30, 2014. The Merger Arbitrage Fund did not pay any brokerage commissions on transactions with NexBank for its fiscal period ended December 31, 2016.
In addition, the Funds, HCMFA and HCFD, as outlined above, are affiliated with NexBank, which also does business as Barrier Advisors, NexBank SSB, a state chartered bank, and Governance Re Ltd. (Governance Re), an insurance company, both of which are indirectly controlled by the principals of HCMFA and HCFD. NexBank and Governance Re may offer certain services to portfolio companies whose securities, including loans, are owned by one or more registered investment companies advised by HCMFA (the Portfolio Companies). For example, NexBank SSB may provide agent services for Portfolio Companies under credit agreements pursuant to which a Fund may be a lender or may offer strategic, financial and operational advisory services to Portfolio Companies; and Governance Re may offer insurance services to the Portfolio Companies. NexBank, Governance Re and other affiliated service providers may receive fees from Portfolio Companies or other parties for services provided.
The Funds Board will, in accordance with specific procedures and policies adopted by the Board, review any investment or operational decisions that are brought to the attention of the Board and that may present potential conflicts of interest between HCMFA and the Fund.
66
DESCRIPTION OF THE FUNDS SHARES
Each Fund is a series of the Trust, a Delaware statutory trust formed on February 28, 2006. The Trust is authorized to issue an unlimited number of its shares of beneficial interest in separate series and classes of each series. The Trust is not required to hold regular annual shareholder meetings, but may hold special meetings for consideration of proposals requiring shareholder approval, such as changing fundamental policies or upon the written request of 10% of the Trusts shares to replace its Trustees. The Trusts Board is authorized to classify or reclassify the unissued shares of the Trust into one or more separate series of shares representing a separate, additional investment portfolio or one or more separate classes of new or existing series. Each Fund currently offers Class A, Class C and Class Z Shares. Shares of all series will have identical voting rights, except where by law certain matters must be approved by the requisite proportion of the shares of the affected series. Each share of any class when issued has equal dividend, liquidation (see Redemption of Shares) and voting rights within the class for which it was issued and each fractional share has those rights in proportion to the percentage that the fractional share represents a whole share. Shares will be voted in the aggregate except where otherwise required by law and except that each class of each series will vote separately on certain matters pertaining to its distribution and shareholder servicing arrangements.
There are no conversion or preemptive rights in connection with any shares of the Funds. All shares, when issued in accordance with the terms of the offering, will be fully paid and non-assessable. At the option of the shareholder, shares will be redeemed at net asset value (NAV), subject, however, in limited circumstances to a redemption fee or a CDSC, all as described in the applicable Prospectus.
The shares of the Funds have noncumulative voting rights, which means that the holders of more than 50% of the shares of the Trust can elect 100% of the Trustees if the holders choose to do so, and, in that event, the holders of the remaining shares will not be able to elect any person or persons to the Board. Unless specifically requested by an investor who is a shareholder of record, the Funds do not issue certificates evidencing their shares.
Description of the Trust
Under Delaware law, shareholders of a statutory trust shall have the same limitation of personal liability that is extended to stockholders of private corporations for profit organized under Delaware law, unless otherwise provided in the trusts governing instrument. The Trusts Agreement and Declaration of Trust (the Declaration of Trust) provides that shareholders shall not be personally liable to any person in connection with any and all property, real or personal, tangible or intangible, that at such time is owned or held by or for the account of a particular series. Moreover, the Declaration of Trust expressly provides that the shareholders shall have the same limitation of personal liability that is extended to shareholders of a private corporation for profit incorporated in the State of Delaware.
The Declaration of Trust provides that no Trustee, officer, employee or agent of the Trust or any series of the Trust shall be subject in such capacity to any personal liability whatsoever to any person, unless, as to liability to the Trust or its shareholders, the Trustees engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of their offices.
The Trust shall continue without limitation of time subject to the provisions in the Declaration of Trust concerning termination by action of the Trustees, and without any vote of the Trusts shareholders, except as may be required under the 1940 Act.
67
Trust Matters
The Trust reserves the right to create and issue a number of series shares, in which case the shares of each series would participate equally in the earnings, dividends and assets of the particular series and would vote separately to approve investment advisory agreements or changes in fundamental investment policies, but shares of all series would vote together in the election or selection of Trustees and on any other matters as may be required by applicable law.
Upon liquidation of the Trust or any series, shareholders of the affected series would be entitled to share pro rata in the net assets of their respective series available for distribution to such shareholders.
Shareholder Approval
Other than elections of Trustees, which is by plurality, any matter for which shareholder approval is required by the 1940 Act requires the affirmative vote of a majority of the outstanding voting securities of the Fund(s) or the Trust at a meeting called for the purpose of considering such approval. For other matters, generally an affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote on such matter (assuming a quorum is present) shall be required for approval of such matter.
Information for Shareholders
All shareholder inquiries regarding administrative procedures, including the purchase and redemption of shares should be directed to: HCFD, 200 Crescent Court, Suite 700, Dallas, Texas 75201. For assistance, call (877) 665-1287 or visit the Funds website at www.highlandfunds.com.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of March 31, 2017, the Trustees and officers of each Fund as a group owned less than 1% of the then outstanding shares of each class of shares of each Fund.
Control persons are presumed to control a Fund for purposes of voting on matters submitted to a vote of shareholders due to their beneficial ownership of 25% or more of a Funds outstanding voting securities. Unless otherwise noted, as of March 31, 2017, the only persons known by the Funds to own of record, or beneficially 25% or more of the outstanding shares of the Funds were as follows:
Name and Address of Record Owner |
Percent of Shares Held (%) | |||
FLOATING RATE OPPORTUNITIES FUND MORGAN STANLEY SMITH BARNEY, LLC 1 NEW YORK PLZ, FL 12 NEW YORK, NY 10004-1901 |
26.85 | % | ||
LONG/SHORT HEALTHCARE FUND MORGAN STANLEY SMITH BARNEY, LLC 1 NEW YORK PLZ, FL 12 NEW YORK, NY 10004-1901 |
32.72 | % |
68
OPPORTUNISTIC CREDIT FUND CHARLES SCHWAB & CO INC CUST ATTN: MUTUAL FUNDS DEPT 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 |
62.63 | % | ||
MERGER ARBITRAGE FUND HIGHLAND GLOBAL ALLOCATION FUND 200 CRESCENT COURT, SUITE 700 DALLAS, TX 75201 |
49.71 | % |
A person who beneficially owns, either directly or indirectly, more than 25% of the voting securities of a Fund or acknowledges the existence of such control may be presumed to control the Fund. A control person could potentially control the outcome of any proposal submitted to the shareholders for approval, including changes to a Funds fundamental policies or terms of the investment advisory agreement with the Adviser.
A principal shareholder is any person who owns (either of record or beneficially) 5% or more of any class of outstanding shares of a Fund. Unless otherwise noted, as of March 31, 2017, the only persons known by a Fund to own of record or beneficially 5% or more of its outstanding shares were as follows (certain of the investors below are believed to hold the indicated shares as nominee):
69
Name and Address |
Outstanding Shares Held |
Percentage of
Class (%) |
||||||
FLOATING RATE OPPORTUNITIES FUND CLASS A WELLS FARGO CLEARING SERVICES LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET STREET ST LOUIS, MO 63103-2523 |
2,984,452.39 | 8.25 | % | |||||
FLOATING RATE OPPORTUNITIES FUND CLASS C MORGAN STANLEY SMITH BARNEY, LLC 1 NEW YORK PLZ, FL 12 NEW YORK, NY 10004-1901 |
6,934,966.02 | 21.56 | % | |||||
FLOATING RATE OPPORTUNITIES FUND CLASS C NATIONAL FINANCIAL SERVICES LLC FOR EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4 TH FLR 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 |
1,736,519.22 | 5.40 | % | |||||
FLOATING RATE OPPORTUNITIES FUND CLASS C PERSHING LLC 1 PERSHING PLZ JERSEY CITY, NJ 07399-0001 |
2,449,361.03 | 7.61 | % | |||||
FLOATING RATE OPPORTUNITIES FUND CLASS C CHARLES SCHWAB & CO INC CUST ATTN: MUTUAL FUNDS 101 MONTGOMERY STREET SAN FRANCISCO, CA 94104-4151 |
2,576,628.37 | 8.01 | % | |||||
FLOATING RATE OPPORTUNITIES FUND CLASS C LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT ATTN: MUTUAL FUND OPS MANAGER 4707 EXECUTIVE DRIVE SAN DIEGO, CA 92121-3091 |
1,683,741.49 | 5.23 | % | |||||
FLOATING RATE OPPORTUNITIES FUND CLASS C WELLS FARGO CLEARING SERVICES LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET STREET ST LOUIS, MO 63103-2523 |
6,102,803.59 | 18.97 | % | |||||
FLOATING RATE OPPORTUNITIES FUND CLASS C MERRILL LYNCH PIERCE FENNER & SMITH FOR THE SOLE BENEFIT OF ITS CUSTOMERS ATTN: FUND ADMINISTRATION #97425 4800 DEER LAKE DR E FL 2 JACKSONVILLE, FL 32246-6484 |
2,405,890.83 | 7.48 | % | |||||
FLOATING RATE OPPORTUNITIES FUND CLASS Z MORGAN STANLEY SMITH BARNEY, LLC 1 NEW YORK PLZ, FL 12 NEW YORK, NY 10004-1901 |
18,758,552.27 | 40.12 | % |
70
Name and Address |
Outstanding Shares Held |
Percentage of
Class (%) |
||||||
FLOATING RATE OPPORTUNITIES FUND CLASS Z NATIONAL FINANCIAL SERVICES LLC FOR EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4 TH FLR 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 |
3,980,701.85 | 8.51 | % | |||||
FLOATING RATE OPPORTUNITIES FUND CLASS Z LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT ATTN: MUTUAL FUND OPS MANAGER 4707 EXECUTIVE DRIVE SAN DIEGO, CA 92121-3091 |
2,659,355.91 | 5.69 | % | |||||
FLOATING RATE OPPORTUNITIES FUND CLASS Z WELLS FARGO CLEARING SERVICES LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET STREET ST LOUIS, MO 63103-2523 |
5,625,427.91 | 12.03 | % | |||||
FLOATING RATE OPPORTUNITIES FUND CLASS Z MITRA & CO FBO NG 480 PILGRIM WAY SUITE 1000 GREEN BAY WI, 54304-5280 |
3,086,328.09 | 6.60 | % | |||||
LONG/SHORT EQUITY FUND CLASS A MORGAN STANLEY SMITH BARNEY, LLC 1 NEW YORK PLZ, FL 12 NEW YORK, NY 10004-1901 |
377,296.20 | 13.37 | % | |||||
LONG/SHORT EQUITY FUND CLASS A WELLS FARGO CLEARING SERVICES LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET STREET ST LOUIS, MO 63103-2523 |
313,194.52 | 11.10 | % | |||||
LONG/SHORT EQUITY FUND CLASS A CHARLES SCHWAB & CO INC CUST ATTN: MUTUAL FUNDS DEPT 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 |
710,513.09 | 25.17 | % | |||||
LONG/SHORT EQUITY FUND CLASS C MORGAN STANLEY SMITH BARNEY, LLC 1 NEW YORK PLZ, FL 12 NEW YORK, NY 10004-1901 |
608,041.97 | 20.21 | % | |||||
LONG/SHORT EQUITY FUND CLASS C WELLS FARGO CLEARING SERVICES LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET STREET ST LOUIS, MO 63103-2523 |
645,096.57 | 21.45 | % |
71
Name and Address |
Outstanding Shares Held |
Percentage of
Class (%) |
||||||
LONG/SHORT EQUITY FUND CLASS C MERRILL LYNCH PIERCE FENNER & SMITH FOR THE SOLE BENEFIT OF ITS CUSTOMERS ATTN: FUND ADMINISTRATION #97425 4800 DEER LAKE DR E FL 2 JACKSONVILLE, FL 32246-6484 |
963,608.84 | 32.03 | % | |||||
LONG/SHORT EQUITY FUND CLASS Z MORGAN STANLEY SMITH BARNEY, LLC 1 NEW YORK PLZ, FL 12 NEW YORK, NY 10004-1901 |
1,641,560.11 | 5.43 | % | |||||
LONG/SHORT EQUITY FUND CLASS Z NATIONAL FINANCIAL SERVICES LLC FOR EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4 TH FLR 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 |
1,937,209.67 | 6.41 | % | |||||
LONG/SHORT EQUITY FUND CLASS Z WELLS FARGO CLEARING SERVICES LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET STREET ST LOUIS, MO 63103-2523 |
6,265,077.74 | 20.72 | % | |||||
LONG/SHORT EQUITY FUND CLASS Z MERRILL LYNCH PIERCE FENNER & SMITH FOR THE SOLE BENEFIT OF ITS CUSTOMERS ATTN: FUND ADMINISTRATION #97425 4800 DEER LAKE DR E FL 2 JACKSONVILLE, FL 32246-6484 |
2,581,919.72 | 8.54 | % | |||||
LONG/SHORT EQUITY FUND CLASS Z CHARLES SCHWAB & CO INC CUST ATTN: MUTUAL FUNDS DEPT 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 |
7,759,621.82 | 25.66 | % | |||||
LONG/SHORT EQUITY FUND CLASS Z BAND & CO C/O U.S. BANK N.A. P.O. BOX 1787 MILWAUKEE, WI 53201-1787 |
8,102,444.05 | 26.80 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS A MORGAN STANLEY SMITH BARNEY, LLC 1 NEW YORK PLZ, FL 12 NEW YORK, NY 10004-1901 |
957,132.03 | 25.29 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS A NATIONAL FINANCIAL SERVICES LLC FOR EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4 TH FLR 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 |
709,060.91 | 18.74 | % |
72
Name and Address |
Outstanding Shares Held |
Percentage of
Class (%) |
||||||
LONG/SHORT HEALTHCARE FUND CLASS A PERSHING LLC 1 PERSHING PLZ JERSEY CITY, NJ 07399-0002 |
280,192.21 | 7.40 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS A WELLS FARGO CLEARING SERVICES LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET STREET ST LOUIS, MO 63103-2523 |
488,643.14 | 12.91 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS A CHARLES SCHWAB & CO INC CUST ATTN: MUTUAL FUNDS DEPT 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 |
288,392.70 | 7.62 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS C MORGAN STANLEY SMITH BARNEY, LLC 1 NEW YORK PLZ, FL 12 NEW YORK, NY 10004-1901 |
802,478.30 | 31.06 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS C NATIONAL FINANCIAL SERVICES LLC FOR EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4 TH FLR 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 |
210,860.45 | 8.16 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS C PERSHING LLC 1 PERSHING PLZ JERSEY CITY, NJ 07399-0002 |
279,738.49 | 10.83 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS C CHARLES SCHWAB & CO INC CUST ATTN: MUTUAL FUNDS DEPT 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 |
154,789.02 | 5.99 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS C WELLS FARGO CLEARING SERVICES LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET STREET ST LOUIS, MO 63103-2523 |
516,747.88 | 20.00 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS Z MORGAN STANLEY SMITH BARNEY, LLC 1 NEW YORK PLZ, FL 12 NEW YORK, NY 10004-1901 |
2,262,166.47 | 38.19 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS Z NATIONAL FINANCIAL SERVICES LLC FOR EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4 TH FLR 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 |
704,779.11 | 11.90 | % |
73
Name and Address |
Outstanding Shares Held |
Percentage of
Class (%) |
||||||
LONG/SHORT HEALTHCARE FUND CLASS Z WELLS FARGO CLEARING SERVICES LLC SPECIAL CUSTODY ACCT FOR THE EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET STREET ST LOUIS, MO 63103-2523 |
1,030,782.36 | 17.40 | % | |||||
LONG/SHORT HEALTHCARE FUND CLASS Z CHARLES SCHWAB & CO INC CUST ATTN: MUTUAL FUNDS DEPT 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 |
754,753.48 | 12.74 | % | |||||
OPPORTUNISTIC CREDIT FUND CLASS A CHARLES SCHWAB & CO INC CUST ATTN: MUTUAL FUNDS DEPT 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 |
1,051,406.66 | 59.29 | % | |||||
OPPORTUNISTIC CREDIT FUND CLASS A NATIONAL FINANCIAL SERVICES LLC FOR EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4 TH FLR 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 |
144,516.92 | 8.15 | % | |||||
OPPORTUNISTIC CREDIT FUND CLASS A PERSHING LLC 1 PERSHING PLZ JERSEY CITY, NJ 07399-0001 |
416,111.44 | 23.46 | % | |||||
OPPORTUNISTIC CREDIT FUND CLASS C PERSHING LLC 1 PERSHING PLZ JERSEY CITY, NJ 07399-0001 |
168,974.16 | 26.65 | % | |||||
OPPORTUNISTIC CREDIT FUND CLASS C CETERA INVESTMENT SERVICES (FBO) YU ZHAO 13006 NE 3RD PL BELLEVUE, WA 98005-3320 |
68,965.52 | 10.88 | % | |||||
OPPORTUNISTIC CREDIT FUND CLASS C CETERA INVESTMENT SERVICES (FBO) YUNTONG ZHANG 1326 13F CHANGZHI RD WU HAO, BEIJING |
34,722.22 | 5.48 | % | |||||
OPPORTUNISTIC CREDIT FUND CLASS Z NATIONAL FINANCIAL SERVICES LLC FOR EXCLUSIVE BENEFIT OF OUR CUSTOMERS ATTN: MUTUAL FUNDS DEPT 4 TH FLR 499 WASHINGTON BLVD JERSEY CITY, NJ 07310-2010 |
1,711,195.20 | 10.47 | % |
74
Name and Address |
Outstanding Shares Held |
Percentage of
Class (%) |
||||||
OPPORTUNISTIC CREDIT FUND CLASS Z CHARLES SCHWAB & CO INC CUST ATTN: MUTUAL FUNDS DEPT 101 MONTGOMERY ST SAN FRANCISCO, CA 94104-4151 |
10,683,975.84 | 65.39 | % | |||||
OPPORTUNISTIC CREDIT FUND CLASS Z JEFFRIES LLC 431-00932-26 101 HUDSON ST FL 11 JERSEY CITY, NJ 07302-3915 |
1,191,420.01 | 7.29 | % | |||||
MERGER ARBITRAGE FUND CLASS A PERSHING LLC 1 PERSHING PLZ JERSEY CITY, NJ 07399-0001 |
11,959.27 | 19.48 | % | |||||
MERGER ARBITRAGE FUND CLASS A CETERA INVESTMENT SERVICES (FBO) LIN TAI NO 2 BLDG 24 ERLI ERQU BEIJING |
26,663.43 | 43.43 | % | |||||
MERGER ARBITRAGE FUND CLASS A CETERA INVESTMENT SERVICES (FBO) JING ZHANG 1650 4 1501 PUDONG JINXIU RD SHANGHAI |
21,827.02 | 35.55 | % | |||||
MERGER ARBITRAGE FUND CLASS C PERSHING LLC 1 PERSHING PLZ JERSEY CITY, NJ 07399-0001 |
3,894.14 | 10.44 | % | |||||
MERGER ARBITRAGE FUND CLASS C CETERA INVESTMENT SERVICES (FBO) YONG ZOU 1110 TREVINA TERRACE SAN JOSE, CA 95120 |
7,083.93 | 19.00 | % | |||||
MERGER ARBITRAGE FUND CLASS C CETERA INVESTMENT SERVICES (FBO) YIMIN YANG RM 2802 N4 LANE 39 YINXIAO RD SHANGHAI |
2,433.09 | 6.53 | % | |||||
MERGER ARBITRAGE FUND CLASS C CETERA INVESTMENT SERVICES (FBO) LI YUAN 19 ZHAOGONGDI XIHU DISTRICT HANGZHOU 310000 |
6,326.03 | 16.97 | % | |||||
MERGER ARBITRAGE FUND CLASS C CETERA INVESTMENT SERVICES (FBO) JIE LI 906 B DANJIANJIAYUAN DANDONG |
3,894.84 | 10.45 | % |
75
Name and Address |
Outstanding Shares Held |
Percentage of
Class (%) |
||||||
MERGER ARBITRAGE FUND CLASS C CETERA INVESTMENT SERVICES (FBO) CHUNLING ZHANG 13016 SE 21ST PL BELLEVUE WA 98005-3933 |
4,870.92 | 13.06 | % | |||||
MERGER ARBITRAGE FUND CLASS C CETERA INVESTMENT SERVICES (FBO) HAIZHEN LI DOOR 4 UNIT 101 BLDG 10 NONGDA BEIJING |
2,422.48 | 6.50 | % | |||||
MERGER ARBITRAGE FUND CLASS Z HIGHLAND GLOBAL ALLOCATION FUND 200 CRESCENT COURT, SUITE 700 DALLAS, TX 75201 |
644,247.33 | 53.80 | % | |||||
MERGER ARBITRAGE FUND CLASS Z HIGHLAND LONG/SHORT EQUITY FUND 200 CRESCENT COURT, SUITE 700 DALLAS, TX 75201 |
293,864.39 | 24.54 | % | |||||
MERGER ARBITRAGE FUND CLASS Z HIGHLAND PREMIER GROWTH EQUITY FUND 200 CRESCENT COURT, SUITE 700 DALLAS, TX 75201 |
173,475.39 | 14.49 | % |
PROGRAMS FOR REDUCING OR ELIMINATING SALES CHARGES
The following information supplements the discussion of methods for reducing or eliminating sales charges in the Class A and Class C Shares Prospectus. The availability of certain sales charge waivers and discounts will depend on whether you purchase your shares directly from a Fund or through a financial intermediary. Intermediaries may have different policies and procedures regarding the availability of front-end sales charge waivers or CDSC waivers, which are discussed below. In all instances, it is the purchasers responsibility to notify the Fund or the purchasers financial intermediary at the time of purchase of any relationship or other facts qualifying the purchaser for sales charge waivers or discounts. For waivers and discounts not available through a particular intermediary, shareholders will have to purchase Fund shares directly from a Fund or through another intermediary to receive these waivers or discounts. Shares purchased through certain financial intermediaries (a Specified Intermediary) may be subject to different initial sales charges or the initial sales charge or CDSC may be waived in certain circumstances.
Right of Accumulation (Class A Shares Only)
Reduced sales charges on Class A Shares of the Funds can be obtained by combining a current purchase with prior purchases of all classes of any Participating Funds (as defined in the Prospectus). The applicable sales charge is based on the combined total of:
1. | the current purchase; and |
2. | the value at the public offering price at the close of business on the previous day of a Funds and any Participating Funds classes of shares held by the shareholder, the shareholders spouse or domestic partner or the shareholders minor children. |
76
The Underwriter and the shareholders Financial Advisor must be promptly notified of each purchase that entitles a shareholder to a reduced sales charge. Such reduced sales charge will be applied upon confirmation of the shareholders holdings by the Transfer Agent. The Funds may terminate or amend this Right of Accumulation at any time without notice.
Letter of Intent (Class A Shares Only)
Any person may qualify for reduced sales charges on purchases of Class A Shares of the Funds made within a 13-month period pursuant to a Letter of Intent (Letter). A shareholder may include, as an accumulation credit toward the completion of such Letter, the value of all shares (of any class) of any Participating Funds held by the shareholder on the date of the Letter. The value is determined at the public offering price on the date of the Letter. Purchases made through reinvestment of distributions do not count toward satisfaction of the Letter. Upon request, a Letter may reflect purchases within the previous 90 days.
During the term of a Letter, the Transfer Agent will hold shares in escrow to secure payment of the higher sales charge applicable to Class A Shares actually purchased if the terms of the Letter are not satisfied. Dividends and capital gains will be paid on all escrowed shares, and these shares will be released (upon satisfaction of any amount owed for sales charges if the terms of the Letter are not satisfied) when the amount indicated has been purchased or at the end of the period covered by the Letter, whichever occurs first. A Letter does not obligate the investor to buy or the Funds to sell the amount specified in the Letter.
If a shareholder exceeds the amount specified in the Letter and reaches an amount that would qualify for a further quantity discount, a retroactive price adjustment will be made at the time of expiration of the Letter. The resulting difference in offering price will purchase additional shares for the shareholders account at the applicable offering price. As a part of this adjustment, the shareholders Financial Advisor shall return to the Underwriter the excess commission previously paid to the Financial Advisor during the 13-month period.
If the amount specified in the Letter is not purchased, the shareholder shall remit to the Underwriter an amount equal to the difference between the sales charge paid and the sales charge that should have been paid. If the shareholder fails within 20 days after a written request to pay such a difference in sales charge, the Transfer Agent will redeem that number of escrowed Class A Shares to equal such difference. The additional amount of Financial Advisor discount from the applicable offering price shall be remitted by the Underwriter to the shareholders Financial Advisor of record.
Additional information about, and the terms of, Letters of Intent are available from your Financial Advisor, or from the Transfer Agent at (877) 665-1287.
Reinstatement Privilege (Class A and C Shares Only)
A shareholder who has redeemed Class A or Class C Shares of a Fund may, upon request, reinstate within one year a portion or all of the proceeds of such sale in Class A Shares or Class C Shares, respectively, of the Fund or another Participating Fund at the NAV next determined after receipt by such shareholders Financial Advisor or the Transfer Agent receives a reinstatement request and payment. The Underwriter will not pay your Financial Advisor a
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commission on any reinvested amount. Any CDSC paid at the time of the redemption will be credited to the shareholder upon reinstatement. The period between the redemption and the reinstatement will not be counted in aging the reinstated shares for purposes of calculating any CDSC or conversion date. Shareholders who desire to exercise this privilege should contact their Financial Advisor or the Transfer Agent. Shareholders may exercise this privilege an unlimited number of times. Exercise of this privilege does not alter the U.S. federal income tax treatment of any capital gains realized on the prior sale of Fund shares, but to the extent any such shares were sold at a loss, some or all of the loss may be disallowed for tax purposes. Please consult your tax adviser.
Privileges of Financial Advisors
Class A Shares of the Funds may be sold at NAV, without a sales charge, to registered representatives and employees of Financial Advisors (including their affiliates) and such persons families and their beneficial accounts.
Privileges of Certain Shareholders
Any shareholder eligible to buy Class Z Shares of any Participating Fund may acquire, through purchase or exchange, Class A Shares of another Participating Fund at NAV in those cases where Class Z Shares are not available. Qualifying shareholders will not be subject to the initial sales charge or CSDC on Class A Shares, although they will be subject to the annual Rule 12b-1 distribution and service fees on Class A Shares.
Sponsored Arrangements
Class A Shares of the Funds may be purchased at reduced or no sales charge pursuant to sponsored arrangements, which include programs under which an organization makes recommendations to, or permits group solicitation of, its employees, members or participants in connection with the purchase of shares of the Funds on an individual basis. The amount of the sales charge reduction will reflect the anticipated reduction in sales expense associated with sponsored arrangements. The reduction in sales expense, and therefore the reduction in sales charge, will vary depending on factors such as the size and stability of the organizations group, the term of the organizations existence and certain characteristics of the members of its group. The Funds reserve the right to revise the terms of or to suspend or discontinue sales pursuant to sponsored plans at any time.
Class A shares may also be purchased at a reduced or zero sales charge by (i) clients of any Financial Advisor that has entered into an agreement with the Underwriter or the Funds pursuant to which a Fund is included as an investment option in programs involving fee-based compensation arrangements; (ii) clients of any Financial Advisor that has entered into an agreement with the Underwriter pursuant to which such Financial Advisor offers Fund shares through self-directed investment brokerage accounts that do not charge transaction fees to its clients; and (iii) participants in certain retirement plans. Whether a sales charge waiver is available for your retirement plan or charitable account depends upon the policies and procedures of your intermediary. Please consult your Financial Adviser for further information. Please refer to the Appendix to the Merger Arbitrage Funds Prospectus for the sales charge or CDSC waivers that are applicable to each Specified Intermediary.
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Waiver of CDSCs
CDSCs may be waived on redemptions in the following situations with the proper documentation:
1. | Death . CDSCs may be waived on redemptions within one year following the death of (i) the sole shareholder on an individual account, (ii) a joint tenant where the surviving joint tenant is the deceaseds spouse or (iii) the beneficiary of a Uniform Gifts to Minors Act (UGMA), Uniform Transfers to Minors Act (UTMA) or other custodial account. If, upon the occurrence of one of the foregoing, the account is transferred to an account registered in the name of the deceaseds estate, the CDSC will be waived on any redemption from the estate account occurring within one year after the death. If Class C Shares are not redeemed within one year of the death, they will remain subject to the applicable CDSC when redeemed from the transferees account. If the account is transferred to a new registration and then a redemption is requested, the applicable CDSC will be charged. |
2. | Disability . CDSCs may be waived on redemptions occurring within one year after the sole shareholder on an individual account or a joint tenant on a spousal joint tenant account becomes disabled (as defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended (the Code). To be eligible for such waiver, (i) the disability must arise after the purchase of shares, (ii) the disabled shareholder must have been under age 65 at the time of the initial determination of disability, and (iii) a letter must be produced from a physician signed under penalty of perjury stating the nature of the disability. If the account is transferred to a new registration and then a redemption is requested, the applicable CDSC will be charged. |
3. | Death of a trustee . CDSCs may be waived on redemptions occurring upon dissolution of a revocable living or grantor trust following the death of the sole trustee where (i) the grantor of the trust is the sole trustee and the sole life beneficiary, (ii) death occurs following the purchase, and (iii) the trust document provides for dissolution of the trust upon the trustees death. If the account is transferred to a new registration (including that of a successor trustee), the applicable CDSC will be charged upon any subsequent redemption. |
4. | Returns of excess contributions . CDSCs may be waived on redemptions required to return excess contributions made to retirement plans or individual retirement accounts, so long as the Financial Advisor agrees to return all or the agreed-upon portion of the commission received on the shares being redeemed. |
5. | Qualified Retirement Plans . CDSCs may be waived on redemptions required to make distributions from qualified retirement plans following normal retirement age (as stated in the document). |
The CDSC also may be waived if the Financial Advisor agrees to return all or an agreed-upon portion of the commission received on the sale of the shares being redeemed.
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The following discussion of U.S. federal income tax consequences of an investment in the Funds is based on the Code, U.S. Treasury regulations, and other applicable authority, as of the date of this SAI. These authorities are subject to change by legislative, administrative, or judicial action, possibly with retroactive effect. The following discussion is only a summary of some of the important U.S. federal tax considerations generally applicable to investments in a Fund. There may be other tax considerations applicable to particular shareholders. Shareholders should consult their own tax advisers regarding their particular situation and the possible application of U.S. federal, state, local, foreign and other tax laws.
Taxation of the Funds
Each Fund has elected to be treated as a regulated investment company (RIC) under Subchapter M of the Code and intends each year to qualify and to be eligible to be treated as such. In order to qualify for the favorable tax treatment accorded RICs and their shareholders, each Fund must, among other things:
(a) | derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies and (ii) net income derived from interests in qualified publicly traded partnerships (as described below); |
(b) | diversify its holdings so that, at the end of each quarter of the Funds taxable year, (i) at least 50% of the market value of the Funds total assets consists of cash and cash items, U.S. government securities, securities of other RICs, and other securities limited in respect of any one issuer to a value not greater than 5% of the value of the Funds total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Funds total assets is invested, including through corporations in which the Fund owns a 20% or more voting stock interest, (x) in the securities (other than those of the U.S. government or other RICs) of any one issuer or of two or more issuers that the Fund controls and that are engaged in the same, similar or related trades or businesses, or (y) in the securities of one or more qualified publicly traded partnerships (as described below); and |
(c) | distribute with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paidgenerally taxable ordinary income and the excess, if any, of net short-term capital gains over net long-term capital losses) and net tax-exempt income, for such year. |
In general, for purposes of the 90% gross income requirement described in (a) above, income derived from a partnership will be treated as qualifying income only to the extent such income is attributable to items of income of the partnership which would be qualifying income if realized directly by the RIC. However, 100% of the net income derived from an interest in a qualified publicly traded partnership (generally, a partnership (x) the interests in which are traded on an established securities market or are readily tradable on a secondary market or the
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substantial equivalent thereof, and (y) that derives less than 90% of its income from the qualifying income sources described in paragraph (a)(i) above) will be treated as qualifying income. In general, such entities will be treated as partnerships for U.S. federal income tax purposes because they meet the passive income requirement under Code Section 7704(c)(2). In addition, although in general the passive loss rules of the Code do not apply to RICs, such rules do apply to a RIC with respect to items attributable to an interest in a qualified publicly traded partnership.
For purposes of meeting the diversification requirement described in (b) above, the term outstanding voting securities of such issuer will include the equity securities of a qualified publicly traded partnership. Also, for purposes of the diversification requirement described in (b) above, the identification of the issuer (or, in some cases, issuers) of a particular Fund investment can depend on the terms and conditions of that investment. In some cases, identification of the issuer (or issuers) is uncertain under current law, and an adverse determination or future guidance by the Internal Revenue Service (IRS) with respect to issuer identification for a particular type of investment may adversely affect a Funds ability to meet diversification test in (b) above.
If a Fund qualifies as a RIC that is accorded favorable tax treatment, that Fund will not be subject to U.S. federal income tax on income or gains distributed in a timely manner to its shareholders in the form of dividends (including Capital Gain Dividends, as defined below).
If a Fund were to fail to meet the income, diversification or distribution test (described respectively in (a), (b) and (c) above), the Fund could in some cases cure such failure, including by paying a Fund-level tax, paying interest, making additional distributions or disposing of certain assets. If the Fund were ineligible to or otherwise did not cure such failure for any taxable year, or if the Fund were otherwise to fail to qualify as a RIC accorded favorable tax treatment for such year, the Fund would be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, would be taxable to shareholders as ordinary income. Some portions of such distributions might be eligible for the dividends received deduction in the case of corporate shareholders and to be treated as qualified dividend income and thus taxable at the lower net capital gain rate in the case of shareholders taxed as individuals, provided in both cases, the shareholder meets certain holding period and other requirements in respect of the Funds shares (as described below). In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying as a RIC that is accorded favorable tax treatment.
Each Fund intends to distribute at least annually to its shareholders all or substantially all of its investment company taxable income (computed without regard to the dividends-paid deduction) and its net capital gain (that is, the excess of net long-term capital gain over net short-term capital loss, in each case determined with reference to any loss carryforwards). Any investment company taxable income retained by a Fund will be subject to Fund-level tax at regular corporate rates. If a Fund retains any net capital gain, it also will be subject to Fund-level tax at regular corporate rates on the amount retained, but may designate the retained amount as undistributed capital gain in a timely notice to its shareholders who would then, in turn, be (i) required to include in income for U.S. federal income tax purposes, as long-term capital gain, their shares of such undistributed amount, and (ii) entitled to credit their proportionate shares of the tax paid by that Fund on such undistributed amount against their U.S. federal income tax liabilities, if any, and to claim refunds on a properly-filed U.S. tax return to the extent the credit exceeds such liabilities. If a Fund makes this designation, for U.S.
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federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund would be increased by an amount equal to the difference between the amount of undistributed capital gains included in the shareholders gross income under clause (i) of the preceding sentence and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence. A Fund is not required to, and there can be no assurance a Fund will, make this designation if it retains all or a portion of its net capital gain in a taxable year.
With respect to the Merger Arbitrage Fund, the assets of the Merger Arbitrage Predecessor Fund transferred to the Merger Arbitrage Fund in exchange for shares of the Merger Arbitrage Fund reflected net unrealized capital gains, in the amount of approximately $20,000 (approximately 2% of the assets transferred to the Merger Arbitrage Fund), which were acquired by the Merger Arbitrage Fund. To the extent the Merger Arbitrage Fund realizes any of those capital gains, it may be required to pay a Fund-level tax on such gains and/or to distribute such gains to all shareholders of the Merger Arbitrage Fund, which could result in payment of taxes by such shareholders.
In determining its net capital gain, including in connection with determining the amount available to support a Capital Gain Dividend (as defined below), its taxable income and its earnings and profits, a Fund generally may elect to treat part or all of any post-October capital loss (defined as any net capital loss attributable to the portion, if any, of the taxable year after October 31, or, if there is no such loss, the net long-term capital loss or net short-term capital loss attributable to any such portion of the taxable year) or late-year ordinary loss (generally, the sum of (i) its net ordinary loss, if any, from the sale, exchange or other taxable disposition of property, attributable to the portion, if any, of the taxable year after October 31, and (ii) its other net ordinary loss, if any, attributable to the portion, if any, of the taxable year after December 31) as if incurred in the succeeding taxable year.
If a Fund were to fail to distribute in a calendar year at least an amount equal to the sum of 98% of its ordinary income for such year and 98.2% of its capital gain net income for the one-year period ending October 31 of such year, plus any such amounts retained from the prior year, the Fund would be subject to a nondeductible 4% excise tax on the undistributed amounts. For purposes of the required excise tax distribution, a Funds ordinary gains and losses from the sale, exchange or other taxable disposition of property that would otherwise be taken into account after October 31 of a calendar year generally are treated as arising on January 1 of the following calendar year. Also for these purposes, a Fund will be treated as having distributed any amount on which it has been subject to corporate income tax in the taxable year ending within the calendar year. Each Fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax, although there can be no assurance that it will be able to do so. In that event, a Fund will be liable for the excise tax only on the amount by which it does not meet the foregoing distribution requirement.
A dividend paid to shareholders in January of a year generally is deemed to have been paid by a Fund on December 31 of the preceding year, if the dividend was declared and payable to shareholders of record on a date in October, November or December of that preceding year.
Each Fund distributes its net investment income and capital gains to shareholders as dividends at least annually to the extent required to qualify as a RIC under the Code and generally to avoid U.S. federal income or excise tax. Under current law, a Fund may treat the portion of redemption proceeds paid to redeeming shareholders that represents the redeeming shareholders portion of the undistributed investment company taxable income and capital gain
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of that Fund as a distribution of investment company taxable income and net capital gain on that Funds tax return. This practice, which involves the use of tax equalization, will reduce the amount of income and gains that a Fund is required to distribute as dividends to shareholders in order for that Fund to avoid U.S. federal income tax and excise tax, which may include reducing the amount of distributions that otherwise would be required to be paid to non-redeeming shareholders. A Funds net asset value generally will not be reduced by the amount of any undistributed income or gains allocated to redeeming shareholders under this practice and thus the total return on a shareholders investment generally will not be reduced as a result of this practice.
Capital losses in excess of capital gains (net capital losses) are not permitted to be deducted against a Funds net investment income. Instead, subject to certain limitations, a Fund may carry net capital losses forward to subsequent taxable years to offset capital gains, if any, realized during such subsequent taxable year. Capital loss carryforwards are reduced to the extent they offset current-year net realized capital gains, whether a Fund retains or distributes such gains. If a Fund incurs or has incurred net capital losses in taxable years beginning after December 22, 2010 (post-2010 losses), those losses will be carried forward to one or more subsequent taxable years without expiration; any such carryforward losses will retain their character as short-term or long-term. If a Fund incurred net capital losses in a taxable year beginning on or before December 22, 2010 (pre-2011 losses), the Fund is permitted to carry such losses forward for eight taxable years; in the year to which they are carried forward, such losses are treated as short-term capital losses that first offset any short-term capital gains, and then offset any long-term capital gains. A Fund must use any post-2010 losses, which will not expire, before it uses any pre-2011 losses. This increases the likelihood that pre-2011 losses will expire unused at the conclusion of the eight-year carryforward period. A Funds ability to use net capital losses to offset gains may be limited as a result of certain (i) acquisitive reorganizations and (ii) shifts in the ownership of the Fund by a shareholder owning or treated as owning 5% or more of the stock of the Fund. Each Funds available capital loss carryforwards will be set forth in its annual shareholder report for each fiscal year.
Fund Distributions
Distributions are taxable to shareholders even if they are paid from gains earned by a Fund before a shareholders investment (and thus were included in the price the shareholder paid). Distributions are taxable whether shareholders receive them in cash or reinvest them in additional shares.
Each Fund will send you information after the end of each calendar year setting forth the amount and tax status of any distributions paid to you by the Fund. Ordinary income dividends and Capital Gain Dividends (defined below) may also be subject to state, local or other taxes.
For U.S. federal income tax purposes, distributions of investment income are generally taxable to shareholders as ordinary income. Taxes on distributions of capital gains are determined by how long a Fund owned the investments that generated them, rather than how long a shareholder has owned his or her shares. In general, a Fund will recognize long-term capital gain or loss on investments it has owned (or is deemed to have owned) for more than one year, and short-term capital gain or loss on investments it has owned (or is deemed to have owned) for one year or less. Distributions of net capital gain that are properly reported by a Fund as capital gain dividends (Capital Gain Dividends) will be taxable to shareholders as long-term capital gains includible in net capital gain and taxed to individuals at reduced rates. Distributions of net short-term capital gain (as reduced by any net long-term capital loss for the
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taxable year) will be taxable to shareholders as ordinary income. Distributions of investment income reported by a Fund as derived from qualified dividend income will be taxed in the hands of individuals at the rates applicable to net capital gain, provided holding period and other requirements are met at both the shareholder and Fund level.
In order for some portion of the dividends received by a Fund shareholder to be qualified dividend income, a Fund must meet holding period and other requirements with respect to some portion of the dividend-paying stocks in its portfolio and the shareholder must meet holding period and other requirements with respect to that Funds shares. In general, a dividend will not be treated as qualified dividend income (at either the Fund or shareholder level) (1) if the dividend is received with respect to any share of stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days during the 181-day period beginning 90 days before such date), (2) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, (3) if the recipient elects to have the dividend income treated as investment income for purposes of the limitation on deductibility of investment interest, or (4) if the dividend is received from a foreign corporation that is (a) not eligible for the benefits of a comprehensive income tax treaty with the United States (with the exception of dividends paid on stock of such a foreign corporation readily tradable on an established securities market in the United States) or (b) treated as a passive foreign investment company.
In general, distributions of investment income reported by a Fund as derived from qualified dividend income will be treated as qualified dividend income by a shareholder taxed as an individual, provided the shareholder meets the holding period and other requirements described above with respect to that Funds shares. If the aggregate qualified dividends received by a Fund during any taxable year are 95% or more of its gross income (excluding long-term capital gain over net short-term capital loss), then 100% of the Funds dividends (other than dividends properly reported as Capital Gain Dividends) will be eligible to be treated as qualified dividend income. The Floating Rate Opportunities Fund and Opportunistic Credit Fund do not expect a significant portion of their respective distributions to be eligible for treatment as qualified dividend income.
Dividends of net investment income received by corporate shareholders of a Fund generally will qualify for the 70% dividends-received deduction generally available to corporations to the extent of the amount of eligible dividends received by that Fund from domestic corporations for the taxable year. A dividend received by a Fund will not be treated as a dividend eligible for the dividends-received deduction (1) if it has been received with respect to any share of stock that the Fund has held for less than 46 days (91 days in the case of certain preferred stock) during the 91-day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with respect to such dividend (during the 181-day period beginning 90 days before such date in the case of certain preferred stock) or (2) to the extent that the Fund is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Moreover, the dividends-received deduction may otherwise be disallowed or reduced (1) if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of that Fund or (2) by application of the Code (for instance, the dividends-received deduction is reduced in the case of a dividend received on debt-financed portfolio stock (generally, stock acquired with borrowed funds)). The Floating Rate Opportunities Fund and Opportunistic Credit Fund do not expect a significant portion of their respective distributions to be eligible for this dividends-received deduction.
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If a Fund receives dividends from another investment company that qualifies as a RIC and the investment company reports such dividends as qualified dividend income or as eligible for the dividends-received deduction, then the Fund is permitted in turn to report a portion of its distributions as qualified dividend income or as eligible for the dividends received deduction, as applicable, provided the Fund meets holding period and other requirements with respect to shares of the investment company.
A Funds dividends representing distributions of interest income and capital gains or distributions from entities that are not corporations for U.S. tax purposes will not constitute qualified dividend income to individual shareholders and will not be eligible for the dividends-received deduction for corporate shareholders. In addition, any distribution of income that is attributable to (i) income received by a Fund in lieu of dividends with respect to securities on loan pursuant to a securities lending transaction or (ii) dividend income received by a Fund on securities it temporarily purchased from a counterparty pursuant to a repurchase agreement that is treated for U.S. federal income tax purposes as a loan by that Fund, will not constitute qualified dividend income to individual shareholders and will not be eligible for the dividends-received deduction for corporate shareholders.
Section 1411 of the Code generally imposes a 3.8% Medicare contribution tax on the net investment income of certain individuals, trusts and estates to the extent their income exceeds certain threshold amounts. For these purposes, net investment income generally includes, among other things, (i) distributions paid by a Fund of net investment income and capital gains as described above, and (ii) any net gain from the sale, redemption, exchange or other taxable disposition of Fund shares. Shareholders are advised to consult their tax advisers regarding the possible implications of this additional tax on their investment in a Fund.
Return of Capital Distributions
If a Fund makes a distribution with respect to any taxable year to a shareholder in excess of that Funds current and accumulated earnings and profits, the excess distribution will be treated as a return of capital to the extent of such shareholders tax basis in its shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces a shareholders tax basis in its shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by the shareholder of its shares.
Dividends and distributions on a Funds shares are generally subject to U.S. federal income tax as described herein to the extent they do not exceed that Funds realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholders investment. Such distributions are likely to occur in respect of shares purchased at a time when a Funds net asset value reflects either unrealized gains or realized but undistributed income or gains that were therefore included in the price that the shareholder paid. Such distributions may reduce the net asset value of a Funds shares below the shareholders cost basis in those shares. As described above, each Fund is required to distribute realized income and gains regardless of whether that Funds net asset value also reflects unrealized losses.
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Tax Implications of Certain Fund Investments
Some debt obligations with a fixed maturity date of more than one year from the date of issuance (and zero-coupon debt obligations with a fixed maturity date of more than one year from the date of issuance) that are acquired by a Fund will be treated as debt obligations that are issued originally at a discount. Generally, the amount of the original issue discount (OID) is treated as interest income and is included in a Funds income (and required to be distributed by the Fund) over the term of the debt security, even though payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt security.
Some debt obligations with a fixed maturity date of more than one year from the date of issuance that are acquired by a Fund in the secondary market may be treated as having market discount. Very generally, market discount is the excess of the stated redemption price of a debt obligation (or in the case of an obligation issued with OID, its revised issue price) over the purchase price of such obligation. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on such debt security. Alternatively, a Fund may elect to accrue market discount currently and thus distribute it over the term of the debt security, even though the payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt security. The rate at which the market discount accrues, and thus is included in a Funds income, will depend upon which of the permitted accrual methods the Fund elects.
Some debt obligations with a fixed maturity date of one year or less from the date of issuance that are acquired by a Fund may be treated as having OID or acquisition discount (very generally, the excess of the stated redemption price over the purchase price). Generally, a Fund will be required to include the OID or acquisition discount in income (as ordinary income) over the term of the debt security, even though payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt security. The rate at which OID or acquisition discount accrues, and thus is included in a Funds income, will depend upon which of the permitted accrual methods the Fund elects.
A substantial portion of the Floating Rate Opportunities Funds and Opportunistic Credit Funds investments in loans and other debt obligations will be treated as having market discount and/or OID, which, in some cases, could be significant.
Some preferred securities may include provisions that permit the issuer, at its discretion, to defer the payment of distributions for a stated period without any adverse consequences to the issuer. If a Fund owns a preferred security that is deferring the payment of its distributions, the Fund may be required to report income for U.S. federal income tax purposes to the extent of any such deferred distribution even though the Fund has not yet actually received the cash distribution.
If a Fund holds the foregoing kinds of obligations, or other obligations subject to special rules under the Code, it may be required to pay out as an income distribution each year an amount which is greater than the total amount of cash interest the Fund actually received. Such distributions may be made from the cash assets of the Fund or, if necessary, by liquidation of portfolio securities (including at a time when it may not be advantageous to do so). A Fund may realize gains or losses from such liquidations. In the event a Fund realizes net long-term or short-term capital gains from such transactions, its shareholders may receive a larger Capital Gain Dividend or ordinary dividend, respectively, than they would in the absence of such transactions.
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Very generally, where a Fund purchases a bond at a price that exceeds the redemption price at maturity that is, at a premium the premium is amortizable over the remaining term of the bond. In the case of a taxable bond, if a Fund makes an election applicable to all such bonds it purchases, which election is irrevocable without consent of the IRS, the Fund reduces the current taxable income from the bond by the amortized premium and reduces its tax basis in the bond by the amount of such offset; upon the disposition or maturity of such bonds acquired on or after January 4, 2013, the Fund is permitted to deduct any remaining premium allocable to a prior period. In the case of a tax-exempt bond, tax rules require a Fund to reduce its tax basis by the amount of amortized premium.
Investments in high-yield debt obligations or other distressed debt obligations that are at risk of or in default present special tax issues for a Fund investing in or holding such obligations. Tax rules are not entirely clear about issues such as whether or to what extent a Fund should recognize market discount on a debt obligation; when a Fund may cease to accrue interest, OID or market discount; when and to what extent a Fund may take deductions for bad debts or worthless securities and how a Fund should allocate payments received on obligations in default between principal and income. These and other related issues will be addressed by each Fund as necessary, in order to seek to ensure that it distributes sufficient income to preserve its eligibility for treatment as a RIC and does not become subject to U.S. federal income or excise tax.
A portion of the OID paid or accrued on certain high-yield discount obligations owned by a Fund may not be deductible to the issuer and will instead be treated as a dividend paid by the issuer for purposes of the dividends-received deduction. In such cases, if the issuer of the obligation is a domestic corporation, dividend payments by the Fund may be eligible for the dividends-received deduction to the extent of the deemed dividend portion of such OID.
A Fund may invest directly or indirectly in residual interests in real estate mortgage investment conduits (REMICs) (including by investing in residual interests in CMOs with respect to which an election to be treated as a REMIC is in effect) or equity interests in taxable mortgage pools (TMPs). Under a notice issued by the IRS in October 2006 and Treasury regulations that have yet to be issued but may apply retroactively, a portion of a Funds income (including income allocated to the Fund from a pass-through entity) that is attributable to a residual interest in a REMIC or an equity interest in a TMP (referred to in the Code as an excess inclusion) will be subject to U.S. federal income tax in all events. This notice also provides, and the regulations are expected to provide, that excess inclusion income of a RIC will be allocated to shareholders of the RIC in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related interest directly. As a result, a Fund investing in such interests may not be a suitable investment for charitable remainder trusts. See Tax-Exempt Shareholders below.
In general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions), (ii) will constitute unrelated business taxable income (UBTI) to entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on UBTI, thereby potentially requiring such an entity that is allocated excess inclusion income, and otherwise might not be required to file a tax return, to file a tax return and pay tax on such income, and (iii) in the case of a non-U.S. shareholder, will not qualify for any reduction in U.S. federal withholding tax. A shareholder will be subject to U.S. federal income tax on such inclusions notwithstanding any exemption from such income tax otherwise available under the Code.
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A Funds transactions in foreign currencies, foreign currency-denominated debt obligations and certain foreign currency options, futures contracts or forward contracts (or similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency concerned. Such ordinary income treatment may accelerate Fund distributions to shareholders and increase the distributions taxed to shareholders as ordinary income. Any net ordinary losses so created cannot be carried forward by a Fund to offset income or gains earned in subsequent years.
Any equity investments by a Fund in certain passive foreign investment companies (PFICs) could potentially subject that Fund to a U.S. federal income tax (including interest charges) on distributions received from the PFIC or on proceeds received from the disposition of shares in the PFIC. This tax cannot be eliminated by making distributions to Fund shareholders. However, a Fund may elect to avoid the imposition of that tax. For example, a Fund may elect to treat a PFIC as a qualified electing fund ( i.e. , make a QEF election), in which case that Fund will be required to include its share of the PFICs income and net capital gains annually, regardless of whether it receives any distribution from the PFIC. A Fund also may make an election to mark the gains (and to a limited extent losses) in such holdings to the market as though it had sold and repurchased its holdings in those PFICs on the last day of that Funds taxable year. Such gains and losses are treated as ordinary income and loss. The QEF and mark-to-market elections may accelerate the recognition of income (without the receipt of cash) and increase the amount required to be distributed by a Fund to avoid taxation. Making either of these elections therefore may require a Fund to liquidate other investments (including when it is not advantageous to do so) to meet its distribution requirement, which also may accelerate the recognition of gain and affect that Funds total return. Dividends paid by PFICs will not be eligible to be treated as qualified dividend income. Because it is not always possible to identify a foreign corporation as a PFIC, a Fund may incur the tax and interest charges described above in some instances.
A Funds investments in foreign countries may be subject to foreign withholding and other taxes on dividends, interest, capital gains, or other income or proceeds. These withholding and other taxes will decrease a Funds yield on the securities subject to such taxes. Tax treaties between certain countries and the U.S. may reduce or eliminate such taxes. If more than 50% of a Funds assets at taxable year end consists of the securities of foreign corporations, the Fund may elect to permit shareholders to claim a credit or deduction on their income tax returns for their pro rata portions of qualified taxes paid by the Fund to foreign countries in respect of foreign securities that the Fund has held for at least the minimum period specified in the Code. In such a case, shareholders will include in gross income from foreign sources their pro rata shares of such taxes paid by the Fund. A shareholders ability to claim an offsetting foreign tax credit or deduction in respect of foreign taxes paid by a Fund is subject to certain limitations imposed by the Code, which may result in the shareholders not receiving a full credit or deduction (if any) for the amount of such taxes. Shareholders who do not itemize on their U.S. federal income tax returns may claim a credit (but not a deduction) for such foreign taxes. Shareholders that are not subject to U.S. federal income tax, and those who invest in a Fund through tax-advantaged accounts (including those who invest through individual retirement accounts or other tax-advantaged retirement plans), generally will receive no benefit from any tax credit or deduction passed through by a Fund. Even if eligible in a particular taxable year, a Fund may determine not to make this election, in which case shareholders will
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not be entitled to claim a credit or deduction for foreign taxes directly or indirectly paid by the Fund in such year. Shareholders of the Long/Short Equity Fund, Long/Short Healthcare Fund and Opportunistic Credit Fund generally will not be entitled to claim a credit or deduction with respect to foreign taxes paid by or withheld from a Fund.
A Funds derivatives transactions, as well as any hedging, straddle and short sale transactions, generally are subject to one or more special tax rules (including, for instance, notional principal contract, mark-to-market, constructive sale, straddle, wash sale and short sale rules). These rules may affect whether gains and losses recognized by a Fund are treated as ordinary or capital and/or as short-term or long-term, accelerate the recognition of income or gains to a Fund, defer losses to a Fund, and cause adjustments in the holding periods of a Funds securities. These rules could therefore affect the amount, timing and/or character of distributions to shareholders. In addition, because these and other tax rules applicable to derivative financial instruments are in some cases uncertain under current law, an adverse determination or future guidance by the IRS with respect to these rules (which determination or guidance could be retroactive) may affect whether a Fund has made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a RIC and avoid a Fund-level tax.
In addition, certain of a Funds investments in derivative instruments and foreign currency-denominated debt instruments, as well as any of a Funds transactions in foreign currencies and hedging activities, are likely to produce a difference between a Funds book income and the sum of its taxable income and net tax-exempt income (if any). If a Funds book income exceeds the sum of its taxable income (including net realized capital gains) and net tax-exempt income (if any), the distribution (if any) of such excess generally will be treated as (i) a dividend to the extent of that Funds remaining earnings and profits (including earnings and profits arising from tax-exempt income), (ii) thereafter, as a return of capital to the extent of the recipients basis in its shares, and (iii) thereafter, as gain from the sale or exchange of a capital asset. If a Funds book income is less than the sum of its taxable income and net tax-exempt income (if any), the Fund could be required to make distributions exceeding book income to qualify as a RIC that is accorded favorable tax treatment.
To the extent a Fund participates in short sales by contracting for the sale of securities it does not own and later purchasing securities necessary to close the sale, the character of the gain or loss realized on such a short sale is determined by reference to the property used to close the short sale and is thus generally short-term. Because net short-term capital gain (after reduction by any long-term capital loss) is generally taxed at ordinary income rates, a Funds short sale transactions can increase the percentage of a Funds gains that are taxable to shareholders as ordinary income.
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Sale, Exchange or Redemption of Fund Shares
The sale, exchange or redemption of Fund shares may give rise to a gain or loss to the shareholder. In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shares have been held for more than 12 months. Otherwise, the gain or loss on the taxable disposition of Fund shares will be treated as short-term capital gain or loss. However, any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any Capital Gain Dividends received (or deemed received) by the shareholder with respect to those shares. In addition, all or a portion of any loss realized upon a taxable disposition of Fund shares will be disallowed under the wash-sale rule of the Code if other substantially identical shares are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
Shareholders may be entitled to offset their Capital Gain Dividends with capital loss from other sources. The Code contains a number of statutory provisions affecting the circumstances under which capital loss may be offset against capital gain and limiting the use of loss from certain investments and activities. Accordingly, shareholders that have capital losses are urged to consult their tax advisers.
Upon the redemption or exchange of Fund shares, the Fund or, in the case of shares purchased through an intermediary, the intermediary may be required to provide you and the IRS with cost basis and certain other related tax information about the Fund shares you redeemed or exchanged. See the Funds Prospectus for more information.
Backup Withholding
A Fund (or if Fund shares are purchased through an intermediary, the intermediary) generally is required to withhold and remit to the U.S. Treasury a percentage of the taxable distributions and redemption proceeds paid to any individual shareholder who fails to properly furnish the Fund (or intermediary) with a correct taxpayer identification number (TIN), who has under-reported dividend or interest income, or who fails to certify to the Fund (or intermediary) that he or she is not subject to such withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholders U.S. federal income tax liability, provided the appropriate information is furnished to the IRS.
Tax Shelter Reporting Regulations
Under Treasury regulations, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on IRS Form 8886. Direct holders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayers treatment of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
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Non-U.S. Shareholders
Distributions by a Fund to shareholders that are not U.S. persons within the meaning of the Code (foreign shareholders) properly reported by the Fund as (1) Capital Gain Dividends, (2) short-term capital gain dividends, and (3) interest-related dividends, each as defined and subject to certain conditions described below, generally will not be subject to withholding of U.S. federal income tax.
In general, the Code defines (1) short-term capital gain dividends as distributions of net short-term capital gains in excess of net long-term capital losses and (2) interest-related dividends as distributions from U.S. source interest income of types similar to those not subject to U.S. federal income tax if earned directly by an individual foreign shareholder, in each case to the extent such distributions are properly reported as such by the Fund in a written notice to shareholders.
The exceptions to withholding for Capital Gain Dividends and short-term capital gain dividends do not apply to (A) distributions to an individual foreign shareholder who is present in the United States for a period or periods aggregating 183 days or more during the year of the distribution and (B) distributions attributable to gain that is treated as effectively connected with the conduct by the foreign shareholder of a trade or business within the United States under special rules regarding the disposition of U.S. real property interests (USRPI) as described below. The exception to withholding for interest-related dividends does not apply to distributions to a foreign shareholder that (A) has not provided a satisfactory statement that the beneficial owner is not a U.S. person, (B) to the extent that the dividend is attributable to certain interest on an obligation if the foreign shareholder is the issuer or is a 10% shareholder of the issuer, (C) that is within certain foreign countries that have inadequate information exchange with the United States, or (D) to the extent the dividend is attributable to interest paid by a person that is a related person of the foreign shareholder and the foreign shareholder is a controlled foreign corporation. A Fund is permitted to report such part of its dividends as interest-related or short-term capital gain dividends as are eligible, but is not required to do so. In the case of shares held through an intermediary, the intermediary may withhold even if the Fund reports all or a portion of a payment as an interest-related or short-term capital gain dividend to shareholders. Foreign shareholders should contact their intermediaries regarding the application of these rules to their accounts.
Distributions by the Fund to foreign shareholders other than Capital Gain Dividends, short-term capital gain dividends, and interest-related dividends (e.g., dividends attributable to dividend and foreign-source interest income or to short-term capital gains or U.S. source interest income to which the exception from withholding described above does not apply) are generally subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate).
A foreign shareholder is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized on the sale of shares of a Fund unless (i) such gain is effectively connected with the conduct of a trade or business carried on by such holder within the United States, (ii) in the case of an individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale and certain other conditions are met, or (iii) the special rules relating to gain attributable to the sale or exchange of USRPIs apply to the foreign shareholders sale of shares of the Fund (as described below).
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Foreign shareholders with respect to whom income from a Fund is effectively connected with a trade or business conducted by the foreign shareholder within the United States will, in general, be subject to U.S. federal income tax on the income derived from the Fund at the graduated rates applicable to U.S. citizens, residents or domestic corporations, whether such income is received in cash or reinvested in shares of the Fund and, in the case of a foreign corporation, may also be subject to a branch profits tax.
If a foreign shareholder is eligible for the benefits of a tax treaty, any effectively connected income or gain will generally be subject to U.S. federal income tax on a net basis only if it is also attributable to a permanent establishment maintained by the shareholder in the United States. More generally, foreign shareholders who are residents in a country with an income tax treaty with the United States may obtain different tax results than those described herein and are urged to consult their tax advisers.
Special rules apply to distributions to certain foreign shareholders from a RIC that is a qualified investment entity (QIE) because it is either a U.S. real property holding corporation (USRPHC) or former USRPHC or would be a USRPHC absent certain exclusions from the definition of USRPIs. Very generally, a USRPHC is a domestic corporation that holds USRPIs USRPIs are defined generally as any interest in U.S. real property or any equity interest in a USRPHC the fair market value of which, during specified testing periods, equals or exceeds 50% of the sum of the fair market values of the corporations USRPIs, interests in real property located outside the United States and other assets. The Funds generally do not expect that they will be USRPHCs or would be USRPHCs but for the operation of the special exceptions referred to above, and thus do not expect these special tax rules to apply.
In order to qualify for any exemption from withholding described above (to the extent applicable) or for lower withholding tax rates under applicable income tax treaties, or to establish an exemption from backup withholding, a foreign shareholder must comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, W-8BEN-E or substitute form). Foreign shareholders should contact their tax advisers in this regard.
A foreign shareholder may be subject to state and local tax and to the U.S. federal estate tax in addition to the U.S. federal tax on income referred to above.
Tax-Exempt Shareholders
Under current law, a Fund serves to block (that is, prevent the attribution to shareholders of) UBTI from being realized by tax-exempt shareholders. Notwithstanding this blocking effect, a tax-exempt shareholder could realize UBTI by virtue of its investment in a Fund if shares in that Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b).
A tax-exempt shareholder may also recognize UBTI if a Fund recognizes excess inclusion income derived from direct or indirect investments in residual interests in REMICS or equity interests in TMPs if the amount of such income recognized by the Fund exceeds the Funds investment company taxable income (after taking into account deductions for dividends paid by the Fund).
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In addition, special tax consequences apply to charitable remainder trusts (CRTs) that invest in RICs that invest directly or indirectly in residual interests in REMICs or equity interests in TMPs. Under legislation enacted in December 2006, a CRT (as defined in section 664 of the Code) that realizes any UBTI for a taxable year must pay an excise tax annually of an amount equal to such UBTI. Under IRS guidance issued in October 2006, a CRT will not recognize UBTI as a result of investing in a Fund to the extent it recognizes excess inclusion income. Rather, if at any time during any taxable year a CRT (or one of certain other tax-exempt shareholders, such as the United States, a state or political subdivision, or an agency or instrumentality thereof, and certain energy cooperatives) is a record holder of a Fund and the Fund recognizes excess inclusion income, then the Fund will be subject to a tax on that portion of its excess inclusion income for the taxable year that is allocable to such shareholders at the highest federal corporate income tax rate. The extent to which this IRS guidance remains applicable in light of the December 2006 legislation is unclear. To the extent permitted under the 1940 Act, a Fund may elect to specially allocate any such tax to the applicable CRT, or other shareholder, and thus reduce such shareholders distributions for the year by the amount of the tax that relates to such shareholders interest in the Fund.
CRTs and other tax-exempt investors are urged to consult their tax advisers concerning the consequences of investing in a Fund.
Shareholder Reporting Obligations With Respect to Foreign Bank and Financial Accounts
Shareholders that are U.S. persons and own, directly or indirectly, more than 50% of a Fund could be required to report annually their financial interest in the Funds foreign financial accounts, if any, on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Shareholders should consult a tax adviser, and persons investing in a Fund through an intermediary should contact their intermediary, regarding the applicability to them of this reporting requirement.
Other Reporting and Withholding Requirements
Sections 1471-1474 of the Code and the U.S. Treasury and IRS guidance issued thereunder (collectively, FATCA) generally require a Fund to obtain information sufficient to identify the status of each of its shareholders under FATCA or under an applicable intergovernmental agreement (an IGA) between the United States and a foreign government. If a shareholder fails to provide the requested information or otherwise fails to comply with FATCA or an IGA, a Fund may be required to withhold under FATCA at a rate of 30% with respect to that shareholder on ordinary dividends it pays and 30% of the gross proceeds of redemptions or exchanges of Fund shares and certain Capital Gain Dividends the Fund pays on or after January 1, 2019. If a payment by a Fund is subject to FATCA withholding, the Fund or its agent is required to withhold even if such payment would otherwise be exempt from withholding under the rules applicable to foreign shareholders described above ( e.g. , Capital Gain Dividends, short-term capital gain dividends and interest-related dividends).
Each prospective investor is urged to consult its tax adviser regarding the applicability of FATCA and any other reporting requirements with respect to the prospective investors own situation. Persons investing in a Fund through an intermediary should contact their intermediary regarding the application of this reporting and withholding regime to their investments in a Fund.
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Shares Purchased Through Tax Qualified Plans
Special tax rules apply to investments through defined contribution plans and other tax-qualified plans or tax-advantaged arrangements. Shareholders should consult their tax advisers to determine the suitability of shares of a Fund as an investment through such plans and arrangements and the precise effect of an investment on their particular tax situation.
General Considerations
The U.S. federal income tax discussion set forth above is for general information only. Prospective investors should consult their tax advisers regarding the specific U.S. federal tax consequences of purchasing, holding, and disposing of shares of a Fund, as well as the effects of state, local, foreign and other tax law and any proposed tax law changes.
The audited financial statements and notes thereto of the Long/Short Equity Fund, Long/Short Healthcare Fund, Floating Rate Opportunities Fund and Opportunistic Credit Fund Annual Report to Shareholders for the fiscal year ended June 30, 2016 are incorporated into this SAI by reference and have been audited by KPMG LLP, an independent registered public accounting firm, whose report, along with the financial statements, appears in the Long/Short Equity Funds, Long/Short Healthcare Funds, Floating Rate Opportunities Funds and Opportunistic Credit Funds 2016 Annual Report to Shareholders for the fiscal year ended June 30, 2016, as filed with the SEC on September 1, 2016 (file # 811-21866).
The audited financial statements and notes thereto of the Merger Arbitrage Fund Annual Report to Shareholders for the fiscal period ended December 31, 2016 are incorporated into this SAI by reference and have been audited by KPMG LLP, an independent registered public accounting firm, whose report, along with the financial statements, appears in the Merger Arbitrage Funds 2016 Annual Report to Shareholders for the fiscal period ended December 31, 2016, as filed with the SEC on March 8, 2017 (file # 811-21866).
The audited financial statements incorporated by reference into the Funds Prospectus and this SAI have been so incorporated in reliance upon the reports of KPMG LLP, given on its authority as an expert in auditing and accounting. The Long/Short Equity Funds, Long/Short Healthcare Funds, Floating Rate Opportunities Funds, Merger Arbitrage Funds and Opportunistic Credit Funds Annual Report is available without charge by calling the Funds at (877) 665-1287 or on the SECs website at http://www.sec.gov.
On July 1, 2014, the Opportunistic Credit Fund acquired the assets of the HSSF Predecessor Fund. The Opportunistic Credit Fund is the successor to the accounting and performance information of the HSSF Predecessor Fund.
On May 12, 2016, the Merger Arbitrage Fund acquired the assets of the Merger Arbitrage Predecessor Fund. The Merger Arbitrage Fund is the successor to the performance information of the Merger Arbitrage Predecessor Fund.
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APPENDIX A R ATINGS CATEGORIES
Ratings in General. A rating of a rating service represents the services opinion as to the credit quality of the security being rated. However, the ratings are general and are not absolute standards of quality or guarantees as to the creditworthiness of an issuer. Consequently, the Adviser believes that the quality of debt securities should be continuously reviewed and that individual analysts give different weightings to the various factors involved in credit analysis. A rating is not a recommendation to purchase, sell or hold a security because it does not take into account market value or suitability for a particular investor. When a security has received a rating from more than one service, each rating should be evaluated independently. Ratings are based on current information furnished by the issuer or obtained by the rating services from other sources that they consider reliable. Ratings may be changed, suspended or withdrawn as a result of changes in or unavailability of such information, or for other reasons. The following is a description of the characteristics of ratings used by Moodys Investors Service (Moodys) and Standard & Poors (S&P).
Moodys
Global Long-term Rating Scale
Ratings assigned on Moodys global long-term rating scales are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
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.
A-1
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.
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Additionally, a (hyb) indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.*
* | By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security. |
Global Short-Term Rating Scale
Ratings assigned on Moodys global short-term rating scales are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect the likelihood of a default on contractually promised payments.
Moodys employs the following designations to indicate the relative repayment ability of rated issuers:
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.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
A-2
S&P
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on S&Ps analysis of the following considerations: (i) likelihood of payment capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; (ii) nature of and provisions of the obligation, and the promise we impute; and (iii) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors rights.
Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA
An obligation rated AAA has the highest rating assigned by S&P. The obligors 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 obligors 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 obligors 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, B, CCC, CC, and C
Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
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 obligors 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 obligors capacity or willingness to meet its financial commitment on the obligation.
A-3
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 S&P 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 S&P 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 obligations rating is lowered to D if it is subject to a distressed exchange offer.
Plus (+) or minus (-)
The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
NR
This indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that S&P does not rate a particular obligation as a matter of policy.
Short-Term Issue Credit Ratings
A-1
A short-term obligation rated A-1 is rated in the highest category by S&P. The obligors 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 obligors 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 obligors capacity to meet its financial commitment on the obligation is satisfactory.
A-4
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.
B
A short-term obligation rated B is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet is financial commitments.
C
A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments.
D
A short-term 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 S&P believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligations rating is lowered to D if it subject to a distressed exchange offer.
SPUR (S&P Underlying Rating)
A SPUR rating is an opinion about the stand-alone capacity of an obligor to pay debt service on a credit-enhanced debt issue, without giving effect to the enhancement that applies to it. These ratings are published only at the request of the debt issuer/obligor with the designation SPUR to distinguish them from the credit-enhanced rating that applies to the debt issue. S&P maintains surveillance of an issue with a published SPUR.
.
A-5
HIGHLAND CAPITAL MANAGEMENT FUND ADVISORS, L.P.
POLICY REGARDING PROXY VOTING
Purpose and Scope
The purpose of these voting policies and procedures (the Policy) is to set forth the principles and procedures by which HCMLP (the Company) votes or gives consents with respect to the securities owned by Clients for which the Company exercises voting authority and discretion. 1 For avoidance of doubt, this includes any proxy and any shareholder vote or consent, including a vote or consent for a private company or other issuer that does not involve a proxy. These policies and procedures have been designed to help ensure that votes are cast in the best interests of Clients in accordance with the Companys fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act of 1940 (the Advisers Act).
This Policy applies to securities held in all Client accounts (including Retail Funds and other pooled investment vehicles) as to which the Company has explicit or implicit voting authority. Implicit voting authority exists where the Companys voting authority is implied by a general delegation of investment authority without reservation of proxy voting authority to the Client.
If the Company has delegated voting authority to an investment sub-adviser with respect to any Retail Fund, such sub-adviser will be responsible for voting all proxies for such Retail Funds in accordance with the sub-advisers proxy voting policies. The Compliance Department, to provide oversight over the proxy voting by sub-advisers and to ensure that votes are executed in the best interests of the Retail Funds, shall (i) review the proxy voting policies and procedures of each Retail Fund sub-adviser to confirm that they comply with Rule 206(4)-6, both upon engagement of the sub-adviser and upon any material change to the sub-advisers proxy voting policies and procedures, and (ii) require each such sub-adviser to provide quarterly certifications that all proxies were voted pursuant to the sub-advisers policies and procedures or to describe any inconsistent votes.
General Principles
The Company and its affiliates engage in a broad range of activities, including investment activities for their own accounts and for the accounts of various Clients and providing investment advisory and other services to Clients. In the ordinary course of conducting the Companys activities, the interests of a Client may conflict with the interests of the Company, other Clients and/or the Companys affiliates and their clients. Any conflicts of interest relating to the voting of proxies, regardless of whether actual or perceived, will be addressed in accordance with these policies and procedures. The guiding principle by which the Company votes all proxies is to vote in the best interests of each
1 |
In any case where a Client has instructed the Company to vote in a particular manner on the Clients behalf, those instructions will govern in lieu of parameters set forth in the Policy. |
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Client by maximizing the economic value of the relevant Clients holdings, taking into account the relevant Clients investment horizon, the contractual obligations under the relevant advisory agreements or comparable documents and all other relevant facts and circumstances at the time of the vote. The Company does not permit voting decisions to be influenced in any manner that is contrary to, or dilutive of, this guiding principle.
Voting Procedures
Third-Party Proxy Advisors
The Company may engage a third-party proxy advisor (Proxy Advisor) to provide proxy voting recommendations with respect to Client proxies. Proxy Advisor voting recommendation guidelines are generally designed to increase investors potential financial gain. When considering whether to retain or continue retaining any particular Proxy Advisor, the Compliance Department will ascertain, among other things, whether the Proxy Advisor has the capacity and competency to adequately analyze proxy issues. In this regard, the Compliance Department will consider, among other things: the adequacy and quality of the Proxy Advisors staffing and personnel; the robustness of its policies and procedures regarding its ability to (a) ensure that its proxy voting recommendations are based on current and accurate information and (b) identify and address any conflicts of interest and any other considerations that the Compliance Department determines would be appropriate in considering the nature and quality of the services provided by the Proxy Advisor. To identify and address any conflicts that may arise on the part of the Proxy Advisor, the Compliance Department will ensure that the Proxy Advisor notifies the Compliance Department of any relevant business changes or changes to its policies and procedures regarding conflicts.
Third-Party Proxy Voting Services
The Company may utilize a third-party proxy voting service (Proxy Voting Service) to monitor holdings in Client accounts for purposes of determining whether there are upcoming shareholder meetings or similar corporate actions and to execute Client proxies on behalf of the Company pursuant to the Companys instructions, which shall be given in a manner consistent with this Policy. The Compliance Department will oversee each Proxy Voting Service to ensure that proxies have been voted in a manner consistent with the Companys instructions.
Monitoring
Subject to the procedures regarding Nonstandard Proxy Notices described below, the Compliance Department of the Company shall have responsibility for monitoring Client accounts for proxy notices. Except as detailed below, if proxy notices are received by other employees of the Company, such employees must promptly forward all proxy or other voting materials to the Compliance Department.
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Portfolio Manager Review and Instruction
From time to time, the settlement group of the Company may receive nonstandard proxy notices, regarding matters including, but not limited to, proposals regarding corporate actions or amendments (Nonstandard Proxy Notices) with respect to securities held by Clients. Upon receipt of a Nonstandard Proxy Notice, a member of the settlement group (the Settlement Designee) shall send an email notification containing all relevant information to the Portfolio Manager(s) with responsibility for the security and [ .com] . Generally, the relevant Portfolio Manager(s) shall deliver voting instructions for Nonstandard Proxy Notices by replying to the email notice sent to the Portfolio Manager(s) and [ .com] by the Settlement Designee or by sending voting instructions to [ .com] and copying [ .com] . Any conflicts for Nonstandard Proxy Notices should also be disclosed to the Compliance Department. In the event a Portfolio Manager orally conveys voting instructions to the Settlement Designee or any other member of the Companys settlement group, that Settlement Designee or member of the Companys settlement group shall respond to the original notice email sent to [ .com] detailing the Portfolio Manager(s) voting instructions.
With regard to standard proxy notices, on a weekly basis, the Compliance Department will send a notice of upcoming proxy votes related to securities held by Clients and the corresponding voting recommendations of the Proxy Advisor to the relevant Portfolio Manager(s). Upon receipt of a proxy notice from the Compliance Department, the Portfolio Manager(s) will review and evaluate the upcoming votes and recommendations. The Portfolio Managers may rely on any information and/or research available to him or her and may, in his or her discretion, meet with members of an issuers management to discuss matters of importance to the relevant Clients and their economic interests. Should the Portfolio Manager determine that deviating from the Proxy Advisors recommendation is in a Clients best interest, the Portfolio Manager shall communicate his or her voting instructions to the Compliance Department.
In the event that more than one Portfolio Manager is responsible for making a particular voting decision and such Portfolio Managers are unable to arrive at an agreement as to how to vote with respect to a particular proposal, they should consult with the applicable Chief Compliance Officer (the CCO) for guidance.
Voting
Upon receipt of the relevant Portfolio Managers voting instructions, if any, the Compliance Department will communicate the instructions to the Proxy Voting Service to execute the proxy votes.
Non-Votes
It is the general policy of the Company to vote or give consent on all matters presented to security holders in any vote, and these policies and procedures have been designated with that in mind. However, the Company reserves the right to abstain on any particular vote if, in the judgment of the CCO, or the relevant Portfolio Manager, the effect on the relevant Clients economic interests or the value of the portfolio holding is insignificant in relation to the Clients portfolio, if the costs associated with voting in any particular instance outweigh the benefits to the relevant Clients or if the circumstances make such an abstention or withholding otherwise advisable and in the best interests of the relevant Clients not to vote. Such determination may apply in respect of all Client holdings of the securities or only certain specified Clients, as the Company deems appropriate under
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the circumstances. As examples, a Portfolio Manager may determine: (a) not to recall securities on loan if, in his or her judgment, the matters being voted upon are not material events affecting the securities and the negative consequences to Clients of disrupting the securities lending program would outweigh the benefits of voting in the particular instance or (b) not to vote proxies relating to certain foreign securities if, in his or her judgment, the expense and administrative inconvenience outweighs the benefits to Clients of voting the securities.
Conflicts of Interest
The Companys Compliance Department is responsible for monitoring voting decisions for any conflicts of interest, regardless of whether they are actual or perceived. All voting decisions contrary to the recommendation of a Proxy Advisor require a mandatory conflicts of interest review by the Compliance Department, which will include a consideration of whether the Company or any Portfolio Manager or other person recommending or providing input on how to vote has an interest in the vote that may present a conflict of interest.
In addition, all Company investment professionals are expected to perform their tasks relating to the voting of proxies in accordance with the principles set forth above, according the first priority to the best interest of the relevant Clients. If at any time a Portfolio Manager or any other investment professional becomes aware of a potential or actual conflict of interest regarding any particular voting decision, he or she must contact the Compliance Department promptly and, if in connection with a proxy that has yet to be voted, prior to such vote. If any investment professional is pressured or lobbied, whether from inside or outside the Company, with respect to any particular voting decision, he or she should contact the Compliance Department promptly. The CCO will use his or her best judgment to address any such conflict of interest and ensure that it is resolved in accordance with his or her independent assessment of the best interests of the relevant Clients.
In the event of a conflict, the Company may choose to address such conflict by: (i) voting in accordance with the Proxy Advisors recommendation; (ii) the CCO determining how to vote the proxy (if the CCO approves deviation from the Proxy Advisors recommendation, then the CCO shall document the rationale for the vote); (iii) echo voting or mirror voting the proxy in the same proportion as the votes of other proxy holders that are not Clients; or (iv) with respect to Clients other than Retail Funds, notifying the affected Client of the material conflict of interest and seeking a waiver of the conflict or obtaining such Clients voting instructions. Where the Compliance Department deems appropriate, third parties may be used to help resolve conflicts. In this regard, the CCO or his or her delegate shall have the power to retain fiduciaries, consultants or professionals to assist with voting decisions and/or to delegate voting or consent powers to such fiduciaries, consultants or professionals.
Where a conflict of interest arises with respect to a voting decision for a Retail Fund, the Company shall disclose the conflict and the rationale for the vote taken to the Retail Funds Board of Directors/Trustees at the next regularly scheduled quarterly meeting. The Compliance Department will maintain a log documenting the basis for the decision and will furnish the log to the Board of Trustees.
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Material Conflicts of Interest
The following relationships or circumstances are examples of situations that may give rise to a material conflict of interest for purposes of this Policy. This list is not exclusive or determinative; any potential conflict (including payments of the types described below but less than the specified threshold) should be identified to the Companys Compliance Department:
(i) | The issuer is a Client of the Company, or of an affiliate, accounting for more than 5% of the Companys or affiliates annual revenues. |
(ii) | The issuer is an entity that reasonably could be expected to pay the Company or its affiliates more than $1 million through the end of the Companys next two full fiscal years. |
(iii) | The issuer is an entity in which a Covered Person (as defined in the Companys Policies and Procedures Designed to Detect and Prevent Insider Trading and to Comply with Rule 17j-1 of the Investment Company Act of 1940, as amended (the Code of Ethics)) has a beneficial interest contrary to the position held by the Company on behalf of Clients. |
(iv) | The issuer is an entity in which an officer or partner of the Company or a relative of any such person is or was an officer, director or employee, or such person or relative otherwise has received more than $150,000 in fees, compensation and other payment from the issuer during the Companys last three fiscal years; provided, however, that the Compliance Department may deem such a relationship not to be a material conflict of interest if the Company representative serves as an officer or director of the issuer at the direction of the Company for purposes of seeking control over the issuer. |
(v) | The matter under consideration could reasonably be expected to result in a material financial benefit to the Company or its affiliates through the end of the Companys next two full fiscal years (for example, a vote to increase an investment advisory fee for a Retail Fund advised by the Company or an affiliate). |
(vi) | Another Client or prospective Client of the Company, directly or indirectly, conditions future engagement of the Company on voting proxies in respect of any Clients securities on a particular matter in a particular way. |
(vii) | The Company holds various classes and types of equity and debt securities of the same issuer contemporaneously in different Client portfolios. |
(viii) | Any other circumstance where the Companys duty to serve its Clients interests, typically referred to as its duty of loyalty, could be compromised. |
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Notwithstanding the foregoing, a conflict of interest described above shall not be considered material for the purposes of this Policy in respect of a specific vote or circumstance if:
The securities in respect of which the Company has the power to vote account for less than 1% of the issuers outstanding voting securities, but only if: (i) such securities do not represent one of the 10 largest holdings of such issuers outstanding voting securities and (ii) such securities do not represent more than 2% of the Clients holdings with the Company.
The matter to be voted on relates to a restructuring of the terms of existing securities or the issuance of new securities or a similar matter arising out of the holding of securities, other than common equity, in the context of a bankruptcy or threatened bankruptcy of the issuer.
Recordkeeping
Following the submission of a proxy vote, the Fund will maintain a report of the vote and all relevant documentation.
The Fund shall retain records relating to the voting of proxies and the Company shall conduct due diligence, including on Proxy Voting Services and Proxy Advisors, as applicable, to ensure the following records are adequately maintained by the appropriate party:
(i) | Copies of this Policy and any amendments thereto. |
(ii) | A current copy of the Proxy Advisors voting guidelines, as amended. |
(iii) | A copy of each proxy statement that the Company receives regarding Client securities. The Company may rely on a third party to make and retain, on the Companys behalf, a copy of a proxy statement, provided that the Company has obtained an undertaking from the third party to provide a copy of the proxy statement promptly upon request. |
(iv) | Records of each vote cast by the Company on behalf of Clients. The Company may satisfy this requirement by relying on a third party to make and retain, on the Companys behalf, a record of the vote cast, provided that the Company has obtained an undertaking from the third party to provide a copy of the record promptly upon request. |
(v) | A copy of any documents created by the Company that were material to making a decision how to vote or that memorializes the basis for that decision. |
(vi) | A copy of each written request for information on how the Company voted proxies on behalf of the Client, and a copy of any written response by the Company to any (oral or written) request for information on how the Company voted. |
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These records shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of the Companys fiscal year during which the last entry was made in the records, the first two years in an appropriate office of the Company. 1
Enforcement of this Policy
It shall be the responsibility of the Compliance Department to handle or coordinate the enforcement of this Policy. The Compliance Department will periodically sample proxy voting records to ensure that proxies have been voted in accordance with this Policy, with a particular focus on any proxy votes that require additional analysis (e.g., proxies voted contrary to the recommendations of a Proxy Advisor).
If the Compliance Department determines that a Proxy Advisor or Proxy Voting Service may have committed a material error, the Compliance Department will investigate the error, taking into account the nature of the error, and seek to determine whether the Proxy Advisor or Proxy Voting Service is taking reasonable steps to reduce similar errors in the future.
In addition, no less frequently than annually, the Compliance Department will review the adequacy of this Policy to ensure that it has been implemented effectively and to confirm that this Policy continues to be reasonably designed to ensure that proxies are voted in the best interest of Clients.
Disclosures to Clients and Investors
The Company includes a description of its policies and procedures regarding proxy voting in Part 2 of Form ADV, along with a statement that Clients can contact the CCO to obtain a copy of these policies and procedures and information about how the Company voted with respect to a Clients securities. This Policy is, however, subject to change at any time without notice.
As a matter of policy, the Company does not disclose how it expects to vote on upcoming proxies. Additionally, the Company does not disclose the way it voted proxies to unaffiliated third parties without a legitimate need to know such information.
1 | If the Company has essentially immediate access to a book or record (on the Companys proprietary system or otherwise) through a computer located at an appropriate office of the Company, then that book or record will be considered to be maintained at an appropriate office of the Company. Immediate access to books and records includes that the Company has the ability to provide promptly to Securities and Exchange Commission (the SEC) examination staff hard copies of the books and records or access to the storage medium. The party responsible for the applicable books and records as described above shall also be responsible for ensuring that those books and records for the first two years are either physically maintained in an appropriate office of the Company or that the Company otherwise has essentially immediate access to the required books and records for the first two years. |
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PART C: Other Information
Item 28. Exhibits
(a) | (1) | Amended and Restated Agreement and Declaration of Trust of the Registrant, dated September 14, 2012 is incorporated herein by reference to Post-Effective Amendment No. 34 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 19, 2012. | ||||
(2) | (i) | Certificate of Designation dated March 3, 2006 for Highland Long/Short Equity Fund (formerly, Pyxis Long/Short Equity Fund, Highland Long/Short Equity Fund, Highland Equity Opportunities Fund) (Long/Short Equity Fund) is incorporated herein by reference to Post-Effective Amendment No. 4 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on March 1, 2007. | ||||
(ii) | Certificate of Designation dated March 7, 2008 for Highland Long/Short Healthcare Fund (formerly, Pyxis Long/Short Healthcare Fund, Highland Long/Short Healthcare Fund, Highland Healthcare Fund) (Long/Short Healthcare Fund) is incorporated herein by reference to Post-Effective Amendment No. 8 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on March 14, 2008. | |||||
(iii) | Certificate of Designation dated February 21, 2011 for Highland Floating Rate Opportunities Fund (formerly, Pyxis Floating Rate Opportunities Fund, Highland Floating Rate Opportunities Fund) (Floating Rate Opportunities Fund) is incorporated herein by reference to Post-Effective Amendment No. 25 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on February 25, 2011. | |||||
(iv) | Certificate of Designation dated September 14, 2012 for Pyxis/iBoxx Senior Loan ETF (Senior Loan ETF) is incorporated herein by reference to Post-Effective Amendment No. 34 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 19, 2012. | |||||
(v) | Certificate of Designation dated February 21, 2014 for Highland Unconstrained Income Opportunities Fund is incorporated herein by reference to Post-Effective Amendment No. 42 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on June 30, 2014. | |||||
(vi) | Amendment to Certificate of Designation dated June 6, 2014 for Highland Unconstrained Income Opportunities Fund, now known as Highland Opportunistic Credit Fund is incorporated herein by reference to Post-Effective Amendment No. 42 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on June 30, 2014. | |||||
(vii) | Amendment to Certificate of Designation dated June 27, 2014 for Highland Opportunistic Credit Fund, now known as Highland Unconstrained Credit Fund is incorporated herein by reference to Post-Effective Amendment No. 42 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on June 30, 2014. | |||||
(viii) | Amendment to Certificate of Designation dated June 30, 2014 for Highland Unconstrained Credit Fund, now known as Highland Opportunistic Credit Fund (Opportunistic Credit Fund) is incorporated herein by reference to Post-Effective Amendment No. 42 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on June 30, 2014. | |||||
(ix) | Certificate of Designation dated February 19, 2016 for Highland Merger Arbitrage Fund (Merger Arbitrage Fund) is incorporated herein by reference to Post-Effective Amendment No. 72 to the Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on May 12, 2016. | |||||
(b) | By-laws of the Registrant is incorporated herein by reference to the Registrants initial Registration Statement on Form N-1A, File No. 333-132400, filed on March 14, 2006. | |||||
(c) | Not applicable. |
(d) | (1) | Amended and Restated Investment Advisory Agreement dated as of December 4, 2006 as amended between Highland Capital Management Fund Advisors, L.P. (formerly, Pyxis Capital, L.P., Highland Capital Management, L.P.) (HCMFA) and the Registrant with respect to Long/Short Equity Fund, is incorporated herein by reference to Post-Effective Amendment No. 38 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2013. | ||||
(2) | Management Fee Waiver Agreement dated October 28, 2016 between HCMFA and the Registrant on behalf of Long/Short Equity Fund is incorporated herein by reference to Post-Effective Amendment No. 79 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2016. | |||||
(3) | Amended and Restated Investment Advisory Agreement dated as of May 1, 2010 as amended between HCMFA and the Registrant with respect to Long/Short Healthcare Fund is incorporated herein by reference to Post-Effective Amendment No. 38 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2013. | |||||
(4) | Amended and Restated Investment Advisory Agreement dated as of June 10, 2011 as amended between HCMFA and the Registrant with respect to Floating Rate Opportunities Fund is incorporated herein by reference to Post-Effective Amendment No. 38 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2013. | |||||
(5) | Investment Advisory Agreement dated September 21, 2012 between HCMFA and the Registrant with respect to Senior Loan ETF is incorporated herein by reference to Post-Effective Amendment No. 34 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 19, 2012. | |||||
(6) | Investment Advisory Agreement between HCMFA and the Registrant with respect to Opportunistic Credit Fund is incorporated herein by reference to Post-Effective Amendment No. 42 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on June 30, 2014. | |||||
(7) | Investment Advisory Agreement dated May 12, 2016 between HCMFA and the Registrant with respect to Merger Arbitrage Fund is incorporated herein by reference to Post-Effective Amendment No. 77 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on August 17, 2016. | |||||
(e) | (1) | Distribution Agreement dated March 31, 2014 between Highland Capital Funds Distributor, Inc. (HCFD) and the Registrant is incorporated herein by reference to Post-Effective Amendment No. 42 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on June 30, 2014. | ||||
(i) | Amended Schedule A dated July 1, 2014 to Distribution Agreement between HCFD and the Registrant is incorporated herein by reference to Post-Effective Amendment No. 44 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 29, 2014. | |||||
(ii) | Amended Schedule A dated August 5, 2016 to the Distribution Agreement between HCFD and the Registrant is incorporated herein by reference to Post-Effective Amendment No. 77 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on August 17, 2016. | |||||
(2) | Form of Selling Group Agreement is incorporated herein by reference to Post-Effective Amendment No. 18 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 30, 2009. | |||||
(3) | Distribution Agreement dated September 25, 2012 between SEI Investments Distribution Co. (SEI) and the Registrant is incorporated herein by reference to Post-Effective Amendment No. 64 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2015. |
(i) | Amendment No. 1 dated December 17, 2012 to Distribution Agreement between SEI and the Registrant with respect to Senior Loan ETF is incorporated herein by reference to Post-Effective Amendment No. 64 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2015. | |||||
(ii) | Amendment No. 2 dated August 11, 2015 to Distribution Agreement between SEI and the Registrant with respect to Senior Loan ETF is incorporated herein by reference to Post-Effective Amendment No. 64 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2015. | |||||
(4) | Form of Selling and/or Services Agreement is filed herein. | |||||
(f) | Not applicable. | |||||
(g) | (1) | Master Custodian Agreement dated October 1, 2012 between State Street Bank and Trust Company (State Street) and the Registrant with respect to Senior Loan ETF, Long/Short Equity Fund, Long/Short Healthcare Fund and Floating Rate Opportunities Fund is incorporated herein by reference to Post-Effective Amendment No. 34 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 19, 2012. | ||||
(i) | Notice to Master Custodian Agreement between State Street and the Registrant is incorporated herein by reference to Post-Effective Amendment No. 44 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 29, 2014. | |||||
(ii) | Notice to Master Custodian Agreement between State Street and the Registrant with respect to Merger Arbitrage Fund is incorporated herein by reference to Post-Effective Amendment No. 77 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on August 17, 2016. | |||||
(h) | (1) | Administration Services Agreement dated December 4, 2006 between HCMFA and the Registrant is incorporated herein by reference to Post-Effective Amendment No. 38 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2013. | ||||
(i) | Amendment No. 1 dated June 6, 2008 to Administration Services Agreement between HCMFA and the Registrant is incorporated herein by reference to Post-Effective Amendment No. 9 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 16, 2008. | |||||
(ii) | Revised Exhibit A dated May 2, 2008 to Administration Services Agreement between HCMFA and the Registrant is incorporated herein by reference to Post-Effective Amendment No. 34 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 19, 2012. | |||||
(iii) | Revised Exhibit A dated February 18, 2016 to Administration Services Agreement between HCMFA and the Registrant is incorporated herein by reference to Post-Effective Amendment No. 77 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on August 17, 2016. | |||||
(2) | Administration Agreement dated September 25, 2012 between SEI Investments Global Funds Services and the Registrant with respect to Senior Loan ETF is incorporated herein by reference to Post-Effective Amendment No. 34 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 19, 2012. | |||||
(i) | Amendment No. 1 dated December 17, 2012 to the Administration Agreement between SEI Investments Global Funds Services and the Registrant with respect to Senior Loan ETF is incorporated herein by reference to Post-Effective Amendment No. 64 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2015. |
(ii) | Amendment No. 2 dated January 22, 2013 to the Administration Agreement between SEI Investments Global Funds Services and the Registrant with respect to Senior Loan ETF is incorporated herein by reference to Post-Effective Amendment No. 64 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2015. | |||||
(iii) | Amendment No. 3 dated March 1, 2015 to the Administration Agreement between SEI Investments Global Funds Services and the Registrant with respect to Senior Loan ETF is incorporated herein by reference to Post-Effective Amendment No. 64 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2015. | |||||
(iv) | Amendment No. 4 dated May 1, 2015 to the Administration Agreement between SEI Investments Global Funds Services and the Registrant with respect to Senior Loan ETF is incorporated herein by reference to Post-Effective Amendment No. 64 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2015. | |||||
(v) | Amendment No. 5 dated November 30, 2016 to the Administration Agreement between SEI Investments Global Funds Services and the Registrant with respect to Senior Loan ETF is filed herein. | |||||
(vi) | Amendment No. 6 dated February 14, 2017 to the Administration Agreement between SEI Investments Global Funds Services and the Registrant with respect to Senior Loan ETF is filed herein. | |||||
(vii) | Amendment No. 7 dated April 17, 2017 to the Administration Agreement between SEI Investments Global Funds Services and the Registrant with respect to Senior Loan ETF is filed herein. | |||||
(3) | Form of Authorized Participant Agreement with respect to Senior Loan ETF is incorporated herein by reference to Post-Effective Amendment No. 34 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 19, 2012. | |||||
(4) | Transfer Agency and Services Agreement dated October 1, 2012 between State Street and the Registrant with respect to Senior Loan ETF is incorporated herein by reference to Post-Effective Amendment No. 34 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 19, 2012. | |||||
(5) | Master Sub-Administration Agreement dated January 7, 2013 between State Street and HCMFA with respect to the series of the Registrant listed on Schedule A thereto (as Schedule A may be amended from time to time) is incorporated herein by reference to Post-Effective Amendment No. 38 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2013. | |||||
(i) | Notice to Master Sub-Administration Agreement dated March 30, 2016 between State Street and HCMFA with respect to Merger Arbitrage Fund is incorporated herein by reference to Post-Effective Amendment No. 77 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on August 17, 2016. | |||||
(6) | Transfer Agency and Service Agreement dated December 26, 2012 between Boston Financial Data Services, Inc. (BFDS) and the series of the Registrant listed on Schedule A thereto (as Schedule A may be amended from time to time), is incorporated herein by reference to Post-Effective Amendment No. 38 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 28, 2013. |
(m) | Amended and Restated Rule 12b-1 Distribution Plan with respect to the series of Highland Funds I listed on Exhibit A is filed herein. | |||||
(n) | Amended and Restated Multi-Class Rule 18f-3 Plan with respect to the series of Highland Funds I listed on Exhibit A is filed herein. | |||||
(o) | Reserved. | |||||
(p) | (1) | Code of Ethics of the Registrant is filed herein. | ||||
(2) | Code of Ethics of HCMFA is filed herein. | |||||
(3) | Code of Ethics of HCFD is filed herein. | |||||
(4) | Code of Ethics of SEI, Distributor for Senior Loan ETF dated October 3, 2012 is incorporated herein by reference to Post-Effective Amendment No. 34 to Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on October 19, 2012. |
Item 29. Persons Controlled by or Under Common Control with the Fund
Not applicable.
Item 30. Indemnification
Section 4.2 of the Registrants Agreement and Declaration of Trust provides as follows:
(a) Highland Funds I (the Trust) hereby agrees, solely out of the assets of the affected Series, to indemnify each Person who at any time serves as Trustee or officer of the Trust (each such Person being an indemnitee) against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and reasonable counsel fees reasonably incurred by such indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while acting in any capacity set forth above in this Article IV by reason of his having acted in any such capacity, except with respect to any matter as to which he shall not have acted in good faith in the reasonable belief that his action was in the best interest of the Trust or the respective Series of the Trust and furthermore, in the case of any criminal proceeding, as to which he shall have had reasonable cause to believe that the conduct was unlawful, provided, however, that no indemnitee shall be indemnified hereunder against any liability to any Person or any expense of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv) reckless disregard of the duties involved in the conduct of his position.
Notwithstanding the foregoing, with respect to any action, suit or other proceeding voluntarily prosecuted by any indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such indemnitee was (1) authorized by a majority of the Trustees or (2) was instituted by the indemnitee to enforce his or her rights to indemnification hereunder in a case in which the indemnitee is found to be entitled to such indemnification. The rights to indemnification set forth in this Declaration shall continue as to a Person who has ceased to be a Trustee or officer of the Trust and shall inure to the benefit of his or her heirs, executors and personal and legal representatives. No amendment or restatement of this Declaration or repeal of any of its provisions shall limit or eliminate any of the benefits provided to any Person who at any time is or was a Trustee or officer of the Trust or otherwise entitled to indemnification hereunder in respect of any act or omission that occurred prior to such amendment, restatement or repeal.
(b) Notwithstanding the foregoing, no indemnification shall be made hereunder unless there has been a determination (1) by a final decision on the merits by a court or other body of competent jurisdiction before whom the issue of entitlement to indemnification hereunder was brought that such indemnitee is entitled to indemnification hereunder or, (2) in the absence of such a decision, by (i) a majority vote of a quorum (being one-third of such Trustees) of those Trustees who are neither Interested Persons of the Trust nor parties to the proceeding (Disinterested Non-Party Trustees), that the indemnitee is entitled to indemnification hereunder, or (ii) if such quorum is not obtainable or even if
obtainable, if such majority so directs, independent legal counsel in a written opinion conclude that the indemnitee should be entitled to indemnification hereunder. All determinations to make advance payments in connection with the expense of defending any proceeding shall be authorized and made in accordance with the immediately succeeding paragraph (c) below.
(c) The Trust shall make advance payments in connection with the expenses of defending any action with respect to which indemnification might be sought hereunder if the Trust receives a written affirmation by the indemnitee of the indemnitees good faith belief that the standards of conduct necessary for indemnification have been met and a written undertaking to reimburse the Trust unless it is subsequently determined that indemnitee is entitled to such indemnification and if a majority of the Trustees determine that the applicable standards of conduct necessary for indemnification appear to have been met. In addition, at least one of the following conditions must be met: (1) the indemnitee shall provide adequate security for his undertaking, (2) the Trust shall be insured against losses arising by reason of any lawful advances, or (3) a majority of a quorum of the Disinterested Non-Party Trustees, or if a majority vote of such quorum so directs, independent legal counsel in a written opinion, shall conclude, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is substantial reason to believe that the indemnitee ultimately will be found entitled to indemnification.
(d) The rights accruing to any indemnitee under these provisions shall not exclude any other right to which he or she may be lawfully entitled.
(e) Subject to any limitations provided by the Investment Company Act of 1940, as amended (the 1940 Act) and this Declaration, the Trust shall have the power and authority, solely out of the assets of the affected Series, to indemnify and provide for the advance payment of expenses to employees, agents and other Persons providing services to the Trust or serving in any capacity at the request of the Trust to the full extent as corporations organized under the Delaware General Corporation Law may indemnify or provide for the advance payment of expenses for such Persons provided that such indemnification has been approved by a majority of the Trustees.
Section 6 of each Investment Advisory Agreement with the Adviser provides as follows:
(a) The Trust hereby agrees to indemnify the Adviser and each of the Advisers partners, officers, employees, and agents (including any individual who serves at the Advisers request as director, officer, partner, trustee or the like of another corporation) and controlling persons (each such person being an Indemnitee) against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees (all as provided in accordance with applicable state law) reasonably incurred by such Indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while acting in any capacity set forth above in this paragraph or thereafter by reason of his having acted in any such capacity, except with respect to any matter as to which he shall have been adjudicated not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust and furthermore, in the case of any criminal proceeding, so long as he had no reasonable cause to believe that the conduct was unlawful, provided, however, that (1) no Indemnitee shall be indemnified hereunder against any liability to the Trust or its shareholders or any expense of such Indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence (iv) reckless disregard of the duties involved in the conduct of his position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as Disabling Conduct), (2) as to any matter disposed of by settlement or a compromise payment by such Indemnitee, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless there has been a determination that such settlement or compromise is in the best interests of the Trust and that such Indemnitee appears to have acted in good faith in the reasonable belief that his action was in the best interests of the Trust and did not involve Disabling Conduct by such Indemnitee and (3) with respect to any action, suit or other proceeding voluntarily prosecuted by any Indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such Indemnitee was authorized by a majority of the full Board of the Trust. Notwithstanding the foregoing, the Trust shall not be obligated to provide any such indemnification to the extent such provision would waive any right that the Trust cannot lawfully waive.
(b) The Trust shall make advance payments in connection with the expenses of defending any action with respect to which indemnification might be sought hereunder if the Trust receives a written affirmation of the Indemnitees good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to reimburse the Trust unless it is subsequently determined that he is entitled to such indemnification and if the Trustees of the Trust determine that the facts then known to them would not preclude indemnification. In addition, at least one of the following conditions must be met: (1) the Indemnitee shall provide adequate security for his undertaking, (2) the Trust shall be insured against losses arising by reason of any lawful advances or, (3) a majority of a quorum of Trustees of the Trust who are neither interested persons of the Trust (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the proceeding (Disinterested Non-Party Trustees) or an independent legal counsel in a written opinion, shall determine, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the Indemnitee ultimately will be found entitled to indemnification.
(c) All determinations with respect to indemnification hereunder shall be made (1) by a final decision on the merits by a court or other body of competent jurisdiction before whom the proceeding was brought that such Indemnitee is not liable by reason of Disabling Conduct or, (2) in the absence of such a decision, by (i) a majority vote of a quorum of the Disinterested Non-Party Trustees of the Trust, or (ii) if such a quorum is not obtainable or even if obtainable, if a majority vote of such quorum so directs, independent legal counsel in a written opinion.
(d) Each Indemnitee shall, in the performance of its duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of the Trusts officers or employees or by any advisor, administrator, manager, distributor, selected dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or other person may also be a Trustee.
(e) The rights accruing to any Indemnitee under these provisions shall not exclude any other right to which he may be lawfully entitled.
Section 19 of the Underwriting Agreement with Highland Capital Funds Distributor, Inc. (the Distributor) provides as follows:
(a) The Funds agree to indemnify and hold harmless the Distributor and each of their directors and officers and each person, if any, who controls the Distributor within the meaning of Section 15 of the 1933 Act, against any loss, liability, claim, damages or expenses (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in connection therewith) arising by reason of any person acquiring any Shares, based upon the grounds that a registration statement, prospectus, statement of additional information, shareholder reports or other information filed or made public a Fund (as from time to time amended) included an alleged untrue statement of a material fact or alleged omission of a material fact required to be stated or necessary in order to make the statements not misleading under the 1933 Act, the 1940 Act, or any other statute or the common law. However, the Fw1d does not agree to indemnify the Distributor or hold it harmless to the extent that the statement or omission was made in reliance upon, and in conformity with, information furnished to the Fund by or on behalf of the Distributor. In no case: (i) is the indemnity of a Fund in favor of the Distributor or any person indemnified to be deemed to protect the Distributor or any person against any liability to the Fund or its security holders to which the Distributor or such person would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement; or (ii) is a Fund to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against the Distributor or any person indemnified unless the Distributor or person, as the case may be, shall have notified the particular Fund in writing of the claim promptly after the summons or other first written notification giving information of the nature of the claims shall have been served upon the Distributor or any such person (or after the Distributor or such person shall have received notice of service on any designated agent). However, failure to notify a Fund of any claim shall not relieve the Fund from any liability which it may have to any person against whom such action is brought otherwise than on account
of its indemnity agreement contained in this paragraph. The Fund shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any litigation or proceeding brought to enforce any claims, and if the Fund elects to assume the defense, the defense shall be conducted by counsel chosen by the Fund. In the event the Fund elects to assume the defense of any litigation or proceeding and retain counsel, the Distributor, officers or directors or controlling person(s), and any other defendant(s) in the litigation or proceeding, shall bear the fees and expenses of any additional counsel retained by them. If the Fund does not elect to assume the defense of any litigation or proceeding, it will reimburse the Distributor, officers or directors or controlling person(s), or any other defendant(s) in the suit covered by the indemnification set forth in this Agreement for the reasonable fees and expenses of any counsel retained by them. The Fund agrees to notify the Distributor promptly of the commencement of any litigation or proceeding against it or any of its officers, directors or controlling person(s) in connection with the issuance or sale of any of the Shares.
(b) The Distributor also covenants and agrees that it will indemnify and hold harmless the Funds and each of their officers, trustees and each person, if any, who control a Fund within the meaning of Section 15 of the 1933 Act, against any loss, liability, damages, claims or expense (including the reasonable cost of investigating or defending any alleged loss, liability, damages, claim or expense and reasonable counsel fees incurred in connection therewith) arising by reason of: (i) any person acquiring any Shares, based upon the 1933 Act, the 1940 Act or any other statute or common law, alleging: (a) any wrongful act of the Distributor or any of its employees; or (b) that any sales literature, advertisements, information, statements or representations used or made by the Distributor or any of its affiliates or employees or that the registration statement, prospectus, or statement of additional information (as from time to time amended) included an alleged untrue statement of a material fact or an alleged omission of a material fact required to be stated or necessary in order to make the statements not misleading , insofar as the statement or omission was made in reliance upon, and in conformity with, information furnished to a Fund by or on behalf of the Distributor. In no case: (i) is the indemnity of the Distributor in favor of a Fund or any person indemnified to be deemed to protect the Fund or any person against any liability to which the Fund or such person would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement; or (ii) is the Distributor to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against a Fund or any person indemnified unless the Fund or person, as the case may be, shall have notified the Distributor in writing of the claim promptly after the summons or other first written notification giving information of the nature of the claim shall have been served upon the Fund or any such person (or after the Fund or such person shall have received notice of service on any designated agent). However, failure to notify the Distributor of any claim shall not relieve the Distributor from any liability which it may have to the Fund or any person against whom the action is brought otherwise than on account of its indemnity agreement contained in this paragraph. In the case of any notice to the Distributor it shall be entitled to participate, at its own expense, in the defense or, if it so elects, to assume the defense of any litigation or proceeding brought to enforce the claim, and if the Distributor elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to the Fund, to its officers and to any controlling person(s) or any other defendant(s) in the suit covered by the indemnification set forth in this Agreement. In the event that the Distributor elects to assume the defense of any litigation or proceeding and retain counsel, the Fund or controlling person(s), and any other defendant(s) in the litigation or proceeding, shall bear the fees and expense of any additional counsel retained by them. If the Distributor does not elect to assume the defense of any litigation or proceeding, it will reimburse the Fund, officers or controlling person(s), or any other defendant(s) in the litigation or proceeding covered by the indemnification set forth in this Agreement, for the reasonable fees and expenses of any counsel retained by them. The Distributor agrees to notify a Fund promptly of the commencement of any litigation or proceeding against it, its officers, its directors or its controlling person(s) in connection with the Fund and sale of any of the Shares.
Section 12 of the Administration Agreement with HCMFA provides as follows:
(a) The Trust agrees to indemnify and hold harmless HCMFA and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including without limitation reasonable attorneys fees and disbursements and liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws) (collectively, Losses) arising directly or indirectly from any action or
omission to act which HCMFA takes (i) at the request or on the direction of or in reliance on the advice of the Trust or (ii) upon Oral Instructions or Written Instructions; provided, however, neither HCMFA nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) arising out of HCMFAs or its affiliates own willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Agreement.
(b) Notwithstanding anything in this Agreement to the contrary, the Trust shall not be liable to HCMFA or its affiliates for any consequential, special or indirect losses or damages which HCMFA or its affiliates may incur or suffer as a consequence of this Agreement, whether or not the likelihood of such damages or losses was known by the Trust.
In addition, the Trust will maintain a trustees and officers liability insurance policy under which the Trust and its trustees and officers will be named insureds.
Item 31. Business and Other Connections of the Investment Adviser and Investment Sub-Advisers
(a) The description of the business of HCMFA, the investment adviser, is set forth under the caption Management of the Funds in the Prospectuses and under the caption Management in the SAI, each forming part of this Registration Statement. The information as to other businesses, if any, and the directors and officers of HCMFA is set forth in its Form ADV, as filed with the SEC through the Investment Adviser Registration Depository (IARD) on June 28, 2016 (CRD No. 149653) and as amended through the date hereof, and is incorporated herein by reference.
(b) Highland Capital Healthcare Advisors, L.P. (HCHA), Acis Capital Management, L.P., NexPoint Advisors, L.P., Highland Capital Management, L.P. (HCM), and Granite Bay Advisors, L.P., each with its principal place of business located at 200 Crescent Court, Suite 700, Dallas, Texas 75201, are registered investment advisers affiliated with HCMFA.
The following persons are executive officers of the general partner of HCHA, Highland Capital Healthcare Advisors GP, LLC:
(1) | James D. Dondero, President |
(2) | Mark Okada, Vice President |
(3) | Frank Waterhouse, Treasurer |
The following person is a non-executive officer of Acis Capital Management, L.P., Granite Bay Advisors, L.P. and HCM:
(1) | Thomas Surgent, Chief Compliance Officer |
The following person is a non-executive officer of NexPoint Advisors, L.P., HCMFA and HCHA:
(1) | Jason Post, Chief Compliance Officer |
The following persons are executive officers of the general partner of NexPoint Advisors, L.P. and NexPoint Advisors GP, LLC:
(1) | James Dondero, President |
(2) | Brian Mitts, Executive Vice President |
(3) | Frank Waterhouse, Treasurer |
(4) | Dustin Norris, Secretary |
The following persons are executive officers of the general partner of HCM and Strand Advisors, Inc.:
(1) | James Dondero, President |
(2) | Mark Okada, Executive Vice President |
(3) | Scott Ellington, Secretary |
(4) | Frank Waterhouse, Treasurer |
(5) | Trey Parker, Assistant Secretary |
Item 32. Principal Underwriter
(a) HCFD serves as principal underwriter for the following investment companies registered under the Investment Company Act of 1940, as amended:
Highland Funds I (certain series)
Highland Funds II
NexPoint Real Estate Strategies Fund
NexPoint Capital, Inc.
SEI serves as principal underwriter for the following investment companies under the Investment Company Act of 1940, as amended:
SEI Daily Income Trust SEI Tax Exempt Trust SEI Institutional Managed Trust SEI Institutional International Trust The Advisors Inner Circle Fund The Advisors Inner Circle Fund II Bishop Street Funds SEI Asset Allocation Trust SEI Institutional Investments Trust City National Rochdale Funds (f/k/a CNI Charter Funds) Causeway Capital Management Trust ProShares Trust Community Capital Trust (f/k/a Community Reinvestment Act Qualified Investment Fund) TD Asset Management USA Funds SEI Structured Credit Fund, LP Global X Funds ProShares Trust II Exchange Traded Concepts Trust (f/k/a FaithShares Trust) Schwab Strategic Trust |
RiverPark Funds Trust Adviser Managed Trust Fund New Covenant Funds Cambria ETF Trust Highland Funds I (certain series) KraneShares Trust LocalShares Investment Trust SEI Insurance Products Trust KP Funds The Advisors Inner Circle Fund III J.P. Morgan Exchange-Traded Fund Trust SEI Catholic Values Trust SEI Hedge Fund SPC SEI Energy Debt Fund Winton Diversified Opportunities Fund Gallery Trust RiverPark Floating Rate CMBS Fund (f/k/a RiverPark Commercial Real Estate Fund) Schroder Series Trust Schroder Global Series Trust |
SEI provides numerous financial services to investment managers, pension plan sponsors and bank trust departments. These services include portfolio evaluation, performance measurement and consulting services and automated execution, clearing and settlement of securities transactions.
(b) HCFDs main business address is 200 Crescent Court, Suite 700, Dallas, Texas 75201. The following is a list of the managers and officers of HCFD:
Name and Principal Business Address* |
Positions and Offices with Underwriter |
Positions and Offices with Registrant |
||
Brad Ross Brian Mitts |
President Chief Operating Officer |
President and Principal Executive Officer Secretary, Principal Accounting Officer and Principal Financial Officer |
||
David Klos | Financial and Operations Principal | None | ||
Eric Holt | Chief Compliance Officer | None |
SEIs main business address is One Freedom Valley Drive, Oaks, Pennsylvania 19456. The following is a list of the directors and officers of SEI:
Name and Principal Business Address* |
Positions and Offices with Underwriter |
Positions and Offices with Registrant |
||
William Doran | Director | None | ||
Paul Klauder | Director | None | ||
Wayne Withrow | Director | None | ||
Kevin Barr | Director, President and Chief Executive Officer | None | ||
Maxine Chou | Chief Financial Officer, Chief Operations Officer & Treasurer | None | ||
Karen LaTourette | Chief Compliance Officer, Anti-Money Laundering Officer & Assistant Secretary | None | ||
John Munch | General Counsel & Secretary | None | ||
Mark Held | Senior Vice President | None | ||
John Coary | Vice President & Assistant Secretary | None | ||
Lori White | Vice President & Assistant Secretary | None | ||
Judith Hirx | Vice President | None | ||
Jason McGhin | Vice President | None | ||
Gary Michael Reese | Vice President | None | ||
Robert Silvestri | Vice President | None |
(c) Not applicable.
Item 33. Location of Accounts and Records
(1) | Boston Financial Data Services Inc., 2000 Crown Colony Drive Quincy, Massachusetts 02169-09534 (records relating to its function as transfer agent). |
(2) | Highland Capital Funds Distributor, Inc., 200 Crescent Court, Suite 700, Dallas, Texas 75201 (records relating to its function as distributor). |
(3) | State Street Bank and Trust Company, One Lincoln Street Boston, Massachusetts 02111 (records relating to its function as custodian, administrator and sub-administrator). |
(4) | Highland Capital Management Fund Advisors, L.P., 200 Crescent Court, Suite 700, Dallas, Texas 75201 (records relating to its function as adviser and as administrator). |
(5) | SEI Investments Distribution Co., One Freedom Valley Drive, Oaks, Pennsylvania 19456 (records relating to its function as distributor). |
(6) | SEI Investments Global Fund Services, One Freedom Valley Drive, Oaks, Pennsylvania 19456 (records relating to its function as administrator). |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the Securities Act), and the Investment Company Act of 1940, as amended (the 1940 Act), Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement under Rule 485(b) under the Securities Act and has duly caused this Post-Effective Amendment No. 81 under the Securities Act and Amendment No. 84 under the 1940 Act to be signed on its behalf by the undersigned, duly authorized, in the City of Dallas, State of Texas on this 27 th day of April, 2017.
By: | /s/ Frank Waterhouse | |
Frank Waterhouse | ||
Treasurer |
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 81 to Registrants Registration Statement on Form N-1A has been signed below by the following persons in the capacities and on the dates indicated.
Signature |
Title |
Date |
||
/s/ Ethan Powell* Ethan Powell |
Trustee | April 27, 2017 | ||
/s/ Timothy K. Hui* Timothy K. Hui |
Trustee | April 27, 2017 | ||
/s/ Dr. Bob Froehlich* Dr. Bob Froehlich |
Trustee | April 27, 2017 | ||
/s/ John Honis* John Honis |
Trustee | April 27, 2017 | ||
/s/ Bryan A. Ward* Bryan A. Ward |
Trustee | April 27, 2017 | ||
/s/ Brian Mitts** Brian Mitts |
Secretary, Principal Financial Officer and Principal Accounting Officer | April 27, 2017 |
* , ** By: | /s/ Frank Waterhouse | |
Frank Waterhouse | ||
Attorney in Fact* , ** |
April 27, 2017
* | Pursuant to Power of Attorney dated January 28, 2016 incorporated herein by reference to Post-Effective Amendment No. 72 to the Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on May 12, 2016. |
** | Pursuant to Power of Attorney dated February 4, 2016 incorporated herein by reference to Post-Effective Amendment No. 72 to the Registrants Registration Statement on Form N-1A, File No. 333-132400, filed on May 12, 2016. |
Exhibit Index
Exhibit No. | ||||||||
(e) | (4) | Form of Selling and/or Services Agreement | ||||||
(h) | (2) | (v) | Amendment No. 5 dated November 30, 2016 to the Administration Agreement between SEI Investments Global Funds Services and the Registrant with respect to Senior Loan ETF | |||||
(h) | (2) | (vi) | Amendment No. 6 dated February 14, 2017 to the Administration Agreement between SEI Investments Global Funds Services and the Registrant with respect to Senior Loan ETF | |||||
(h) | (2) | (vii) | Amendment No. 7 dated April 17, 2017 to the Administration Agreement between SEI Investments Global Funds Services and the Registrant with respect to Senior Loan ETF | |||||
(h) | (11) | Expense Limitation and Recoupment Agreement dated April 27, 2017 between HCMFA and the Registrant on behalf of Merger Arbitrage Fund | ||||||
(j) | (1) | Consent of Independent Registered Public Accounting Firm | ||||||
(m) | Amended and Restated Rule 12b-1 Distribution Plan with respect to the series of Highland Funds I listed on Exhibit A | |||||||
(n) | Amended and Restated Multi-Class Rule 18f-3 Plan with respect to the series of Highland Funds I listed on Exhibit A | |||||||
(p) | (1) | Code of Ethics of the Registrant | ||||||
(p) | (2) | Code of Ethics of HCMFA | ||||||
(p) | (3) | Code of Ethics of HCFD |
Exhibit (e)(4)
SELLING AND/OR SERVICES AGREEMENT
FOR
HIGHLAND FAMILY OF FUNDS
This Selling and/or Services Agreement ( Agreement ) is made by and between [NAME OF INTERMEDIARY] ( Intermediary ) and Highland Capital Funds Distributor, Inc. ( Distributor ), and is effective as of the date accepted and agreed to by the Distributor below.
R E C I T A L S
WHEREAS, the investment companies of the Highland Family of Funds, identified on Schedule A (each a Fund and collectively, the Funds ), which are registered under the Investment Company Act of 1940, as amended ( 1940 Act ), and currently offer for public sale shares of beneficial interest ( Shares ) in the separate portfolios or series of the Funds; and
WHEREAS, Distributor, a Delaware Corporation , serves as the principal underwriter for the Funds pursuant to the Underwriting Agreement by and between Distributor and with each Fund dated April 1, 2014 (Underwriting Agreement); and
WHEREAS, Intermediary, a [STATE OF ORGANIZATION] [BUSINESS STRUCTURE], desires to offer and sell Shares of the Funds, including Shares of any and all series or classes thereof, and/or to provide services to shareholders of the Funds.
NOW, THEREFORE, in consideration of the promises and the mutual covenants contained herein, Distributor and Intermediary agree as follows:
I. | APPOINTMENT. |
Distributor hereby authorizes Intermediary on a non-exclusive basis and subject to applicable law, rule and regulation; the terms and conditions of the then current prospectuses (including Statutory Prospectuses and Summary Prospectuses as defined in Rule 498 under the Securities Act of 1933, as amended ( Securities Act ) and any supplements thereto as may be filed from time to time) and any statement of additional information ( SAI ) of the Funds (collectively, the then current Statutory Prospectuses, Summary Prospectuses and SAIs of the Funds and supplements thereto are hereinafter referred to as the Prospectuses ); other applicable Trust documentation; reasonable instructions of the Distributor; and the terms set forth herein, to: (i) offer and sell Shares; and (ii) place (or arrange for the placement) with each Trust or its delegate(s) orders for the purchase, redemption (sale) or exchange of Shares.
A. | This Agreement shall not be deemed to obligate Intermediary to offer or sell any particular series of the Funds or class of Shares, and Intermediary may choose the series, class or classes of Shares to offer or sell in its sole discretion. Intermediary shall use only its best efforts in the offer and sale of the series, class or classes of Shares it chooses to offer and sell. |
B. | Each party understands and acknowledges that: (i) the other parties hereto and/or the Funds may enter into other similar agreements and arrangements with other financial intermediaries, investment companies, sponsors, providers, administrators, recordkeepers or servicing agents or bureaus, as the case may be; and (ii) that nothing herein shall constitute Distributor and Intermediary as a selling syndicate, association, joint venture, partnership, unincorporated business or other separate legal entity, or otherwise serve as the basis to conclude that Distributor and Intermediary are partners, or that Intermediary is anything other than an independent contractor of Distributor. |
C. | The customers in question are for all purposes Intermediarys customers and not Distributors customers. Each Fund shall execute Intermediarys transactions for each of Intermediarys customers only upon Intermediarys authorization; it being understood in all cases that: |
1. | Intermediary is acting as the agent for the customer; |
2. | As between Intermediary and the customer, the customer will have beneficial ownership of the securities; |
3. | Each transaction is initiated solely upon the order of the customer; |
4. | Each transaction shall be executed by the Fund only upon receipt of instructions from Intermediary acting as agent for Intermediarys customer; |
5. | Each transaction is for the account of the customer; provided, however, that the foregoing shall not prevent the purchase of Shares by Intermediary for Intermediarys own bona fide investment; |
6. | Intermediary is responsible for determining the suitability of any Fund (and class of Shares thereof) for any customer to whom it recommends such Shares; |
7. | Intermediary will have the full right, power and authority to effect transactions (including without limitation, placing any purchases and redemptions) in Shares on behalf of all customer accounts provided by Intermediary to any transfer agent of the Fund as such term is defined in the Prospectus of the Fund ( Transfer Agent ); and |
8. | Intermediary shall be responsible for opening and approving and monitoring customer accounts, all in accordance with applicable law, including the rules of the Securities and Exchange Commission ( SEC ) and the Financial Industry Regulatory Authority, Inc. ( FINRA ). |
2
D. | Distributors obligations to Intermediary under this Agreement are subject to all applicable provisions of any Underwriting Agreement entered into between Distributor and the Funds. Intermediary understands and agrees that in performing Intermediarys services covered by this Agreement, Intermediary is acting as agent for the customer, and Distributor is in no way responsible for the manner of Intermediarys performance or for any of Intermediarys acts or omissions in connection therewith. |
E. | Intermediary understands and agrees that, as Distributor for the Shares, Distributor is not liable to the Funds for payment for purchases of Shares. |
II. | SHAREHOLDER SERVICES. |
If requested by the Distributor or a Fund, the Intermediary will undertake from time to time certain shareholder support services ( Shareholder Services ) for its customers who may from time to time beneficially own Shares of the Fund. In performing the Shareholder Services, the Intermediary will provide such office space and equipment, telephone facilities, and personnel (which may be any part of the space, equipment, and facilities currently used in its business, or any of its personnel) as may be reasonably necessary or beneficial in order to provide such Shareholder Services to customers. The Shareholder Services provided by Intermediary may include one or more of the following services:
A. | Establishing and maintaining accounts and records relating to customers that invest in Shares; |
B. | Processing dividend and distribution payments from the Fund on behalf of customers; |
C. | Providing information periodically to customers showing their positions in Shares and integrating such statements with those of other transactions and balances in customers accounts serviced by Intermediary; |
D. | Arranging for bank wires; |
E. | Responding to customer inquiries relating to the services provided by Intermediary; |
F. | Responding to routine inquiries from customers concerning their investment in Shares; |
G. | Providing sub-accounting with respect to Shares beneficially owned by customers; |
H. | Forwarding shareholder communications from the Fund (e.g., proxies, shareholder reports, annual and semi-annual financial statements, and dividend, distribution and tax notices) to customers; |
I. | Assisting in processing purchase, exchange and redemption requests from customers and in placing such orders with the Funds Transfer Agent; |
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J. | Assisting customers in changing dividend options, account designations and addresses; |
K. | Providing customers with a service that invests the assets of their accounts in Shares pursuant to specific or pre-authorized instructions; and |
L. | Providing such other similar services as the Fund or Distributor may reasonably request to the extent that the Intermediary is permitted to do so under applicable statutes, rules, or regulations. |
III. | COMPENSATION . |
A. | If applicable, Intermediary understands that it will be compensated for distribution services it provides under the terms of this Agreement in accordance with the terms of the applicable Prospectus for each Fund. In addition, if applicable, Intermediary will be compensated by Distributor for the Shareholder Services that Intermediary provides pursuant to Section II of this Agreement, if any, also in accordance with the terms of the applicable Prospectus for each Fund. |
B. | Intermediary acknowledges that any compensation paid to Intermediary, if any, is subject to all rules and regulations of FINRA and the terms of any plan of distribution adopted by the Funds in accordance with Rule 12b-1 under the 1940 Act ( 12b-1 Plan ), if applicable. The Intermediary further acknowledges that any compensation paid to it will only derive from amounts paid to the Distributor from the applicable Fund. The Intermediary also acknowledges and agrees that the Distributor shall not be responsible for the payment of any such fee unless and until the Distributor has received such fee from the applicable Fund, and the Intermediary agrees to waive payment of such fee unless and until the Distributor has received payment from the applicable Fund. |
C. | In the event that any payment of compensation contemplated hereunder is: (i) directly or indirectly limited, restricted or prohibited by applicable law, rule or regulation; or (ii) otherwise terminated for reasons beyond the reasonable control of Distributor, the Distributor may reduce or eliminate such fee to the extent payable to Intermediary. |
D. | In the event Intermediary utilizes the services of a broker-dealer to clear and settle transactions with the Funds ( Clearing Firm ), Intermediary acknowledges and agrees that any compensation payable by Distributor under this Section III shall be paid to the Clearing Firm for full credit to the Intermediary. The agreement between the Intermediary and the Clearing Firm will govern the pass through of fees from the Clearing Firm to the Intermediary. To the extent that Intermediary permits the Clearing Firm to retain any payments made by Distributor pursuant to this Section III, the parties acknowledge that such payments represent compensation for the services provided by the Clearing Firm to the Intermediary and not for distribution or shareholder services provided to the Distributor, the Funds or shareholders of the Funds. |
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IV. | ORDER HANDLING. |
A. | Intermediary will offer and sell the Shares only in accordance with the terms and conditions of the applicable Prospectus and Intermediary will make no representations not included in such Prospectus or in any authorized supplemental material supplied by Distributor. |
B. | Intermediary understands that the Shares of the Funds will be offered and sold at the net asset value ( NAV ) next determined after a purchase order is effective plus any applicable sales charge (the Current Offering Price ), which is in effect at the time the order for such Shares is confirmed and accepted by the applicable Fund or its Transfer Agent. |
C. | All orders for redemption of any Shares of an open-end Fund shall be executed at the NAV per Share minus any applicable sales charge as described in the Prospectus. |
D. | All requests for repurchase of Shares of a closed-end Fund shall be executed at the NAV as determined on the pricing dated for the repurchase offer and the proceeds of such repurchases shall be reduced by any expenses permitted by Rule 23c-3 under the 1940 Act for repurchase offers, as set forth in the Prospectus of the Fund or the applicable repurchase offer notice, as the case may be. |
E. | Class Z Shares are available only to certain Eligible Investors as provided in the Class Z prospectus of each Fund, as amended from time to time. Intermediary agrees to only make Class Z Shares available to its customers only with written authorization from the Fund. In connection with any repurchase offer for Shares of a closed-end Fund, Intermediary agrees to deliver or cause to be delivered to each customer to whom such offer is made, a copy of the prospectus offer notice. |
F. | Intermediary expressly acknowledges and understands that Shares of any closed-end Fund will not be repurchased by the respective closed-end Fund (other than through repurchase offers or tender offers from time to time, if any) and that no secondary market for the Shares of any such closed-end Fund exists currently or is expected to develop. Intermediary also expressly acknowledges and agrees that, in the event the customer cancels his or her order for such Shares after confirmation, such Shares may not be repurchased, remarketed or otherwise disposed of by or through Intermediary. ANY REPRESENTATION AS TO A REPURCHASE OFFER OR A TENDER OFFER BY A CLOSED-END FUND, OTHER THAN THAT WHICH IS SET FORTH IN ITS PROSPECTUS OR THE REPURCHASE OFFER NOTICE, IS EXPRESSLY PROHIBITED. |
G. | The minimum dollar purchase of Shares shall be the applicable minimum amount described in the then current applicable Prospectus and no order for less than such amount will be accepted hereunder. |
H. | All purchase requests and applications submitted by Intermediary are subject to acceptance or rejection in each Funds or Distributors sole discretion, and, if accepted, each purchase will be deemed to have been consummated at the office of the Fund. |
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I. | Each Fund reserves the right, at its discretion and without prior notice, to suspend the sale of Shares or withdraw entirely the sale of Shares of the Fund. |
J. | Intermediary agrees that all transactions will be processed through the systems of the National Securities Clearing Corp. ( NSCC ) unless otherwise agreed to between the parties or as instructed by the Transfer Agent. The procedures relating to purchase, redemption or exchange orders and the handling thereof will be subject to the terms of the Prospectus and written and agreed upon instructions received by Intermediary from a Fund or the Funds Transfer Agent from time to time. |
K. | Intermediary agrees that Intermediary will follow all requirements, rules and regulations in connection with Intermediarys handling of orders for transactions in the Shares, including, without limitation, Rule 22c-1(a) under the 1940 Act and as required by FINRA Rules 2010 and 2020. |
L. | Intermediary understands and agrees that, if any Shares sold under this Agreement are redeemed or repurchased by a Fund or are tendered for redemption within seven (7) Business Days ( i.e., a day that the applicable Fund is open for business) after the date of confirmation of the initial purchase of such Shares, Intermediary shall forfeit and repay to the Distributor any portion of a sales charge reallowed by the Fund to Intermediary with respect to such Shares. |
M. | Intermediary will not present any conditional purchase orders, and Intermediary understands that no conditional orders will be accepted by any Fund or its agents. Intermediary agrees that purchase orders placed by Intermediary will be made only for the purpose of covering purchase orders already received from Intermediarys customers and that Intermediary will not make purchases for any securities dealer or broker. |
N. | Intermediary further agrees that Intermediary will comply with the terms of the then current Prospectus of each Fund with respect to the purchase, redemption and exchange of Shares, including any market-timing and late trading policies applicable to the Shares. Intermediary further represents and warrants that Intermediary maintains, and will continue to maintain during the term of this Agreement, internal policies and procedures which Intermediary believes are appropriate and sufficient with regard to the appropriate order handling of Fund Shares. |
O. |
For trades placed manually, payment for purchases of Shares made by wire order from Intermediary shall be made directly to a Funds Transfer Agent, as per the Prospectus instructions, in an amount equal to the Current Offering Price per Share being purchased without deduction for Intermediarys agency commission, if any. If such payment is not received at the customary or required time for |
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settlement of the transaction, Intermediary understands that each Fund reserves the right, without notice, forthwith, to cancel the sale, in which case Intermediary may be held responsible for any reasonable loss, including loss of profit, and expense suffered by the Fund or Distributor resulting from Intermediarys failure to make the aforesaid payment. |
P. | On the settlement date of each transaction, Intermediary on behalf of Intermediarys customers will remit the full purchase price, and Intermediarys customer will be credited with an investment in the Shares of the Fund equal to such purchase price. Intermediarys agency commission, if any, shall be payable on at least a monthly basis. |
Q. | Intermediary further agrees to obtain from each customer to whom Intermediary sells Shares any taxpayer identification number certification required by Section 3406 of the Internal Revenue Code of 1986, as amended (the Code ), and the regulations promulgated thereunder. |
R. | Intermediary further agrees that it will place orders immediately upon their receipt and will not withhold any order so as to profit therefrom; provided, however, that the foregoing shall not prevent the purchase of Shares by Intermediary for Intermediarys own bona fide investment. |
V. | SALES LOADS AND BREAKPOINTS . |
In the event a Fund offers Shares with a front-end sales load, Intermediary acknowledges and agrees to the following:
A. | In the case of purchase of Shares hereunder that are sold with a sales load, an agency commission shall be payable to Intermediary as hereinafter provided. In determining the amount of any agency commission payable to Intermediary hereunder, the Fund and Distributor reserve the right to exclude any accounts which the Fund or Distributor reasonably determines are not initiated, and any subsequent purchases for any accounts which the Fund or Distributor reasonably determines are not made, in accordance with the terms of the applicable Prospectus and the provisions of this Agreement. |
B. |
In accordance with the terms of the Prospectus of the Fund involved, a reduced sales load may be available to customers on the purchase of additional Shares of a Fund sold with a front-end sale load at the then Current Offering Price per share when the total of the: (i) dollar amount of Shares then being purchased; and (ii) an amount equal to the then current net asset value of the Shares of such Fund (and any other Fund as may be permitted by the applicable Prospectus) that are already beneficially owned at the time of purchase by the customer on which a front-end sales load has been directly or indirectly paid reaches the amount needed to qualify for a reduced sales charge. Certain purchases of Shares made by a customer and certain other persons (for example, a customers spouse and minor children) as set forth from time to time in the applicable Fund Prospectus may be |
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combined for purposes of qualifying for a reduced front-end sales load, and other reduced sales loads may apply as described in the applicable Fund Prospectus. Reduced front-end sales loads may be modified or terminated at any time in the sole discretion of the Fund. |
C. | Intermediary acknowledges that certain classes of investors may be entitled to a exemption from the front-end sales load and be able to purchase at net asset value without a front-end sales load as from time to time provided in the applicable Fund Prospectus. |
D. | Intermediary agrees to advise the Fund or its designee promptly as to the amount of any and all sales of Shares by Intermediary qualifying for a reduced front-end sales load or an exemption from the front-end sales load. Intermediary shall be solely responsible for determining whether a sale qualifies for a reduced front-end sales load. |
E. | Intermediary agrees that it is responsible for knowing the provisions and policies of the Funds related to sales charges and applicable breakpoints and for applying those provisions and policies to the sale of Shares to customers. Intermediary agrees that it will not combine customer orders to reach breakpoints in commissions or for any other purposes unless authorized by the then current Prospectus or by the Fund in writing. Intermediary further agrees that it will not place orders for Shares in amounts just below the point at which sales charges are reduced so as to benefit from a higher sales charge applicable to an amount below a breakpoint. |
F. | Intermediary further agrees to maintain policies and procedures, including supervisory procedures, reasonably designed to ensure that customers are apprised of, and receive, breakpoint opportunities. Intermediary agrees to provide the Fund or Distributor, upon reasonable request, with a copy of such policies and procedures. |
VI. | COMPLIANCE MATTERS. |
A. | In connection with its duties and obligations hereunder, Intermediary will at all times comply with: (i) the terms of each Funds Prospectus and other applicable Fund documentation; (ii) all applicable laws, rules and regulations, including, without limitation, the Employee Retirement Income Security Act of 1974, as amended ( ERISA ), and the Code, as the case may be; and (iii) the regulations, notices and other requirements of any self-regulatory organization of which the Intermediary is a member. |
B. |
Intermediary shall establish, implement and maintain an adequate business continuity policy aimed at ensuring, in the case of an interruption to its systems and procedures, the preservation of essential data and functions, and the maintenance of services and activities, or, where that is not possible, the timely recovery of such data and functions and the timely resumption of its services and |
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activities. Intermediary shall maintain a log of all business continuity events. In the event that a material business continuity event occurs, Intermediary shall advise the Distributor promptly of such event and the steps proposed in order to minimize any interruption to its services hereunder. |
VII. | REPRESENTATIONS AND WARRANTIES . |
A. | Each party hereto represents, warrants, and covenants that: |
1. | It has full power and authority under applicable law, and has taken all action necessary, to enter into and perform this Agreement; |
2. | It is entering into this Agreement and performing its duties and obligations hereunder will not breach or otherwise impair any other agreement or understanding the party has with any other person, corporation, or other entity; and |
3. | It has obtained all registrations, licenses and regulatory authorizations necessary to permit it to perform the activities hereunder and shall maintain all such registrations, licenses and authorizations during the term of this Agreement. |
B. | Intermediary further represents, warrants, and covenants that: |
1. | It is a member in good standing of FINRA, and that it shall notify Distributor immediately if it ceases to be a member in good standing of FINRA; |
2. | The arrangements provided for in this Agreement, including compensation arrangements, will be timely disclosed, to the extent required or appropriate, by Intermediary to Fund shareholders and prospective Fund shareholders and the receipt of the compensation reallowable or payable to Intermediary in connection with this Agreement will not violate any applicable law, rule or regulation, including ERISA, and in particular will not constitute a non-exempt prohibited transaction under ERISA or the Code; |
3. | In connection with sales of Shares or delivery of such Shares after sale (except with respect to subscription accounts), it shall furnish to each investor a copy of the applicable then-current Statutory Prospectus and/or Summary Prospectus (at no cost to the Funds, Distributor or any affiliated person of them), including supplements (all as obtained from Distributor as provided for in Section IX), in a manner that satisfies all delivery obligations of the Funds and/or Intermediary under applicable law, rule and regulation; |
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4. | It has due authority to take each act it takes on behalf of each of its customers, maintains in its files proper authorization from each of its customers to exercise such authority (whether or not exercising investment discretion (as defined in Section 3(a)(35) of the Securities Exchange Act of 1934, as amended) and has examined such documents and is satisfied that each such document is authentic, properly authorized and duly executed and delivered to Intermediary by the customer or its duly authorized agent; |
5. | If Intermediary provides brokerage clearing services to broker-dealers that wish to sell Shares to their customers (each, an Originating Firm ): (i) it and each such Originating Firm are parties to a clearing agreement which conforms with the requirements of FINRA or, as applicable, the rules of a national securities exchange; and (ii) in connection with its provision of such services, Intermediary shall be responsible for ensuring either that the Originating Firm (1) complies with the terms and conditions of the applicable Prospectus and this Agreement when Originating Firm offers, sells or otherwise acts in connection with or pursuant to this Agreement as if it were Intermediary hereunder (and Intermediary acknowledges that it shall be as responsible to the Funds and the Distributor for each act or omission of Originating Firm as if Intermediary had itself so acted or omitted) or (2) has entered into a Sales Agreement or other suitable agreement with Distributor; |
6. | Understands the Fund administrators record-keeping obligations under Rule 204-2(a)(18)(i)(B) under the Investment Advisers Act of 1940, as amended ( Advisers Act ), with respect to any government entity (as such term is defined in Rule 206(4)-5 under the Advisers Act) invested in a Fund, and will provide, upon request, in a format agreed between the parties, the information required to be kept as a record by the administrator in connection with 529 plan accounts and all participant-directed 403(b) and 457 retirement plan accounts in the Funds that are sponsored by a state or any of its political subdivisions, agencies, authorities, or instrumentalities; and |
7. | If applicable, Intermediary acknowledges that Distributor may be required under any applicable 12b-1 Plan to provide to the Board of Trustees ( Board ), and the Board will review, at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made. In such case, Intermediary agrees to furnish Distributor and the Fund with such information as may reasonably be requested (including, without limitation, periodic certifications confirming the provision to customers of the services described herein), and will otherwise cooperate with Distributor in connection with preparation of reports to the Board concerning this Agreement and the monies paid or payable by Distributor pursuant hereto, as well as any other reports or filings that may be required by law. |
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VIII. | STATE FILING REQUIREMENTS . |
A. | Upon request, Distributor shall notify Intermediary of the states or other jurisdictions in which each Funds Shares are currently noticed, registered or qualified for offer or sale to the public. Distributor shall have no obligation to make notice filings of, register or qualify, or to maintain notice filings of, registration of or qualification of, a Funds Shares in any particular state or other jurisdiction. Intermediary shall comply with requests of Distributor for information about the Intermediarys customers that are Fund shareholders that Distributor properly may require in order for the Funds to make notice and other applicable filings under state law, as well as to qualify for any applicable exemptions. |
B. | Distributor shall not be responsible for any notices or other applicable filings that are necessary to permit Intermediary to engage in the offer and sale of mutual fund shares or the provision of services contemplated hereunder under state law. |
IX. | PROSPECTUS DELIVERY AND OTHER SHAREHOLDER COMMUNICATIONS . |
A. | In connection with the offers to sell and sales of Shares, Intermediary agrees to deliver or cause to be delivered to each person to whom such offer or sale is made, at or prior to the time of completion of such sale, a copy of the Prospectus and, upon request, the SAI of the Fund. Distributor will furnish, or cause to be furnished, to Intermediary without charge reasonable quantities of Prospectuses and SAIs, with any supplements currently in effect, and copies of current shareholder reports of the Fund, and sales materials issued from time to time. |
B. | Distributor shall deliver, or cause to be delivered, to Intermediary copies of all annual and interim reports and any other information and materials relating to the Fund and prepared by or on behalf of Distributor, the Fund or its investment adviser, custodian, transfer agent or dividend disbursing agent, to provide to each of the customers who purchase Shares through Intermediary. |
C. | Intermediary may not publish any advertisement or distribute sales literature or other written material to the public which makes reference to Distributor or any Fund (except material which Distributor has furnished to Intermediary) without Distributors prior written approval. |
X. | RECORDKEEPING . |
Intermediary will: (i) maintain all records required by law to be kept by Intermediary relating to transactions in Shares of the Funds and shall promptly make available such records and other records as the Funds or Distributor may reasonably request; and (ii) promptly notify the Funds Distributor if Intermediary experiences any difficulty in maintaining the records described in the foregoing clause in an accurate and complete manner. If Intermediary holds Shares as record owner for its customers, it will be responsible for maintaining all necessary books and records which reflect their beneficial ownership of Shares, which records shall specifically reflect that Intermediary is holding Shares as agent, custodian or nominee for its customers.
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XI. | PROXIES . |
Intermediary will cooperate with reasonable requests of the Funds in the solicitation of proxies by the Board as provided for in any proxy material. Intermediary will comply with all obligations required of it by applicable law, rules or regulations in connection with the solicitation of such proxies.
XII. | INDEMNIFICATION; LIMITATION ON DAMAGES . |
A. | Intermediary shall indemnify and hold harmless each Fund and Distributor and each of their directors, trustees, officers, employees, and each person, if any, who controls any of them within the meaning of the Securities Act, against any losses, claims, damages, liabilities or expenses ( Losses ) to which an indemnitee may become subject insofar as such Losses or actions in respect thereof arise out of or are based upon: (i) Intermediarys gross negligence or willful misconduct in performing hereunder; (ii) any material failure by Intermediary to comply with any provision of this Agreement, the Prospectus, other applicable Fund documentation or applicable laws, rules and regulations; (iii) any material breach by Intermediary of a representation or warranty made in this Agreement; or (iv) any untrue statement or representation made by Intermediary with respect to a Fund or Shares other than statements contained in the Prospectuses, advertisements, or supplemental material authorized by Distributor. |
B. | An indemnitor will reimburse an indemnitee for any legal or other expenses reasonably incurred, as incurred, by them in connection with investigating or defending any such Loss, claim or action. This indemnity provided in this Section XII will be in addition to any liability which an indemnitor may otherwise have. |
C. |
If an indemnitee hereunder receives notice of the commencement of an action and wishes to seek indemnification hereunder, the indemnitee will notify the indemnitor of such commencement within ten (10) days after the summons or other first legal process has been served. The omission so to notify the indemnitor will not relieve it from any liability that it may have to any indemnitee otherwise than under this Section XII. If any such action is brought against any indemnitee and it properly notifies the indemnitor of such commencement, the indemnitor may assume the defense thereof with counsel reasonably satisfactory to the indemnitee, and the indemnitee(s) in such action entitled to indemnification hereunder may participate in the defense or preparation of the defense of any such action. If the indemnitor elects to assume the defense of any such action and retain counsel: (i) the indemnitee(s) shall bear the fees and expenses of any additional counsel retained by any of them; and (ii) the indemnitor shall not, without the prior written consent of the indemnitee(s), settle or compromise the liability of the indemnitee(s), or permit a default or consent to the entry of any |
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judgment in respect thereof, unless each indemnitee receives from the claimant a release from all liability in respect of such claim. If the indemnitor does not elect to assume the defense of any such action, the indemnitor will reimburse the indemnitee(s) named as defendant(s) in such action for the fees and expenses of counsel agreed upon by indemnitor and indemnitee. |
D. | THE PARTIES AGREE THAT, NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NO PARTY SHALL BE LIABLE TO ANOTHER PARTY FOR ANY PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY KIND IN CONNECTION WITH THIS AGREEMENT, EVEN IF THE PARTY WHO IS LIABLE HAS BEEN INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES. |
XIII. | CONFIDENTIAL INFORMATION . |
Each party hereto agrees to comply, to the extent applicable, with the requirements of Title V of the Gramm-Leach-Bliley Act, 15 U.S.C. §§ 6801 et seq., as may be amended from time to time, and any regulations adopted thereto, including Regulation S-P of the SEC, as well as with any other applicable federal or state privacy laws and regulations, including but not limited to (as applicable) the Massachusetts Standards for the Protection of Personal Information, 201 CMR 17.00, et seq. Intermediary shall implement and maintain appropriate security measures for personal information of Fund shareholders and others in accordance with applicable laws, rules and regulations. The parties agree that any Non-Public Personal Information, as the term is defined in Regulation S-P that may be disclosed hereunder is disclosed for the specific purpose of permitting the other parties to perform the services set forth in this Agreement. Each party acknowledges that, with respect to such information, it will comply with Regulation S-P and that it will not disclose any Non-Public Personal Information received in connection with this Agreement to any other person, except: (i) to the extent required to carry out the services set forth in this Agreement; (ii) as otherwise required or permitted by law or regulation; or (iii) as requested by any regulatory body or governmental agency or body having jurisdiction over the disclosing party.
XIV. | ANTI-MONEY LAUNDERING . |
A. | Intermediary represents and warrants that it has implemented, and agrees to maintain an anti-money laundering program reasonably designed to comply with all applicable anti-money laundering laws and regulations, including but not limited to the Bank Secrecy Act of 1970 and the USA PATRIOT Act of 2001, each as amended from time to time, and any rules adopted thereunder and/or any applicable anti-money laundering laws and regulations of other jurisdictions where Intermediary conducts business, and any rules adopted thereunder or guidelines issued, administered or enforced by any governmental agency. Intermediary further represents and warrants that its anti-money laundering program includes written policies, a designated compliance officer, ongoing training for employees, procedures for detecting and reporting suspicious transactions, and an independent audit to test the implementation of the program. |
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B. | Intermediary represents and warrants that it has policies, procedures and internal controls in place which are reasonably designed so that neither it, nor any of its subsidiaries, nor any officer, director, or employee of it or its subsidiaries is an individual or entity ( Person ) that is, or is controlled by a Person that is: (i) the subject of any sanctions administered or enforced by the U.S. Department of Treasurys Office of Foreign Assets Control, the United Nations Security Council, the European Union, Her Majestys Treasury, or other relevant sanctions authority (collectively, Sanctions ); or (ii) located, organized or resident in a country or territory that is the subject of Sanctions. Further, Intermediary will continue to undertake appropriate due diligence to ensure that neither the Intermediary nor any Person is subject to Sanctions. Intermediary further represents that the foregoing policy prohibits the Intermediary and its officers, directors, employees and other representatives from soliciting or focusing its marketing effort directly or indirectly to any Person who is subject to Sanctions. Intermediary acknowledges its ongoing and continuing obligations to comply with the applicable Sanctions. Intermediary will provide reasonable assistance to the other parties hereto in connection with their respective obligations under the applicable Sanctions. |
C. | Intermediary represents, warrants, and covenants that: (i) its officers, directors, employees, agents and other representatives (together with Intermediary, each a Relevant Person ) are subject to written policies and procedures relating to anti-bribery and anti-corruption, and shall not commit, authorize or permit any action that would cause any Relevant Person to be in violation of any applicable anti-bribery and corruption laws (such as the U.S. Foreign Corrupt Practices Act and/or the UK Bribery Act, in each case, if applicable); (ii) in connection with any services provided in connection with this Agreement, the Relevant Persons have not taken nor will they take any actions in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving anything of value to, nor have the Relevant Persons received, nor will they receive, any payment or anything of value from, any person (whether directly or indirectly) while knowing that all or some portion of the money or value will be offered, given, promised or received by anyone improperly to influence official action, improperly to obtain or retain business or otherwise secure an illegal advantage; and (iii) it shall create and maintain accurate books and financial records in connection with the services performed under this Agreement. Intermediary shall promptly notify Distributor if a Relevant Person becomes aware of any breach of this provision, and Distributor may terminate this Agreement with immediate effect in the event of such breach by any Relevant Person. |
XV. | ABUSIVE TRADING PRACTICES . |
Intermediary shall make reasonable efforts to assist the Funds and their service providers (including Distributor and Transfer Agent) to detect, prevent and report excessive, short-term trading of Shares and other abusive trading practices, including market timing. If Intermediary has actual knowledge of violations of Fund policies (as set forth in the applicable Prospectus) or applicable law regarding: (i) the timing of orders and pricing of Shares; or (ii) excessive short-term trading, market timing or other abusive trading practices, Intermediary shall promptly report such known violations to Distributor.
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XVI. | SHAREHOLDER INFORMATION (RULE 22c-2) . |
A. | Agreement to Provide Information . Intermediary agrees to provide to each Fund or its designee, upon written request of the Fund or its designee (or their authorized affiliates), the Taxpayer Identification Number ( TIN ), Individual/International Taxpayer Identification Number ( ITIN ) or other government-issued identifier ( GII ), if known, of any or all shareholders of the account and the amount, date, name or other identifier of any investment professional(s) associated with the shareholder(s) or account (if known), and transaction type (purchase, redemption, transfer, or exchange) of every transaction of Shares held through an omnibus account maintained by Intermediary during the period covered by the request. |
1. | Period Covered by Request . Requests must set forth a specific period for which transaction information is sought, which generally will not exceed ninety (90) days (or any three (3) month period, as applicable) of transaction information. The Fund or its designee may request transaction information older than ninety (90) days from the date of the request as it deems necessary to investigate compliance with policies established by the Fund for the purpose of eliminating or reducing any dilution of the value of the outstanding Shares issued by the Fund. |
2. | Form and Timing of Response . Intermediary agrees to provide, promptly upon request of the Fund or its designee, the requested information specified in XVI.A. If requested by the Fund or its designee, Intermediary agrees to use best efforts to determine promptly whether any specific person about whom it has received the identification and transaction information specified in XVI.A is itself an intermediary ( Indirect Intermediary ) and, upon further request of the Fund or its designee, promptly either (i) provide (or arrange to have provided) the information set forth in XVI.A for those shareholders who hold an account with an Indirect Intermediary or (ii) restrict or prohibit the Indirect Intermediary from purchasing, in nominee name on behalf of other persons, Shares issued by the Fund. Intermediary additionally agrees to inform the Fund or its designee whether it plans to perform (i) or (ii). Responses required by this paragraph must be communicated in writing and in a format mutually agreed upon by the parties. To the extent practicable, the format for any transaction information provided to the Fund should be consistent with the NSCC Standardized Data Reporting Format or another industry standardized data reporting format. |
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3. | Limitations on Use of Information . The Funds, Distributor and each of their affiliates agree not to use the information received pursuant to this Section XVI.A for marketing or any other similar purpose without Intermediarys prior written consent. Separately, the Funds have provided written assurances to the Distributor that the Funds will not use the information received for marketing or any other similar purpose without the Intermediarys prior written consent. |
B. | Agreement to Restrict Trading . Intermediary agrees to execute written instructions from a Fund or its designee to restrict or prohibit further purchases or exchanges of Shares by a Shareholder that has been identified by the Fund as having engaged in transactions of the Funds Shares (directly or indirectly through an account with Intermediary) that violate policies established by the Fund for the purpose of eliminating or reducing any dilution of the value of the outstanding Shares issued by the Fund. |
1. | Form of Instructions . Instructions to restrict trading must include the shareholder(s) TIN, ITIN or GII, if known, and the specific restriction(s) to be executed. If the TIN, ITIN or GII is not known, the instructions must include an equivalent identifying number of the shareholder(s) or account(s) or other agreed upon information to which the instruction relates. |
2. | Timing of Response . Intermediary agrees to execute instructions as soon as reasonably practicable, but not later than five (5) business days after receipt of the instructions by Intermediary. |
3. | Confirmation . Intermediary will provide written confirmation to the Fund or its designee that instructions have been executed. Intermediary agrees to provide confirmation as soon as reasonably practicable, but not later than ten (10) business days after the instructions have been executed. |
XVII. | MISCELLANEOUS . |
A. | Amendment and Termination . |
This Agreement may be amended only by a writing executed by both parties, provided, however, Intermediary agrees that Distributor has and reserves the right, in Distributors sole discretion, to modify, amend or cancel this Agreement upon written notice to Intermediary of such modification, amendment or cancellation, which shall be effective on the date stated in such notice.
Intermediary may terminate this Agreement by notice in writing to Distributor, which termination shall become effective sixty (60) days immediately after the date of mailing of such notice to Distributor. This Agreement may be terminated with respect to a Fund or a class of Shares thereof at any time, without payment of any penalty, by vote of a majority of the directors who are not interested persons (as defined in the 1940 Act), or by vote of a majority of the class of Shares of such Fund for which services are provided hereunder, on not more than sixty (60) days written notice. Without limiting the foregoing, Distributor may terminate this Agreement for cause on violation by Intermediary of any of the provisions of this Agreement, said termination to become effective on the date of mailing notice to Intermediary of such termination.
16
In the event: (i) of an assignment (within the meaning of the 1940 Act) of this Agreement; or (ii) any 12b-1 Plan terminates, is not continued or ceases to remain in effect, then the provisions of this Agreement relating to such plan automatically shall terminate with respect to the Shares covered by such assignment or such terminated plan, to the extent required by applicable law, rule or regulation or the terms of the applicable plan.
Without limiting the foregoing, any provision hereof to the contrary notwithstanding, Intermediarys expulsion from FINRA will automatically terminate this Agreement without notice. Intermediarys suspension from FINRA or Intermediarys violation of applicable state or federal laws or rules and regulations of any authorized regulatory agency will terminate this Agreement effective upon the date of Distributors mailing notice to Intermediary of such termination.
B. | No Waiver . Waiver of any breach of any provision of this Agreement will not be construed as a waiver of the provision or of Distributors right to enforce said provision thereafter. Distributors failure to terminate for any cause shall not constitute a waiver of Distributors right to terminate at a later date for any such cause. |
C. | Assignment . This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. No party may assign this Agreement nor any rights, privileges, duties or obligations hereunder without the prior written consent of the other parties, except that Distributor may assign or transfer this Agreement to any affiliated broker-dealer which becomes the underwriter of the Funds without obtaining the written consent of the Intermediary. |
D. | Notices . Any notice, request, demand, approval or other communication required or permitted under the terms of this Agreement, must be in writing addressed to the parties at the addresses set forth below, or other address subsequently specified by a party in writing, and will be deemed given on the date sent if delivered personally or on the next day after it is sent if sent via overnight delivery by Federal Express or similar delivery service, or on the third day after it is sent via registered mail with the U.S. Postal Service. |
If to Distributor:
Fax: |
17
If to Intermediary:
Fax: |
E. | Governing Law . |
1. | This Agreement and its Exhibits shall be governed by, and construed in accordance with, the internal laws of the [State of New York] and the applicable provisions of federal law. To the extent that the applicable laws of the [State of New York], or any of the provisions herein, conflict with the applicable provisions of federal law, the latter shall control. |
2. | Each party to this Agreement hereby irrevocably consents to the jurisdiction of the [United States District Court for the Southern District of New York located in the Borough of Manhattan and the courts of the State of New York located in the County of New York] in any action to enforce, interpret or construe any provision of this Agreement and waives any objection that it may have to the laying of venue in any such court or that such court is an inconvenient forum or does not have personal jurisdiction over them. |
3. | THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT THAT THEY MAY HAVE TO TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION, OR IN ANY LEGAL PROCEEDING, DIRECTLY OR INDIRECTLY BASED UPON OR ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. |
4. | Notwithstanding the foregoing, if a dispute arises between parties hereto that are members of FINRA, and such parties are unable to resolve the dispute between themselves, it shall be settled by arbitration to the extent required by and in accordance with the then existing FINRA Code of Arbitration Procedure. |
F. | Effective Date and Entire Agreement . This Agreement shall become effective as of the date when it is accepted. This Agreement contains the full and complete understanding of the parties and supersedes all prior representations, promises, statements, arrangements, warranties and understandings between the parties with respect to the subject matter hereof, whether oral or written, express or implied. |
18
G. | Subcontracting. Each party may appoint and compensate from their respective resources one or more other entities (each, a delegate ) to perform any or all of their respective obligations under this Agreement on a subcontracted basis so long as the party has undertaken commercially reasonable due diligence to ensure the delegate possesses the requisite expertise, personnel and resources to perform such obligations, and obtains a written agreement from the delegate related to the services to be performed in connection with this Agreement. If either party appoints one or more delegates to perform any or all of their respective obligations under this Agreement on a subcontracted basis, the appointing party will remain liable to the other party for the delegated acts and omissions of such delegates as if the appointing party itself performed (or failed to perform) such obligations. |
H. | Freedom to Act . Nothing herein shall limit the authority of the Funds, the Distributor to take such lawful action as any of them may deem appropriate or advisable in connection with all matters relating to the operation of the Funds and the sale of the Shares. Nothing herein shall preclude a Funds Board from taking any actions it deems necessary in furtherance of its fiduciary duties, which may include refusing to sell Shares to any person or suspending or terminating the offer of any Shares of any Fund. |
I. | Severability . If any provision of this Agreement is held by any court or any act, regulation, rule or decision of any other governmental or supranational body or authority or regulatory or self-regulatory organization to be invalid, illegal or unenforceable for any reason, it shall be invalid, illegal or unenforceable only to the extent so held and shall not affect the validity, legality or enforceability of the other provisions of this Agreement so long as this Agreement, as so modified, continues to express, without material change, the original intentions of the parties as to the subject matter of this Agreement and the deletion of such portion of this Agreement will not substantially impair the respective benefits, obligations, or expectations of the parties to this Agreement. |
J. | Force Majeure . Notwithstanding any other provisions of this Agreement to the contrary, Distributor and Intermediary shall not be responsible for delays or errors caused by acts of God or by circumstances beyond their reasonable control, provided that the party relying on this provision has adopted, implemented and appropriately maintained a commercially reasonable and regulatory compliant business continuity plan and makes reasonable efforts to mitigate damages. |
K. | Survival; Headings; Counterparts . The provisions of Sections XII, XIII, XIV, XVII.A, XVII.C and XVII.E hereof shall survive termination of this Agreement. The Section headings in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. |
19
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized officers as of the date written below.
[NAME OF INTERMEDIARY]
By: | ||
Name: | ||
Title: | ||
Date: |
Accepted and Agreed:
HIGHLAND CAPITAL FUNDS DISTRIBUTOR, INC.
By: | ||
Name: | ||
Title: | ||
Date: |
20
SCHEDULE A
List of Funds
Highland Funds I* |
Highland Funds II* |
* | Open-End Fund |
21
Exhibit (h)(2)(v)
AMENDMENT NO. 5 TO ADMINISTRATION AGREEMENT
THIS AMENDMENT NO. 5 TO ADMINISTRATION AGREEMENT (this Amendment ), is made this 30th day of November, 2016 (the Amendment Effective Date ), by and between Highland Funds I (the Trust ), and SEI Investments Global Funds Services (the Administrator ).
WHEREAS:
1. | The Trust and the Administrator entered into an Administration Agreement dated as of September 25, 2012, as amended (the Agreement ), pursuant to which, among other things, the Administrator agreed to provide administration services with respect to the Trust; |
2. | The parties hereto desire to amend the Agreement as described in detail below. |
NOW THEREFORE, in consideration of the premises, covenants, representations and warranties contained herein and intending to be legally bound hereby, the parties hereto agree as follows:
1. | Defined Terms . Except as specifically set forth herein, defined terms used herein shall have their respective meanings as set forth in the Agreement. |
2. | Section 9.01 (Term and Renewal) . Section 9.01 (Term and Renewal) of the Agreement is hereby deleted in its entirety and replaced as follows: |
9.01 | Term and Renewal . This Agreement shall become effective as of the Effective Date and shall remain in effect through and until April 30, 2017 (the Initial Term ), and thereafter shall automatically renew for successive two year terms (each such period, a Renewal Term ) unless terminated by any party giving written notice of non-renewal at least ninety days prior to the last day of the then current term to each other party hereto. |
3. | Schedule I (Funds) . Schedule I (Funds) of the Agreement is hereby deleted in its entirety and replaced with the Schedule I attached hereto. |
4. | Schedule III (Fees) . Schedule III (Fees) of the Agreement is hereby deleted in its entirety and replaced with the Schedule III attached hereto. |
5. | Ratification of Agreement . Except as expressly amended and provided herein, all of the terms, conditions and provisions of the Agreement shall continue in full force and effect. |
6. | Binding Effect . This Amendment shall be binding upon, and shall inure to the benefit of the Administrator, the Trust and each of their respective permitted successors and assigns. |
7. | Governing Law . This Amendment shall be governed by and provisions shall be construed in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to any conflict of laws or choice of laws rules or principles thereof |
[Signature page follows]
Highland Funds I Amendment No. 5 to Administration Agreement |
Page 1 of 4 | |||||||
SEI 211807v1 |
||||||||
THIS DOCUMENT CONSTITUTES CONFIDENTIAL INFORMATION OF SEI INVESTMENTS GLOBAL FUNDS SERVICES |
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the Amendment Effective Date.
SEI INVESTMENTS GLOBAL FUNDS SERVICES | HIGHLAND FUNDS I | |||||||
By: | /s/ John Alshefski | By: | /s/ Dustin Norris | |||||
Name: John Alshefski | Name: Dustin Norris | |||||||
Title: SVP | Title: Assistant Treasurer |
Highland Funds I Amendment No. 5 to Administration Agreement |
Page 2 of 4 | |||
SEI 211807v1 |
||||
THIS DOCUMENT CONSTITUTES CONFIDENTIAL INFORMATION OF SEI INVESTMENTS GLOBAL FUNDS SERVICES |
SCHEDULE I
Funds
Highland / iBoxx Senior Loan ETF
Highland Funds I Amendment No. 5 to Administration Agreement |
Page 3 of 4 | |||
SEI 211807vl |
||||
THIS DOCUMENT CONSTITUTES CONFIDENTIAL INFORMATION OF SEI INVESTMENTS GLOBAL FUNDS SERVICES |
SCHEDULE III
Fees
Administration and Accounting Fee:
The following fees are due and payable monthly to Administrator pursuant to Section 8 of the Agreement. Each Fund will be charged the greater of the applicable Asset Based Fee or the Annual Minimum Fee, in each case calculated in the manner set forth below.
Asset Based Fees: (calculated and assessed monthly in arrears based on the aggregate net assets of each Fund as set forth below):
Fund Assets |
Basis Points | |
First $100 million in aggregate net assets of each Fund |
10 BPS | |
Next $200 million in aggregate net assets of each Fund |
8.5 BPS | |
Aggregate net assets of each Fund in excess of $300 million |
6.5 BPS |
Annual Minimum Fee (calculated and paid on a monthly basis) :
Fund |
Annual Minimum Fee | |
Highland / iBoxx Senior Loan ETF |
$ 105,000 | |
Each additional Fund added to Schedule I |
To be mutually agreed |
Manager Dashboard:
The Adviser shall receive 5 seats to Administrators Manager Dashboard at no additional charge. Additional seats shall be made available to Adviser subject to good faith negotiations with Administrator.
Expense Reimbursement:
All reasonable expenses incurred by the Administrator on behalf of a Fund will be billed to the applicable Fund quarterly in arrears as set forth in Section 7.02 of this Agreement.
Change of Terms:
This schedule is based upon regulatory requirements and the Trusts requirements as set forth in its Trust Materials as of the Effective Date. Any material change to any of the foregoing, including but not limited to, a material change in the Trusts assets or the investment objective of a Fund will constitute a material change to this Agreement. If such a change occurs, the Administrator agrees to review the change with representatives of the Trust and provide information concerning the feasibility of implementing any additional or enhanced services and associated costs resulting from such change. The parties shall then in good faith agree to mutually agreeable terms applicable to such additional or enhanced service.
The Trust acknowledges and agrees that Administrator reserves the right to impose a five percent (5%) per annum surcharge per Fund in the event such Fund has not implemented by the first anniversary of this Agreement an automated trade ticket process with Administrator to facilitate the orderly and timely processing of transactions, valuations and reconciliations.
Highland Funds I Amendment No. 5 to Administration Agreement | Page 4 of 4 | |||||||
SEI 211807v1 |
||||||||
THIS DOCUMENT CONSTITUTES CONFIDENTIAL INFORMATION OF SEI INVESTMENTS GLOBAL FUNDS SERVICES |
Exhibit (h)(2)(vi)
AMENDMENT NO. 6 TO ADMINISTRATION AGREEMENT
THIS AMENDMENT NO. 6 TO ADMINISTRATION AGREEMENT (this Amendment ), is made this 14th day of February, 2017 (the Amendment Effective Date ), by and between Highland Funds I (the Trust ), and SEI Investments Global Funds Services (the Administrator ).
WHEREAS:
1. | The Trust and the Administrator entered into an Administration Agreement dated as of September 25, 2012, as amended (the Agreement ), pursuant to which, among other things, the Administrator agreed to provide administration services with respect to the Trust; |
2. | The parties hereto desire to amend the Agreement as described in detail below. |
NOW THEREFORE, in consideration of the premises, covenants, representations and warranties contained herein and intending to be legally bound hereby, the parties hereto agree as follows:
1. | Defined Terms . Except as specifically set forth herein, defined terms used herein shall have their respective meanings as set forth in the Agreement. |
2. | Section 9.01 (Term and Renewal) . Section 9.01 (Term and Renewal) of the Agreement is hereby deleted in its entirety and replaced as follows: |
9.01 | Term and Renewal . This Agreement shall become effective as of the Effective Date and shall remain in effect through and until July 31, 2017 (the Initial Term ), and thereafter shall automatically renew for successive two year terms (each such period, a Renewal Term ) unless terminated by any party giving written notice of non-renewal at least ninety days prior to the last day of the then current term to each other party hereto. |
3. | Ratification of Agreement . Except as expressly amended and provided herein, all of the terms, conditions and provisions of the Agreement shall continue in full force and effect. |
4. | Binding Effect . This Amendment shall be binding upon, and shall inure to the benefit of the Administrator, the Trust and each of their respective permitted successors and assigns. |
5. | Governing Law . This Amendment shall be governed by and provisions shall be construed in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to any conflict of laws or choice of laws rules or principles thereof |
[Signature page follows]
Highland Funds I Amendment No. 6 to Administration Agreement | Page 1 of 2 | |||||||
SEI 230021v2 |
||||||||
THIS DOCUMENT CONSTITUTES CONFIDENTIAL INFORMATION OF SEI INVESTMENTS GLOBAL FUNDS SERVICES |
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the Amendment Effective Date.
SEI INVESTMENTS GLOBAL FUNDS SERVICES | HIGHLAND FUNDS I | |||||||
By: | /s/ John Alshefski | By: | /s/ Dustin Norris | |||||
Name: John Alshefski | Name: Dustin Norris | |||||||
Title: SVP | Title: | Assistant Treasurer |
Highland Funds I Amendment No. 6 to Administration Agreement | Page 2 of 2 | |||||||
SEI 230021v2 |
||||||||
THIS DOCUMENT CONSTITUTES CONFIDENTIAL INFORMATION OF SEI INVESTMENTS GLOBAL FUNDS SERVICES |
Exhibit (h)(2)(vii)
AMENDMENT NO. 7 TO ADMINISTRATION AGREEMENT
THIS AMENDMENT NO. 7 TO ADMINISTRATION AGREEMENT (this Amendment ), is made this 17th day of April, 2017 (the Amendment Effective Date ), by and between Highland Funds I (the Trust ), and SEI Investments Global Funds Services (the Administrator ).
WHEREAS:
1. | The Trust and the Administrator entered into an Administration Agreement dated as of September 25, 2012, as amended (the Agreement ), pursuant to which, among other things, the Administrator agreed to provide administration services with respect to the Trust; |
2. | The parties hereto desire to amend the Agreement as described in detail below. |
NOW THEREFORE, in consideration of the premises, covenants, representations and warranties contained herein and intending to be legally bound hereby, the parties hereto agree as follows:
1. | Defined Terms . Except as specifically set forth herein, defined terms used herein shall have their respective meanings as set forth in the Agreement. |
2. | Section 9.01 (Term and Renewal) . Section 9.01 (Term and Renewal) of the Agreement is hereby deleted in its entirety and replaced as follows: |
9 01 | Term and Renewal. This Agreement shall become effective as of the Effective Date and shall remain in effect through and until December 31, 2017 (the Initial Term ), and thereafter shall automatically renew for successive two year terms (each such period, a Renewal Term ) unless terminated by any party giving written notice of non-renewal at least ninety days prior to the last day of the then current term to each other party hereto. |
3. | Ratification of Agreement . Except as expressly amended and provided herein, all of the terms, conditions and provisions of the Agreement shall continue in full force and effect. |
4. | Binding Effect . This Amendment shall be binding upon, and shall inure to the benefit of the Administrator, the Trust and each of their respective permitted successors and assigns. |
5. | Governing Law . This Amendment shall be governed by and provisions shall be construed in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to any conflict of laws or choice of laws rules or principles thereof |
[Signature page follows]
Highland Funds I Amendment No.7 to Administration Agreement
|
Page 1 of 2 | |||
THIS DOCUMENT CONSTITUTES CONFIDENTIAL INFORMATION OF SEI INVESTMENTS GLOBAL FUNDS SERVICES |
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the Amendment Effective Date.
SEI INVESTMENTS GLOBAL FUNDS SERVICES | HIGHLAND FUNDS I | |||||||
By: | /s/ John Alshefski | By: | /s/ Dustin Norris | |||||
Name: John Alshefski | Name: Dustin Norris | |||||||
Title: SVP | Title: Assistant Secretary |
Highland Funds I Amendment No. 7 to Administration Agreement
|
Page 2 of 2 | |||
THIS DOCUMENT CONSTITUTES CONFIDENTIAL INFORMATION OF SEI INVESTMENTS GLOBAL FUNDS SERVICES |
Exhibit (h)(11)
April 27, 2017
LETTER AGREEMENT
Highland Funds I (the Trust)
200 Crescent Court, Suite 700
Dallas, Texas 75201
Re: Expense Limitation and Recoupment Agreement
Ladies and Gentlemen:
This Letter Agreement documents (i) an undertaking by Highland Capital Management Fund Advisors, L.P. (the Adviser) to limit the total operating expenses of the Highland Merger Arbitrage Fund (the Fund), a series of the Trust, and (ii) our agreement regarding the extent to which the Adviser will, under certain circumstances, receive payment from the Trust, on behalf of the Fund, as recoupment of certain amounts paid, waived or reimbursed by the Adviser to the Fund in fulfillment of the undertaking described above. This Letter Agreement shall terminate (i) in the event the Investment Advisory Agreement between the Trust and the Adviser terminates with respect to the Fund, (ii) at the sole discretion of the Funds Board of Trustees on 30 days prior written notice to the Adviser, or (iii) upon mutual agreement between the Adviser and the Funds Board of Trustees.
Effective April 27, 2017 and until at least May 1, 2018, the Adviser hereby undertakes to limit the total annual operating expenses (exclusive of fees paid by the Fund pursuant to its distribution plan under Rule 12b-1 under the Investment Company Act of 1940, taxes, brokerage commissions and other transaction costs, interest payments, acquired fund fees and expenses, extraordinary expenses and dividend expenses on short sales (together the Excluded Expenses)) of the Fund to 1.50% of average daily net assets attributable to any class of the Fund (the Expense Cap).
The Trust, on behalf of the Fund, hereby agrees that it will be obligated to pay the Adviser all amounts previously paid, waived or reimbursed by the Adviser with respect to the Fund pursuant to the Expense Cap, provided that the amount of such additional payment in any year, together with all other expenses of the Fund (excluding Excluded Expenses), in the aggregate, would not cause the Funds total annual operating expenses in any such year to exceed the amount of the Expense Cap or any other agreed upon expense limitation for that year, and provided further that no additional payments by the Trust will be made with respect to amounts paid, waived or reimbursed by the Adviser more than thirty-six (36) months after the date such amounts are paid, waived or reimbursed by the Adviser. The Adviser may not recoup any amounts previously paid, waived or reimbursed hereunder before payment of the Funds operating expenses for the year in which the Adviser intends to recoup such amounts.
Any payments by the Trust under this Letter Agreement shall be in addition to all amounts otherwise payable to the Adviser as an advisory fee or any other fee for services to the Fund under the Investment Advisory Agreement or any other agreement with the Trust, as applicable.
This Letter Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without giving effect to the conflict of laws principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the Investment Company Act of 1940, as amended, and the Investment Advisers Act of 1940, as amended, and any rules and regulations promulgated thereunder.
Sincerely, | ||
Highland Capital Management Fund Advisors, L.P. | ||
By: Strand Advisors XVI, Inc., its general partner | ||
By: | /s/ Frank Waterhouse | |
Name: Frank Waterhouse | ||
Title: Treasurer | ||
ACKNOWLEDGED AND ACCEPTED | ||
Highland Funds I | ||
on behalf of its series, Highland Merger Arbitrage Fund | ||
By: | /s/ Frank Waterhouse | |
Name: Frank Waterhouse | ||
Title: Treasurer |
Exhibit (j)(1)
Consent of Independent Registered Public Accounting Firm
The Board of Trustees and Shareholders
Highland Funds I:
We consent to the use of our report, dated February 28, 2017, with respect to the financial statements of Highland Merger Arbitrage Fund, incorporated herein by reference. We also consent to the references to our firm under the headings FINANCIAL HIGHLIGHTS in the prospectus and INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM and FINANCIAL STATEMENTS in the statement of additional information.
/s/ KPMG LLP |
Boston, Massachusetts
April 27, 2017
Exhibit (m)
HIGHLAND FUNDS I
HIGHLAND FUNDS II
CLASS A SHARES, CLASS C SHARES AND CLASS T SHARES
AMENDED AND RESTATED
RULE 12b-1 DISTRIBUTION PLAN
Highland Funds I, a Delaware statutory trust, and Highland Funds II, a Massachusetts statutory trust, each engages in business as an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (the Act), on behalf of its series listed on Exhibit A attached hereto and made a part hereof, as such Exhibit A may be amended from time to time (each a Fund), adopts the following distribution plan with respect to each Fund (the Plan) pursuant to Rule 12b-1 (the Rule) under the Act for the purpose of providing personal service and/or the maintenance of shareholder accounts and to facilitate the distribution of shares of each Fund.
I. | Service and Distribution Fees |
Each Fund shall pay a service fee at the annual rate of 0.25% of the net assets of each of its Class A Shares and Class C Shares, if any, and a distribution fee at the annual rate as shall be set forth in Exhibit A of the average daily net assets of its Class A Shares, of the average daily net assets of its Class C Shares, and of the average daily net assets of its Class T Shares, if any. Such fees shall be accrued daily and paid monthly in arrears (or shall be accrued and paid at such other intervals as the Board may determine).
II. | Payments of Fees under the Plan |
Each Fund shall make all payments of service and distribution fees under this Plan to the principal underwriter of the shares of the Fund (the Distributor) on the 20th day of each month or, if such day is not a business day, on the next business day thereafter. A Fund shall not pay, nor shall the Distributor be entitled to receive, any amount under this Plan if such payment would result in the Distributors receiving amounts in excess of those permitted by applicable law or by rules of the Financial Industry Regulatory Authority, Inc.
III. | Use of Fees |
The Distributor may pay part or all of the service and distribution fees it receives from a Fund as commissions, asset-based sales charges or other compensation to financial service firms (including, but not limited to, any affiliate of the Distributor) that sell Fund Shares or as reimbursements to financial service firms or other entities (including, but not limited to, any affiliate of the Distributor) that provide shareholder services to and/or maintenance of accounts of record or of beneficial owners of Fund Shares (including third-party administrators of qualified plans). This provision does not obligate the Distributor to make any such payments nor limit the use that the Distributor may make of the fees it receives.
IV. | Reporting |
The Distributor shall provide to the Funds Trustees, and the Trustees shall review, at least quarterly, written reports setting forth all Plan expenditures and the purposes for those expenditures. Amounts payable under this paragraph are subject to any limitations on such amounts prescribed by applicable laws or rules.
V. | Other Payments Authorized |
Payments by a Fund or the Distributor and its affiliates other than as set forth in Section I which may be indirect financing of distribution costs are authorized by this Plan.
VI. | Continuation; Amendment; Termination |
This Plan shall continue in effect with respect to a Fund or Class of Shares only so long as specifically approved for that Fund and Class at least annually as provided in the Rule. The Plan may not be amended to increase materially the service fee or distribution fee with respect to a Fund and Class of Shares without such shareholder approval as is required by the Rule and any applicable orders of the Securities and Exchange Commission, and all material amendments of the Plan must be approved in the manner described in the Rule. The Plan may be terminated with respect to any Fund or Class of Shares at any time as provided in the Rule without payment of any penalty.
VII. | Agreements Related to the Plan |
All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide that such agreement (a) shall be approved, as provided in the Rule, at a meeting called for the purpose of voting on such agreement and shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually as provided in the Rule, (b) may be terminated at any time, as provided in the Rule without payment of any penalty, and (c) shall terminate automatically in the event of its assignment as such term is defined in the Act.
Adopted: December 16, 2016
Amended: March 31, 2017
EXHIBIT A
Fund |
Distribution Fee
Annual Limit |
|||||||||||
Class A | Class C | Class T | ||||||||||
HIGHLAND FUNDS I |
||||||||||||
Highland Floating Rate Opportunities Fund |
0.10 | % | 0.60 | % | 0.25 | % | ||||||
Highland Long/Short Equity Fund |
0.10 | % | 0.75 | % | 0.25 | % | ||||||
Highland Long/Short Healthcare Fund |
0.10 | % | 0.75 | % | 0.25 | % | ||||||
Highland Merger Arbitrage Fund |
0.10 | % | 0.75 | % | 0.25 | % | ||||||
Highland Opportunistic Credit Fund |
0.10 | % | 0.60 | % | 0.25 | % | ||||||
HIGHLAND FUNDS II |
||||||||||||
Highland Energy MLP Fund |
0.00 | % | 0.75 | % | 0.25 | % | ||||||
Highland Premier Growth Equity Fund |
0.00 | % | 0.75 | % | 0.25 | % | ||||||
Highland Small-Cap Equity Fund |
0.00 | % | 0.75 | % | 0.25 | % | ||||||
Highland Fixed Income Fund |
0.00 | % | 0.75 | % | 0.25 | % | ||||||
Highland Tax-Exempt Fund |
0.00 | % | 0.75 | % | 0.25 | % | ||||||
Highland Global Allocation Fund |
0.00 | % | 0.75 | % | 0.25 | % | ||||||
Highland Total Return Fund |
0.00 | % | 0.75 | % | 0.25 | % | ||||||
Highland-First Foundation Income Fund |
0.25 | % | 1.00 | % | 0.25 | % |
Exhibit (n)
HIGHLAND FUNDS I
HIGHLAND FUNDS II
AMENDED AND RESTATED
RULE 18f-3 MULTI-CLASS PLAN
This Amended and Restated Rule 18f-3 Multi-Class Plan (the Multi-Class Plan) is adopted pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended (the Act), to provide for the issuance and distribution of multiple classes of shares by each of Highland Funds I (HFI) and Highland Funds II (HFII) (each a Trust) on behalf the series listed on Exhibit A attached hereto and made a part hereof, as such Exhibit A may be amended from time to time, (each a Fund) in accordance with the terms, procedures and conditions set forth below. A majority of the Trustees of each Trust, including a majority of the Trustees who are not interested persons of the Trust within the meaning of the Act, have found this Multi-Class Plan, including the expense allocations, to be in the best interests of each Fund and each Class of Shares constituting a Fund.
A. | Definitions. As used herein, the terms set forth below shall have the meanings ascribed to them below. |
1. | The Act the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder. |
2. | CDSC contingent deferred sales charge. |
3. | CDSC Period the period of time following acquisition during which Shares are assessed a CDSC upon redemption. |
4. | Class a class of Shares of a Fund. |
5. | Class A Shares shall have the meaning ascribed in Section B.1. |
6. | Class C Shares shall have the meaning ascribed in Section B.2. |
7. | Class Y Shares shall have the meaning ascribed in Section B.3. |
8. | Class Z Shares shall have the meaning ascribed in Section B.4. |
9. | Class T Shares shall have the meaning ascribed in Section B.5. |
10. | Class Expenses shall have the meaning ascribed in Section E.1. |
11. | Distribution Expenses expenses and any element of profit referred to in a Plan of Distribution and/or board resolutions, incurred in activities that are primarily intended to result in the distribution and sale of Shares. |
1
12. | Distribution Fee a fee paid by a Trust in respect of the asset of a Class of the Fund to the Distributor pursuant to the Plan of Distribution relating to the Class. |
13. | Distributor the principal underwriter of the Shares of a Fund. |
14. | FINRA Financial Industry Regulatory Authority, Inc. |
15. | Fund Expenses shall have the meaning ascribed in Section E.2. |
16. | Plan of Distribution any plan adopted under Rule 12b-1 under the Act with respect to payment of a Distribution Fee. |
17. | Prospectus(es) the prospectus(es), including the statement(s) of additional information incorporated by reference therein, covering the Shares of the referenced Class or Classes of a Fund, as in effect from time to time. |
18. | SEC Securities and Exchange Commission. |
19. | Service Fee a fee paid to financial intermediaries, including the Distributor and its affiliates, for the ongoing provision of personal services to shareholders of a Class and/or the maintenance of shareholder accounts relating to a Class pursuant to the Plan of Distribution relating to the Class. |
20. | Share a share of beneficial interest in a Trust. 21. Trust Highland Funds I and Highland Funds II. |
22. | Trust Expenses shall have the meaning ascribed in Section E.2. |
23. | Trustees the Trustees of each Trust. |
B. | Classes. Each Trust on behalf of a Fund may offer one or more of the following Classes: |
1. | Class A Shares. Class A Shares shall be (1) offered at net asset value (2) plus a front-end sales charge set forth in the Prospectus from time to time, which may be reduced, waived or eliminated in any manner not prohibited by the Act or FINRA as set forth in the Prospectus. Class A Shares bought without a front-end sales charge may be subject to a CDSC, as described in the Prospectus. The offering price of Class A Shares subject to a front-end sales charge shall be computed in accordance with the Act. Class A Shares shall be subject to ongoing Distribution Fees or Service Fees approved from time to time by the Trustees and set forth in the Prospectus. In addition, Class A Shares may reimburse the Distributor or other persons for shareholder servicing or sub-transfer agency services, in amounts calculated in a manner approved from time to time by the Trustees, as described in the Prospectus. |
Class A shares shall only be available to those investors as outlined in the Prospectus.
No provision of this Plan will preclude the Trustees from identifying, from time to time pursuant to Rule 22d-1 under the Act, certain persons who may be eligible to purchase Class A shares pursuant to special arrangements with respect to the front-end sales load.
2. | Class C Shares. Class C Shares shall be (1) offered at net asset value, (2) subject to a CDSC, as described in the Prospectus, for the CDSC Period set forth in Section C.1., and (3) subject to ongoing Distribution Fees and Service Fees approved from time to time by the Trustees and set forth in the Prospectus. In addition, Class C Shares may reimburse the Distributor or other persons for shareholder servicing or sub-transfer agency services, in amounts calculated in a manner approved from time to time by the Trustees, as described in the Prospectus. Class C shares shall only be available to those investors as outlined in the Prospectus. |
3. | Class Y Shares. Class Y shares (formerly designated Class D shares) shall be (1) offered at net asset value, (2) offered without imposition of a sales charge, and (3) offered without imposition of a service or distribution fee. Class Y shares shall only be available to those investors as outlined in the Prospectus. |
4. | Class Z Shares. Class Z Shares shall be (1) offered at net asset value, (2) sold without a front-end sales load or CDSC, and (3) offered to certain institutions and other eligible investors. Purchasers of Class Z Shares must purchase the minimum amount of Shares as set forth in the Prospectus. In addition, Class Z Shares may reimburse the Distributor or other persons for shareholder servicing or sub-transfer agency services, in amounts calculated in a manner approved from time to time by the Trustees, as described in the Prospectus. Class Z shares shall only be available to those investors as outlined in the Prospectus. |
5. | Class T Shares. Class T Shares shall be (1) offered at net asset value (2) plus a front-end sales charge set forth in the Prospectus from time to time, which may be reduced, waived or eliminated in any manner not prohibited by the Act or FINRA as set forth in the Prospectus. The offering price of Class T Shares subject to a front-end sales charge shall be computed in accordance with the Act. Class T Shares shall be subject to ongoing Distribution Fees approved from time to time by the Trustees and set forth in the Prospectus. In addition, Class T Shares may reimburse the Distributor or other persons for shareholder servicing or sub-transfer agency services, in amounts calculated in a manner approved from time to time by the Trustees, as described in the Prospectus. |
Class T shares shall only be available to those investors as outlined in the Prospectus.
No provision of this Plan will preclude the Trustees from identifying, from time to time pursuant to Rule 22d-1 under the Act, certain persons who may be eligible to purchase Class T shares pursuant to special arrangements with respect to the front-end sales load.
C. | CDSC. A CDSC may be imposed upon redemption of Class A Shares bought without a front-end sales charge, as described in the Prospectus, and upon redemption of Class C Shares, subject to the following conditions: |
1. | CDSC Period. The CDSC Period shall be 18 months for Class A Shares in HFI, one year for Class A Shares in HFII, and one year for Class C Shares in both Trusts. Each CDSC Period begins on the day on which the purchase was made. |
2. | CDSC Rate. The CDSC rate shall be approved by the Trustees. |
3. | Disclosure and changes. The CDSC rates and CDSC Period shall be disclosed in the Prospectus and may be increased or decreased at the discretion of the Trustees in a manner not prohibited by the Act or FINRA. |
4. | Method of calculation. The CDSC shall be assessed on an amount equal to the lower of the net asset value at the time of purchase or redemption. No CDSC shall be assessed on Shares derived from reinvestment of dividends or capital gains distributions. When Shares are redeemed, the Fund will automatically redeem those Shares (if any) not subject to a CDSC and then those Shares held by the shareholder for the longest period. |
5. | Waiver. A CDSC otherwise due upon the redemption of Shares of any Class may be reduced or waived under certain circumstances as disclosed in the Prospectus and as permitted by Rule 6c-10 under the Act. |
D. | Service and Distribution Fees. Class A Shares shall be subject to a Distribution Fee not in excess of 0.10% per annum of the average daily net assets of the Class and a Service Fee not in excess of 0.25% of the average daily net assets of the Class. Class C Shares shall be subject to a Distribution Fee not in excess of 0.75% per annum of the average daily net assets of the Class for all Funds, except Highland Floating Rate Opportunities Fund and Highland Opportunistic Credit Fund, which shall be subject to a Distribution Fee not in excess of 0.60% per annum of the average daily net assets of the Class, and a Service Fee not in excess of 0.25% of the average daily net assets of the Class. Class T Shares shall be subject to a Distribution Fee not in excess of 0.25% per annum of the average daily net assets of the Class. All other terms and conditions with respect to Service Fees and Distribution Fees shall be governed by the plan adopted by the Trust with respect to such fees and Rule 12b-1 of the Act. |
E. | Allocation of Liabilities, Expenses, Income and Gains Among Classes. |
1. | Each Class of a Fund shall pay the expenses associated with their different distribution and shareholder servicing arrangements (Class Expenses). Other expenses applicable to a particular class, such as incremental transfer agency fees (but not including advisory, administration or custodial fees or other expenses related to the management of a Trusts and a Funds assets), will also be considered Class Expenses for purposes of this Multi-Class Plan. |
2. | The gross income of a Fund generally shall be allocated to each Class on the basis of net assets. To the extent practicable, certain expenses (other than Class Expenses as defined above, which shall be allocated more specifically) shall be subtracted from the gross income on the basis of the net assets of each Class of a Fund. These expenses include: |
(a) | Expenses incurred by a Trust (including, but not limited to, fees of Trustees, insurance, and legal counsel) not attributable to a Fund or to a particular Class of a Fund (Trust Level Expenses); and |
(b) | Expenses incurred by a Fund not attributable to any particular Class of a Funds Shares (for example, advisory fees, custodial fees, or other expenses relating to the management of a Funds assets) (Fund Expenses). |
3. | Expenses of a Fund shall be apportioned to each Class of Shares depending upon the nature of the expense item. Trust Level Expenses and Fund Expenses shall be allocated among the Classes of Shares based on their relative net asset values in relation to the net asset value of a Trust or a Fund, as applicable. Class Expenses shall be allocated to the particular Class to which they are attributable. In addition, certain expenses may be allocated differently if their method of imposition changes. Thus, if a Class Expense can no longer be attributed to a Class, it may be charged to a Fund for allocation among Classes, as determined by the Trustees. |
4. | Each Trust reserves the right to utilize any other appropriate method to allocate income and expenses among the Classes, including those specified in Rule 18f-3(c)(1), provided that a majority of the Trustees and a majority of the Trustees who are not interested persons of that Trust (as defined in the Act) determine that the method is fair to the shareholders of each Class and that the annualized rate of return of each Class will generally differ from that of the other Classes only by the expense differentials among the Classes. |
F. | Exchange Privilege. Holders of Class A Shares, Class C Shares, Class Y Shares, Class Z Shares and Class T Shares shall have such exchange privileges as set forth in the Prospectuses for such Class. Exchange privileges may vary among Classes and among holders of a Class. |
G. | Conversion Features. None of the Classes of Shares convert to any other Class of Shares. |
H. | Dividends and Distributions. Each Fund pays dividends and capital gain distributions as described in its Prospectus. All dividends and/or distributions will be paid in the form of additional Shares of the Class to which the dividends and/or distributions relate or in cash, depending on the election of each shareholder. Dividends paid by a Fund are calculated in the same manner and at the same time with respect to each Class. |
I. | Reports to Trustees. The Trustees may request such information as the Trustees may from time to time deem to be reasonably necessary to evaluate this Multi-Class Plan. |
J. | Additional Classes of Shares. The Trustees have the authority to create additional classes, or change existing classes, from time to time, in accordance with Rule 18f-3 of the 1940 Act. |
K. | Amendment. Any material amendment to this Multi-Class Plan shall be approved by the affirmative vote of both (a) a majority of the Trustees of the Trust and (b) a majority of the Trustees of the Trust who are not interested persons of the Trust (as defined in the Act). |
Adopted: December 16, 2016
Amended: March 31, 2017
EXHIBIT A
List of Funds
HIGHLAND FUNDS I
Highland Floating Rate Opportunities Fund
Highland Long/Short Equity Fund
Highland Long/Short Healthcare Fund
Highland Merger Arbitrage Fund
Highland Opportunistic Credit Fund
HIGHLAND FUNDS II
Highland Energy MLP Fund
Highland Premier Growth Equity Fund
Highland Small-Cap Equity Fund
Highland Fixed Income Fund
Highland Tax-Exempt Fund
Highland Global Allocation Fund
Highland Total Return Fund
Highland-First Foundation Income Fund
Exhibit (p)(1)
CODE OF ETHICS
of
Highland Funds I, Highland Funds II,
NexPoint Credit Strategies Fund, NexPoint Real Estate Strategies Fund, NexPoint
Opportunistic Credit Fund and NexPoint Capital, Inc.
(each a Fund and collectively, the Funds)
A. | Legal Requirement. |
Rule 17j-1(b) under the Investment Company Act of 1940, as amended (the 1940 Act ), makes it unlawful for any Trustee or Director (Board Member) or officer of a Fund or a Funds investment advisor, NexPoint Advisors, L.P. or Highland Capital Management Fund Advisors, L.P., as applicable (together, the Advisor ), as well as certain other persons, in connection with the purchase or sale by such person of a security held or to be acquired by a Fund:
(1) | To employ any device, scheme or artifice to defraud the Fund; |
(2) | To make any untrue statement of a material fact to the Fund or omit to state a material fact necessary in order to make the statements made to the Fund, in light of the circumstances under which they are made, not misleading; |
(3) | To engage in any act, practice or course of business that operates or would operate as a fraud or deceit on the Fund; or |
(4) | To engage in any manipulative practice with respect to the Fund. |
A security is held or to be acquired by the Fund if within the most recent 15 days it (i) is or has been held by a Fund, or (ii) is being or has been considered by the Fund or the Advisor for purchase by the Fund. A security held or to be acquired by a Fund also includes any option to purchase or sell, and any security convertible into or exchangeable for, a security described in the preceding sentence. A purchase or sale of a security includes, among other things, the writing of an option to purchase or sell a security.
B. | Fund Policy. |
It is the policy of each Fund that no access person 1 of the Fund or of the Advisor shall engage in any act, practice or course of conduct that would violate the provisions of Rule 17j-1(b) set forth above.
1 | An access person is each board member, officer or advisory person of a Fund or the Advisor (hereinafter, Access Person ). |
An advisory person is (i) any director/trustee, officer or employee of a Fund or the Advisor (or of a fund in a control relationship to a Fund or the Advisor) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of securities by a Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales, and (ii) any natural person in a control relationship to a Fund or the Advisor who obtains information concerning recommendations made to a Fund with regard to the purchase or sale of securities by the Company.
C. | Procedures. |
1. To provide the Fund with information to enable it to determine with reasonable assurance whether the provisions of Rule 17j-1(b) are being observed:
(a) | Within 10 days of becoming an Access Person, all Access Persons (other than board members who are not interested persons (as defined in the 1940 Act) of the Fund, Independent Board Members) must submit to the Funds Chief Compliance Officer (the Chief Compliance Officer) a statement of all securities in which such Access Person has any direct or indirect beneficial ownership. 2 |
This statement must include (i) the title, number of shares and principal amount of each reportable security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person, (ii) the name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of such Access Person as of the date the person became an Access Person and (iii) the date of submission by the Access Person. This statement also must be submitted by all new Fund employees who are Access Persons upon their employment by the Fund.
(b) | When an account is established by an Access Person (other than an Independent Board Member) in which any securities were held during a quarter for the direct or indirect benefit of the Access Person such Access Person is required to send written notification (which include email notification) of such fact to the Chief Compliance Officer before engaging in any personal securities transactions through such account, but in any event within 10 days of the end of the calendar quarter in which the account was opened. Such report must include (i) the name of the broker, dealer or bank with whom the Access Person established the account, (ii) the date the account was established and (iii) the date the report was submitted by the Access Person. A letter in substantially the form annexed hereto as Appendix A, as may be amended from time to time, will be sent to the broker-dealer involved, allowing such Access Person to maintain the account and directing that duplicate confirmations of transactions in the account be sent to the Chief Compliance Officer. |
2 | Beneficial ownership of a security is determined in the same manner as it would be for purposes of Section 16 of the Securities Exchange Act of 1934, as amended (the 1934 Act ) except that such determination should apply to all securities. Generally, you should consider yourself the beneficial owner of securities held by your spouse, your minor children, a relative who shares your home, or other persons if, by reason of any contract, understanding, relationship, agreement or other arrangement, you obtain from such securities benefits substantially equivalent to those of ownership. You should also consider yourself the beneficial owner of securities if you can vest or revest title in yourself, now or in the future. Any report by an Access Person required under this Code of Ethics may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the security to which the report relates. |
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(c) | Investment Personnel 3 are prohibited from engaging in any personal securities transaction involving reportable securities without obtaining prior written approval from the Chief Compliance Officer. 4 |
(d) | Investment Personnel are generally prohibited from participating in IPOs 5 and Limited Offerings. 6 However, an Investment Person may participate in an IPO or a Limited Offering if he or she obtains prior written approval from the Chief Compliance Officer before directly or indirectly acquiring beneficial ownership in any securities in an IPO or Limited Offering pursuant to the Pre-Clearance Procedures. In connection with any decision by the Chief Compliance Officer to approve transactions by Investment Personnel acquiring direct or indirect beneficial ownership in any securities in an initial public offering or a Limited Offering, the Chief Compliance Officer will prepare a report of the decision that takes into account, among other factors, whether the investment opportunity should be reserved for the Company and its shareholders, and whether the opportunity is being offered to an individual by virtue of his or her position with the Company. Any Investment Personnel receiving approval from the Chief Compliance Officer to acquire securities in an IPO or a Limited Offering must disclose that investment when they participate in the Funds subsequent consideration of an investment in such issuer and any decision by the Fund to invest in such issuer will be subject to an independent review by Investment Personnel with no personal interest in the issuer. |
(e) | Each Access Person (other than an Independent Board Member) is prohibited from buying or selling a security within at least seven calendar days before the Fund trades in that security. |
(f) | All Investment Personnel and any other Access Persons who obtain information concerning recommendations made to the Fund with regard to the purchase or sale of a security are prohibited from engaging in any personal securities transaction on a day the Fund has a pending buy or sell order involving the same security until the Funds order is executed or withdrawn. |
3 | Investment personnel is (i) any employee of a Fund or the Advisor (or of any company in a control relationship to the Company or the Advisor) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Fund, and (ii) any natural person who controls the Fund or the Advisor and who obtains information concerning recommendations made to the Fund regarding the purchase or sale of securities by the Company. |
4 | Such prior approval includes any prior approval pursuant to the procedures set forth in the section titled Pre-Clearance Procedures of the Advisors Code of Ethics Policy, as such procedures may be amended from time to time. |
5 | IPO means an offering of securities registered under the Securities Act of 1933, as amended (1933 Act), the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the 1934 Act. |
6 | Limited Offering means an offering or a private placement of securities that is exempt from registration under the 1933 Act, pursuant to Section 4(2) or Section 4(6) or pursuant to Rule 504, Rule 505, or Rule 506 under the 1933 Act. |
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(g) | Each Access Person shall submit reports in substantially the form attached hereto as Appendix B, as may be amended from time to time, to the Chief Compliance Officer, showing all transactions in reportable securities in which the person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership. Such reports shall be filed no later than 30 days after the end of each calendar quarter, but need not show transactions over which such person had no direct or indirect influence or control or with respect to transactions pursuant to an Automatic Investment Plan. 7 An Access Person need not make a quarterly transaction report under this Section if the report would duplicate information contained in Certifications of Transactions reports submitted through the Advisors Financial Tracking Personal Trading System, broker trade confirmations, or account statements received by the Chief Compliance Officer with respect to the Access Person in the time period required above, if all information required to be in the quarterly transaction report is contained in the broker trade confirmations or account statements. |
(h) | Each Access Person, other than an Independent Board Member, shall submit an annual report in substantially the form attached hereto as Appendix C, as may be amended from time to time, to the Chief Compliance Officer, showing as of a date no more than 30 days before the report is submitted (i) the title, number of shares and principal amount of each reportable security in which the Access Person had any direct or indirect beneficial ownership, (ii) the name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of such Access Person and (iii) the date of submission by the Access Person. |
(i) | Each Independent Board Member shall not be required to submit the quarterly report required under subparagraph (g), unless during the quarter said board member engaged in a transaction in a reportable security when he or she knew or, in the ordinary course of fulfilling his other official duties as a board member, should have known that during the 15-day period immediately before or after the date of the transaction, the Fund purchased or sold, or considered for purchase or sale, the security. |
(j) | All Access Persons (other than an Independent Board Members) are prohibited from receiving a gifts, regardless of value, other than unsolicited perishable items. |
(k) | Investment personnel must receive authorization from the Chief Compliance Officer prior to serving as a board member of any publicly-traded company. Authorization will be based upon a determination that the board service would be consistent with the interests of the Fund and its shareholders. |
7 | Automatic Investment Plan means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An Automatic Investment Plan includes a dividend reinvestment plan, 401k plan or similarly structured plan. |
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(l) | All Access Persons are required to certify annually to the Chief Compliance Officer that they have (i) read and understand this Code of Ethics and recognize that they are subject to its terms and conditions, (ii) complied with the requirements of this Code of Ethics and (iii) disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to this Code of Ethics. Such certification shall be provided on substantially the form annexed hereto as Appendix D, as may be amended from time to time. |
In accordance with Rule 17j-1, reportable securities do not include direct obligations of the United States Government, bankers acceptances, bank certificates of deposit, commercial paper, high quality short-term debt instruments, 8 including repurchase agreements, and shares of registered open-end investment companies. Further, in light of the investment objectives and policies of the Fund, the Funds Board does not believe that transactions by its Access Persons in any securities other than the securities which the Fund is permitted to purchase would be prohibited by Rule 17j-1. Accordingly, a reportable security does not include securities which the Fund is not permitted to acquire under its investment objective and policies set forth in its then-current prospectus under the Securities Act of 1933. If the investment objective and policies of the Fund change in the future, the Funds Board will reconsider the scope of this reporting requirement in light of such change and Rule 17j-1.
2. The Chief Compliance Officer shall notify each Access Person of the Fund who may be required to make reports pursuant to this Code that such person is subject to its reporting requirements and shall deliver a copy of this Code to each such person. Each Access Person must read (and acknowledge that he or she has done so on substantially the form annexed hereto as Appendix E, as may be amended from time to time) and must retain this Code.
3. The Advisor shall adopt, maintain and enforce a separate code of ethics with respect to its personnel who are access persons in compliance with Rule 17j-1, and shall forward to the Chief Compliance Officer copies of the code, all future amendments and modifications thereto, the names of all persons who are now or hereafter required to report their securities transactions pursuant to the code, and a copy of each report submitted by such persons. To the extent any Access Persons of the Fund are subject to the code of ethics adopted pursuant to Rule 17j-1 by the Advisor, the reporting procedures under this Code of Ethics shall not apply to such Access Persons.
4. The Chief Compliance Officer shall:
(a) | review all reports required to be made by the Funds Access Persons pursuant to this Code; |
8 | High quality short-term debt instruments means any instrument that has a maturity at issuance of less than 366 days and that is rated in one of the two highest rating categories by a Nationally Recognized Statistical Rating Organization. |
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(b) | maintain copies of the code of ethics adopted by the Advisor pursuant to Rule 17j-1 and the names of the persons who are required to report their securities transactions pursuant to such code; |
(c) | receive and review copies of all reports to be made under the code of ethics adopted by the Advisor in compliance with Rule 17j-1; and |
(d) | submit to the Funds Board at its regularly scheduled quarterly meeting a written report listing (i) the names of those persons who were required to submit reports for the prior quarter under this Code or the code of ethics adopted by the Advisor but failed to and (ii) any material violations that occurred during the prior quarter of this Code or the code of ethics adopted by the Advisor. |
5. At least once a year, each of the Fund and the Advisor must provide the Funds Board with a written report that (i) describes issues that arose during the previous year under its respective code of ethics, including information about material code violations and sanctions imposed in response to these material violations, and (ii) certifies to the Funds Board that the Fund or the Advisor, as the case may be, has adopted procedures reasonably necessary to prevent Access Persons from violating its code of ethics. A copy of each report required by this Section must be preserved with the Funds records for the period required by Rule 17j-1.
6. The Funds Board shall oversee the operation of this Code and review with the Chief Compliance Officer, counsel to the Fund and, if appropriate, representatives of the Adviser, the reports provided to it pursuant to the immediately preceding paragraph and material violations of this Code and the code of ethics adopted by the Advisor in compliance with Rule 17j-1. The Funds Board shall consider what sanctions, if any, should be imposed with respect to this Code.
7. This Code and any material changes to the Code must be approved by the Funds Board, including a majority of Independent Board Members. Each such approval must be based on a determination that this Code contains provisions reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by Rule 17j-1. Before approving this Code or any amendment thereto, the Board must receive a certification from the Fund that it has adopted procedures reasonably necessary to prevent its Access Persons from violating this Code. The Funds Board shall approve material changes to this Code no later than six months after adoption of such changes.
8. This Code, a copy of each report by an Access Person, a record of all persons, currently or within the past five years, who are or were required to make reports under the Code, or who are or were responsible for reviewing these reports, a record of any decision, and the reasons supporting the decision, to approve the acquisition by Investment Personnel of securities under Section C.1(d) of the Code, a record of any Code violation and any action taken as a result of the violation must be preserved with the Funds records for the period required by Rule 17j-1.
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APPENDIX A
Date:
Contact:
Broker/Dealer:
Telephone:
Address:
Re: (Access Persons Name)
Dear
We have been informed that , [state title] of is maintaining an account with .
Account Numbers:
This letter will serve to inform you that we do not object to the maintenance of this account, provided that you promptly send duplicate copies of all confirmations and statements to the undersigned marked Personal and Confidential.
Sincerely yours,
APPENDIX B
QUARTERLY PERSONAL INVESTMENT REPORT
Date of Report:
To: Chief Compliance Officer
From:
Date of Transaction:
Name of Security:
Interest Rate and Maturity Date (As Applicable):
Number of Shares:
Principal Amount ($):
Price Per Share ($):
Purchase:
Sale: Other:
Name of Broker, Dealer or Bank with or through which the Transaction was effected:
Comments:
Signature:
Approved By:
APPENDIX C
ANNUAL PERSONAL HOLDINGS REPORT*
Date of Report:
To: Chief Compliance Officer
From:
Name of Security Number of Shares Principal Amount($)
Names of Brokers, Dealers or Banks with whom you maintain an Account in which any Securities are held for your direct or indirect benefit:
Signature:
Approved By:
* | Information must be current as of a date no more than 30 days before this report is submitted. |
APPENDIX D
ANNUAL CERTIFICATION OF COMPLIANCE WITH THE CODE OF ETHICS
I certify that:
1. I have read and understand the Code and recognize that I am subject to its terms and conditions.
2. During the past year, I have complied with the Codes procedures.
3. During the past year, I have disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the Codes procedures.
Signature | ||||
Dated: | ||||
Print Name |
APPENDIX E
ACKNOWLEDGMENT
I certify that I have read and understand the Code of Ethics of the Funds and recognize that I am subject to its terms and conditions. I have disclosed all reported personal securities transactions required to be disclosed or reported pursuant to the Codes procedures and will continue to do so.
NAME | DATE |
Exhibit (p)(2)
CODE OF ETHICS POLICY
Purpose and Scope
The purpose of the Code of Ethics Policy (the Policy) is to implement a policy of strict compliance with the highest standards of ethical business conduct and the provisions of applicable federal securities laws, including rules and regulations promulgated by the SEC. This Policy provides guidance to all Company personnel regarding ethical business principles. The Policy designed to ensure compliance with legal requirements and the Companys standard of business conduct. Employees shall read and understand the Policy and uphold the standards outlined herein in their day-to-day activities at the Company.
General Policy
This Policy does not address every possible situation that may arise. Consequently, every Employee is responsible for exercising good judgment, applying ethical principles, and bringing violations or potential violations of this Policy to the attention of the Chief Compliance Officer. Any questions regarding the Companys policies and procedures should be referred to the Compliance Department. This Policy shall apply to each Employee of the Company. The Policy covers the following topics:
(i) | Insider Trading |
(ii) | Personal Trading Policy |
(iii) | Outside Business Activities and Private Securities Transactions |
(iv) | Business Gifts and Entertainment |
(v) | Political Contributions |
The Company will distribute this Code of Ethics, and any amendments, to each Employee, and each Employee will be required to sign either electronically or in writing an acknowledgement, indicating that they have received a copy of the Code of Ethics and will comply with its provisions. Acknowledgements required under the Code of Ethics may be submitted in written or electronic format containing substantially the same information included on the form.
1
Standards of Conduct
Compliance with Governing Laws, Regulations and Procedures
The Company and its Employees shall comply with all applicable federal and state laws and regulations.
(i) | Employees shall comply with all procedures and guidelines established by the Company to ensure compliance with applicable federal and state laws and regulations. No Employee shall knowingly participate in, assist, or condone any act of violation of any statute or regulation governing the Company or any act that would violate any provision of this Policy. |
(ii) | Employees shall have and maintain knowledge of and shall comply with the provisions of the Policy. |
(iii) | Employees having knowledge of violations of this Policy shall immediately report such violations to the Chief Compliance Officer. |
Individual Standards of Conduct
The following general principles guide the individual conduct of each Employee:
(i) | Employees will not take any action that will violate any applicable laws or regulations, including all federal securities laws. |
(ii) | Employees will adhere to the highest standards of ethical conduct. |
(iii) | Employees will maintain the confidentiality of all information obtained in the course of employment with the Company. |
(iv) | Employees will bring any issues reasonably believed to place the Company at risk to the attention of the Chief Compliance Officer. |
(v) | Employees will not abuse or misappropriate the Companys or any Clients assets or use them for personal gain. |
(vi) | Employees will disclose any activities that may create an actual or potential conflict of interest between the Employee, the Company and/or any Client. |
(vii) | Employees will deal fairly with Clients and other Employees and will not abuse the Employees position of trust and responsibility with Clients or take inappropriate advantage of his or her position with the Company. |
(viii) | Employees will comply with this Code of Ethics. |
2
Ethical Business Practices
It is the policy of the Company that any violation of applicable laws, regulations or this Policy shall be immediately reported to the Chief Compliance Officer. If an Employee, in good faith, raises an issue regarding a possible violation of law, regulation or Company policy or any suspected illegal or unethical behavior he or she will be protected from retaliation.
Falsification or Alteration of Records
Falsifying or altering records or reports, preparing records or reports that do not accurately or adequately reflect the underlying transactions or activities, or knowingly approving such conduct is prohibited. Examples of prohibited financial or accounting practices include:
(i) | Making false or inaccurate entries or statements in any Company or Client books, records, or reports that intentionally hide or misrepresent the true nature of a transaction or activity; |
(ii) | Manipulating books, records, or reports for personal gain; |
(iii) | Failing to maintain books and records that completely, accurately, and timely reflect all business transactions; |
(iv) | Maintaining any undisclosed or unrecorded Company or Client funds or assets; |
(v) | Using funds for a purpose other than the described purpose; and |
(vi) | Making a payment or approving a receipt with the understanding that the funds will be, or have been, used for a purpose other than what is described in the record of the transaction. |
Competition and Fair Dealing
The Company seeks to outperform its competition fairly and honestly. The Company seeks competitive advantages through superior performance, not through unethical or illegal business practices. Stealing proprietary information, possessing trade secret information obtained without the owners consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each Employee should endeavor to respect the rights of and deal fairly with the Clients, vendors, service providers, suppliers, and competitors. No Employee should, in connection with any Company business, take
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unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair dealing practice. Employees should not falsely disparage or make unfair negative comments about its competitors or their products and services. Negative public statements concerning the conduct or performance of any former Employee of the Company should also be avoided.
Privacy of Personal Information
The Company will acquire and retain only personal information that is required for the effective operation of the business of the Company or that is required by law in the jurisdictions in which the Company operates. Access to such information will be restricted internally to those with a legitimate need to know. Employee communications transmitted by the Companys systems are not considered private.
Online Blogging and Communication with Media
Without the express advance approval of the Chief Compliance Officer or the Compliance Department, Employees are prohibited from posting their opinions regarding an investment, issuer, investment strategy, market conditions, government financial actions, and any and all other such opinions as may appear to impart a financial opinion on any corporate, personal, or financial blogging website.
Spreading of False Rumors
The Company prohibits Employees from spreading Rumors (as hereinafter defined) directly or indirectly regarding the financial condition of any company. For purposes of the Code of Ethics, a Rumor shall be defined to include any statement which, at the time of making, the Employee knew, or should have known, was false, misleading, or otherwise untrue or deceptive. This includes any statement in which the Employee omits a fact or set of facts, which if disclosed would change the nature of the statement, and which by being omitted results in the statement being false, misleading or otherwise untrue and deceptive. The Company prohibits the dissemination of Rumors verbally, electronically, or in writing.
Protection of Confidential Information
Information generated in the Company is a valuable Company asset. Protecting this information plays a vital role in the Companys continued growth and ability to compete. Such information includes among other things, technical information such as computer programs and databases, business information such as the Companys objectives and strategies, trade secrets, processes, analysis, charts, drawings, reports, sales, earnings, forecasts, relationships with Clients, marketing strategies, training materials, Employee compensation and records, and other information of a similar nature. Employees must maintain the confidentiality of the Companys proprietary and confidential information and must not use or disclose such information without the express consent of an officer of the Company or when legally mandated.
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Confidentiality of Investor Information
As a registered investment adviser, we have particular responsibilities for safeguarding our investors information and the proprietary information of the Company. Employees should be mindful of this obligation when using the telephone, fax, electronic mail, and other electronic means of storing and transmitting information. Employees should not discuss confidential information in public areas, read confidential documents in public places, or leave or discard confidential documents where they can be retrieved by others.
Information concerning the identity of investors and their transactions and accounts is confidential. Such information may not be disclosed to persons within the Company except as they may need to know it in order to fulfill their responsibilities to the Company. You may not disclose such information to anyone or any firm outside the Company unless (i) the outside firm requires the information in order to perform services for the Company and is bound to maintain its confidentiality; (ii) when the Client has consented or been given an opportunity to request that the information not be shared; (iii) as required by law; or (iv) as authorized by the Chief Compliance Officer. In addition, Regulation S-AM (Reg S-AM) prohibits a registered investment adviser from using information about an individual consumer that has been obtained from an affiliated entity for marketing purposes unless the information sharing practices have been disclosed and the consumer has not opted out. The Company should not use information about individuals that was obtained from affiliates for any marketing purposes and the should not provide information about individuals to any of its affiliates for any marketing purposes.
Information regarding investor orders must not be used in any way to influence trades in personal accounts or in the accounts of other Clients. Intentionally trading ahead of a Clients order with the purpose of benefiting on the trade as a result of the Clients follow-on trade is known as frontrunning and is prohibited. Similarly, intentionally following a Clients order with Employee trading activity for a similar purpose is known as piggybacking or shadowing and is likewise prohibited. Certain six-month short-swing transactions (e.g., a sale and a purchase, or a purchase and a sale, occurring within a six-month period) are also prohibited. If you reasonably believe improper trading in personal or Client accounts has occurred, you must report such conduct to the Chief Compliance Officer.
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Additionally, Employees are prohibited from buying or selling an option while in possession of non-public information concerning a block transaction in the underlying stock, or buying or selling an underlying security while in possession of non-public information concerning a block transaction in an option covering that security (the inter-market front running), for an account in which the Company or such Employee has an interest or with respect to which the Company or such Employee exercises investment discretion. This prohibition extends to trading in stock index options and stock index futures while in possession of non-public information concerning a block transaction in a component stock of an index. A block transaction means a transaction involving 10,000 shares or more of an underlying security or options covering 10,000 shares or more of such security. In the case of a thinly traded security, fewer than 10,000 shares may constitute a block transaction.
Prohibition Against Insider Trading
General
The Company forbids any Employee from trading, either personally or on behalf of others, including registered investment companies, private investment funds and private accounts advised by the Company, on material non-public information or communicating material non-public information to others in violation of the law. This conduct is frequently referred to as insider trading. The Companys policy extends to activities within and outside each persons duties at the Company.
The term insider trading is not defined in the federal securities laws, but generally is used to refer to the use of material non-public information to trade in securities (whether or not one is an insider) or to communications of material non-public information to others.
While the law concerning insider trading is not static, it is generally understood that the law prohibits:
(i) | Trading by an insider while in possession of material non-public information; |
(ii) | Trading by a non-insider while in possession of material non-public information, where the information either was disclosed to the non-insider in violation of an insiders duty to keep it confidential or was misappropriated; or |
(iii) | Communicating material non-public information to others. |
Insider Trading
The elements of insider trading and the penalties for such unlawful conduct are discussed below. If Employees have any questions, they should consult the Chief Compliance Officer.
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Who is an Insider?
The concept of who is an insider is broad. It includes generally officers, directors and Employees of a company. In addition, a person can become a temporary insider if he or she enters into a special confidential relationship in the conduct of a companys affairs and, as a result, is given access to information solely for the companys purposes. A temporary insider can include, among others, a companys attorneys, accountants, consultants, bank lending officers, and certain Employees of such organizations. In addition, although it is unlikely to occur in the normal conduct of its business, the Company or an Employee could become a temporary insider of a company it advises or for which it performs other services. According to the U.S. Supreme Court, the company must expect an outsider to keep the disclosed non-public information confidential and the relationship must at least imply such a duty before the outsider will be considered an insider.
What is Material Information?
Trading on inside information is not a basis for liability unless the information is material. Material information is defined generally as information for which there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions, or information that is reasonably certain to have a substantial effect on the price of a Companys securities. Information that should be considered material includes, but is not limited to, dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation problems, antitrust charges, labor disputes, pending large commercial or government contracts, major new products or services, significant shifts in operating or financial circumstances (such as major write-offs and strikes at major plants) and extraordinary management developments (such as key personnel changes).
What is Non-Public Information?
Information is non-public until it has been effectively communicated to the market place. One must be able to point to some fact to show that the information is generally public. For example, information found in a report filed with the SEC, or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal or other publications of general circulation would be considered public.
Penalties for Insider Trading
Penalties for trading on or communicating material non-public information are severe, both for individuals involved in such unlawful conduct and their employers. A person can be subject to some or all of the penalties below even if he or she does not personally benefit from the violation. Penalties include:
(i) | civil injunctions; |
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(ii) | disgorgement of profits; |
(iii) | jail sentences; |
(iv) | fines for the person who committed the violation of up to three times the profit gained or loss avoided, whether or not the person actually benefited; and |
(v) | fines for the employer or other controlling person of up to the greater of $1,000,000 or three times the amount of the profit gained or loss avoided. |
In addition, violations can be expected to result in serious sanctions by the Company, detailed in the Sanction Provisions section in this Policy, potentially including dismissal of the person(s) involved.
Procedures to Detect and Prevent Insider Trading
The following procedures have been established to aid Employees in avoiding insider trading, and to aid the Company in preventing, detecting and imposing sanctions against individuals for insider trading. Each Employee must follow these procedures or risk serious sanctions, including dismissal, substantial personal liability and criminal penalties.
Identifying Inside Information
Before trading for yourself or others, including any Client Account, in the securities of a Company about which you may have potential inside information, ask yourself the following questions:
(i) | Is the information material? Is this information that an investor would consider important in making his or her investment decisions? Is this information that would substantially affect the market price of the securities if disclosed? |
(ii) | Is the information non-public? To whom has this information been provided? Has the information been effectively communicated to the marketplace by appearing in publications of general circulation? Is the information already available to a significant number of other traders in the market? |
If after consideration of the foregoing you believe that the information is material and non-public, or if you have questions as to whether the information is material and non-public, you should take the following steps:
(i) | Report the matter immediately to the Chief Compliance Officer. |
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(ii) | Do not purchase or sell the securities on behalf of yourself or others, including any Client Account. |
(iii) | Do not communicate the information within or outside of the Company other than to the Chief Compliance Officer. |
Client Account Trading
In connection with Company investments, certain Employees may gain access to material, non-public information relating to the applicable borrower or issuer. In such cases, the applicable borrower or issuer will be placed on the Companys Restricted List discussed below. In addition, in connection with investments, the Company will often enter into a confidentiality agreement relating to information that it may receive. It is the Companys general policy that all companies who are the subject of a confidentiality agreement will be placed on the Companys Restricted List.
Prior to a confidentiality agreement being executed and an issuer being placed on the internal Company restricted list, an email should be circulated by the investment professional or his/her designee to an internal restricted list, which comprises members of investments, notifying his/her intention to become restricted in an issuer. This notification will provide members of the firm time to opine or reject the execution of the confidentiality agreement. After a period of 24 hours has passed and if there are no objections received, the issuer will be placed on the Companys restricted list. Each proposed confidentiality agreement shall be emailed to the Companys Legal department for review, prior to execution.
Restricting Access to Material Non-Public Information
Information in your possession that you identify as material and non-public may not be communicated to anyone, including any person within the Company other than those persons who need to know such information in order to perform their job responsibilities at the Company. In addition, care should be taken to keep the information secure. For example, memos, reports, correspondence or files containing the information should be restricted.
Resolving Insider Trading Issues
If, after consideration of the provisions of this Code of Ethics, you have questions as to whether information is material or non-public, the propriety of any action, or about the foregoing procedures, please contact the Legal/Compliance Department to discuss your questions before trading or communicating the information to anyone.
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Restricted Lists
Prior to voluntarily receiving any private-side or otherwise non-public information regarding any issuer (regardless of whether it is currently owned by the Company or any Client Account, but particularly if the Company is analyzing or recommending securities for Client transactions) in any form (oral, written, electronic, etc.) or in any manner (by conversation, by accessing private-side information on intralinks/syndtrak/debt domain, by fax, by e-mail, by confidentiality agreement, etc.), Employees should email [ .com] requesting permission for the issuer to become restricted. This email is intended to put all relevant parties on notice of the potential restriction. Please include in your email the issuer name and whether or not the issuer has public securities. Also please indicate the anticipated length of the restriction (Note: for confidentiality agreements, this period is assumed to be the term of the agreement, absent CCO approval of a shorter period). Each analyst is responsible for notifying the Compliance Department immediately when the name of an issuer he or she monitors changes.
After receipt of the email notification, recipients of the restricted list request are generally provided 24 hours to object to the request to become restricted. If an objection is received, the relevant portfolio managers and other Employees should discuss the matter with Compliance to determine whether we will proceed with receiving the private information and become restricted.
Notwithstanding anything in this policy to the contrary, if an Employee of the Company receives or otherwise is in possession of material, non-public information with respect to an issuer, there is no applicable waiting period and the Employee receiving the information must immediately notify the Compliance Department via [ .com] to immediately add the issuer to the Restricted List . Specific instances where an issuer must immediately be added to the Companys Restricted List include, but are not limited to, the following:
| In the event Highland has a representative or observer on the Board of Directors of an issuer, the employee appointed or the portfolio manager responsible for the issuer must also immediately submit a Restricted List request for such issuer. |
| In the event any Highland personnel becomes aware that any Highland portfolio company in respect of which Highland has a board designee or observer rights is entering into or has entered into a confidentiality or non-disclosure agreement with respect to a M&A transaction, the counterparties (e.g., the acquiring, merging or target company) should be immediately placed on the Restricted List. |
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Any questions regarding whether we are in possession of material non-public information or whether we need to add an issuer to the Restricted List must be brought to the immediate attention of the CCO for a determination. The CCO may, but is not required to, consult legal counsel for further guidance in making such a determination.
Exceptions to this policy can only be granted with express Compliance Approval upon a showing that none of the information in the possession of the Company constitutes material non-public information. The Compliance Department also has discretion to place an issuer on the Restricted List even though no Employee has or is expected to receive any material, non-public information about the issuer. Such action may be taken for the purpose of avoiding any appearance of the misuse of material, non-public information. When an issuer is placed on the Restricted List, all Employees are prohibited from personal trading in securities of those issuers. In addition, no trades in Client Accounts may be made in securities of an issuer on the Restricted List until the Compliance Department makes a determination as provided below.
In the event that the Company desires to engage in a securities transaction relating to an issuer that is listed on the Restricted List, the Chief Compliance Officer will consider all relevant factors, which may include: (i) whether the proposed transaction involves a security, (ii) the circumstances surrounding the placement of such issuer on the Restricted List, (iii) the extent to which any Employee may have material, non-public information, (iv) whether the counterparty to the transaction has access to the same information, and (v) whether the counterparty is entering into customary big-boy/non-reliance representations. The Chief Compliance Officer will then determine whether such factors prevent the Company from engaging in such security transaction. All such determinations will be made on a case-by-case basis and may be made in conjunction with advice from internal and/or external legal counsel. The Legal/Compliance Department may condition its determination on the Portfolio Manager providing a certification affirming that, as of such trade date, he or she does not possess any material, non-public information relating to such issuer. In addition, in certain circumstances the Chief Compliance Officer may authorize one or more groups to trade while the firm is in possession of material nonpublic information, subject to appropriate ethical walls determined by the Chief Compliance Officer following consultation with any internal and/or external legal counsel that the Chief Compliance Officer may deem appropriate, being imposed that insulate the authorized groups from the information otherwise in possession of the firm.
All confidentiality or non-disclosure agreements must be reviewed by a member of the Companys legal department prior to execution.
There are two processes to remove an issuer from the Restricted List:
| Process A: Restricted List Expiration |
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| Five days prior to the issuers expiration date a computer generated email reminder will be sent to the Portfolio Managers listed on the Restricted List as well as to the Compliance Department. |
| The issuer will be removed from the Restricted List upon the expiration date if the Portfolio Managers affirmatively indicate to the Compliance Department that the issuer should be removed. |
| Process B: Removal Prior to Expiration |
| For removals that are prior to the Restricted List expiration date, send an email to the Compliance Department confirming the basis for why we no longer have material non-public information. |
| Compliance will only remove a particular issuer from the Restricted List with Chief Compliance Officer approval following review of the relevant facts and circumstances, as described above. |
The only persons who are authorized to remove issuers from the Restricted List are members of the Compliance Department.
Personal Trading Policy
Policy Overview
The purpose of this policy regarding employee personal trading is to ensure that employees personal trading activity complies with applicable laws and regulations, and is carried out in a manner consistent with Company policy. The Company has an obligation to monitor employee personal trading to ensure that all trades meet the requirements set forth in this policy and that all personal trading transactions must avoid even the appearance of a conflict of interest. (For additional information regarding the Personal Trading Policy, including the list of approved brokerage firms, please see Employee Trading Policy ).
General Principles
The following general principles should guide the individual trading activities of Employees:
1. | Employees may only trade Reportable Securities during the permitted trading windows discussed under Blackout Periods for Reportable Securities below, provided that up to 40 ETF trades may be completed each year at any time and, provided further that the Chief Compliance Officer may permit additional trades on a case-by-case basis. |
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2. | Employees may not trade in the securities of an issuer in which any portfolio or fund managed by the Company has an interest in any part of the capital structure, (other than securities of issuers with respect to which the Company may be deemed to have an interest solely as a result of such securities being held in a retail client that is managed by a third party sub-advisor). Notwithstanding the foregoing, the Chief Compliance Officer may approve exceptions to this limitation upon showing of need such as (in the case of a sale by an employee where the Company is long the security in an account) or a showing of alignment of interests (such as where the employee wishes to buy a security that the company is long) provided that the investment does not violate any legal, regulatory, or contractual restriction. Issuers held by Company-advised ETFs which track an underlying index are excluded for this purpose and may be traded by employees assuming all other factors are met. |
3. | Executions of Employee account orders are subject to completion of Client orders (See, Restrictions on Personal Trading Activity below). |
4. | The Company reserves the right to cancel any Employees transaction. If a transaction is canceled, the Employee will bear the risk of loss and the Company (or a designated charity) will retain any profit associated with such cancellation. |
5. | Any breach of this policy may result in disciplinary action, up to and including termination of employment (See, Sanction Provisions for a detailed list of sanctions relating to violations of the Companys Code of Ethics Policy). |
Pre-Clearance Required for Reportable Securities: PTS
Employees are required to pre-clear all acquisitions or dispositions of Reportable Securities. Pre-clearance approval is good for the day on which it is obtained. Receiving pre-clearance approval for a specific trade does not oblige the employee to place the trade. Limit orders expiring at the end of a trading day are permissible; good until canceled orders are not.
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Pre-Clearance Procedures
To monitor, record, and report the personal trading activities of Employees, the Company uses the Financial Tracking Personal Trading System (PTS). Each Employee is provided a username and password to the online PTS. Pre-clearance must be obtained by submitting a pre-clearance request using the PTS. PTS will generate an approval or denial of the pre-clearance. PTS maintains a record of all pre-clearance requests submitted and their approval status, which can be viewed by both Compliance and Employees. The Chief Compliance Officer monitors all transactions made by all Employees in order to ascertain any pattern of conduct which may evidence conflicts or potential conflicts with the principles and objectives of this Policy.
Employees requiring pre-clearance of personal securities transactions while out of the office can email [ .com] .
Transaction activity in proprietary accounts of the Company and its affiliates does not require preclearance pursuant to these policies.
Advance trade clearance in no way waives or absolves any Employees of the obligation to abide by the provisions, principles and objectives of this Policy.
Reportable Securities
For the purpose of this Code of Ethics, Reportable Securities are exchange traded funds (ETFs), closed-end funds, notes and financial derivatives, and, except as provided below, all public or private securities. However, ETFs and options on ETFs are not required to be pre-cleared.
The following instruments are not considered Reportable Securities: shares issued by open-end funds (mutual funds), other than funds advised by the Company or its affiliates , direct obligations of the Government of the United States, municipal securities, annuities, currencies and commodities, commercial paper, banker acceptances, and bank certificates of deposit.
Restrictions on Personal Trading Activity
Excessive trading by employees is discouraged and will be documented by Compliance and any issues identified will be presented to Senior Management.
Under no circumstances may any Employee effect a transaction in his or her personal account or in another Employees account while either in possession of material non-public information (MNPI) regarding the financial instrument and/or issuer that is the subject of the transaction, or with knowledge that a Client account is engaging, or likely to engage on the same day, in a similar transaction in the same instrument. Employees may reference the Companys Restricted List for a complete list of issuers the Company has access to MNPI. If an employee holds a position that is subsequently placed on the Restricted List, employees are prevented from closing out the position until the issuer is removed from the list.
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Employees are also restricted from trading issuers where the Company has filed under Section 13D (Company owns more than 5%) or Section 16A (Company owns more than 10%). Compliance will maintain a complete list of restricted issuers under this rule.
Employees are prohibited from trading in any firm holding, excluding ETFs, that is in conflict with the Companys position. Conflicting positions misalign employee interests with investor interests. For example, employees are not allowed to go long in a security if the Company is currently short in an account nor shall they short a security if the company is currently long the security in an account.
All employees are prohibited from violating any rule, regulation, or law while trading in their personal accounts. Highland employees are expected to live up not only to the letter of the law but also to the ideals of the Company.
Blackout Periods for Reportable Securities
Without the prior approval of the Chief Compliance Officer or his designee, no employee may directly or indirectly acquire or dispose of a beneficial ownership interest in a Reportable Security other than during the first 7 calendar days of February, May, August, November and during the seven calendar days commencing on December 15 th and ending on December 21 st each year. No Employee may directly or indirectly acquire or dispose of a beneficial ownership in a Reportable Security, with the exceptions of ETFs, when the Company has a pending transaction for an asset of the same issuer or its wholly owned affiliate. In the event the Chief Compliance Officer permits an employee trading a firm holding, such employee trade may not be effected until the seventh calendar day after the Companys most recent transaction in the assets of that issuer. For example, if the Company purchases any part of IBMs capital structure on Calendar Day 1 (loans, bonds, or equity), on Calendar Day 6 an employee may not trade in IBM but on Calendar Day 7 the Employee may enter such a trade if the Company did not enter a trade in IBM on Calendar Day 6 and has no open orders on Calendar Day 7.
Employees will not be restricted from (i) exercising a call/put option position or otherwise covering an option position in their personal trading accounts prior to expiration as long as the original option position was approved through PTS, (ii) toggling elections within the Companys 401(k) plan, or (iii) investing in Funds managed by the Company or its affiliates (subject to applicable investor eligibility restrictions).
Front Running
All Employees are prohibited from front running. The SEC states front-running occurs when a person trades in advance of his or her client in order to take advantage of changes in the market price of a security that will be caused by that clients trade. The Company generally does not permit Employees to trade within seven days before a Client Account, unless subject to approval from the Chief Compliance Officer. If the seventh day falls on a weekend or holiday, the preceding business day is used.
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Highland Retail Fund Trading
Employees are not allowed to trade for short term profits in any of the Retail Funds managed or sub-advised by the Company. Preclearance will be reviewed by the Chief Compliance Officer and will be subject to the same restrictions held on all other securities.
Pre-Clearance Required for Participation in IPOs
No Employee shall acquire any beneficial ownership in any securities in an initial public offering (as defined in Rule 204A-1 promulgated under the Advisers Act), for his or her account, without the prior approval of the Chief Compliance Officer who has been provided with full details of the proposed transaction.
Pre-Clearance Required for Private or Limited Offerings
No Employee shall acquire beneficial ownership of any securities in a limited offering (as defined in Rule 204A-1 promulgated under the Advisers Act) without the prior written approval of the Chief Compliance Officer who has been provided with full details of the proposed transaction.
Pre-Clearance Required for Personal Loans Collateralized by Securities
Prior to arranging a personal loan with a financial institution, which will be collateralized by securities, an Employee must obtain the approval of the Chief Compliance Officer. If the loan is approved, the Employee must supply the Chief Compliance Officer with an email containing the following information:
(i) | The date of the transaction, the title and the number of securities involved in the transaction, the principal amount of each security, and a description of any other interest involved; |
(ii) | The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); |
(iii) | The price at which the transaction was effected; and |
(iv) | The name of the broker, dealer or bank with or through whom the transaction was effected. |
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Hardship Exemption
Employees may request to trade outside of permitted windows or amounts under the hardship exemption. This exemption includes, without limitation, transferring assets to a new account, raising cash for taxes due, raising cash for unanticipated personal, family or medical expenses, raising cash for a large investment, incurring losses or gains in excess of 20% on an investment, or court ordered liquidation. These and other claims under the hardship exemption will be reviewed at the discretion of the Chief Compliance Officer.
Requests for hardship exemptions must be provided to the Chief Compliance Officer in writing. The Employee is not permitted to complete any transaction unless approval has been granted.
Any and all ambiguities relating to the administration of this policy will be determined and resolved by the Chief Compliance Officer in his sole discretion.
Monitoring and Review of Personal Securities Transactions
The Chief Compliance Officer or a designee will monitor and review all reports required under the Policy for compliance with Highlands policies regarding personal securities transactions and applicable SEC rules and regulations. The Chief Compliance Officer may also initiate inquiries of Employees regarding personal securities trading. Employees are required to cooperate with such inquiries and any monitoring or review procedures employed by the Company. Any transactions for any accounts of the Chief Compliance Officer will be reviewed and approved by a separate member of Compliance, internal legal counsel or other designated supervisory person. All Employees are required to comply with the reporting requirements outlined in the Code of Ethics.
Reporting Requirements for Employees
Every Employee shall annually disclose their personal brokerage and third party 401(k) accounts and holdings held within those accounts. It is the Companys policy that Employees must maintain their account with firm approved brokerage firms. Additionally, an employee may be asked to provide hard copy duplicate statements for their disclosed personal brokerage accounts.
Initial and Annual Holdings Disclosure
Every Employee must, no later than ten (10) days after becoming an Employee and after opening any additional brokerage accounts thereafter, submit a completed Securities/Futures Account Disclosure Form covering the accounts over which they have investment discretion. Employees are required to provide a copy of their most current brokerage statements (and the information must be current as of no more than 45 days
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prior to the reporting date), and transfer their account to one of the designated brokers approved by the Company. For the purpose of this Policy, an Employee account includes:
(i) | Any account owned by an Employee, any account owned/controlled by his or her family (including a spouse, minor child or other relative living in the same household); |
(ii) | Any account, contract, understanding or other arrangement in which the Employee has a beneficial or pecuniary interest (such as a corporation, partnership, or estate in which the Employee has an interest); and |
(iii) | Any account over which the Employee exercises discretionary trading control (such as an IRA, trust account or other custodian account). |
Every employee must submit a completed Non-Discretionary Account Certification (attached as Appendix F ) if any of their accounts include a trust or third-party managed account within ten days of opening a new account. Employees completing this form will certify that:
(i) | The employee cannot suggest purchases or sales of investments to the trustee or third-party discretionary manager; |
(ii) | The employee cannot direct purchases or sales of investments in any of the trusts or third-party managed accounts; and |
(iii) | The employee does not consult with the trustee or third-party discretionary manager as to the particular allocation of investments to be made in any of the trusts or third-party managed accounts. |
No later thirty (30) days after the end of each calendar year, each Employee must complete an Annual Holdings Certification reflecting account holdings as of year-end. Both the Securities/Futures Account Disclosure Form and the Annual Holdings Certification at a minimum must contain the following information:
(i) | The title and type, the exchange ticker symbol or CUSIP number, the interest rate and maturity date (if applicable), the number of shares and the principal amount (if applicable) of each reportable security and/or reportable fund in which the Employee had any direct or indirect beneficial ownership; |
(ii) | The name of any broker, dealer or bank with whom the Employee maintains an account in which any securities were held for the direct or indirect benefit of the Employee; and |
(iii) | The date the report is submitted by the Employee. |
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Securities/Futures Account Disclosure Form, Non-Discretionary Account Certification and Annual Holdings Certifications are submitted to the Chief Compliance Officer using PTS.
Quarterly Certification of Transactions
Every Employee must, no later than thirty (30) days after the end of each calendar quarter, file a quarterly Certification of Transactions containing the following information with respect to any transaction during the quarter in a reportable security over which the Employees had any direct or indirect beneficial ownership:
(i) | The date of the transaction, the title and exchange ticker symbol or CUSIP number, the interest rate and maturity date (if applicable), the number of shares and the principal amount (if applicable) of each reportable security; |
(ii) | The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); |
(iii) | The price of the reportable security at which the transaction was effected; |
(iv) | The name of the broker, dealer or bank with or through whom the transaction was effected; |
(v) | The date the account was established; and |
(vi) | The date the report is submitted by the Employee. |
As part of the reporting requirements, every Employee must also, no later than thirty (30) days after the end of each calendar quarter, affirm that they have reported all Reportable Securities transactions during the period. Quarterly Certification of Transactions are submitted to the Chief Compliance Officer using PTS.
Annual Certification & Conflict of Interest Disclosure
Every Employee must, no later than 30 days following year end, or no less than annually, must complete the Annual Certification & Conflicts of Interest Disclosure. The Annual Certification & Conflicts of Interest Disclosure is submitted to the Chief Compliance Officer using PTS. The Chief Compliance Officer or his/her designee is responsible reviewing and following up on any issues identified as potential conflicts of interest on the questionnaires.
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Sanction Provisions
The following details violations of the Policy and the related sanctions that may result from non-adherence to the Policy. Each violation may result in the corresponding sanction, but the Company is not limited by what is enumerated. Similarly, the Company may take disciplinary action with respect to certain violations not specifically mentioned herein. The Chief Compliance Officer has the discretion to additionally fine a violator and to call a violator before Senior Management. A violation of the Policy may result in, warnings or fines as well as additional disciplinary action up to and including termination. All penalty fines will be placed in a fund held by the Company that will be available for donations to charities approved by Senior Management.
The Company encourages any Employee who has or may have violated the Policy (or any securities law or regulation) to voluntarily bring the matter to the attention of the Chief Compliance Officer. To the extent that any such volunteered violation of the Policy is determined to have been unintentional, or to the extent that such voluntary disclosure prevented further violation of the Policy, the Chief Compliance Officer, after such consultation with Senior Management that the Chief Compliance Officer determines is necessary or advisable, shall take such factors into consideration in determining any sanction relating to such Employee actions.
Outside Business Activities and Private Transactions
All employees of Highland Capital Management, L.P. (the Company) are required to devote their full time and efforts to the business of the Company. In addition, no person may make use of his or her position as an employee, make use of information acquired during employment, or make personal investments in a manner that may create a conflict, or the appearance of a conflict, between the employees personal interests and the interests of the Company.
To assist in ensuring that such conflicts are avoided, an employee must obtain the approval of the Chief Compliance Officer prior to:
(i) | Serving as a director, officer, general partner or trustee of, or as a consultant to, any business, corporation or partnership, including family owned businesses and charitable, non-profit and political organizations. |
(ii) | Accepting a second job or part-time job of any kind or engaging in any other business outside of the Company. |
(iii) | Acting, or representing that the employee is acting, as agent for a firm in any investment banking matter or as a consultant or finder. |
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(iv) | Forming or participating in any stockholders or creditors committee. |
(v) | Receiving compensation of any nature, directly or indirectly, from any person, firm, corporation, estate, trust or association, other than the Company, whether as a fee, commission, bonus or other consideration such as stock, options or warrants. |
Every employee is required to complete the required disclosure form via PTS and have the form approved by the Chief Compliance Officer prior to serving in any of the capacities or making any of the investments described heretofore.
The Chief Compliance Officer, in connection with approving any outside activities, may place such conditions on an approval as he deems necessary and appropriate to protect the interests of any Client. In addition, an employee must notify the Legal/Compliance Department if the employee is or believes that he or she may become a participant, either as a plaintiff, defendant or witness, in any litigation or arbitration.
Gifts and Entertainment Policy
General
The Company recognizes the value of fostering good working relationships with individuals and firms doing business or seeking to do business with the Company. To this end, subject to the guidelines below, Employees are permitted, on occasion, to accept unsolicited perishable gifts and invitations to attend entertainment events with current or prospective service providers and counterparties. When doing so, however, Employees should always act in the best interests of the Company and its Clients and should avoid any activity that might create an actual or perceived conflict of interest or impropriety in the course of the Companys business relationships. Employees should contact the Chief Compliance Officer to discuss any offered activity or gift that they feel creates such a conflict. The Company reserves the right to prohibit the acceptance or retention of a gift or offer of entertainment, regardless of value, as it may determine in its sole discretion. In addition, the Company may reimburse certain expenses or costs paid by Employees as determined on a case by case basis.
Prior to accepting entertainment from an existing or prospective firm service provider or counterparty, Employees must notify and obtain approval from their Team Leader. All entertainment having a market value in excess of $200.00 per occurrence/item must also be pre-approved by Compliance. No gifts regardless of market value, other than unsolicited perishable items, may be accepted by Employees. To obtain approval employees must submit a Gift and Event Approval Form using PTS.
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To determine approval or denial of the pre-clearance requests, the Chief Compliance Officer or his designee will consider if the gift or entertainment is of significant value and whether accepting such the gift or entertainment would create a real or potential conflict of interest. Entertainment may include such events as meals, shows, concerts, theatre events, sporting events, certain accommodations or similar types of entertainment. Entertainment also includes in-town and out-of-town trips and seminars where the service provider or counterparty offers to pay for items such as lodging, airfare, meal and/or event expenses. No gift or entertainment may be accepted or given, however, regardless of value, that is intended to influencing, or has the likelihood of influences, any business decision or relationship of the Company.
Entertainment
Entertainment includes events such as meals, shows, concerts, theatre events, sporting events, or similar types of entertainment.
(i) | The applicable current or prospective service provider or counterparty must accompany Employees to all Entertainment. |
(ii) | Entertainment may be provided for Employees and their immediate family members. |
(iii) | Employees must pay for all air transportation, which may be reimbursed by the Company in its sole discretion. |
(iv) | Despite the actual dollar value, the cost of the entertainment should in all instances be reasonable under the circumstances. |
(v) | Employees may not request to attend particular entertainment events. |
Gifts
Gifts include all items received from a service provider or counterparty, as well as tickets to an event that is not attended by the grantor, which is prohibited.
(i) | Only unsolicited perishable gifts are permitted. Alcoholic beverages are not considered perishable for Compliance purposes. |
(ii) | If a non-perishable gift is received, the Employee must return the gift to the grantor or donate the gift to charity. If the Employee elects to donate the gift to charity: |
(a) | The gift must be forwarded to the Employees respective administrative assistant. |
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(b) | The non-perishable item will be donated to a local charitable organization (e.g. Goodwill or the Salvation Army). |
(c) | Evidence of the donation must be submitted to Compliance. |
(d) | No charitable tax deduction can be taken by the Company or any Employee in connection with the donation. |
(iii) | Employees may not request or solicit gifts. |
(iv) | No gift of cash or cash equivalents may be accepted. |
(v) | Employees may not receive perishable gifts on more than two occasions annually from a specific service provider or counterparty. |
Employee Provided Gifts and Entertainment
Employees may occasionally give and expense business gifts to someone doing or seeking to do business with the Advisor.
(i) | The value of such gift should be limited to approximately $150.00. |
(ii) | Employees should limit entertainment and meal expenses to approximately $150.00 per attendee per event and approximately $400.00 per person per day, provided that seats at sporting events shall be permitted regardless of value. |
(iii) | Employees should not give a requested business gift or entertainment. |
Guiding Principles
The Company holds its Employees to high ethical standards and strictly prohibits any giving or receipt of things of value that are designed to improperly influence the recipient. Anti-bribery and anti-corruption statutes in the U.S. and the U.K. are broadly written, so Employees should consult with the CCO if there is even an appearance of impropriety associated with the giving or receipt of anything of value.
Business gifts and entertainment are complex topics involving strict rules and dollar limits as well as the need for good judgment. Before offering or accepting any Business Gift or Business Entertainment, it is essential that Employees are familiar with the rules, but it is equally essential that Employees exercise appropriate judgment in situations that, even if within the rules, could appear improper to an independent observer such as a regulator or member of the media.
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Terms with Special Meanings
Business Entertainment.
Any meal, sporting event (whether as a spectator or participant), cultural event, or similar entertainment that an Employee and a Business Partner attend together and that one of the parties provided. Exception: Meals that are in connection with an approved training and education event or industry conference are not considered Business Entertainment.
Business Gift.
Anything of value that is given to, or accepted from, a Business Partner. It includes prizes (whether awarded by skill or chance) and any discount or rebate not generally available to the public.
Business Partner.
Any natural person who is:
(i) | A current or prospective Client, a consultant of same, or a vendor, supplier, or provider of any service to the Company. |
(ii) | An employee, agent, officer, or representative of any of the above. |
Government Official.
Any elected or appointed official at any level of government in any country (U.S. or non-U.S.), and any U.S. candidate for federal, state or local office. This includes any board members or personnel of a state or local retirement plan, sovereign wealth fund, or government-controlled enterprise. For purposes of this policy, the term Government Official also includes any individual who would be considered a foreign official under the Foreign Corrupt Practices Act (FCPA), including but not limited to, all officers and employees of a foreign government or any department, agency, or instrumentality thereof, as well as any board members or personnel of a state or local retirement plan, sovereign wealth fund, or government-controlled enterprise.
General Restrictions and Requirements
Prohibition Against Broker-Sponsored Entertainment.
The acceptance of any broker provided gifts, tickets or invitations to entertainment oriented events while acting as a representative of the Company is prohibited. This includes gifts of any kind as well as invitations ore tickets to any sporting events, plays, concerts, rounds of golf, charitable events, etc. If Employees elect to participate in any of these events with a broker, the Employee must consider their participation as a personal choice and they will be required to pay their own way.
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Prohibition Against Giving or Receiving Cash or Cash Equivalents.
Employees must never give or accept cash or cash equivalents as a Business Gift. This includes items that can be redeemed for cash, such as checks and cash-redeemable gift cards. Gift cards or gift certificates that can be redeemed only for goods or services, and not for cash, are allowed.
Prohibition Against Solicitation of Business Gifts and Business Entertainment.
Employees must never solicit a Business Gift or Business Entertainment. If a Business Partner solicits either of these from an Employee, such request should politely be declined and reported to the CCO.
Prohibition Against Quid Pro Quo Arrangements.
Employees may never give or receive a Business Gift or Business Entertainment if there is any explicit quid-pro-quo arrangement, meaning that there is an understanding (either spoken or implicit) that the gift or entertainment is specifically linked to a certain business outcome.
Restrictions for Special Categories
Gifts and Entertainment Given to Union Officials.
Any gift or entertainment provided by Highland to a labor union or a union official in excess of $250 per fiscal year must be reported on Department of Labor Form LM-10 within 90 days following the end of the Companys fiscal year.
Gifts and Entertainment Given to ERISA Plan Fiduciaries.
The Company is prohibited from giving gifts or entertainment with an aggregate value exceeding $250 per year to any ERISA plan fiduciary.
Gifts and Entertainment Given to Government Officials.
Due to various restrictions on the giving of gifts and entertainment to elected and appointed officials at any level of government and in any country, as well as any United States candidate for federal, state, or local office, all Business Gifts and Business Entertainment to be given to such Government Officials must be pre-cleared.
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The Foreign Corrupt Practices Act (FCPA) prohibits the direct or indirect giving of, or a promise to give, things of value in order to corruptly obtain a business benefit from an officer, employee, or other instrumentality of a foreign government. Companies that are owned, even partly, by a foreign government may be considered an instrumentality of that government. In particular, government investments in foreign financial institutions may make the FCPA applicable to those institutions. Individuals acting in an official capacity on behalf of a foreign government or a foreign political party may also be instrumentalities of a foreign government.
The FCPA includes provisions that may permit the giving of gifts and entertainment under certain circumstances, including certain gifts and entertainment that are lawful under the written laws and regulations of the recipients country, as well as bona-fide travel costs for certain legitimate business purposes. However, the availability of these exceptions is limited and is dependent on the relevant facts and circumstances.
Civil and criminal penalties for violating the FCPA can be severe. Employees must consult with the CCO, or designee, prior to providing any business gifts and/or entertainment to individuals that may be covered by the FCPA.
Political Contributions
General
Individuals may have important personal reasons for seeking public office, supporting candidates for public office, or making charitable contributions. However, such activities could pose compliance and business risks to an investment adviser because federal and state pay-to-play laws.
SEC Rule 206(4)-5 (the Pay-to-Play Rule) imposes restrictions on certain political contributions made by investment advisers that provide advisory services to a state or local government entity or to an investment pool in which a state or local governmental entity invests. An investment pool includes:
(i) | Any investment company registered under the Investment Company Act that is an investment option of a plan or program of a government entity; or |
(ii) | Any company that would be an investment company under section 3(a) of the Investment Company Act but for the exclusion provided from that definition by section 3(c)(1), section 3(c)(7) or section 3(c)(11) of the Investment Company Act. |
The Company currently provides advisory services to government entities and anticipates continuing to do so in the future and therefore will fall under the provisions of the Rule. Any questions regarding this rule should be directed to the Chief Compliance Officer.
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Specifics of the Rule
There are three key elements of the Rule: (i) a two-year time-out from receiving compensation for providing advisory services to certain government entities after certain political contributions are made, (ii) a prohibition on soliciting contributions and payments, and (iii) a prohibition from paying third parties for soliciting government clients.
Two-Year Time Out
The Rule prohibits an Investment Adviser from receiving compensation from a government entity for two years after the Investment Adviser or any of its covered associates makes a political contribution to an official of the government entity. During the two-year time-out period, the Investment Adviser is only prohibited from receiving compensation from a government entity; the Investment Adviser can still provide advisory services to the government entity.
Any employee who makes a disqualifying contribution during the course of his or her employment without first clearing such contribution with Compliance may be held personally liable to the Company for any loss of fees or other damages incurred by the Company as a result of such noncompliance.
Employees Must Obtain Pre-Clearance Before Making Political Contributions
If an employee is considering making a political contribution to any state or local government entity, official, candidate, political party, or political action committee, the potential contributor must seek pre-clearance from the CCO.
Look-Back Provision
Under the Rule, when a person becomes a covered associate (including when an existing employee is transferred or promoted), the Investment Adviser must look back in time to that persons prior contributions to determine whether the time-out provisions of the Rule apply to the Investment Adviser. If the person is involved in soliciting clients, then the Investment Adviser is required to look back two years. If the person is not involved in soliciting clients, then the Investment Adviser is only required to look back six months. The look-back provision is prophylactic since it bars advisers from influencing the selection process by hiring persons who have made political contributions.
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Soliciting Contributions and Payments
The Rule bars an Investment Adviser and its covered associates from soliciting or coordinating: (i) contributions to an official of a government entity to which the Investment Adviser is seeking to provide investment advisory services, or (ii) payments to a political party of a state or locality where the Investment Adviser is providing or seeking to provide investment advisory services to a government entity.
Prohibition on Third Party Solicitation
The Rule prohibits an Investment Adviser or any of its covered associates from paying any person to solicit a government entity unless such person is (i) a regulated person (i.e., a registered investment adviser or broker-dealer) that is subject to prohibitions against engaging in pay-to-play practices or (ii) one of the Investment Advisers employees, general partners, managing members, or executive officers (although contributions by these persons may trigger the two-year time out). This provision is a change from the initial proposal, which would have completely barred the use of solicitors.
The prohibition does not extend to non-affiliated persons providing legal, accounting or other professional services in connection with specific investment advisory business that are not being paid directly or indirectly for communicating with the government entity for the purpose of obtaining or retaining investment advisory business for the Investment Adviser.
Catch-all Provision
There is a catch-all provision in the Rule that prohibits acts done indirectly, which, if done directly, would violate the Rule. As a result, an Investment Adviser and its covered associates are not permitted to funnel payments through third parties, including, for example, consultants, attorneys, family members, friends or companies affiliated with the adviser as a means to circumvent the Rule.
De Minimis Exception
The Rule has a de minimis exception for contributions to officials for whom the contributor can vote. The exception permits individual contributions up to $350 per official (per election) for whom the employee is entitled to vote. In addition, contributions that in the aggregate do not exceed $150 per election per official will not violate the Rule, even if the contributor is not entitled to vote for the official. These de minimis exceptions are available only for contributions by individual covered associates, not the Investment Adviser. Under both exceptions, primary and general elections are considered separate elections.
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Returned Contributions Exception
The Rule contains an exception that will provide an Investment Adviser with a limited ability to cure the consequences of an inadvertent political contribution to an official for whom the covered associate making it is not entitled to vote. The exception is available for a limited number of contributions that, in the aggregate, do not exceed $350 to any one official, per election. The Investment Adviser must have discovered the offending contribution within four months of the date the contribution was made and, within 60 days after learning of the triggering contribution, the contributor must obtain the return of the contribution.
Exemptions
The SEC may exempt an Investment Adviser from the two-year time out requirement after an offending contribution is discovered when the exemption is necessary or appropriate in the public interest.
Whistleblower Policy
Purpose
This policy establishes procedures for the receipt, review, and retention of Reporting Person (defined below) complaints relating to the Advisers accounting, internal accounting controls, and auditing matters. The Adviser is committed to complying with all applicable accounting standards, accounting controls, and audit practices. While the Adviser does not encourage frivolous complaints, the Adviser does expect its officers, employees, and agents to report any irregularities and other suspected wrongdoing regarding questionable accounting or auditing matters. It is the Advisers policy that its employees may submit complaints of such information on a confidential and anonymous basis without fear of dismissal or retaliation of any kind. This policy applies only to reports concerning Accounting Violations (as defined in Part 3 below).
The Chief Compliance Officer is responsible for overseeing the receipt, investigation, resolution, and retention of all complaints submitted pursuant to this policy.
This policy was adopted in order to:
(i) | Cause violations to be disclosed before they can disrupt the business or operations of the Adviser, or lead to serious loss; |
(ii) | Promote a climate of accountability and full disclosure with respect to the Advisers accounting, internal controls, compliance matters, and Code of Ethics; and |
(iii) | Ensure that no individual feels at a disadvantage for raising legitimate concerns. |
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This policy provides a means whereby individuals can safely raise, at a high level, serious concerns and disclose information that an individual believes in good faith relates to violations of the Compliance Manual, Code of Ethics, or law.
Reporting Persons Protected
This policy and the related procedures offer protection from retaliation against officers, employees, and agents who make any complaint with respect to perceived violations (referred to herein as a Reporting Person), provided the complaint is made in good faith. Good faith means that the Reporting Person has a reasonably held belief that the complaint made is true and has not been made either for personal gain or for any ulterior motive.
The Adviser will not discharge, demote, suspend, threaten, harass, or in any manner discriminate or otherwise retaliate against any Reporting Person in the terms or conditions of his employment with the Adviser based upon such Reporting Persons submitting in good faith any complaint regarding an Accounting Violation. Any acts of retaliation against a Reporting Person will be treated by the Adviser as a serious violation of Adviser policy and could result in dismissal.
Scope of Complaints
The Adviser encourages employees and officers (Inside Reporting Persons) as well as non-employees such as agents, consultants and investors (Outside Reporting Persons) to report irregularities and other suspected wrongdoings, including, without limitation, the following:
(i) | Fraud or deliberate error in the preparation, evaluation, review or audit of any financial statement of the Adviser; |
(ii) | Fraud or deliberate error in preparation and dissemination of any financial, marketing, informational, or other information or communication with regulators and/or the public; |
(iii) | Deficiencies in or noncompliance with the Advisers internal controls and procedures; |
(iv) | Misrepresentation or false statement to or by a senior officer of the Adviser regarding any matters in violation of state and/or federal securities laws; or |
(v) | Deviation from full and fair reporting of the Advisers financial condition. |
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Confidentiality of Complaint
The Chief Compliance Officer will keep the identity of any Inside Reporting Person confidential and privileged under all circumstances to the fullest extent allowed by law, unless the Inside Reporting Person has authorized the Adviser to disclose his identity.
The Chief Compliance Officer will exercise reasonable care to keep the identity of any Outside Reporting Person confidential until it launches a formal investigation. Thereafter, the identity of the Outside Reporting Person may be kept confidential, unless confidentiality is incompatible with a fair investigation, there is an overriding reason for identifying or otherwise disclosing the identity of such person, or disclosure is required by law, such as where a governmental entity initiates an investigation of allegations contained in the complaint. Furthermore, the identity of an Outside Reporting Person may be disclosed if it is reasonably determined that a complaint was made maliciously or recklessly.
Submitting Complaints
Inside Reporting Persons should submit complaints in accordance with the following procedures:
(i) | Complaints must be submitted in writing and mailed in a sealed envelope addressed as follows: The Chief Compliance Officer, Confidential To be Opened Only by the Chief Compliance Officer. |
(ii) | If they so desire, Inside Reporting Persons may request to discuss their complaint with the Chief Compliance Officer by indicating such desire and including their name and telephone number in the complaint. |
(iii) | Inside Reporting Persons may report violations on an anonymous basis. The Chief Compliance Officer urges any employee that is considering making an anonymous complaint to strongly consider that anonymous complaints are, by their nature, susceptible to abuse, less reliable, and more difficult to resolve. In addition, employees considering making an anonymous complaint should be aware that there are significant rights and protections available to them if they identify themselves when making a complaint, and that these rights and protections may be lost if they make the complaint on an anonymous basis. Therefore, the Adviser encourages employees to identify themselves when making reports of Accounting Violations. In responding to anonymous complaints, the Chief Compliance Officer will pay due regard to: |
(a) | The fairness to any individual named in the anonymous complaint; |
(b) | The seriousness of the issue raised; |
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(c) | The credibility of the information or allegations in the complaint, with allegations that are speculative or that do not have a specific factual basis being likely to receive less credence; and |
(d) | The ability to ascertain the validity of the complaint and appropriately resolve the complaint without the assistance and cooperation of the person making the complaint. |
Outside Reporting Persons should submit complaints concerning violations in accordance with the following procedures:
(i) | Complaints may be submitted by e-mail or by a written letter in a sealed envelope addressed as follows: The Chief Compliance Officer, Confidential To be Opened Only by the Chief Compliance Officer. |
The Chief Compliance Officer recommends that Outside Reporting Persons use the sample Complaint Form attached to this policy when reporting Accounting Violations.
(ii) | Outside Reporting Persons are required to disclose their identity in any complaints submitted under this policy. Complaints submitted by non-employees on an anonymous basis may not be reviewed. |
Investigation of Complaints
(i) | Upon receipt of a complaint, the Chief Compliance Officer (or his designated representative) will confirm the complaint pertains to a violation. Investigations will be conducted as quickly as possible, taking into account the nature and complexity of the complaint and the issues raised therein. Any complaints submitted pursuant to this policy that do not relate to a violation will be returned to the Reporting Person, unless the Reporting Persons identity is unknown. |
(ii) | The Chief Compliance Officer may enlist employees of the Adviser and outside legal, accounting and other advisors, as appropriate, to conduct an investigation of a complaint. |
(iii) | The results of each investigation will be reported timely to the Chief Compliance Officer, which will then apprise the Chief Executive Officer, and prompt and appropriate remedial action will be taken as warranted in the judgment of the Chief Executive Officer or as otherwise directed by the Chief Compliance Officer. Any actions taken in response to a complaint will be reported to the Reporting Person to the extent allowed by law, unless the complaint was submitted on an anonymous basis. |
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(iv) | An Inside Reporting Person who is not satisfied with the outcome of the initial investigation or the remedial action taken with respect thereto, if any, may submit directly to the Chief Compliance Officer for its review a written complaint with an explanation of why the investigation or remedial action was inadequate. An Inside Reporting Person may submit a revised complaint on an anonymous basis in his sole discretion. The Inside Reporting Person should forward the revised complaint to the attention of the Chief Compliance Officer in the same manner as set out above for the original complaint. |
(v) | The Chief Compliance Officer will review the Reporting Persons revised complaint, together with documentation of the initial investigation, and determine in its sole discretion if the revised complaint merits further investigation. The Chief Compliance Officer will conduct a subsequent investigation to the extent and in the manner it deems appropriate. The Chief Compliance Officer may enlist employees of the Adviser and outside legal, accounting and other advisors, as appropriate, to undertake the subsequent investigation. The Chief Compliance Officer or its designated representative will inform the Reporting Person of any remedial action taken in response to a Revised Complaint to the extent allowed by law, unless the complaint was submitted on an anonymous basis. |
Retention of Complaints
The Chief Compliance Officer will maintain all complaints received, tracking their receipt, investigation, and resolution. All complaints and reports will be maintained in accordance with the Advisers confidentiality and document retention policies.
Unsubstantiated Allegations
If a Reporting Person makes a complaint in good faith pursuant to this policy and any facts alleged therein are not confirmed by a subsequent investigation, no action will be taken against the Reporting Person. In submitting complaints, Reporting Persons should exercise due care to ensure the accuracy of the information reported. If, after an investigation, it is determined that a complaint is without substance or was made for malicious or frivolous reasons or otherwise submitted in bad faith, the Reporting Person could be subject to disciplinary action. Where alleged facts reported pursuant to this policy are found to be without merit or unsubstantiated: (i) the conclusions of the investigation will be made known to both the Reporting Person, unless the complaint was submitted on an anonymous basis, and, if appropriate, to the persons against whom any allegation was made in the complaint; and (ii) the allegations will be dismissed.
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Reporting and Annual Review
The Chief Compliance Officer will submit periodic reports to the Chief Executive Officer of all complaints and any remedial actions taken in connection therewith. This policy will be reviewed annually by the Chief Compliance Officer, taking into account the effectiveness of this policy in promoting the reporting of Accounting Violations of the Adviser, but with a view to minimizing improper complaint submissions and investigations.
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Exhibit (p)(3)
Highland Capital Funds Distributors, Inc.s (Company) Written Supervisory Procedures (WSPs) along with its Code of Ethics and Standards of Professional Conduct (Code and Standards) are essential to achieving high standards of business conduct, integrity and professional excellence. The WSPs and the Code and Standards have been developed in conjunction with Rules and Regulations of FINRA and other Self-Regulatory Organizations, ideas and values from the CFA Institute, and senior management experience.
The Code of Ethics
All registered representatives and associated persons must:
| Act with integrity, competence, diligence, respect and in an ethical manner with the public, customers, prospective customers, employers, employees, colleagues in the investment profession, and other participants in the global capital markets. |
| Place interest of customers and the integrity of the investment profession above their own personal interest. |
| Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. |
| Practice and encourage others to practice in a professional and ethical manner that will reflect credit on us and the profession. |
| Promote the integrity of, and uphold the rules governing, capital markets. |
| Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals. |
Standards of Professional Conduct
I. Professionalism
A. | Knowledge of the Law. Registered representatives and associated persons must understand and comply will all applicable laws, rules and regulations of any government authority, regulatory organization licensing agency, or professional association governing their professional activities. Registered representatives and associated persons must not knowingly participate or assist in and must disclose any violation of such laws, rules, or regulations. |
B. | Independence and Objectivity. Registered representatives and associated persons must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Registered representatives and associated persons must not offer, solicit, or accept any gifts, benefits, compensation, or considerations that reasonably could be expected to compromise their independence and objectivity. |
C. | Misrepresentation. Registered representatives and associated persons must not knowingly make any misrepresentation relating to investment analyses, recommendations, actions, or other professional activities. |
D. | Misconduct. Registered representatives and associated persons must not engage in any professional conduct involving dishonesty, fraud, deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. |
II. Integrity of Capital Markets
A. | Material Nonpublic Information. Registered representatives and associated persons who possess material nonpublic information that would reasonably be expected to affect the value of an investment must not act or cause others to act on the information. |
B. | Market Manipulation. Registered representatives and associated persons must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead the public |
C. | Spreading of False Rumors. The Company prohibits Access Persons from spreading Rumors (as hereinafter defined) directly or indirectly regarding the financial condition of any company. For purposes of the Code of Ethics, a Rumor shall be defined to include any statement which, at the time of making, the Access Person knew, or should have known, was false, misleading, or otherwise untrue or deceptive. This includes any statement in which the Access Person omits a fact or set of facts, which if disclosed would change the nature of the statement, and which by being omitted results in the statement being false, misleading or otherwise untrue and deceptive. The Company prohibits the dissemination of Rumors via any medium, including verbally, electronically, or in writing. |
III. Duties to Customers
A. | Loyalty, Prudence, and Care. Registered representatives and associated persons have a duty of loyalty to their customers and must act with reasonable care and exercise prudent judgment. Registered representatives and associated persons must act for the benefit of their customers and place their customers interests before their personal or employers interest. In relationships with customers, registered representatives and associated persons must comply with any fiduciary duty that they may have. |
B. | Fair Dealing. Registered representatives and associated persons must deal fairly and objectively with all customers when providing investment analyses, making investment recommendations, taking investment actions, or engaging in other professional activities. |
C. | Performance Presentation. When communicating investment performance information, registered representatives and associated persons must make reasonable efforts to ensure that it is fair, accurate and complete. |
D. | Preservation of Confidentiality. Registered representatives and associated persons must keep information about current, former, and prospective customers confidential unless: |
1. | The information concerns illegal activities on the part of the current, former, or prospective customers. |
2. | Disclosure is required by law. |
3. | The current, former, or prospective customer permits disclosure of the information. |
IV. Duties to Employer
A. | Loyalty. In matters related to their employment, registered representatives and associated persons must act for the benefit of their employer and not deprive their employer of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer. |
B. | Additional Compensation Arrangements. Registered representatives and associated persons must not accept gifts, benefits, compensation, or considerations that would reasonably be expected to create a conflict of interest with their employers or the interest of customers, except in accordance with applicable laws, rules and regulations. |
C. | Responsibility of Supervisors. Registered representatives and associated persons must make reasonable efforts to detect and prevent violations of applicable laws, rules, regulations and the Code and Standards by anyone subject to their supervision or authority. |
V. Investment Analysis, Recommendations, and Action
A. | Diligence and Reasonable Basis. Registered representatives and associated persons must: |
Exercise diligence, independence and thoroughness in analyzing investments, making investment recommendations, and taking investment actions. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.
B. | Communication with Customers and Prospective Customers. Registered representatives and associated persons must: |
1. | Disclose to current and prospective customers the basic format and general principals of the investment process used to analyze investments, select securities, and construct portfolios, and must promptly disclose any changes that might materially affect those processes. |
2. | Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations or actions, and include those factors in communications with current and prospective customers . |
3. | Distinguish between fact and opinion in the presentation of investment analyses and recommendations. |
C. | Record Retention. Registered representatives and associated persons must develop and maintain appropriate records to support their investment analyses, recommendations, actions and other investment-related communications with customers and prospective customers. |
VI. Conflict of Interest
A. | Disclosure of Conflicts. Registered representatives and associated persons must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with their duties to customers and their employer. Registered representatives and associated persons must ensure that such disclosures are prominent, delivered in plain language, and communicated effectively. |
B. | Priority of Transactions. Investment transactions for customers must have priority over investment transactions in which a registered representative or associated person or his/her firm is the beneficial owner. |
C. | Referral Fees. Registered representatives and associated persons must disclose to their employer, customers, and prospective customers, as appropriate, any compensation, consideration, or benefit received from, or paid to, others for the recommendation of products or services. |