As filed with the Securities and Exchange Commission on September 25, 2017
Securities Act File No. 333-217196
Investment Company Act File No. 811-23247
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM N-2
☒ Registration Statement under the Securities Act of 1933
☒ Pre-Effective Amendment No. 4
☐ Post-Effective Amendment No.
and/or
☒ Registration Statement under the Investment Company Act of 1940
☒ Amendment No. 4
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST
(Exact Name of Registrant as Specified in Charter)
321 North Clark Street, Suite 2430
Chicago, Illinois 60654
(Address of Principal Executive Offices)
Registrants Telephone Number, Including Area Code: (312) 374-6930
John P. McGarrity, Esq.
XA Investments LLC
321 North Clark Street, Suite 2430
Chicago, Illinois 60654
(Name and Address of Agent for Service)
Copies to:
Kevin T. Hardy, Esq. Skadden, Arps, Slate, Meagher & Flom LLP 155 North Wacker Drive Chicago, Illinois 60606 |
Clifford R. Cone, Esq. Jefferey D. LeMaster, Esq. Clifford Chance US LLP 31 West 52nd Street New York, New York 10019 |
Approximate date of proposed public offering: As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as amended, other than securities offered in connection with a dividend reinvestment plan, check the following box . . . . ☐
It is proposed that this filing will become effective (check appropriate box):
☐ | When declared effective pursuant to section 8(c). |
If appropriate, check the following box:
☐ | This [post-effective] amendment designates a new effective date for a previously filed [post-effective amendment] [registration statement]. |
☐ | This form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act and the Securities Act registration statement number of the earlier effective registration statement for the same offering is . |
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Title of Securities Being Registered |
Amount Being Registered (1)
|
Proposed Maximum Offering Price Per Share (1)
|
Proposed Maximum Aggregate Offering Price (1)
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Amount of Registration Fee
|
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Common Shares, $0.01 par value |
9,500,000 | $10.00 | $95,000,000 | $11,010.50 (2) |
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes $115.90 previously paid in connection with the initial filing on April 7, 2017.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that the Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION | SEPTEMBER 25, 2017 | ||
Shares | ||||
XAI Octagon Floating Rate & Alternative Income Term Trust
Common Shares
The Trust. XAI Octagon Floating Rate & Alternative Income Term Trust (the Trust) is a newly-organized, diversified, closed-end management investment company.
Investment Objective. The investment objective of the Trust is to seek attractive total return with an emphasis on income generation across multiple stages of the credit cycle. There can be no assurance that the Trust will achieve its investment objective, and you could lose some or all of your investment.
Investment Strategy. The Trust seeks to achieve its investment objective by investing in a dynamically managed portfolio of opportunities primarily within the private credit markets. Under normal market conditions, the Trust will invest at least 80% of its Managed Assets (as defined in this Prospectus) in floating rate credit instruments and other structured credit investments.
Portfolio Contents. The Trusts investments may include (i) structured credit investments, including collateralized loan obligation (CLO) debt and subordinated (i.e., residual or equity) securities; (ii) traditional corporate credit investments, including leveraged loans and high yield bonds; (iii) opportunistic credit investments, including stressed and distressed credit situations and long/short credit investments; and (iv) other credit-related instruments. The Trust currently intends to pursue its investment objective by investing primarily in below investment grade credit instruments, but may invest without limitation in investment grade credit instruments. Below investment grade credit instruments are often referred to as high yield securities or junk bonds. Below investment grade credit instruments are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and to repay principal. The Trust may invest without limitation in credit instruments that are illiquid.
(continued on following page)
Investing in the common shares involves certain risks. The Trust has no operating history. An investment in the Trust is subject to investment risk, including the possible loss of the entire principal amount that you invest. The Trust intends to utilize leverage, which is subject to numerous risks. See Risks beginning on page 41 of this Prospectus. Certain of these risks are summarized in Prospectus SummarySpecial Risk Considerations beginning on page 9 of this Prospectus. You should carefully consider these risks together with all of the other information contained in this Prospectus before making a decision to purchase the common shares.
Neither the Securities and Exchange Commission (SEC) nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Price to the Public |
Sales Load(2) |
Estimated
Offering Expenses(3) |
Proceeds,
after expenses, to the Trust |
|||||
Per Share | $10.00 | $0.20 | $0.02 | $9.78 | ||||
Total | $ | $ | $ | $ | ||||
Total assuming full exercise of the over-allotment option(1) | $ | $ | $ | $ |
(notes on following page)
The Underwriters expect to deliver the common shares to purchasers on or about , 2017.
UBS Investment Bank |
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BB&T Capital Markets | Ladenburg Thalmann | Maxim Group LLC | ||
National Securities Corporation Newbridge Securities Corporation | ||||
Wedbush Securities | Wunderlich |
(notes from cover page)
(1) | The Trust has granted the Underwriters an option to purchase up to an additional common shares at the public offering price, less the sales load, within 45 days of the date of this Prospectus solely to cover over-allotments, if any. See Underwriting. |
(2) | XA Investments LLC (XAI or the Adviser) (and not the Trust) has agreed to pay, from its own assets, additional compensation of $0.10 per common share (other than common shares purchased by the management investors (as defined below) to the Underwriters in connection with this offering. Separately, the Adviser and Octagon Credit Investors, LLC (Octagon or the Sub-Adviser) (and not the Trust) have agreed to pay, from their own assets, upfront structuring fees to each of UBS Securities LLC, BB&T Capital Markets, a division of BB&T Securities, LLC, Ladenburg Thalmann & Co. Inc., Maxim Group LLC, National Securities Corporation, Newbridge Securities Corporation, Wedbush Securities Inc. and Wunderlich Securities, Inc., and may pay certain other qualifying Underwriters a structuring fee, sales incentive fee or additional compensation in connection with the offering. These fees and compensation are not reflected under Sales load in the table above. See UnderwritingAdditional Compensation to be Paid by the Adviser. |
(3) | The Adviser and the Sub-Adviser have agreed to (i) pay all organizational expenses of the Trust and (ii) pay or reimburse offering expenses of the Trust (other than sales load) that exceed $0.02 per common share. Assuming the issuance of 7,000,000 common shares, offering expenses (other than sales load) are estimated to be approximately $940,000, or $0.13 per common share, of which $0.02 per common share would be borne by the Trust. Organizational expenses and offering expenses in excess of $0.02 per common share that are borne by the Adviser and the Sub-Adviser are not subject to recoupment from the Trust. In addition, the Adviser (and not the Trust) has agreed to pay to First Dominion Capital Corp. (FDCC) a fee equal to 0.90% of the total price to the public of the common shares sold in this offering (inclusive of the over-allotment option), as payment for providing certain distribution-related services, and to reimburse reasonable out of pocket expenses related to the Trusts roadshow. |
(continued from cover page)
Adviser and Sub-Adviser. XA Investments LLC serves as the investment adviser to the Trust and is responsible for overseeing the Trusts overall investment strategy and its implementation. Octagon Credit Investors, LLC (Octagon or the Sub-Adviser) serves as the investment sub-adviser of the Trust and is responsible for investing the Trusts assets. The Trust pays a management fee to the Adviser. The Adviser will pay to the Sub-Adviser a sub-advisory fee out of the management fee received by the Adviser.
The Trust has also retained the Adviser to provide investor support services and secondary market services in connection with the ongoing operation of the Trust. The Trust pays a service fee to the Adviser in exchange for such services pursuant to a separate investor support and secondary market services agreement.
The Adviser, the Sub-Adviser and certain of their respective affiliates, associates and employees (management investors), have indicated an interest in purchasing an aggregate of up to $15 million of common shares in this offering at the initial offering price. However, because indications of interest are not binding agreements or commitments to purchase, the Underwriters (as defined below) may determine to sell more, less or no common shares in this offering to the management investors. In addition, the management investors may determine to purchase more, less or no common shares in this offering. If the Trust sells more common shares in the offering than currently assumed herein, the management investors intend to purchase fewer common shares so as not to reduce the number of common shares available to the general public. The Underwriters will receive the same underwriting discount on any common shares purchased by the management investors as they will on any other common shares sold to the public in this offering; provided, however, that the Underwriters will not be paid the additional compensation of $0.10 per common share from the Adviser on common shares purchased by the management investors.
Listing. The Trusts common shares have been approved for listing on the New York Stock Exchange (NYSE), subject to notice of issuance, under the symbol XFLT.
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Distributions. The Trust intends to pay substantially all of its net investment income, if any, to common shareholders through monthly distributions. The Trust intends to distribute any net long-term capital gains to common shareholders at least annually. The Trust expects to declare initial distributions approximately 45 to 60 days after completion of the common share offering, and to pay such initial distributions approximately 60 to 90 days after the completion of the common share offering, depending upon market conditions. There is no assurance the Trust will make its initial monthly distribution or continue to pay regular monthly distributions or that it will do so at a particular rate. Distributions may be paid by the Trust from any permitted source and, from time to time, all or a portion of a distribution may be a return of capital.
Leverage. The Trust currently anticipates utilizing leverage to seek to enhance total return and income. The Trust may use leverage through (i) the issuance of senior securities representing indebtedness, including through borrowing from financial institutions or issuance of debt securities, including notes or commercial paper (collectively, Indebtedness), (ii) the issuance of preferred shares (Preferred Shares) and/or (iii) reverse repurchase agreements, securities lending, short sales or derivatives, such as swaps, futures or forward contracts, that have the effect of leverage (portfolio leverage). Under current market conditions, the Trust initially expects to utilize leverage through Indebtedness in an aggregate amount of approximately 25%-30% of the Trusts Managed Assets (as defined below) (including the proceeds of leverage). The Trust will not utilize leverage, either through Indebtedness, Preferred Shares or portfolio leverage, in an aggregate amount in excess of 40% of the Trusts Managed Assets (including the proceeds of leverage). The use of leverage is a speculative technique that involves special risks. There can be no assurance that the Trusts leveraging strategy will be successful. See Use of Leverage and RisksLeverage Risk.
Limited Term. The Trust will terminate on or before December 31, 2029 (the Termination Date); provided, that if the Board of Trustees believes that under then-current market conditions it is in the best interests of the Trust to do so, the Trust may extend the Termination Date (i) once for up to one year (i.e., up to December 31, 2030), and (ii) once for up to an additional six months (i.e., up to June 30, 2031), in each case upon the affirmative vote of a majority of the Board of Trustees and without a shareholder vote. In addition, as of a date within twelve months preceding the Termination Date, the Board of Trustees may cause the Trust to conduct a tender offer to purchase 100% of the then outstanding Common Shares of the Trust at a price equal to the net asset value per Common Share on the expiration date of the tender offer (an Eligible Tender Offer). Following the completion of an Eligible Tender Offer, the Board of Trustees may eliminate the Termination Date upon the affirmative vote of a majority of the Board of Trustees and without a shareholder vote. In making a decision to eliminate the Termination Date and provide for the Trusts perpetual existence, the Board of Trustees will take such actions with respect to the continued operations of the Trust as it deems to be in the best interests of the Trust, based on market conditions at such time, the extent of Common Shareholder participation in the Eligible Tender Offer and all other factors deemed relevant by the Board of Trustees in consultation with the Adviser and Sub-Adviser. The Trust should not be confused with a so called target date or life cycle fund whose asset allocation becomes more conservative over time as the funds target date, often associated with retirement, approaches, and does not typically terminate on the target date. In addition, the Trust should not be confused with a target term fund whose investment objective is to return the funds original net asset value on the termination date. The Trusts investment objective and policies are not designed to seek to return to investors that purchase Common Shares in this offering their initial investment of $10.00 per Common Share on the Termination Date or in an Eligible Tender Offer, and such investors and investors that purchase Common Shares after the completion of this offering may receive more or less than their original investment upon termination or in an Eligible Tender Offer. See RisksLimited Term Risk.
You should read this Prospectus, which contains important information about the Trust that you should know before deciding whether to invest, and retain it for future reference. A Statement of Additional Information, dated , 2017, containing additional information about the Trust, has been filed with the SEC and is incorporated by reference in its entirety into this Prospectus. You may request free copies of the Statement of Additional Information, the table of contents of which is on page 95 of this Prospectus, annual
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and semi-annual reports to shareholders, when available, and other information about the Trust, and make shareholder inquiries, by calling (888) 903-3358 or by writing to XA Investments at 321 North Clark Street, Suite 2430, Chicago, Illinois 60654, or you may obtain a copy (and other information regarding the Trust) from the SECs website (www.sec.gov). Free copies of the Trusts reports and its Statement of Additional Information will also be available from the Trusts website at www.xainvestments.com.
The Trusts common shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
This Prospectus, and the SAI, contain or incorporate by reference forward-looking statements, within the meaning of the federal securities laws, that involve risks and uncertainties. These statements describe the Trusts plans, strategies, and goals and the Trusts beliefs and assumptions concerning future economic and other conditions and the outlook for the Trust, based on currently available information. In this Prospectus, words such as anticipates, believes, expects, objectives, goals, future, intends, seeks, will, may, could, should, and similar expressions, and the negative of such terms, are used in an effort to identify forward-looking statements, although some forward-looking statements may be expressed differently. By their nature, all forward looking statements involve risks and uncertainties, and actual results could differ materially from those contemplated by any forward looking statements. Although the Trust believes that the expectations expressed in these forward looking statements are reasonable, actual results could differ materially from those projected or assumed in these forward looking statements. The Trusts future financial condition and results of operations, as well as any forward looking statements, are subject to change and are subject to inherent risks and uncertainties, such as those disclosed in the Risks section of this Prospectus, which describes certain currently known risk factors that could cause actual results to differ materially from the Trusts expectations. The Trust urges you to review carefully that section for a more detailed discussion of the risks associated with an investment in the Trusts securities. All forward looking statements contained or incorporated by reference in this Prospectus are made as of the date of this Prospectus. The Trust does not intend, and undertakes no obligation, to update any forward looking statement. The Trust is not entitled to the safe harbor for forward-looking statements pursuant to Section 27A of the Securities Act of 1933.
You should rely only on the information contained or incorporated by reference in this Prospectus. The Trust has not, and the Underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The Trust is not, and the Underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information in this Prospectus is accurate as of any date other than the date of this Prospectus. The Trusts business, financial condition and results of operations may have changed since that date. The Trust will amend this Prospectus if, during the period that this Prospectus is required to be delivered, there are any subsequent material changes.
Until (25 days after the date of this Prospectus), all dealers that buy, sell or trade the common shares, whether or not participating in this offering, may be required to deliver a Prospectus. This is in addition to the dealers obligation to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions.
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Table of Contents of the Statement of Additional Information |
95 |
This is only a summary of information contained elsewhere in this Prospectus. Before investing in the Trusts common shares, you should carefully read the more detailed information contained in this Prospectus, especially the information under the heading Risks. You may also request a copy of the Trusts Statement of Additional Information, dated , 2017 (the SAI), which contains additional information about the Trust.
THE TRUST
XAI Octagon Floating Rate & Alternative Income Term Trust (the Trust) is a newly-organized, diversified, closed-end management investment company.
THE OFFERING
The Trust is offering common shares of beneficial interest (Common Shares) at $10.00 per share through a group of underwriters (the Underwriters) led by UBS Securities LLC. You must purchase at least 500 Common Shares in this offering. The Adviser (as defined in this Prospectus) and the Sub-Adviser (as defined in this Prospectus) have agreed to (i) pay all organizational expenses of the Trust and (ii) pay or reimburse all offering expenses of the Trust (other than sales load) that exceed $0.02 per Common Share. Organizational expenses and offering expenses in excess of $0.02 per common share that are borne by the Adviser and the Sub-Adviser are not subject to recoupment from the Trust. See Management of the TrustExpenses.
The Adviser, the Sub-Adviser and certain of their respective affiliates, associates and employees (management investors), have indicated an interest in purchasing an aggregate of up to $15 million of Common Shares in this offering at the initial offering price. However, because indications of interest are not binding agreements or commitments to purchase, the Underwriters may determine to sell more, less or no Common Shares in this offering to the management investors. In addition, the management investors may determine to purchase more, less or no Common Shares in this offering. If the Trust sells more Common Shares in the offering than currently assumed herein, the management investors intend to purchase fewer Common Shares so as not to reduce the number of Common Shares available to the general public. The Underwriters will receive the same underwriting discount on any Common Shares purchased by the management investors as they will on any other Common Shares sold to the public in this offering; provided, however, that the Underwriters will not be paid the additional compensation of $0.10 per Common Share from the Adviser on Common Shares purchased by the management investors. Management investors will be restricted from selling Common Shares purchased in the offering for a period of 180 days following completion of this offering.
INVESTMENT OBJECTIVE
The investment objective of the Trust is to seek attractive total return with an emphasis on income generation across multiple stages of the credit cycle. There can be no assurance that the Trust will achieve its investment objective. The investment objective of the Trust may be changed by the Board of Trustees of the Trust (the Board or Board of Trustees) on 60 days prior written notice to shareholders.
WHO MAY WANT TO INVEST
You should consider your financial situation and needs, other investments, investment goals, investment experience, time horizons, liquidity needs and risk tolerance before investing in the Trust. An investment in the Trust is not appropriate for all investors and the Trust is not intended to be a complete investment program. The Trust is designed as a long-term investment and not as a trading vehicle. The Trust may be an appropriate investment for income oriented investors seeking an alternative investment opportunity with the following features and the potential for:
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income diversification from an alternative income source, including floating rate instruments; |
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institutional access for the first time to a SEC registered fund offering featuring Octagons credit expertise; |
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the convenience of a 1099 tax form; |
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the potential for intra-day liquidity through listing on the New York Stock Exchange (NYSE); |
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the potential to enhance total return over the long term and earn liquidity premiums associated with less liquid investments; |
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an opportunistic credit strategy that can serve as an inflation hedge and seeks to outperform traditional credit investments in inflationary and rising rate environments; and |
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a diverse credit portfolio that includes instruments in categories that historically have demonstrated low correlation to traditional stock and bond indices. |
INVESTMENT STRATEGY
The Trust seeks to achieve its investment objective by investing in a dynamically managed portfolio of opportunities primarily within the private credit markets. Under normal market conditions, the Trust will invest at least 80% of its Managed Assets (as defined below) in floating rate credit instruments and other structured credit investments.
PORTFOLIO CONTENTS
The Trusts investments may include (i) structured credit investments, including collateralized loan obligation (CLO) debt and subordinated (i.e., residual or equity) securities; (ii) traditional corporate credit investments, including leveraged loans and high yield bonds; (iii) opportunistic credit investments, including stressed and distressed credit situations and long/short credit investments; and (iv) other credit-related instruments. The Trust may invest in loans, bonds and other debt securities, CLO securities, including debt and subordinated (i.e., residual or equity) CLO securities, credit default swaps and other credit and credit-related instruments. The Trust may invest in senior, junior, secured and unsecured credit instruments. Floating rate credit instruments have floating or variable interest rates, and include floating rate instruments the interest rates of which vary periodically based upon, or inverse to, a benchmark indicator of prevailing interest rates.
The Trust may invest up to 50% of its Managed Assets (as defined below) in CLO securities, including debt and subordinated (i.e., residual or equity) CLO securities.
The Trust currently intends to pursue its investment objective by investing primarily in below investment grade credit instruments, but may invest without limitation in investment grade credit instruments. A credit instrument is considered below investment grade quality if it is rated below investment grade (that is, below Baa3- by Moodys Investors Service, Inc. (Moodys) or below BBB- by Standard & Poors Ratings Services (S&P) or Fitch Ratings (Fitch)) or, if unrated, judged to be below investment grade quality by the Sub-Adviser. Below investment grade credit instruments are often referred to as high yield securities or junk bonds. Below investment grade credit instruments are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and to repay principal. The Trust will not invest more than 20% of its Managed Assets in credit instruments rated below Caa2 by Moodys or CCC by S&P or Fitch.
The Trust may invest without limitation in illiquid credit instruments, including instruments that are unregistered, restricted, for which there is no readily available trading market or that are otherwise illiquid.
The Trust may invest in credit instruments of any maturity, and does not manage its portfolio seeking to maintain a targeted dollar-weighted average maturity level. The Trust does not have a fixed duration target, and the portfolios duration may vary significantly over time based on the Sub-Advisers assessment of the current market conditions.
The Trust may invest up to 20% of its Managed Assets in opportunistic credit investments, including stressed and distressed credit situations.
While the investment strategy of the Trust does not focus primarily on non-U.S. corporate credit investments, under certain circumstances where such opportunities are favorable, the Trust may invest up to 20% of its Managed Assets in corporate credit instruments issued by non-U.S. issuers and in markets outside
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the United States. The Trusts investments in structured credit instruments, which are commonly issued by special purpose vehicles formed in jurisdictions outside of the United States, are not subject to or limited by this policy.
The Trust may, from time to time, engage in short sales of credit instruments in an amount not to exceed 10% of its Managed Assets. A short sale is a transaction in which the Trust sells an instrument that it does not own in anticipation that the market price will decline.
As an alternative to holding investments directly, the Trust may also obtain investment exposure to securities in which it may invest directly by investing up to 10% of its Managed Assets in other investment companies. The Trust may invest in mutual funds, closed-end funds and exchange-traded funds.
The Trust may, but is not required to, use various derivatives transactions for hedging and risk management purposes, to facilitate portfolio management and to earn income or enhance total return. The use of derivatives transactions to earn income or enhance total return may be particularly speculative. Derivatives are financial instruments the value of which is derived from a reference instrument. The Trust may engage in a variety of derivatives transactions, including options, swaps, futures contracts, options on futures contracts and forward currency contracts and options on forward currency contracts. The Trust may purchase and sell exchange-listed and off-exchange derivatives. The Trust may utilize derivatives that reference one or more securities, indices, commodities, currencies or interest rates. In addition, the Trust may utilize new techniques, transactions, instruments or strategies that are developed or permitted as regulatory changes occur.
See Investment Objective and PoliciesInvestment Strategy and The Trusts Investments.
INVESTMENT PHILOSOPHY AND INVESTMENT PROCESS
At the heart of Octagons investment philosophy is a deep understanding of fundamental credit analysis, enhanced by a process focused on optimizing returns against target risk profiles. Octagons investment philosophy combines relative value focus and active portfolio management. Over Octagons 23 year history, Octagon believes that it has developed a proven, repeatable and scalable credit selection and investment process.
Octagons investment process involves four key steps:
1) | ongoing assessment of investment opportunities; |
2) | research, analysis and written recommendations with defined investment thesis; |
3) | investment committee approval before any credit is considered for investment; and |
4) | continual monitoring which is a collaborative team effort to enhance decision making and risk management. |
The Octagon portfolio management team manages positions in an effort to optimize relative value. Octagons focus on improving credits seeks to enhance alpha generation by searching for opportunities in the credit markets. As part of this ongoing process, Octagon refreshes internal ratings for credits to identify buy and sell opportunities. The Octagon research method is robust, involving various key factors including the assessment of industry dynamics, competitive factors, performance history, deal sponsor, company management, cash flow estimates, liquidity, collateral values, quality, downside protection, capital structure, macroeconomic factors, technical supply and demand and potential political or regulatory influences.
Octagon will dynamically manage the Trusts portfolio based on its evolving credit market outlook in an effort to produce attractive risk-adjusted returns. The Octagon team meets regularly to monitor portfolios using its robust review process and striving to manage risk via its proprietary internal credit rating and portfolio weighting system.
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BENCHMARK INDEX
The Trusts opportunistic credit strategy seeks to outperform its primary benchmark, the S&P/LSTA U.S. Leveraged Loan 100 Index, which is designed to reflect the performance of the largest facilities in the leveraged loan market. The S&P/LSTA U.S. Leveraged Loan 100 Index is utilized by the Trust as a comparative measure only. The Trust may from time to time use additional benchmark indices to analyze certain aspects of the Trusts performance. The Trust is actively managed and does not track any index. Index information is not meant to represent the performance of the Trust or its underlying investments.
LEVERAGE
The Trust currently anticipates utilizing leverage to seek to enhance total return and income. The Trust may use leverage through (i) the issuance of senior securities representing indebtedness, including through borrowing from financial institutions or issuance of debt securities, including notes or commercial paper (collectively, Indebtedness), (ii) the issuance of preferred shares (Preferred Shares) and/or (iii) reverse repurchase agreements, securities lending, short sales or derivatives, such as swaps, futures or forward contracts, that have the effect of leverage (portfolio leverage). Under current market conditions, the Trust initially expects to utilize leverage through Indebtedness in an aggregate amount of approximately 25%-30% of the Trusts Managed Assets (including the proceeds of leverage). The Trust will not utilize leverage, either through Indebtedness, Preferred Shares or portfolio leverage, in an aggregate amount in excess of 40% of the Trusts Managed Assets (including the proceeds of leverage).
Under the Investment Company Act of 1940, as amended (the 1940 Act), the Trust may not incur Indebtedness if, immediately after incurring such Indebtedness, the Trust would have asset coverage (as defined in the 1940 Act) of less than 300% (i.e., for every dollar of Indebtedness outstanding, the Trust is required to have at least three dollars of total assets, including the proceeds of leverage). Under the 1940 Act, the Trust may not issue Preferred Shares if, immediately after issuance, the Trust would have asset coverage (as defined in the 1940 Act) of less than 200% (i.e., for every dollar of Preferred Shares outstanding, the Trust is required to have at least two dollars of total assets, including the proceeds of leverage).
The Trust currently intends to arrange a floating rate credit facility with one or more banks or other financial institutions pursuant to which the Trust would be entitled to borrow funds from time to time in accordance with the terms of such credit facility after the consummation of this offering.
The Trust may engage in certain derivatives transactions that have economic characteristics similar to leverage. To the extent the terms of such transactions obligate the Trust to make payments, the Trust intends to earmark or segregate cash or liquid securities in an amount at least equal to the current value of the amount then payable by the Trust under the terms of such transactions or otherwise cover such transactions in accordance with applicable interpretations of the SEC and its staff. As a result of such segregation or cover, the Trusts obligations under such transactions will not be considered Indebtedness for purposes of the 1940 Act, including the asset coverage requirements applicable to indebtedness under the 1940 Act, but the leverage effect of such transactions will be treated as portfolio leverage subject to the Trusts policy not to use leverage in excess of 40% of its Managed Assets. To the extent that the Trusts obligations under such transactions are not so segregated or covered, such obligations may be considered senior securities representing indebtedness under the 1940 Act and therefore subject to the 300% asset coverage requirement described above.
The Adviser and the Sub-Adviser anticipate that the use of leverage may result in higher total return to the holders of Common Shares (Common Shareholders) over time; however, there can be no assurance that such expectations will be realized or that a leveraging strategy will be successful in any particular time period. Use of leverage creates an opportunity for increased income and capital appreciation but, at the same time, creates special risks. The use of leverage will cause the Trusts net asset value, market price and level of distributions to be more volatile than if leverage were not used. The costs associated with the issuance of leverage will be borne by the Trust, which will result in a reduction of net asset value of the Common Shares and as a result such costs will be borne by Common Shareholders. The fee paid to the Adviser and
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Sub-adviser will be calculated on the basis of the Trusts Managed Assets (as defined below), including proceeds from leverage, so the fees paid to the Adviser and Sub-Adviser will be higher when leverage is utilized. The Trust bears the portion of the management fee attributable to assets purchased with the proceeds of leverage and therefore Common Shareholders effectively bear the entire management fee. There can be no assurance that a leveraging strategy will be utilized or, if utilized, will be successful. See RisksLeverage Risk.
TEMPORARY DEFENSIVE INVESTMENTS
During periods in which the Sub-Adviser believes that changes in economic, financial or political conditions make it advisable to maintain a temporary defensive posture (a temporary defensive period), or in order to keep the Trusts cash fully invested, including the period during which the net proceeds of the offering of Common Shares are being invested, the Trust may, without limitation, hold cash or invest its assets in short term investments and repurchase agreements in respect of those instruments. See The Trusts InvestmentsTemporary Defensive Investments.
NET ASSET VALUE
The net asset value of the common shares of the Trust is calculated by subtracting the Trusts total liabilities (including from Indebtedness) and the liquidation preference of any outstanding Preferred Shares from total assets (the market value of the securities the Trust holds plus cash and other assets). The per share net asset value of the Common Shares is calculated by dividing the net asset value of the Trust by the number of Common Shares outstanding and rounding the result to the nearest full cent. The Trust calculates its net asset value as of the close of regular trading on the NYSE on each day on which there is a regular trading session on the NYSE and at such other times as may be determined by the Board of Trustees from time to time.
In determining net asset value, portfolio instruments generally are valued using prices provided by independent pricing services or, if independent pricing services are unavailable, prices obtained from other sources, such as broker-dealer quotations. The Trust may invest without limitation in less liquid and illiquid investments, which may be more difficult to price. If a price cannot be obtained from a pricing service or other pre-approved source, or if the Adviser deems such price to be unreliable, or if a significant event occurs after the close of the local market but prior to the time at which the Trusts net asset value is calculated, a portfolio instrument will be valued at its fair value as determined in good faith by the Board of Trustees or persons acting at their direction. The Board of Trustees has adopted valuation procedures for the Trust and has delegated the day-to-day responsibility for fair value determinations to a valuation committee comprised of representatives from the Adviser, the Sub-Adviser and the Trusts administrator (the Valuation Committee). All fair value determinations made by the Valuation Committee are subject to review and ratification by the Board of Trustees. As a general principle, the fair value of a portfolio instrument is the amount that an owner might reasonably expect to receive upon the instruments current sale. A range of factors and analysis may be considered when determining fair value, including relevant market data, interest rates, credit considerations and/or issuer specific news. In addition, the Valuation Committee may consider valuations provided by valuation firms retained to assist in the valuation of certain of the Trusts investments. However, fair valuation involves subjective judgments and it is possible that the fair value determined for a portfolio instrument may be materially different from the value that could be realized upon the sale of that instrument. Information that becomes known to the Trust or their respective agent after the Trusts net asset value has been calculated on a particular day will not be used to retroactively adjust the price of a security or the Trusts previously determined net asset value.
DISTRIBUTIONS
The Trust intends to distribute substantially all of its net investment income, if any, to Common Shareholders through monthly distributions. In addition, the Trust intends to distribute any net long-term capital gains to Common Shareholders at least annually.
The Trust expects that distributions paid on the Common Shares will consist primarily of (i) investment company taxable income, which includes ordinary income (such as interest, dividends, and certain income
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from hedging or derivatives transactions) and the excess, if any, of net short-term capital gain over net long-term capital loss, and (ii) net capital gain (which is the excess of net long-term capital gain over net short-term capital loss).
The Trust expects to declare initial distributions approximately 45 to 60 days after completion of the Common Share offering, and to pay such initial distributions approximately 60 to 90 days after the completion of the Common Share offering, depending upon market conditions.
Because of the nature of the Trusts investments and changes in market conditions from time to time, the distributions paid by the Trust for any particular month may be more or less than the amount of net investment income from that monthly period. As a result, all or a portion of a distribution may be a return of capital, which is in effect a partial return of the amount a Common Shareholder invested in the Trust, up to the amount of the Common Shareholders tax basis in their Common Shares, which would reduce such tax basis. Although a return of capital may not be taxable, it will generally increase the Common Shareholders potential gain, or reduce the Common Shareholders potential loss, on any subsequent sale or other disposition of Common Shares. Shareholders who periodically receive the payment of a distribution consisting of a return of capital may be under the impression that they are receiving net income or profits when they are not. Shareholders should not assume that the source of a distribution from the Trust is net income or profit.
The Trust may, but is not required to, seek to obtain exemptive relief to permit the Trust to make periodic distributions of long-term capital gains with respect to its Common Shares as frequently as monthly. Such relief, if obtained, would permit the Trust to implement a managed distribution policy pursuant to which the Trust would distribute a fixed percentage of the net asset value (or market price if then applicable) of the Common Shares at a particular point in time or a fixed monthly amount, any of which may be adjusted from time to time. It is anticipated that under such a distribution policy, the minimum annual distribution rate with respect to the Common Shares would be independent of the Trusts performance during any particular period but would be expected to correlate with the Trusts performance over time.
The Trust reserves the right to change its distribution policy and the basis for establishing the rate of distributions at any time and may do so without prior notice to Common Shareholders. See Distributions.
If you hold your Common Shares in your own name or if you hold your Common Shares with a brokerage firm that participates in the Trusts Dividend Reinvestment Plan (the Plan), unless you elect to receive cash, all dividends and distributions that are declared by the Trust will be automatically reinvested in additional Common Shares of the Trust pursuant to the Plan. If you hold your Common Shares with a brokerage firm that does not participate in the Plan, you will not be able to participate in the Plan and any dividend reinvestment may be effected on different terms than those applicable under the Plan. Consult your financial advisor for more information. For information regarding how to opt out of the Plan and for additional information regarding the Plan. See Dividend Reinvestment Plan.
ADVISER
XA Investments LLC serves as the investment adviser to the Trust and is responsible for overseeing the Trusts overall investment strategy and its implementation.
XAI was founded by the principals of XMS Capital Partners, LLC in April 2016. The XAI leadership team believes that the investing public needs better access to a broader range of alternative investment strategies and managers. XAI sponsors registered investment companies designed to provide investors with access to institutional caliber alternative investments, by partnering with established alternative asset managers selected from among numerous alternative credit managers, hedge fund managers and private debt and equity firms to sub-adviser XAI funds.
The Trust will pay the Adviser an annual management fee, payable monthly in arrears, in an amount equal to 1.70% of the Trusts average daily Managed Assets. Managed Assets means the total assets of the Trust, including assets attributable to the Trusts use of leverage, minus the sum of its accrued liabilities (other than liabilities incurred for the purpose of creating leverage).
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SUB-ADVISER
Octagon Credit Investors, LLC (the Sub-Adviser) serves as the investment sub-adviser of the Trust and is responsible for investing the Trusts assets. The Sub-Advisers experienced team of investment professionals has worked together for many years and managed funds through multiple credit cycles over Octagons 23 year history. The Sub-Adviser currently manages $16 billion in assets under management as of June 30, 2017 across twenty-one CLOs, fourteen separately managed accounts and nine commingled private fund structures. The Adviser will pay to the Sub-Adviser a sub-advisory fee out of the management fee received by the Adviser.
The Trust is managed by the members of the Sub-Advisers Investment Committee: Andrew D. Gordon, Michael B. Nechamkin, Lauren M. Basmadjian and Gretchen M. Lam. See Management of the TrustPortfolio Management.
INVESTOR SUPPORT SERVICES AND SECONDARY MARKET SUPPORT
The Trust has retained the Adviser to provide investor support services and secondary market support services in connection with the ongoing operation of the Trust. Such services include providing ongoing contact with respect to the Trust with financial intermediaries, communicating with the NYSE specialist for the Shares, and with the closed-end fund analyst community regarding the Trust on a regular basis, and hosting and maintaining a website for the Trust. The Trust will pay the Adviser a service fee, payable monthly in arrears, in an annual amount equal to 0.20% of the Trusts average daily Managed Assets.
EXPENSES
The Trust pays all costs and expenses of its operations (in addition to the advisory fee and investor support services and secondary market support services fee paid to XAI). The Adviser has contractually agreed, for the period ending two years after the date of this Prospectus, to waive a portion of the advisory fee and/or reimburse the Trust for certain operating expenses so that the annual expenses of the Trust do not exceed 0.30% of the Trusts Managed Assets (exclusive of investment advisory fees, investor support and secondary market services fees, taxes, expenses incurred directly or indirectly by the Trust as a result of an investment in a permitted investment (including, without limitation, acquired fund fees and expenses), expenses associated with the acquisition or disposition of portfolio investments (including, without limitation, brokerage commissions and other trading or transaction expenses), leverage expenses (including, without limitation, costs associated with the issuance or incurrence of leverage, commitment fees, interest expense or dividends on preferred shares), expenses incurred in connection with issuances and sales of shares of the Trust (including, without limitation, fees, commissions and offering costs), dividends on short sales, if any, securities lending costs, if any, expenses of holding, and soliciting proxies for, meetings of shareholders of the Trust (except to the extent relating to routine items such as the election of trustees), expenses of a reorganization, restructuring, redomiciling or merger of the Trust or the acquisition of all or substantially all of the assets of another fund, or any extraordinary expenses not incurred in the ordinary course of the Trusts business (including, without limitation, expenses related to litigation, derivative actions, demands related to litigation, regulatory or other government investigations and proceeding)). The expense limitation agreement, during its term, may be terminated only by the Board of Trustees. After its initial two-year term, the expense limitation agreement may be renewed with the consent of the Adviser and the Board of Trustees. The Adviser may recoup waived or reimbursed amounts for three years following the date of such waiver or reimbursement, provided total expenses, including such recoupment, do not exceed the lesser of the annual expense limit at the time such expenses were waived or reimbursed or the annual expense limit at the time of recoupment.
LISTING AND SYMBOL
The Trusts Common Shares have been approved for listing on the NYSE, subject to notice of issuance, under the symbol XFLT.
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TAX MATTERS
The Trust intends to elect to be a regulated investment company (RIC) under subchapter M of the Internal Revenue Code of 1986, as amended (the Code). See Tax Matters.
LIMITED TERM AND ELIGIBLE TENDER OFFER
The Trust will terminate on or before December 31, 2029 (the Termination Date); provided, that if the Board of Trustees believes that under then-current market conditions it is in the best interests of the Trust to do so, the Trust may extend the Termination Date (i) once for up to one year (i.e., up to December 31, 2030), and (ii) once for up to an additional six months (i.e. up to June 30, 2031), in each case upon the affirmative vote of a majority of the Board of Trustees and without a shareholder vote. In determining whether to extend the Termination Date, the Board of Trustees may consider the inability to sell the Trusts assets in a time frame consistent with termination due to lack of market liquidity or other extenuating circumstances. Additionally, the Board of Trustees may determine that market conditions are such that it is reasonable to believe that, with an extension, the Trusts remaining assets will appreciate and generate income in an amount that, in the aggregate, is meaningful relative to the cost and expense of continuing the operation of the Trust.
Beginning one year before the Termination Date (the wind-down period), the Trust may begin liquidating all or a portion of the Trusts portfolio, and may deviate from its investment policies, including its policy of investing at least 80% of its Managed Assets in floating rate credit instruments and other structured credit investments and may not achieve its investment objective. During the wind-down period, the Trusts portfolio composition may change as more of its portfolio holdings are called or sold and portfolio holdings are disposed of in anticipation of liquidation. Rather than reinvesting the proceeds of matured, called or sold securities, the Trust may such proceeds in short term or other lower yielding securities or hold the proceeds in cash, which may adversely affect its performance.
In addition, within twelve months preceding the Termination Date, the Board of Trustees may cause the Trust to conduct an Eligible Tender Offer. An Eligible Tender Offer would consist of a tender offer to purchase 100% of the then outstanding Common Shares of the Trust at a price equal to the net asset value per Common Share on the expiration date of the tender offer. The terms of an Eligible Tender Offer will include a condition pursuant to which in the event that the number of Common Shares properly tendered in the Eligible Tender Offer exceeds a stated percentage of the outstanding Common Shares, with such percentage to be established at the time of such Eligible Tender Offer by the Board of Trustees representing the minimum threshold for the continued viability of the Trust (the Termination Threshold), the Eligible Tender Offer will be terminated and no Common Shares will be repurchased pursuant to the Eligible Tender Offer. Instead, the Trust will begin (or continue) liquidating its portfolio and proceed to terminate on or before the Termination Date. The Adviser will pay all costs and expenses associated with the making of an Eligible Tender Offer, other than brokerage and related transaction costs associated with disposition of portfolio investments in connection with the Eligible Tender Offer, which will be borne by the Trust and its shareholders.
If the number of properly tendered Common Shares is less than the Termination Threshold, all Common Shares properly tendered and not withdrawn will be purchased by the Trust pursuant to the terms of the Eligible Tender Offer. See RisksLimited Term Risk. Following such completion of the Eligible Tender Offer, the Board of Trustees may eliminate the Termination Date and convert the Trust to a perpetual trust upon the affirmative vote of a majority of the Board of Trustees and without a shareholder vote. In making such decision, the Board of Trustees will take such actions with respect to the continued operations of the Trust as it deems to be in the best interests of the Trust, based on market conditions at such time, the extent of Common Shareholder participation in the Eligible Tender Offer and all other factors deemed relevant by the Board of Trustees in consultation with the Adviser and Sub-Adviser.
The Trust should not be confused with a so called target date or life cycle fund whose asset allocation becomes more conservative over time as the funds target date, often associated with retirement, approaches, and does not typically terminate on the target date. In addition, the Trust should not be confused with a target term fund whose investment objective is to return the funds original net asset value on the
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termination date. The Trusts investment objective and policies are not designed to seek to return to investors that purchase Common Shares in this offering their initial investment of $10.00 per Common Share on the Termination Date or in an Eligible Tender Offer, and such investors and investors that purchase Common Shares after the completion of this offering may receive more or less than their original investment upon termination or in an Eligible Tender Offer. See Limited Term.
Investment in the Trust involves special risk considerations, which are summarized below. The Trust is designed as a long-term investment and not as a trading vehicle. The Trust is not intended to be a complete investment program. The Trusts performance and the value of its investments will vary in response to changes in interest rates, inflation and other market factors. See Risks for a more complete discussion of the special risk considerations associated with an investment in the Trust.
No prior history
The Trust is a newly-organized, diversified, closed-end management investment company with no history of operations. As a result, prospective investors have no track record or operational history upon which to base their investment decision.
Investment and market risk
An investment in Common Shares is subject to investment risk, including the possible loss of the entire principal amount that you invest. Your investment in Common Shares represents an indirect investment in the securities owned by the Trust. Your Common Shares at any point in time may be worth less than your original investment, even after taking into account the reinvestment of distributions. A prospective investor should invest in the Common Shares only if the investor can sustain a complete loss in its investment.
Market discount risk
Shares of closed-end management investment companies frequently trade at a discount from their net asset value, which is a risk separate and distinct from the risk that the Trusts net asset value could decrease as a result of its investment activities. Although the value of the Trusts net assets is generally considered by market participants in determining whether to purchase or sell Common Shares, whether investors will realize gains or losses upon the sale of Common Shares will depend entirely upon whether the market price of Common Shares at the time of sale is above or below the investors purchase price for Common Shares. Because the market price of Common Shares will be determined by factors such as net asset value, dividend and distribution levels (which are dependent, in part, on expenses), supply of and demand for Common Shares, stability of dividends or distributions, trading volume of Common Shares, general market and economic conditions and other factors beyond the control of the Trust, the Trust cannot predict whether Common Shares will trade at, below or above net asset value or at, below or above the initial public offering price. This risk may be greater for investors expecting to sell their Common Shares soon after the completion of the public offering, as the net asset value of the Common Shares will be reduced immediately following the offering as a result of the payment of certain offering costs. Common Shares of the Trust are designed primarily for long-term investors; investors in Common Shares should not view the Trust as a vehicle for trading purposes.
Below investment grade securities risk
The Trust intends to invest primarily in below investment grade credit instruments, which are commonly referred to as high-yield securities or junk bonds. Investment in securities of below investment grade quality involves substantial risk of loss. Securities of below investment grade quality are considered predominantly speculative with respect to the issuers capacity to pay interest and repay principal when due and therefore involve a greater risk of default or decline in market value due to adverse economic and issuer-specific developments. Issuers of below investment grade securities are not perceived to be as strong financially as those with higher credit ratings. These issuers face ongoing uncertainties and exposure to adverse business, financial or economic conditions and are more vulnerable to financial setbacks and recession than more creditworthy issuers, which may impair their ability to make interest and principal payments. Securities of below investment grade quality display increased price sensitivity to changing interest rates and to a deteriorating economic environment. The market values of certain below investment grade
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securities tend to reflect individual issuer developments to a greater extent than do higher-rated securities, which react primarily to fluctuations in the general level of interest rates. The market values for securities of below investment grade quality tend to be more volatile and such securities tend to be less liquid than investment grade debt securities, which could result in the Trust being unable to sell such securities for an extended period of time, if at all. To the extent that a secondary market does exist for certain below investment grade securities, the market for them may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Because of the substantial risks associated with investments in below investment grade securities, you could have an increased risk of losing money on your investment in Common Shares, both in the short-term and the long-term. To the extent that the Trust invests in below investment grade securities that are unrated, the Trusts ability to achieve its investment objectives will be more dependent on the Sub-Advisers credit analysis than would be the case when the Trust invests in rated securities. See RisksBelow Investment Grade Securities Risk.
Structured credit instruments risk
Holders of structured credit instruments bear risks of the underlying investments, index or reference obligation as well as risks associated with the issuer of the instrument, which is often a special purpose vehicle, and may also be subject to counterparty risk. See RisksStructured Credit Investments Risk.
CLO risk
CLOs often involve risks that are different from or more acute than risks associated with other types of credit instruments. Generally, there may be less information available to the Trust regarding the underlying investments held by CLOs than if the Trust had invested directly in credit securities of the underlying issuers. Trust shareholders will not know the details of the underlying investments of the CLOs in which the Trust invests. Due to their often complicated structures, various CLOs may be difficult to value and may constitute illiquid investments. In addition, there can be no assurance that a liquid market will exist in any CLO when the Trust seeks to sell its interest therein. Moreover, the value of CLOs may decrease if the ratings agencies reviewing such securities revise their ratings criteria and, as a result, lower their original rating of a CLO in which the Trust has invested. Further, the complex structure of the security may produce unexpected investment results. Also, it is possible that the Trusts investment in a CLO will be subject to certain contractual limitations on transfer.
The market value of CLO securities may be affected by, among other things, changes in the market value of the underlying assets held by the CLOs, changes in the distributions on the underlying assets, defaults and recoveries on the underlying assets, capital gains and losses on the underlying assets, prepayments on underlying assets and the availability, prices and interest rate of underlying assets. Therefore, changes in the market value of the Trusts CLO investments could be greater than the change in the market value of the underlying instruments.
Restructuring of Investments Held by CLOs . The manager of a CLO has broad authority to direct and supervise the investment and reinvestment of the investments held by the CLO, which may include the execution of amendments, waivers, modifications and other changes to the investment documentation in accordance with the collateral management agreement. During periods of economic uncertainty and recession, the incidence of amendments, waivers, modifications and restructurings of investments may increase. Such amendments, waivers, modifications and other restructurings will change the terms of the investments and in some cases may result in the CLO holding assets not meeting the CLOs criteria for investments. This could adversely impact the coverage tests under an indenture governing the notes issued by the CLO. If as a result of any such restructurings, the Sub-Adviser determines that continuing to hold instruments issued by such CLO is no longer in the best interest of the Trust, the Sub-Adviser may dispose of such CLO instruments. In certain instances, the Trust may be unable to dispose of such investments at advantageous prices and/or may be required to reinvest the proceeds of such disposition in lower-yielding investments.
CLO Management Risk . The activities of any CLO in which the Trust may invest will generally be directed by a collateral manager. In the Trusts capacity as holder of CLO securities, the Trust is generally not able to make decisions with respect to the management, disposition or other realization of any investment, or other decisions regarding the business and affairs, of that CLO.
See RisksCLO Risks.
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CLO subordinated notes risk
The Trust may invest in subordinated notes issued by a CLO (often referred to as the residual or equity tranche), which are junior in priority of payment and are subject to certain payment restrictions generally set forth in an indenture governing the notes. In addition, CLO subordinated notes generally do not benefit from any creditors rights or ability to exercise remedies under the indenture governing the notes. The subordinated notes are not guaranteed by another party. Subordinated notes are subject to greater risk that the senior notes issued by the CLO. CLOs are typically highly levered, utilizing up to approximately ten times leverage, and therefore subordinated notes are subject to a higher risk of total loss. There can be no assurance that distributions on the assets held by the CLO will be sufficient to make any distributions or that the yield on the subordinated notes will meet the Trusts expectations.
CLOs generally may make payments on subordinated notes only to the extent permitted by the payment priority provisions of an indenture governing the notes issued by the CLO. CLO indentures generally provide that principal payments on subordinated notes may not be made on any payment date unless all amounts owing under secured notes are paid in full. In addition, if a CLO does not meet the asset coverage tests or the interest coverage test set forth in the indenture governing the notes issued by the CLO, cash would be diverted from the subordinated notes to first pay the secured notes in amounts sufficient to cause such tests to be satisfied.
The subordinated notes are unsecured and rank behind all of the secured creditors, known or unknown, of the issuer, including the holders of the secured notes it has issued. Relatively small numbers of defaults of instruments underlying CLOs in which the Trust holds subordinated notes may adversely impact the Trusts returns. The leveraged nature of subordinated notes is likely to magnify the adverse impact on the subordinated notes of changes in the market value of the investments held by the issuer, changes in the distributions on those investments, defaults and recoveries on those investments, capital gains and losses on those investments, prepayments on those investments and availability, prices and interest rates of those investments.
CLO subordinated notes do not have a fixed coupon and payments on CLO subordinated notes will be based on the income received from the underlying collateral and the payments made to the secured notes, both of which may be based on floating rates. While the payments on CLO subordinated notes will vary, CLO subordinated notes may not offer the same level of protection against changes in interest rates as other floating rate instruments. An increase in interest rates would materially increase the financing costs of CLOs. Since underlying instruments held by a CLO may have LIBOR floors, there may not be corresponding increases in investment income to the CLO (if LIBOR increases but stays below the LIBOR floor rate of such instruments) resulting in smaller distribution payments on CLO subordinated notes.
Subordinated notes are illiquid investments and subject to extensive transfer restrictions, and no party is under any obligation to make a market for subordinated notes. At times, there may be no market for subordinated notes, and the Trust may not be able to sell or otherwise transfer subordinated notes at their fair value, or at all, in the event that it determines to sell them. Investments in CLO subordinated notes may have complicated accounting and tax implications. See RisksCLO Subordinated Notes Risk.
Corporate credit investments risk
Corporate debt instruments pay fixed, variable or floating rates of interest. The value of fixed-income securities in which the Trust invests will change in response to fluctuations in interest rates. In addition, the value of certain fixed-income securities can fluctuate in response to perceptions of creditworthiness, political stability or soundness of economic policies. Fixed-income securities are subject to the risk of the issuers inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). See RisksCorporate Credit Investments Risk.
Senior Loan risk
Senior Loans are generally of below investment grade credit quality and therefore are subject to greater risks than investment grade corporate obligations. The prices of these investments may be volatile and will generally fluctuate due to a variety of factors that are inherently difficult to predict, including, but not
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limited to, changes in interest rates, prevailing credit spreads, general economic conditions, financial market conditions, U.S. and non-U.S. economic or political events, developments or trends in any particular industry, and the financial condition of certain Borrowers. See RisksSenior Loan Risk.
Second lien loans risk
Second lien loans are secured by liens on the collateral securing the loan that are subordinated to the liens of at least one other class of obligations of the related obligor, and thus, the ability of the Trust to exercise remedies after a second lien loan becomes a defaulted loan is subordinated to, and limited by, the rights of the senior creditors holding such other classes of obligations. In many circumstances, the Trust may be prevented from foreclosing on the collateral securing a second lien loan until the related senior loan is paid in full. See RisksSecond Lien Loan Risks.
Unsecured loan risk
Unsecured loans do not benefit from any security interest in the assets of the Borrower. Liens on such Borrowers assets, if any, will secure the applicable Borrowers obligations under its outstanding secured indebtedness and may secure certain future indebtedness that is permitted to be incurred by the Borrower under its secured loan agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before repayment of unsecured instruments held by the Trust. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy the Trusts unsecured obligations after payment in full of all secured loan obligations of the Borrower. If such proceeds were not sufficient to repay the Borrowers outstanding secured loan obligations, then the Trusts unsecured claims against the Borrower would rank equally with the unpaid portion of such secured creditors claims against the Borrowers remaining assets, if any. As a result, the prices of unsecured loans may be more volatile than those of senior loans, second lien and other secured loans and other investments held by the Trust.
Loan participation and assignment risk
The Trust may purchase Senior Loans, second lien loans and unsecured loans on a direct assignment basis from a participant in the original syndicate of lenders or from subsequent assignees of such interests. The Trust may also purchase, without limitation, participations in Senior Loans, second lien loans and unsecured loans. The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to the debt obligation; however, the purchasers rights can be more restricted than those of the assigning institution, and, in any event, the Trust may not be able to unilaterally enforce all rights and remedies under the loan and with regard to any associated collateral. A participation typically results in a contractual relationship only with the institution participating out the interest, not with the Borrower. In purchasing participations, the Trust generally will have no right to enforce compliance by the Borrower with the terms of the loan agreement against the Borrower, and the Trust may not directly benefit from the collateral supporting the debt obligation in which it has purchased the participation. As a result, the Trust will be exposed to the credit risk of both the Borrower and the institution selling the participation. Further, in purchasing participations in lending syndicates, the Trust may not be able to conduct the same due diligence on the Borrower with respect to a loan hat the Trust would otherwise conduct. In addition, as a holder of the participations, the Trust may not have voting rights or inspection rights that the Trust would otherwise have if it were investing directly in the loan, which may result in the Trust being exposed to greater credit or fraud risk with respect to the Borrower.
Illiquid investments risk
The Trust expects to invest in restricted, as well as thinly traded, instruments and securities (including privately placed securities and instruments, which are assets which are subject to Rule 144A). There may be no trading market for these securities and instruments, and the Trust might only be able to liquidate these positions, if at all, at disadvantageous prices. See RisksIlliquid Investments Risk.
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Stressed and distressed investments risk
The Trust may invest in stressed and distressed credit instruments. The ability of the Trust to obtain a profit from these investments may often depend upon factors that are intrinsic to the particular issuer, rather than the market as a whole. Appreciation in the value of such investments may be contingent upon the occurrence of certain events, such as a successful reorganization or merger. If the expected event does not occur, the Trust may incur a loss on the position. Stressed and distressed investments may have a limited trading market, resulting in limited liquidity and presenting difficulties to the Trust in valuing its positions.
Uncertain Exit Strategies . Due to the illiquid nature of many stressed and distressed investments, as well as the uncertainties of the reorganization and active management process, the Sub-Adviser may be unable to predict with confidence what the exit strategy will ultimately be for any given position, or that one will definitely be available.
Control Position Risk . Certain stressed and distressed investment opportunities may allow a holder to have significant influence on the management, operations and strategic direction of the portfolio companies in which it invests.
See RisksStressed and Distressed Investments Risk.
Leverage risk
The Trust currently anticipates utilizing leverage to seek to enhance total return and income. There can be no assurance that the Advisers and the Sub-Advisers expectations will be realized or that a leveraging strategy will be successful in any particular time period. Use of leverage creates an opportunity for increased income and capital appreciation but, at the same time, creates special risks. Leverage is a speculative technique that exposes the Trust to greater risk and increased costs than if it were not implemented.
The use of leverage by the Trust will cause the net asset value of the Common Shares to fluctuate significantly in response to changes in interest rates and other economic indicators. As a result, the net asset value, market price and dividend rate of the Common Shares is likely to be more volatile than those of a closed-end management investment company that is not exposed to leverage. In a declining market the use of leverage may result in a greater decline in the net asset value and market price of the Common Shares than if the Trust were not leveraged.
Leverage will increase operating costs, which may reduce total return. Increases in interest rates that the Trust must pay on its Indebtedness will increase the cost of leverage and may reduce the return to Common Shareholders. This risk may be greater in the current market environment because interest rates are near historically low levels.
During the time in which the Trust is utilizing leverage, the amount of the fees paid to the Adviser, and thereby to the Sub-Adviser, for investment advisory services will be higher than if the Trust did not utilize leverage because the fees paid will be calculated based on the Trusts Managed Assets, including proceeds of leverage. This may create a conflict of interest between the Adviser and the Sub-Adviser on the one hand and the Common Shareholders.
See RisksLeverage Risk.
Other investment companies risk
Investments in other investment companies present certain special considerations and risks not present in making direct investments in securities in which the Trust may invest. Investments in other investment companies involve operating expenses and fees that are in addition to the expenses and fees borne by the Trust. Such expenses and fees attributable to the Trusts investments in other investment companies are borne indirectly by Common Shareholders. Accordingly, investment in such entities involves expense and fee layering. See RisksOther Investment Companies Risk.
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Exchange-traded fund risk
For ETFs tracking an index of securities, the cumulative percentage increase or decrease in the net asset value of the shares of an ETF may over time diverge significantly from the cumulative percentage increase or decrease in the relevant index due to the compounding effect experienced by an ETF which results from a number of factors, including, leverage (if applicable), daily rebalancing, fees, expenses and interest income, which in turn results in greater non-correlation between the return of an ETF and its corresponding index. See RisksExchange-Traded Fund Risk.
Short sales risk
Short sales involve selling securities of an issuer short in the expectation of covering the short sale with securities purchased in the open market at a price lower than that received in the short sale. If the price of the issuers securities declines, the Trust may then cover the short position with securities purchased in the market. The profit realized on a short sale will be the difference between the price received in the sale and the cost of the securities purchased to cover the sale. The possible losses from selling short a security differ from losses that could be incurred from a cash investment in the security; the former may be unlimited, whereas the latter can only equal the total amount of the cash investment. Short selling activities are also subject to restrictions imposed by the federal securities laws and the various national and regional securities exchanges, which restrictions could limit the Trusts investment activities. There can be no assurance that securities necessary to cover a short position will be available for purchase. See RisksShort Sales Risk.
Derivatives risk
Derivatives are financial contracts in which the value depends on, or is derived from, the value of an underlying asset, reference rate or index. The Trust may, but is not required to, engage in various derivatives transactions for hedging and risk management purposes, to facilitate portfolio management and to seek to enhance total return of earn income. The Trusts use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of risks, such as interest rate risk, market risk, counterparty risk, and credit risk. See RisksDerivatives Risk.
Off-exchange derivatives risk
The Trust may invest a portion of its assets in investments which are not traded on organized exchanges and as such are not standardized. Such transactions may include forward contracts, swaps or options. While some markets for such derivatives are highly liquid, transactions in off-exchange derivatives may involve greater risk than investing in exchange-traded derivatives because there is no exchange market on which to close out an open position. See RisksOff-Exchange Derivatives Risk.
Options risk
Trading in options involves a number of risks. Specific market movements of the option and the instruments underlying an option cannot be predicted. No assurance can be given that a liquid offset market will exist for any particular option or at any particular time. If no liquid offset market exists, the Trust might not be able to effect an offsetting transaction in a particular option. See RisksOptions Risk.
Futures risk
Futures contracts markets are highly volatile and are influenced by a variety of factors, including national and international political and economic developments. In addition, because of the low margin deposits normally required in futures trading, a high degree of leverage is typical of a futures trading account. As a result, a relatively small price movement in a futures contract may result in substantial losses to the trader. See RisksFutures Risk.
Swaps risk
The Trust may utilize swap agreements including, without limitation, interest rate, index and currency swap agreements. The use of swaps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary securities transactions. There are risks relating to the financial soundness and creditworthiness of the counterparty to swap agreements. See RisksSwaps Risk.
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Credit default swaps risk
The Trust 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. The Trust may be either the buyer or seller in a credit default swap transaction. Credit default swap transactions involve greater risks than if a Trust had invested in the reference obligation directly. Credit default swaps are subject to the risk of non-performance by the swap counterparty, including risks relating to the financial soundness and creditworthiness of the swap counterparty. See RisksCredit Default Swaps Risk.
Hedging transactions risk
The success of any hedging strategy utilized by the Trusts will be subject to the Sub-Advisers ability to correctly assess the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the investments in the portfolio being hedged. Since the characteristics of many securities change as markets change or time passes, the success of the Trusts hedging strategy will also be subject to the Sub-Advisers ability to continually recalculate, readjust, and execute hedges in an efficient and timely manner. See RisksHedging Transactions Risk.
Counterparty risk
The Trust will be subject to credit risk with respect to the counterparties to the derivative contracts entered into by the Trust. See RisksCounterparty Risk.
Synthetic investment risk
The Trust may be exposed to certain additional risks should the Sub-Adviser uses derivatives transactions as a means to synthetically implement the Trusts investment strategies. Customized derivative instruments will likely be highly illiquid, and it is possible that the Trust will not be able to terminate such derivative instruments prior to their expiration date or that the penalties associated with such a termination might impact the Trusts performance in a materially adverse manner. See RisksSynthetic Investment Risk.
Segregation and cover risk
In connection with certain derivatives transactions, the Trust may be required to segregate liquid assets or otherwise cover such transactions and/or to deposit amounts as premiums or to be held in margin accounts. Regulators have adopted rules that generally require margin to be posted and collected for off-exchange derivatives. Such amounts may not otherwise be available to the Trust for investment purposes. The Trust may earn a lower return on its portfolio than it might otherwise earn if it did not have to segregate assets in respect of, or otherwise cover, its derivatives transactions positions. See RisksSegregation and Cover Risk.
Interest rate risk
Interest rate risk is the risk that credit securities will decline in value because of changes in market interest rates. When market interest rates rise, the market value of fixed income credit securities generally will fall. These risks may be greater in the current market environment because interest rates are near historically low levels. Prevailing interest rates may be adversely impacted by market and economic factors. If interest rates rise the markets may experience increased volatility, which may adversely affect the value and/or liquidity of certain of the Trusts investments. The prices of longer-term securities fluctuate more than prices of shorter-term securities as interest rates change. The Trusts use of leverage will tend to increase the interest rate risk to which its Common Shares are subject. The Trust invests primarily in variable and floating rate credit instruments and other structured credit investments, which generally are less sensitive to interest rate changes than fixed rate instruments, but generally will not increase in value if interest rates decline.
Prepayment risk
The frequency at which prepayments (including voluntary prepayments by the obligors and accelerations due to defaults) occur on bonds and loans will be affected by a variety of factors including the prevailing level of interest rates and spreads as well as economic, demographic, tax, social, legal and other factors. The adverse effects of prepayments may impact the Trusts portfolio in several ways. During periods of declining interest rates, when the issuer of a security exercises its option to prepay principal earlier than scheduled, the
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Trust may be required to reinvest the proceeds of such prepayment in lower-yielding securities. Particular investments may experience outright losses, as in the case of an interest-only security in an environment of faster actual or anticipated prepayments. In addition, particular investments may underperform relative to hedges that the Sub-Adviser may have constructed for these investments, resulting in a loss to the Trusts overall portfolio. See RisksPrepayment Risk.
Inflation/deflation risk
Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Shares and distributions can decline. Deflation risk is the risk that prices throughout the economy decline over timethe opposite of inflation. Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Trusts portfolio. See RisksInflation/Deflation Risk.
Duration and maturity risk
The Trust has no set policy regarding maturity or duration of credit instruments in which it may invest or of the Trusts portfolio generally. The price of fixed rate securities with longer maturities or duration generally is more significantly impacted by changes in interest rates than those of fixed rate securities with shorter maturities or duration. Therefore, generally speaking, the longer the duration of the Trusts portfolio, the more exposure the Trust will have to interest rate risk described above. The Sub-Adviser may seek to adjust the portfolios duration or maturity based on its assessment of current and projected market conditions and all factors that the Sub-Adviser deems relevant. The Trust may incur costs in seeking to adjust the portfolio average duration or maturity. There can be no assurance that the Sub-Advisers assessment of current and projected market conditions will be correct or that any strategy to adjust the portfolios duration or maturity will be successful at any given time. See RisksDuration and Maturity Risk.
Credit risk
Credit risk is the risk that an issuer of securities will be unable to pay principal and interest when due, or that the value of the security will suffer because investors believe the issuer is less able to pay. See RisksCredit Risk.
Non-U.S. investments risk
The risk of loss associated with investments in securities of foreign issuers include currency exchange risks, expropriation, or limits on repatriating an investment, government intervention, confiscatory taxation, political, economic or social instability, illiquidity, less efficient markets, price volatility and market manipulation. See RisksNon-U.S. Securities Risk.
Equity investments risk
Incidental to the Trusts investments in credit instruments, the Trust may acquire or hold equity securities, or warrants to purchase equity securities, of a Borrower or issuer. Common equity securities prices fluctuate for a number of reasons, including changes in investors perceptions of the financial condition of an issuer, the general condition of the relevant stock market and broader domestic and international political and economic events. See RisksEquity Investments Risk.
Limited term risk
Unless the Trust completes an Eligible Tender Offer and converts to perpetual existence, the Trust will terminate on or about the Termination Date. The Trust should not be confused with a so called target date or life cycle fund whose asset allocation becomes more conservative over time as the funds target date, often associated with retirement, approaches, and does not typically terminate on the target date. In addition, the Trust should not be confused with a target term fund whose investment objective is to return the funds original net asset value on the termination date. The Trusts investment objective and policies are not designed to seek to return to investors that purchase Common Shares in this offering their initial investment of $10.00 per Common Share on the Termination Date or in an Eligible Tender Offer, and such investors and investors that purchase Common Shares after the completion of this offering may receive more or less than their original investment upon termination or in an Eligible Tender Offer.
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Because the assets of the Trust will be liquidated in connection with the termination, the Trust will incur transaction costs in connection with dispositions of portfolio securities. The Trust does not limit its investments to securities having a maturity date prior to the Termination Date and may be required to sell portfolio securities when it otherwise would not, including at times when market conditions are not favorable, which may cause the Trust to lose money. In particular, the Trusts portfolio may still have significant remaining average maturity and duration, and large exposures to below investment grade securities, as the Termination Date approaches, losses due to portfolio liquidation may be significant. Beginning one year before the Termination Date (the wind-down period), the Trust may begin liquidating all or a portion of the Trusts portfolio, and may deviate from its investment policies, including its policy of investing at least 80% of its Managed Assets in floating rate credit instruments and other structured credit investments and may not achieve its investment objective. During the wind-down period, the Trusts portfolio composition may change as more of its portfolio holdings are called or sold and portfolio holdings are disposed of in anticipation of liquidation. Rather than reinvesting the proceeds of matured, called or sold securities, the Trust may such proceeds in short term or other lower yielding securities or hold the proceeds in cash, which may adversely affect its performance. The Trust may distribute the proceeds in one or more liquidating distributions prior to the final liquidation, which may cause fixed expenses to increase when expressed as a percentage of assets under management. Upon a termination, it is anticipated that the Trust will have distributed substantially all of its net assets to shareholders, although securities for which no market exists or securities trading at depressed prices, if any, may be placed in a liquidating trust. Common Shareholders will bear the costs associated with establishing and maintaining a liquidating trust, if necessary. Securities placed in a liquidating trust may be held for an indefinite period of time until they can be sold or pay out all of their cash flows. The Trust cannot predict the amount, if any, of securities that will be required to be placed in a liquidating trust.
If the Trust conducts an Eligible Tender Offer, the Trust anticipates that funds to pay the aggregate purchase price of Common Shares accepted for purchase pursuant to the tender offer will be first derived from any cash on hand and then from the proceeds from the sale of portfolio investments held by the Trust. In addition, the Trust may be required to dispose of portfolio investments in connection with any reduction in the Trusts outstanding leverage necessary in order to maintain the Trusts desired leverage ratios following a tender offer. The disposition of portfolio investments by the Trust could cause market prices of such instruments, and hence the net asset value of the Common Shares, to decline. In addition, disposition of portfolio investments will cause the Trust to incur increased brokerage and related transaction expenses. The Trust may receive proceeds from the disposition of portfolio investments that are less than the valuations of such investments by the Trust. It is likely that during the pendency of a tender offer, and possibly for a time thereafter, the Trust will hold a greater than normal percentage of its total assets in cash and cash equivalents, which may impede the Trusts ability to achieve its investment objective and decrease returns to shareholders. If the Trusts tax basis for the investments sold is less than the sale proceeds, the Trust will recognize capital gains, which the Trust will be required to distribute to shareholders. In addition, the Trusts purchase of tendered Common Shares pursuant to a tender offer will have tax consequences for tendering shareholders and may have tax consequences for non-tendering shareholders. The purchase of Common Shares by the Trust pursuant to a tender offer will have the effect of increasing the proportionate interest in the Trust of non-tendering shareholders. All shareholders remaining after a tender offer will be subject to proportionately higher expenses due to the reduction in the Trusts total assets resulting from payment for the tendered Common Shares. Such reduction in the Trusts total assets may also result in less investment flexibility, reduced diversification and greater volatility for the Trust, and may have an adverse effect on the Trusts investment performance.
The Trust is not required to conduct an Eligible Tender Offer. If the Trust conducts an Eligible Tender Offer, there can be no assurance that tendered Common Shares will not exceed the Termination Threshold, in which case the Eligible Tender Offer will be terminated, no Common Shares will be repurchased pursuant to the Eligible Tender Offer and the Trust will terminate on or before the Termination Date (subject to possible extentions). Following the completion of an Eligible Tender Offer in which the tendered Common Shares do not exceed the Termination Threshold, the Board of Trustees may eliminate the Termination Date upon the affirmative vote of a majority of the Board of Trustees and without a shareholder vote. Thereafter, the Trust will have a perpetual existence. The Trust is not required to conduct additional tender offers
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following an Eligible Tender Offer and conversion to perpetual existence. Therefore, remaining shareholders may not have another opportunity to participate in a tender offer. Shares of closed-end management investment companies frequently trade at a discount from their net asset value, and as a result remaining shareholders may only be able to sell their Common Shares at a discount to net asset value.
Additional risks
For additional risks relating to investments in the Trust, including Bankruptcy Cases Risk, Creditor Committee Risk, Board Participation Risk, Certain Other Creditor Risks, Allegations of Equitable Subordination Risk, Management Risk, New Adviser Risk, Valuation Risk, Dependence on Occurrence of Events Risk, Competition Risk, Conflicts of Interest Risks, Confidential Information Risk Tax Risk, Portfolio Turnover Risk, Reliance on Service Providers, Technology Risk Recent Market Developments Risk, Market Disruption and Geopolitical Risk, UK Departure from EU Risk, Eurozone Risk, Legislation and Regulation Risk, LIBOR Risk and Large Investors Risk please see Risks beginning on page 41 of this Prospectus.
ANTI-TAKEOVER PROVISIONS IN THE TRUSTS GOVERNING DOCUMENTS
The Trusts Certificate of Trust, Agreement and Declaration of Trust (the Declaration of Trust) and By-Laws (collectively, the Governing Documents) include provisions that could limit the ability of other entities or persons to acquire control of the Trust or convert the Trust to an open-end fund. See Anti-Takeover Provisions in the Trusts Governing Documents and RisksAnti-Takeover Provisions in the Trusts Governing Documents Risk.
CUSTODIAN, TRANSFER AGENT, AND ADMINISTRATOR
US Bank N.A. serves as the custodian of the Trusts assets pursuant to a custody agreement. Under the custody agreement, the custodian is required to hold the Trusts assets in compliance with the 1940 Act. For its services, the custodian will receive a monthly fee based upon, among other things, the average value of the total assets of the Trust, plus certain charges for securities transactions.
DST Systems, Inc. serves as the Trusts dividend disbursing agent, agent under the Trusts Plan (the Plan Agent), transfer agent and registrar with respect to the Common Shares of the Trust.
ALPS Fund Services Inc. serves as the administrator of the Trust. Pursuant to an administration, bookkeeping and pricing services agreement, the administrator provides certain administrative services to the Trust.
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This table describes the fees and expenses of the Trust that you will incur, directly or indirectly, if you buy and hold Common Shares. Because the Trust has no operating history, many of these expenses are estimates. The expenses shown in the table are based on estimated amounts for the Trusts first year of operations and assume that the Trust issues approximately 7,000,000 Common Shares. The Trusts actual expenses may vary from the estimated expenses shown in the table, and may increase as a percentage of net assets attributable to Common Shares if the Trust issues less than 7,000,000 Common Shares. See Management of the Trust.
Common Shareholder Transaction Expenses |
||||
Sales load paid by Common Shareholders (as a percentage of offering price) (1) |
2.00 | % | ||
Offering expenses borne by the Trust (as a percentage of offering price) (2)(3) |
0.20 | % | ||
Dividend Reinvestment Plan fees (4) |
None | |||
As a Percentage of
Net Assets Attributable to Common Shares (11) |
||||
Annual Expenses |
||||
Management fees (5) |
2.43 | % | ||
Interest payments on borrowed funds (6) |
1.09 | % | ||
Other expenses |
||||
Investor Support and Secondary Market Support Services Fee (7) |
0.29 | % | ||
Other (8)(9) |
1.27 | % | ||
|
|
|||
Total annual expenses (10) |
5.08 | % | ||
|
|
|||
Fee Waiver (10) |
(0.84 | )% | ||
|
|
|||
Total annual expenses after fee waiver (10) |
4.24 | % | ||
|
|
(1) | The Adviser (and not the Trust) has agreed to pay, from its own assets, additional compensation of $0.10 per Common Share (other than Common Shares purchased by the management investors) to the Underwriters in connection with this offering. This compensation is not reflected under Sales load paid by Common Shareholders (as a percentage of offering price) in the table above. See UnderwritingAdditional Compensation to be Paid by the Adviser. |
(2) | The Adviser and the Sub-Adviser have agreed to (i) pay all organizational expenses of the Trust and (ii) pay or reimburse offering expenses of the Trust (other than sales load) that exceed $0.02 per Common Share. Assuming the Trust issues 7,000,000 Common Shares ($70,000,000), offering expenses (other than sales load) are estimated to be approximately $940,000. The Trust, and therefore Common Shareholders, will bear $140,000 or approximately $0.02 per Common Share of offering expenses, and the Adviser and the Sub-Adviser will bear any offering expenses above that amount. Organizational expenses and offering expenses in excess of $0.02 per Common Share that are borne by the Adviser and the Sub-Adviser are not subject to recoupment from the Trust. In addition, the Adviser (and not the Trust) has agreed to pay to FDCC a fee equal to 0.90% of the total price to the public of the Common Shares sold in this offering (inclusive of the over-allotment option), as payment for providing certain distribution-related services, and to reimburse reasonable out of pocket expenses related to the Trusts roadshow. |
(3) | The Adviser and the Sub-Adviser (and not the Trust) have agreed to pay, from their own assets, upfront structuring fee to each of UBS Securities LLC, BB&T Capital Markets, a division of BB&T Securities, LLC, Ladenburg Thalmann & Co. Inc., Maxim Group LLC, National Securities Corporation, Newbridge Securities Corporation, Wedbush Securities Inc. and Wunderlich Securities, Inc., and may pay certain other qualifying Underwriters a structuring fee, a sales incentive fee or other additional compensation in connection with the offering. These fees and compensation are not reflected under Offering expenses borne by Common Shareholders (as a percentage of offering price) in the table above. See UnderwritingAdditional Compensation to be Paid by the Adviser. |
(4) | Common Shareholders will incur brokerage charges if they direct DST Systems, Inc., as Plan Agent for the Common Shareholders, to sell their Common Shares held in a dividend reinvestment account. |
(5) | The Trust will pay the Adviser an annual management fee, payable monthly in arrears, in an amount equal to 1.70% of the Trusts average daily Managed Assets. Common Shareholders bear the portion of the investment advisory fee attributable to the assets purchased with the proceeds of leverage, which means that Common Shareholders effectively bear the entire management fee. The contractual management fee rate of 1.70% of the Trusts Managed Assets represents an effective management fee rate of 2.43% of net assets attributable to Common Shares, assuming leverage of 30% of the Trusts Managed Assets (including the proceeds of such Borrowings). The Adviser will pay to the Sub-Adviser a sub-advisory fee out of the management fee received by the Adviser. |
(6) | Assumes leverage by the Trust through bank borrowings in an amount equal to approximately 30% of the Trusts Managed Assets, at an estimated annual interest rate of 2.55%. The costs associated with such borrowing by the Trust will be borne entirely by Common Shareholders. |
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Summary of Trust expenses
(7) | The Trust has retained the Adviser to provide investor support services and secondary market support services in connection with the ongoing operation of the Trust. The Trust will pay the Adviser a service fee, payable monthly in arrears, in an annual amount equal to 0.20% of the Trusts average daily Managed Assets. The investor support services and secondary market support services agreement will have an initial term of two years and will remain in effect from year to year thereafter if approved annually by the Board of Trustees. |
(8) | Expenses attributable to the Trusts investments, if any, in other investment companies, including closed-end funds and exchange-traded funds, are currently estimated not to exceed 0.01% of net assets attributable to Common Shares. |
(9) | The Other expenses shown in the table and related footnotes include operating expenses of the Trust and are based on estimated amounts for the Trusts first year of operations and may be greater or less than the estimates shown in the table and accompanying footnotes. |
(10) | The Adviser has contractually agreed, for the period ending two years after the date of this Prospectus, to waive a portion of the advisory fee and/or reimburse the Trust for certain operating expenses so that the annual expenses of the Trust do not exceed 0.30% of the Trusts Managed Assets (exclusive of investment advisory fees, investor support and secondary market services fees, taxes, expenses incurred directly or indirectly by the Trust as a result of an investment in a permitted investment (including, without limitation, acquired fund fees and expenses), expenses associated with the acquisition or disposition of portfolio investments (including, without limitation, brokerage commissions and other trading or transaction expenses), leverage expenses (including, without limitation, costs associated with the issuance or incurrence of leverage, commitment fees, interest expense or dividends on preferred shares), expenses incurred in connection with issuances and sales of shares of the Trust (including, without limitation, fees, commissions and offering costs), dividends on short sales, if any, securities lending costs, if any, expenses of holding, and soliciting proxies for, meetings of shareholders of the Trust (except to the extent relating to routine items such as the election of trustees), expenses of a reorganization, restructuring, redomiciling or merger of the Trust or the acquisition of all or substantially all of the assets of another fund, or any extraordinary expenses not incurred in the ordinary course of the Trusts business (including, without limitation, expenses related to litigation, derivative actions, demands related to litigation, regulatory or other government investigations and proceeding)). The expense limitation agreement, during its term, may be terminated only by the Board of Trustees. After its initial two-year term, the expense limitation agreement may be renewed with the consent of the Adviser and the Board of Trustees. The Adviser may recoup waived or reimbursed amounts for a period of up to three years following the date of such waiver or reimbursement, provided total expenses, including such recoupment, do not exceed the lesser of the annual expense limit at the time such expenses were waived or reimbursed or the annual expense limit at the time of recoupment. |
(11) | The table presented in this footnote estimates what the Trusts annual expenses would be, stated as percentages of the Trusts net assets attributable to Common Shares, and assumes the Trust is the same size as the table above but, unlike the table above, assumes that the Trust does not utilize any form of leverage. In accordance with these assumptions, the Trusts expenses would be estimated as follows: |
Common Shareholder Transaction Expenses |
||||
Sales load paid by Common Shareholders (as a percentage of offering price) (1) |
2.00 | % | ||
Offering expenses borne by the Trust (as a percentage of offering price) (2)(3) |
0.20 | % | ||
Dividend Reinvestment Plan fees (4) |
None | |||
Percentage of Net Assets Attributable to Common
Shares (assumes
|
||||
Annual Expenses |
||||
Management fees (5) |
1.70 | % | ||
Interest payments on borrowed funds |
None | |||
Other expenses |
||||
Investor Support and Secondary Market Support Fee (7) |
0.20 | % | ||
Other (8)(9) |
1.27 | % | ||
|
|
|||
Total annual expenses (10) |
3.17 | % | ||
|
|
|||
Fee waiver (10) |
(0.97 | )% | ||
|
|
|||
Total annual expenses after fee waiver (10) |
2.20 | % | ||
|
|
EXAMPLE
The following example illustrates the expenses (including (i) sales load of $20 and (ii) estimated offering expenses of $2) that you would pay on a $1,000 investment in Common Shares, assuming (1) total annual expenses of 4.24% of net assets attributable to Common Shares in Years 1 and 2, and 5.08% of net assets attributable to Common Shares in Years 3 through 10 (*) and (2) a 5% annual return. The example assumes that the estimated Total Annual Expenses set forth in the Annual Expenses table are accurate and that all
20
Summary of Trust expenses
dividends and distributions are reinvested at net asset value per Common Share. Actual expenses may be greater or less than those assumed. Moreover, the Trusts actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||||||||||||||
$ | 64 | $ | 156 | $ | 257 | $ | 508 |
The Example should not be considered a representation of future expenses or returns. Actual expenses may be higher or lower than those assumed. Moreover, the Trusts actual rate of return may be higher or lower than the hypothetical 5% return shown in the example.
(*) | Based on the assumptions noted above but without the use of leverage, assuming (i) total annual expenses of 2.20% of net assets attributable to Common Shares in Years 1 and 2, and 3.17% of net assets attributable to Common Shares in Years 3 through 10 and (ii) a 5% annual return, you would pay the following expenses on a $1,000 investment in Common Shares: |
1 Year | 3 Years | 5 Years | 10 Years | |||||||||||
$44 | $99 | $167 | $348 |
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XAI Octagon Floating Rate & Alternative Income Term Trust is a newly-organized, diversified, closed-end management investment company registered under the 1940 Act. The Trust was organized as a statutory trust on April 4, 2017, pursuant to a Certificate of Trust, and is governed by the laws of the State of Delaware. As a newly-organized entity, the Trust has no operating history. The Trusts principal office is located at 321 North Clark Street, Suite 2430, Chicago, Illinois 60654, and its telephone number is (312) 374-6930.
XA Investments LLC serves as the Trusts investment adviser and is responsible for the management of the Trust. Octagon Credit Investors, LLC serves as the Trusts investment sub-adviser and is responsible for the management of the Trusts portfolio of securities.
The net proceeds of the offering of the Common Shares will be approximately $ after payment of the estimated offering costs. The Trust expects that following receipt of the net proceeds from the sale of Common Shares by the Trust, the Trust will invest such proceeds as soon as practicable in accordance with the Trusts investment objective and strategies and consistent with market conditions and the availability of suitable investments. The Trust expects to be able to invest the net proceeds from this offering within three months after the completion of this offering. While the Trust expects to be fully invested in accordance with its investment policies within three months, the Trust intends to invest in various categories of credit instruments, and achieving the desired allocations to certain specific categories of credit instruments (e.g., CLO equity interests) may take longer than three months, as a result of limited liquidity in the market for such credit instruments. During this time the Trust may be overweighted to one or more categories of credit instruments and underweighted to one or more other categories of credit instruments relative to the target allocations set forth under Investment Objective and PoliciesInvestment Philosophy and ProcessInitial Portfolio Composition, in which case the Trust may be more exposed to the risks associated with those categories of credit instruments with respect to which it is overweighted. The Trust expects to have allocated its investments in accordance with its target allocations within four months after the completion of this offering. Pending the full investment of the proceeds of the offering, it is anticipated that all or a portion of the proceeds will be invested in U.S. Government securities or high grade, short-term money market instruments, which have returns substantially lower than those the Trust anticipates earning once it has fully invested the proceeds of the offering in accordance with its investment objective.
Investment objective and policies
INVESTMENT OBJECTIVE
The investment objective of the Trust is to seek attractive total return with an emphasis on income generation across multiple stages of the credit cycle. There can be no assurance that the Trust will achieve its investment objective. The investment objective of the Trust may be changed by the Board of Trustees on 60 days prior written notice to Common Shareholders.
INVESTMENT STRATEGY
The Trust seeks to achieve its investment objective by investing in a dynamically managed portfolio of opportunities primarily within the private credit markets. Under normal market conditions, the Trust will invest at least 80% of its Managed Assets in floating rate credit instruments and other structured credit investments.
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Investment objective and policies
Credit instruments
The Trusts investments may include (i) structured credit investments, including CLO debt and subordinated (i.e., residual or equity) securities; (ii) traditional corporate credit investments, including leveraged loans and high yield bonds; (iii) opportunistic credit investments, including stressed and distressed credit situations and long/short credit investments; and (iv) other credit-related instruments. The Trust may invest in loans, bonds and other debt securities, CLO securities, including debt and subordinated (i.e., residual or equity) CLO securities, credit default swaps and other credit and credit-related instruments. The Trust may invest in senior, junior, secured and unsecured credit instruments. Floating rate credit instruments have floating or variable interest rates, and include floating rate instruments the interest rates of which vary periodically based upon, or inverse to, a benchmark indicator of prevailing interest rates.
The Trust may invest up to 50% of its Managed Assets in CLO securities, including debt and subordinated (i.e., residual or equity) CLO securities.
Below-investment grade investments
The Trust currently intends to pursue its investment objective by investing primarily in below investment grade credit instruments, but may invest without limitation in investment grade credit instruments. A credit instrument is considered below investment grade quality if it is rated below investment grade (that is, below Baa3- by Moodys or below BBB- by S&P or Fitch) or, if unrated, judged to be below investment grade quality by the Sub-Adviser. Below investment grade credit instruments are often referred to as high yield securities or junk bonds. Below investment grade credit instruments are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and to repay principal.
The Trust will not invest more than 20% of its Managed Assets in credit instruments rated below Caa2 by Moodys or CCC by S&P or Fitch. In the case of a security receiving two or more different ratings from different rating agencies, the Trust will apply the higher of the ratings for the purposes of the foregoing policy. The foregoing policy applies only at the time an instrument is purchased, and the Trust is not required to dispose of a security if a rating agency downgrades its assessment of that instrument. In determining whether to retain or sell an instrument that has been downgraded, the Sub-Adviser may consider such factors as its assessment of the credit quality of the instrument, the price at which the instrument could be sold, and the rating, if any, assigned to the instrument by other ratings agencies.
Rating agencies, such as Moodys, S&P or Fitch, are private services that provide ratings of the credit quality of debt obligations. Ratings assigned by a rating agency are not absolute standards of credit quality but represent the opinion of the rating agency as to the quality of the obligation. Rating agencies may fail to make timely changes in credit ratings and an issuers current financial condition may be better or worse than a rating indicates. To the extent that the issuer of a security pays a rating agency for the analysis of its security, an inherent conflict of interest may exist that could affect the reliability of the rating. Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk or liquidity of such obligations.
To the extent that the Trust invests in unrated lower grade securities, the Trusts ability to achieve its investment objective will be more dependent on the Sub-Advisers credit analysis than would be the case when the Trust invests in rated securities.
Please refer to Appendix A to the SAI for more information regarding Moodys, S&Ps and Fitchs ratings.
Illiquid investments
The Trust may invest without limitation in illiquid credit instruments, including instruments that are unregistered, restricted, for which there is no readily available trading market or that are otherwise illiquid.
Maturity and duration
The Trust may invest in credit instruments of any maturity, and does not manage its portfolio seeking to maintain a targeted dollar-weighted average maturity level. The Trust does not have a fixed duration target,
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Investment objective and policies
and the portfolios duration may vary significantly over time based on the Sub-Advisers assessment of the current market conditions. In comparison to maturity, interest rate duration is a measure of the price volatility of a credit instrument as a result of changes in market interest rates, based on the weighted average timing of the instruments expected principal and interest payments. For example, if interest rates increase by 1%, the net asset value of a portfolio with a duration of five years would decrease by approximately 5%. Conversely, if interest rates decline by 1%, the net asset value of a portfolio with a duration of five years would increase by approximately 5%. The longer the duration, the more susceptible the portfolio will be to changes in interest rates. Duration is expressed as a number of years but differs from maturity in that it considers an instruments yield, coupon payments, principal payments and call features in addition to the amount of time until the instrument matures. As the value of an instrument changes over time, so will its duration. Prices of instruments with longer durations tend to be more sensitive to interest rate changes than instrument with shorter durations. Longer-maturity investments generally have longer interest rate durations because the investments fixed rate is locked in for longer periods of time. Floating rate or adjustable rate securities, however, generally have shorter interest rate durations because their interest rates are not fixed but rather float up and down with the level of prevailing interest rates. The Trust intends to invest a significant portion of its assets in floating rate or adjustable rate securities and CLO subordinated notes, the income from which will vary based on income received from the underlying collateral and the payments made to the secured notes, both of which may be based on floating rates, which may mitigate risk associated with increases in prevailing short-term interest rates.
Opportunistic credit investments
The Trust may invest up to 20% of its Managed Assets in opportunistic credit investments, including stressed and distressed credit situations.
Short sales
The Trust may, from time to time, engage in short sales of credit instruments in an amount not to exceed 10% of its Managed Assets. A short sale is a transaction in which the Trust sells an instrument that it does not own in anticipation that the market price will decline.
Non-U.S. investments
While the investment strategy of the Trust does not focus primarily on non-U.S. corporate credit investments, under certain circumstances where such opportunities are favorable, the Trust may invest up to 20% of its Managed Assets in corporate credit instruments issued by non-U.S. issuers and in markets outside the U.S. Generally, such non-U.S. investments will be issued by large non-U.S. corporations, partnerships, limited liability companies and other business entities. The Trusts investments in structured credit instruments, which are commonly issued by special purpose vehicles formed in jurisdictions outside of the U.S., are not subject to or limited by this policy.
Other investment companies
As an alternative to holding investments directly, the Trust may also obtain investment exposure to securities in which it may invest directly by investing up to 10% of its Managed Assets in other investment companies. The Trust may invest in mutual funds, closed-end funds and exchange-traded funds.
Derivative transactions
The Trust may, but is not required to, use various derivatives transactions for hedging and risk management purposes, to facilitate portfolio management and to earn income or enhance total return. The use of derivatives transactions to earn income or enhance total return may be particularly speculative. Derivatives are financial instruments the value of which is derived from a reference instrument. The Trust may engage in a variety of derivatives transactions, including options, swaps, futures contracts, options on futures contracts and forward currency contracts and options on forward currency contracts. The Trust may purchase and sell exchange-listed, centrally cleared and off-exchange derivatives. The Trust may utilize derivatives that reference one or more securities, indices, commodities, currencies or interest rates. In addition, the Trust may utilize new techniques, transactions, instruments or strategies that are developed or permitted as regulatory changes occur.
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Investment objective and policies
INVESTMENT PHILOSOPHY AND PROCESS
At the heart of Octagons investment philosophy is a deep understanding of fundamental credit analysis, enhanced by a process focused on optimizing returns against target risk profiles. Octagons investment philosophy combines relative value focus and active portfolio management. Over Octagons 20-plus-year history, Octagon believes that it has developed a proven, repeatable and scalable credit selection and investment process.
Octagons investment process involves four key steps:
1) | ongoing assessment of investment opportunities; |
2) | research, analysis and written recommendations with defined investment thesis; |
3) | investment committee approval before any credit is considered for investment; and |
4) | continual monitoring which is a collaborative team effort to enhance decision making and risk management. |
The Octagon portfolio management team manages positions in an effort to optimize relative value. Octagons focus on improving credits seeks to enhance alpha generation by searching for opportunities in the credit markets. As part of this ongoing process, Octagon refreshes internal ratings for credits to identify buy and sell opportunities. The Octagon research method is robust, involving various key factors including the assessment of industry dynamics, competitive factors, performance history, deal sponsor, company management, cash flow estimates, liquidity, collateral values, quality, downside protection, capital structure, macroeconomic factors, technical supply and demand and potential political or regulatory influences.
Investment process
Octagon employs a disciplined asset selection process based on fundamental credit analysis and collaborative investment team input to identify attractive relative value opportunities, while seeking to minimize downside risk and produce returns that outperform industry benchmarks. In evaluating potential investments, Octagon assesses industry dynamics and competitive environments, performance history and prospects, investment sponsors and management, projected cash flow generation, quality and value of underlying collateral, downside protection and relative value opportunities within an issuers capital structure.
Octagon seeks to identify investment opportunities in both the primary and secondary leveraged credit markets through rigorous industry and company analysis guided by information from issuers, underwriters, agents, and sales and trading desks. Identified investment opportunities are initially screened with a focus on the applicable industry. Octagon utilizes industry expertise, discussions with company management, independent research, relative value data, and input from Octagon investment professionals to efficiently extract information that facilitates credit judgments and recommendations. Octagon considers the business competitive position, its ability to generate cash flow, the character of its sponsor and management team, the resilience of the capital structure and the assets positioning within it, structural and covenant protection, and the value of collateral in the context of the risk premium offered, as well as macroeconomic backdrop, technical supply and demand, liquidity, industry dynamics, and political and regulatory influences.
With respect to existing portfolio positions, Octagons analysis is centered on any changes to the underlying credit or industry that would impact the risk/return attributes of the position, which may lead to a decision to sell an existing position.
Risk management
Octagon will dynamically manage the Trusts portfolio based on its evolving credit market outlook in an effort to produce attractive risk-adjusted returns. The Octagon team meets regularly to monitor portfolios using its
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Investment objective and policies
robust review process and striving to manage risk via its proprietary internal credit rating and portfolio weighting system. The investment team has a set risk monitoring process which involves the following:
Ø |
Relative Value Meetings to examine new market trends and discuss technical dynamics with a focus on recent price changes and price target revisions. At these meetings Octagon investment professionals discuss seeking the best loan and bond relative value and return ideas. |
Ø |
Loan & Bond Assets Meetings to discuss new leveraged loan and high yield bond issues and trading opportunities. |
Ø |
Team Network Exchange for daily real-time updates with mobile access to address earnings, news, trading levels, buy/sell recommendations and watch lists. |
Ø |
Full and Mini Portfolio Reviews to conduct credit review of all assets (full review) or lower-rated assets (mini review) in a single investment professionals portfolio with a focus on action-oriented recommendations. The objective of these reviews is to affirm or change internal credit ratings and collateral grades. |
Ø |
Watch List Reviews and Meetings to examine and discuss credits on watch list. |
Ø |
Strategic Reviews to discuss credit cycle fundamentals and analyze macro factors including GDP, interest rate and default projections. Strategic Reviews are designed to determine and forecast shifts in the economic cycle, evaluate the impact of the latest economic and market data and to determine tactical and strategic allocations. |
Benchmark index
The Trusts opportunistic credit strategy seeks to outperform its primary benchmark, the S&P/LSTA U.S. Leveraged Loan 100 Index which is designed to reflect the performance of the largest facilities in the leveraged loan market. The S&P/LSTA U.S. Leveraged Loan 100 Index is utilized by the Master Trust and the Trust as a comparative measure only. The Trust may from time to time use additional benchmark indices to analyze certain aspects of the Trusts performance. The Trust is actively managed and does not track any index. Index information is not meant to represent the performance of the Trust or its underlying investments.
Initial portfolio composition
Based on current market conditions, the Sub-Adviser currently anticipates targeting allocations of approximately 45% of the Trusts Managed Assets to structured credit instruments (including CLO debt and CLO subordinated notes), approximately 50% of the Trusts Managed Assets to traditional corporate credit instruments (including Senior Loans, Second Lien and Subordinated Loans and high yield bonds) and approximately 5% of the Trusts Managed Assets to opportunistic credit investments (including stressed and distressed credit situations and long/short credit investments) immediately after the initial investment of the proceeds from the offering of Common Shares (the initial portfolio). Anticipated initial portfolio characteristics are based on current market conditions and the expectations of the portfolio team. Current market conditions may change and the Trust may not be able to invest its initial portfolio as planned. The Trusts portfolio allocations may vary over time consistent with the Trusts investment policies and restrictions described in this Prospectus.
The Trusts investment portfolio may consist of investments in the following types of securities. There is no guarantee the Trust will buy all of the types of securities or use all of the investment techniques that are described herein.
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The Trusts investments
COLLATERALIZED LOAN OBLIGATIONS
The Trust may invest up to 50% of its Managed Assets in CLO securities, including debt and subordinated (i.e., residual or equity) CLO securities. A CLO vehicle generally is an entity that is formed to hold a portfolio consisting principally (typically, 80% or more of its assets) of loan obligations. The loan obligations within the CLO vehicle are limited to loans which meet established credit criteria and are subject to concentration limitations in order to limit a CLO vehicles exposure to a single credit. A CLO issues various classes or tranches of securities. Each tranche has different payment characteristics and different credit ratings. These tranches are generally categorized as senior, mezzanine, or subordinated/equity, according to their degree of risk. The key feature of the CLO structure is the prioritization of the cash flows from a pool of securities among the several tranches of the CLO. As interest payments are received, the CLO makes contractual interest payments to each tranche of debt based on its seniority. If there are funds remaining after each tranche of debt receives its contractual interest rate and the CLO meets or exceeds required collateral coverage levels (or other similar covenants), the remaining funds may be paid to the subordinated (or residual) tranche (often referred to as the equity tranche). The contractual provisions setting out this order of payments are set out in detail in the relevant CLOs indenture. These provisions are referred to as the priority of payments or the waterfall and determine the terms of payment of any other obligations that may be required to be paid ahead of payments of interest and principal on the securities issued by a CLO. In addition, for payments to be made to each tranche, after the most senior tranche of debt, there are various tests that must be complied with, which are different for each CLO.
The Trust expects to invest in CLO securities issued by CLOs that principally hold Senior Loans, diversified by industry and Borrower. It is also possible that the underlying obligations of CLOs in which the Trust invests will include (i) second lien and/or subordinated loans, (ii) debt tranches of other CLOs, and (iii) equity securities incidental to investments in senior loans. The cash flows on the underlying obligations will primarily determine the payments to holders of CLO securities. CLO securities may have floating interest rates, fixed interest rates or, in the case of subordinated CLO securities, no set interest rate (but rather participate in residual cash flows of the relevant CLO). The rated tranches of CLO securities are generally assigned credit ratings by one or more nationally recognized statistical rating organizations (whether or not such tranches are issued as part of a component of a composite instrument with one or more other instruments). The subordinated (or residual) tranche (often referred to as the equity tranche) does not receive a rating. The transaction documents relating to the issuance of CLO securities impose eligibility criteria on the assets of the CLO, restrict the ability of the CLOs investment manager to trade investments and impose certain portfolio-wide asset quality requirements.
CLO securities are generally limited recourse obligations of the CLO payable solely from the underlying assets of the CLO or the proceeds thereof. Consequently, holders of CLO securities must rely solely on distributions on the underlying assets or proceeds thereof for payment in respect thereof. The cash flows generated by the underlying obligations held in a CLOs portfolio will generally determine the interest payments on CLO securities. Payments to holders of tranched CLO securities are made in sequential order of priority.
CLO subordinated notes
The Trust may invest in subordinated notes issued by a CLO (often referred to as the residual or equity tranche), which are junior in priority of payment and are subject to certain payment restrictions generally set forth in an indenture governing the notes. In addition, CLO subordinated notes generally do not benefit from any creditors rights or ability to exercise remedies under the indenture governing the notes. The subordinated notes are not guaranteed by another party. The subordinated tranche of a CLO vehicle is generally required to absorb the CLOs losses before any of the CLOs other tranches, yet it also has the lowest level of payment priority among the CLOs tranches; therefore, the subordinated tranche is typically the riskiest of CLO investments. CLO subordinated notes do not have a fixed coupon and payments on CLO subordinated notes will be based on the income received from the underlying collateral and the payments made to the secured notes, both of which may be based on floating rates.
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The Trusts investments
SENIOR LOANS
Senior secured loans (Senior Loans) are typically made to U.S. and, to a lesser extent, large non-U.S. corporations, partnerships, limited liability companies and other business entities (Borrowers) which operate in various industries and geographical regions. Senior Loans rated below investment grade are sometimes referred to as leveraged loans.
Senior Loans generally hold the most senior position in the capital structure of a Borrower, are typically secured with specific collateral and have a claim on the assets and/or stock of the Borrower that is senior to that held by unsecured creditors, subordinated debt holders and holders of equity of the Borrower. Typically, in order to borrow money pursuant to a Senior Loan, a Borrower will, for the term of the Senior Loan, pledge collateral (subject to typical exceptions), including but not limited to (i) working capital assets, such as accounts receivable and inventory; (ii) tangible fixed assets, such as real property, buildings and equipment; (iii) intangible assets, such as trademarks and patent rights; and (iv) security interests in shares of stock of subsidiaries or affiliates. In the case of Senior Loans made to non-public companies, the companys shareholders or owners may provide collateral in the form of secured guarantees and/or security interests in assets that they own. In many instances, a Senior Loan may be secured only by stock in the Borrower or its subsidiaries. Collateral may consist of assets that may not be readily liquidated, and there is no assurance that the liquidation of such assets would satisfy fully a Borrowers obligations under a Senior Loan.
A Borrower must comply with various covenants contained in a loan agreement or note purchase agreement between the Borrower and the holders of the Senior Loan (the Loan Agreement). In a typical Senior Loan, an administrative agent (the Agent) administers the terms of the Loan Agreement. In such cases, the Agent is normally responsible for the collection of principal and interest payments from the Borrower and the apportionment of these payments to the credit of all institutions that are parties to the Loan Agreement. The Trust will generally rely upon the Agent or an intermediate participant to receive and forward to the Trust its portion of the principal and interest payments on the Senior Loan. Additionally, the Trust normally will rely on the Agent and the other loan investors to use appropriate credit remedies against the Borrower. The Agent is typically responsible for monitoring compliance with covenants contained in the Loan Agreement based upon reports prepared by the Borrower. The Agent may monitor the value of the collateral and, if the value of the collateral declines, may accelerate the Senior Loan, may give the Borrower an opportunity to provide additional collateral or may seek other protection for the benefit of the participants in the Senior Loan. The Agent is compensated by the Borrower for providing these services under a Loan Agreement, and such compensation may include special fees paid upon structuring and funding the Senior Loan and other fees paid on a continuing basis.
Senior Loans typically have rates of interest that are determined daily, monthly, quarterly or semi-annually by reference to a base lending rate, plus a premium or credit spread. As a result, as short-term interest rates increase, interest payable to the Trust from its investments in Senior Loans should increase, and as short-term interest rates decrease, interest payable to the Trust from its investments in Senior Loans should decrease. These base lending rates are primarily the London Interbank Offered Rate (LIBOR) and secondarily the prime rate offered by one or more major U.S. banks and the certificate of deposit rate or other base lending rates used by commercial lenders.
There may be less readily available information about most Senior Loans and the Borrowers thereunder than is the case for many other types of securities, including securities issued in transactions registered under the Securities Act of 1933 (the Securities Act) or the Securities Act of 1934 (the Exchange Act), and Borrowers subject to the periodic reporting requirements of Section 13 of the Exchange Act. Senior Loans may be issued by companies that are not subject to SEC reporting requirements and these companies, therefore, do not file reports with the SEC that must comply with SEC form requirements and, in addition, are subject to a less stringent liability disclosure regime than companies subject to SEC reporting requirements. As a result, the Sub-Adviser will rely primarily on its own evaluation of a Borrowers credit quality rather than on any available independent sources. Therefore, the Trust will be particularly dependent on the analytical abilities of the Sub-Adviser.
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The Trusts investments
No active trading market may exist for some Senior Loans, and some loans may be subject to restrictions on resale. Any secondary market for Senior Loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods, which may impair the ability of a seller to realize full value and thus cause a material decline in the net asset value of the Common Shares. In addition, the Trust may not be able to readily dispose of its Senior Loans at prices that approximate those at which the Trust could sell such loans if they were more widely traded and, as a result of such illiquidity, the Trust may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. A limited supply or relative illiquidity of Senior Loans may adversely affect the Trusts ability to achieve its investment objective.
The Trust may purchase and retain in its portfolio Senior Loans where the Borrower has experienced, or may be perceived to be likely to experience, credit problems, including involvement in or recent emergence from bankruptcy court proceedings or other forms of debt restructuring. Such investments may provide opportunities for enhanced income as well as capital appreciation, although they also will be subject to greater risk of loss. At times, in connection with the restructuring of a Senior Loan either outside of bankruptcy court or in the context of bankruptcy court proceedings, the Trust may determine or be required to accept equity securities or junior credit securities in exchange for all or a portion of a Senior Loan.
In the process of buying, selling and holding Senior Loans, the Trust may receive and/or pay certain fees. These fees are in addition to interest payments received and may include facility fees, commitment fees, amendment fees, commissions and prepayment penalty fees. On an ongoing basis, the Trust may receive a commitment fee based on the undrawn portion of the underlying line of credit portion of a Senior Loan. In certain circumstances, the Trust may receive a prepayment penalty fee upon the prepayment of a Senior Loan by a Borrower. Other fees received by the Trust may include covenant waiver fees, covenant modification fees or other amendment fees.
Direct assignments
The Trust generally will seek to purchase Senior Loans on a direct assignment basis. If the Trust purchases a Senior Loan on direct assignment, it typically succeeds to all the rights and obligations under the Loan Agreement of the assigning lender and becomes a lender under the Loan Agreement with the same rights and obligations as the assigning lender. Investments in Senior Loans on a direct assignment basis may involve additional risks to the Trust. For example, if such loan is foreclosed, the Trust could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral.
Loan participations
The Trust may also acquire in participations in Senior Loans. The participation by the Trust in a lenders portion of a Senior Loan typically will result in the Trusts having a contractual relationship only with such lender, not with the Borrower. As a result, the Trust may have the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the participation and only upon receipt by such lender of payments from the Borrower. Such indebtedness may be secured or unsecured. In connection with purchasing participations, the Trust generally will have no right to enforce compliance by the Borrower with the terms of the Loan Agreement, nor any rights with respect to any funds acquired by other investors through set-off against the Borrower and the Trust may not directly benefit from the collateral supporting the Senior Loan in which it has purchased the participation. In the event of the insolvency of the entity selling a participation, the Trust may be treated as a general creditor of such entity. The selling entity and other persons interpositioned between such entity and the Trust with respect to such participations will likely conduct their principal business activities in the banking, finance and financial services industries. Persons engaged in these industries may be more susceptible to, among other things, fluctuations in interest rates, changes in the Federal Reserve Open Market Committees monetary policy, governmental regulations concerning these industries and concerning capital raising activities generally and fluctuations in the financial markets generally.
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The Trusts investments
SECOND LIEN AND SUBORDINATED LOANS
The Trust may also invest in second lien and subordinated secured loans. Second lien and subordinated secured loans generally have similar characteristics as Senior Loans except that such loans are subordinated in payment and/or lower in lien priority to first lien holders. The Trust may purchase interests in second lien and subordinated secured loans through assignments or participations.
UNSECURED LOANS
Unsecured loans generally have lower priority in right of payment compared to holders of secured debt of the Borrower. Unsecured loans are not secured by a security interest or lien to or on specified collateral securing the Borrowers obligation under the loan. Unsecured loans by their terms may be or may become subordinate in right of payment to other obligations of the borrower, including senior loans, second lien loans and subordinated secured loans. Unsecured loans may have fixed or floating rate interest payments. Because unsecured loans are subordinate to the secured debt of the borrower, they present a greater degree of investment risk but often pay interest at higher rates reflecting this additional risk. Such investments generally are of below investment grade quality. Other than their subordinated and unsecured status, such investments have many characteristics and risks similar to senior loans, second lien loans and subordinated secured loans discussed above. The Trust may purchase interests in unsecured loans through assignments or participations.
CORPORATE BONDS
Corporate bonds typically pay a fixed rate of interest and must be repaid on or before maturity. The investment return of corporate bonds reflects interest on the security and changes in the market value of the security. The market value of a corporate bond generally may be expected to rise and fall inversely with interest rates. The value of intermediate- and longer-term corporate bonds normally fluctuates more in response to changes in interest rates than does the value of shorter-term corporate bonds. The market value of a corporate bond also may be affected by investors perceptions of the creditworthiness of the issuer, the issuers performance and perceptions of the issuer in the market place. There is a risk that the issuers of corporate bonds may not be able to meet their obligations on interest or principal payments at the time called for by an instrument.
STRESSED, DISTRESSED AND DEFAULTED INVESTMENTS
The Trust may invest in loans, debt securities and other instruments of companies undergoing, or that have recently completed, bankruptcies, reorganizations, insolvencies, liquidations or other fundamental changes or similar proceedings or other stressed issuers. In any investment opportunity involving any such type of special situation, there exists the risk that the contemplated transaction either will be unsuccessful, will take considerable time or will result in a distribution of cash or new securities, the value of which will be less than the purchase price to the Trust of the securities or other financial instruments in respect of which such distribution is received. Similarly, if an anticipated transaction does not in fact occur, the Trust may be required to sell its investment at a loss. The consummation of such transactions can be prevented or delayed by a variety of factors, including but not limited to (i) intervention of a regulatory agency; (ii) market conditions resulting in material changes in securities prices; (iii) compliance with any applicable bankruptcy, insolvency or securities laws; and (iv) the inability to obtain adequate financing. Because there is substantial uncertainty concerning the outcome of transactions involving financially troubled companies in which the Trust intends to invest, there is a potential risk of loss by the Trust of its entire investment in such companies.
The Trust may invest in loans, debt securities and other instruments that are in default or at risk of being in default as to the repayment of principal and/or interest at the time of acquisition by the Trust. The repayment of defaulted obligations is subject to significant uncertainties. Defaulted obligations might be repaid only after lengthy bankruptcy or other reorganization proceedings, during which the issuer might not make any interest or other payments.
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The Trusts investments
Distressed and defaulted instruments generally present the same risks as investment in below investment grade instruments. However, in most cases, these risks are of a greater magnitude because of the uncertainties of investing in an issuer undergoing financial distress. Distressed instruments present a risk of loss of principal value, including potentially a total loss of value. Distressed instruments may be highly illiquid and the prices at which they may be sold may represent a substantial discount to what the Sub-Adviser believes to be their ultimate value.
VARIABLE, FLOATING, AND FIXED RATE DEBT OBLIGATIONS
Floating or variable rate securities provide for periodic adjustments in the interest rate. Floating rate securities are generally offered at an initial interest rate which is at or above prevailing market rates. The interest rate paid on floating rate securities is then reset periodically (commonly every 90 days) to an increment over some predetermined interest rate index. Commonly utilized indices include the three-month Treasury bill rate, the 180-day Treasury bill rate, the one-month or three-month LIBOR, the prime rate of a bank, the commercial paper rates, or the longer term rates on U.S. Treasury securities. Variable and floating rate securities are relatively long-term instruments that often carry demand features permitting the holder to demand payment of principal at any time or at specified intervals prior to maturity. If the Sub-Adviser incorrectly forecasts interest rate movements, the Trust could be adversely affected by use of variable and floating rate securities. In addition, the Trust invests in CLO subordinated notes. CLO subordinated notes do not have a fixed coupon and payments on CLO subordinated notes will be based on the income received from the underlying collateral and the payments made to the secured notes, both of which may be based on floating rates.
Fixed rate securities pay a fixed rate of interest and tend to exhibit more price volatility during times of rising or falling interest rates than securities with variable or floating rates of interest. The value of fixed rate securities will tend to fall when interest rates rise and rise when interest rates fall. The value of variable or floating rate securities, on the other hand, fluctuates much less in response to market interest rate movements than the value of fixed rate securities. This is because variable and floating rate securities behave like short-term instruments in that the rate of interest they pay is subject to periodic adjustments according to a specified formula, usually with reference to some interest rate index or market interest rate. Fixed rate securities with short-term characteristics are not subject to the same price volatility as fixed rate securities without such characteristics. Therefore, they behave more like variable or floating rate securities with respect to price volatility.
SHORT SALES
The Trust may engage in short sales of credit instruments and exchange-traded funds (ETFs) in an amount not to exceed 10% of its Managed Assets. to the extent the Sub-Adviser deems it advisable in connection with the Trusts investments or as opportunistic investments. A short sale is a transaction in which the Trust sells an instrument that it does not own in anticipation that the market price will decline. To deliver the securities to the buyer, the Trust arranges through a broker to borrow the securities and, in so doing, the Trust becomes obligated to replace the securities borrowed at their market price at the time of replacement. When selling short, the Trust intends to replace the securities at a lower price at a later date and therefore profit from the difference between the cost to replace the securities and the proceeds received from the earlier sale of the securities. When the Trust makes a short sale, the proceeds it receives from the sale will be held on behalf of a broker, and will accrue interest, until the Trust replaces the borrowed securities. The Trust may have to pay a premium to borrow the securities and must pay any dividends or interest payable on the securities until they are replaced. The Trusts obligation to replace the securities borrowed in connection with a short sale will be secured by collateral deposited with the broker that consists of cash and/or liquid securities. In addition, the Trust will place in a segregated account an amount of cash and/or liquid securities equal to the difference, if any, between (i) the market value of the securities sold at the time they were sold short, and (ii) any cash and/or liquid securities deposited as collateral with the broker in connection with the short sale.
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The Trusts investments
The Trust may use derivative transactions, including futures, options, swaps, credit default swaps, total return swaps, forward sales or other transactions, to effectuate short exposure in the portfolio.
OTHER INVESTMENT COMPANIES
As an alternative to holding investments directly, the Trust may also obtain investment exposure to securities in which it may invest directly by investing in other investment companies. The Trust may invest in mutual funds, closed-end funds and exchange-traded funds. Under the 1940 Act, the Trust generally may invest only up to 10% of its total assets in the aggregate in shares of other investment companies and only up to 5% of its total assets in any one investment company, provided the investment does not represent more than 3% of the voting stock of the acquired investment company at the time such shares are purchased. However, pursuant to certain exemptions set forth in the 1940 Act and/or in accordance with the terms of exemptive relief obtained by certain other investment companies in which the Trust may seek to invest, the Trust may invest in excess of this limitation provided that certain conditions are met.
Investments in other investment companies involve operating expenses and fees at the other investment company level that are in addition to the expenses and fees borne by the Trust and are borne indirectly by Common Shareholders. For purposes of the Trusts policy of investing at least 80% of its Managed Assets in floating rate credit instruments and other structured credit investments, the Trust will include the value of its investments in other investment companies that invest at least 80% of their net assets, plus the amount of any borrowings for investment purposes, in floating rate credit instruments or other structured credit investments.
DERIVATIVE TRANSACTIONS
The Trust may, but is not required to, use various derivatives transactions for hedging and risk management purposes, to facilitate portfolio management and to earn income or enhance total return. The use of derivatives transactions to earn income or enhance total return may be particularly speculative. Derivatives are financial instruments the value of which is derived from a reference instrument. The Trust may engage in a variety of derivatives transactions, including options, swaps, swaptions, futures contracts, options on futures contracts and forward currency contracts and options on forward currency contracts. The Trust may purchase and sell exchange-listed, centrally cleared and off-exchange derivatives. If a derivative is centrally cleared, a central clearing entity stands between the two parties to the trade as counterparty to each. The Trust may utilize derivatives that reference one or more securities, indices, commodities, currencies or interest rates. In addition, the Trust may utilize new techniques, transactions, instruments or strategies that are developed or permitted as regulatory changes occur. Derivatives may allow the Trust to increase or decrease the level of risk to which the Trust is exposed more quickly and efficiently than transactions in other types of instruments. If the Trust invests in a derivative for speculative purposes, the Trust will be fully exposed to the risks of loss of that Derivative, which may sometimes be greater than the derivatives cost. The use of derivatives may involve substantial economic leverage and consequently substantial volatility.
There is no assurance that these derivative strategies will be available at any time, that the Sub-Adviser will determine to use them for the Trust or, if used, that the strategies will be successful.
Options
An option on a security (or an index) 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. The writer of a call option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price. The writer of a put option has the obligation upon exercise of the option to pay the exercise price upon delivery of the underlying security. The Trust may buy, sell and write exchange-traded and off-exchange call and put options.
If an option written by the Trust expires unexercised, the Trust realizes on the expiration date a capital gain equal to the premium the Trust received at the time the option was written. If an option purchased by the
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The Trusts investments
Trust expires unexercised, the Trust realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange-traded option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Trust desires.
The Trust may sell put or call options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option which is sold. Prior to exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series. The Trust will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Trust will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Trust will realize a capital gain or, if it is less, the Trust will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying security or index and the time remaining until the expiration date.
The Trust may buy or write straddles consisting of a combination of a call and a put written on the same underlying security. A straddle will be covered when sufficient assets are deposited to meet the Trusts immediate obligations. The Trust may use the same liquid assets to cover both the call and put options where the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Trust will also segregate liquid assets equivalent to the amount, if any, by which the put is in the money.
The Trust may cover its obligations when it writes call options or put options. In the case of a call option on a credit instrument or other security, the option is covered if the Trust owns the instrument underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, cash or other liquid assets in such amount are segregated by its custodian) upon conversion or exchange of other instruments held by the Trust.
A call option written on an instrument is also covered if the Trust does not hold the underlying instrument or have the right to acquire it (a so-called naked call option), but the Trust segregates liquid assets in an amount equal to the contract value of the position (minus any collateral deposited with a broker-dealer), on a mark-to-market basis.
For a call option on an index, the option is covered if the Trust segregates liquid assets in an amount equal to the contract value of the index. A call option is also covered if the Trust holds a call on the same index or security as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Trust in segregated liquid assets. A put option on a security or an index is covered if the Trust segregates liquid assets equal to the exercise price. A put option is also covered if the Trust holds a put on the same security or index as the put written where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the difference is maintained by the Trust in segregated liquid assets. Obligations under written call and put options so covered will not be construed to be senior securities for purposes of the Trusts investment restrictions concerning senior securities and borrowings.
A put option written by the Trust is covered if the Trust segregates liquid assets equal to the exercise price. A put option is also covered if the Trust holds a put on the same security as the put written where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the difference is maintained by the Trust in segregated liquid assets.
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The Trusts investments
Futures and options on futures
The Trust may buy, sell and write futures contracts that relate to: interest rates, credit instruments and related indices, volatility indices, credit-linked notes and individual stocks and stock indices.
A futures contract is an agreement between two parties to buy and sell a security, index or interest rate (each a financial instrument) for a set price on a future date. Certain futures contracts, such as futures contracts relating to individual securities, call for making or taking delivery of the underlying financial instrument. However, these contracts generally are closed out before delivery by entering into an offsetting purchase or sale of a matching futures contract (same exchange, underlying financial instrument, and delivery month). Other futures contracts, such as futures contracts on interest rates and indices, do not call for making or taking delivery of the underlying financial instrument, but rather are agreements pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the financial instrument at the close of the last trading day of the contract and the price at which the contract was originally written. These contracts also may be settled by entering into an offsetting futures contract.
Unlike when the Trust purchases or sells a security, no price is paid or received by the Trust upon the purchase or sale of a futures contract. Initially, the Trust will be required to deposit with the futures broker, known as a futures commission merchant (FCM), an amount of cash or securities equal to a varying specified percentage of the contract amount. This amount is known as initial margin. The margin deposit is intended to ensure completion of the contract. Minimum initial margin requirements are established by the futures exchanges and may be revised. In addition, FCMs may establish margin deposit requirements that are higher than the exchange minimums. Cash held in the margin account generally is not income producing. However, coupon-bearing securities, such as Treasury securities, held in margin accounts generally will earn income. Subsequent payments to and from the FCM, called variation margin, will be made on a daily basis as the price of the underlying financial instrument fluctuates, making the futures contract more or less valuable, a process known as marking the contract to market. Changes in variation margin are recorded by the Trust as unrealized gains or losses. At any time prior to expiration of the futures contract, the Trust may elect to close the position by taking an opposite position that will operate to terminate its position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid by or released to the Trust, and the Trust realizes a gain or loss. In the event of the bankruptcy or insolvency of an FCM that holds margin on behalf of the Trust, the Trust may be entitled to the return of margin owed to it only in proportion to the amount received by the FCMs other customers, potentially resulting in losses to the Trust. Futures transactions also involve brokerage costs and the Trust may have to segregate additional liquid assets in accordance with applicable SEC requirements under the 1940 Act.
The Trust also may buy and write options on the futures contracts in which it may invest (futures options) and may buy or write straddles, which consist of a call and a put option on the same futures contract. A futures option gives the purchaser of such option the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call futures option, the purchaser acquires a long position in the futures contract and the writer is assigned the opposite short position. Upon the exercise of a put futures option, the opposite is true. The Trust will only write futures options and straddles which are covered. This means that, when writing a call option, the Trust must either segregate liquid assets with a value equal to the fluctuating market value of the optioned futures contract, or the Trust must own an option to purchase the same futures contract having an exercise price that is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Trust in segregated liquid assets. When writing a put option, the Trust must segregate liquid assets in an amount not less than the exercise price, or own a put option on the same futures contract where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the difference is maintained by the Trust in segregated liquid assets. A straddle will be covered when sufficient assets are deposited to meet the Trusts immediate obligations. The Trust may use the same liquid assets to cover both the call and put options in a
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The Trusts investments
straddle where the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Trust will also segregate liquid assets equivalent to the amount, if any, by which the put is in the money.
Swaps
Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or swapped between the parties are calculated with respect to a notional amount (i.e., the dollar amount invested at a particular interest rate, in a particular foreign currency, or in a basket of securities representing a particular index). The notional amount of the swap agreement is only a basis on which to calculate the obligations that the parties to a swap agreement have agreed to exchange. The Trusts obligations (or rights) under a swap agreement generally will be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement. The Trusts obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Trust) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by marking as segregated liquid, unencumbered assets.
Credit Default Swaps. The Trust may enter into credit default swap agreements and similar agreements. Among other purposes, credit default swaps provide investment exposure to changes in credit spreads and relative interest rates. The credit default swap agreement or similar instrument may have as reference obligations one or more securities that are not currently held by the Trust (including a basket of securities representing an index). The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront payment or a periodic stream of payments over the term of the contract provided generally that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled.
The Trust may be either the buyer or seller in the transaction. If the Trust is a buyer and no credit event occurs, the Trust recovers nothing if the swap is held through its termination date. However, if a credit event occurs, the Trust may elect to receive the full notional value of the swap in exchange for delivery of an equal face amount of deliverable obligations of the reference entity that may have little or no value. As a seller, the Trust generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no value.
Total Return Swaps. The Trust may enter into total return swaps. Total return swaps are used as substitutes for owning a particular physical security, or the securities comprising a given market index, or to obtain exposure in markets where no physical securities are available such as an interest rate index. Total return refers to the payment (or receipt) of the total return on the security, index or other instrument underlying the swap, which is then exchanged for the receipt (or payment) of a floating interest rate. Total return swaps provide the Trust with the additional flexibility of gaining exposure to a particular security or index by using the most cost-effective vehicle available. Total return swaps provide the Trust with the opportunity to actively manage the cash maintained by the Trust as a result of not having to purchase the actual securities or other instruments underlying the swap. The cash backing total return swaps is actively managed to seek to earn a return in excess of the floating rate paid on the swap.
Interest Rate Swaps. Interest rate swaps involve the exchange by the Trust with another party of respective commitments to pay or receive interest (e.g., an exchange of fixed rate payments for floating rate payments).
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The Trusts investments
Currency Swaps. Currency swaps involve the exchange of the two parties respective commitments to pay or receive fluctuations with respect to a notional amount of two different currencies (e.g., an exchange of payments with respect to fluctuations in the value of the U.S. dollar relative to the Japanese yen).
Swaptions
The Trust may enter into swaptions, which are options on swap agreements. A swaption is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. The Trust may write (sell) and purchase put and call swaptions. Depending on the terms of the particular option agreement, the Trust generally will incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When the Trust purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. When the Trust writes a swaption, upon exercise of the option the Trust will become obligated according to the terms of the underlying agreement.
Credit-linked securities
Credit-linked securities are issued by a limited purpose trust or other vehicle that, in turn, invests in a derivative or basket of derivatives, such as credit default swaps, interest rate swaps and other securities, in order to provide exposure to certain fixed income markets. Like an investment in a bond, investments in these credit-linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. However, these payments are conditioned on the issuers receipt of payments from, and the issuers potential obligations to, the counterparties to the derivatives and other securities in which the issuer invests. For instance, the issuer may sell one or more credit default swaps, under which the issuer would receive a stream of payments over the term of the swap agreements provided that no event of default has occurred with respect to the referenced debt obligation upon which the swap is based. If a default occurs, the stream of payments may stop and the issuer would be obligated to pay the counterparty the par (or other agreed upon value) of the referenced debt obligation. This, in turn, would reduce the amount of income and principal that the Trust would receive. The Trusts investments in these instruments are indirectly subject to the risks associated with derivatives, including, among others, counterparty risk, credit risk and leverage risk. There may be no established trading market for these securities.
SYNTHETIC INVESTMENTS
As an alternative to holding investments directly, the Trust may also obtain investment exposure to investments in which the Trust may invest directly through the use of derivative instruments. The Trust may utilize swaps, options, forwards, notional principal contracts or other derivative instruments to replicate, modify or replace the economic attributes associated with an investment in which the Trust may invest directly. To the extent that the Trust invests in synthetic investments with economic characteristics similar to floating rate instruments or other structured credit investments, the value of such investments will be counted for purposes of the Trusts policy of investing at least 80% of its Managed Assets in floating rate credit instruments and other structured credit investments.
UNFUNDED COMMITMENTS
From time to time, the Trusts investments may involve unfunded commitments, which are contractual obligations of the Trust to make loans up to a specified amount at future dates. Certain of the loan participations or assignments acquired by the Trust may involve unfunded commitments of the lenders or revolving credit facilities under which a Borrower may from time to time borrow and repay amounts up to the maximum amount of the facility. In such cases, the Trust would have an obligation to provide its portion of such additional borrowings when drawn upon in the future, upon the terms specified in the loan documentation. Such an obligation may have the effect of requiring the Trust to increase its investment in a company at a time when it might not be desirable to do so (including at a time when the companys financial condition makes it unlikely that such amounts will be repaid).
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The Trusts investments
EQUITY SECURITIES
Incidental to the Trusts investments in credit instruments, the Trust may acquire or hold equity securities, or warrants to purchase equity securities, of a Borrower or issuer. Equity securities held by the Trust may include common equity securities and preferred securities. Common stock represents an equity ownership interest in a company. Warrants give holders the right, but not the obligation, to buy common stock of an issuer at a given price, usually higher than the market price at the time of issuance, during a specified period. preferred securities are generally equity securities of the issuer that have priority over the issuers common shares as to the payment of dividends (i.e., the issuer cannot pay dividends on its common shares until the dividends on the preferred shares are current) and as to the payout of proceeds of bankruptcy or other liquidation, but are subordinate to an issuers senior debt and junior debt as to both types of payments. The equity interests held by the Trust, if any, may not pay dividends or otherwise generate income.
TEMPORARY DEFENSIVE INVESTMENTS
During periods in which the Sub-Adviser believes that changes in economic, financial or political conditions make it advisable to maintain a temporary defensive posture (a temporary defensive period), or in order to keep the Trusts cash fully invested, including the period during which the net proceeds of the offering of Common Shares are being invested, the Trust may, without limitation, hold cash or invest its assets in in short-term investments, including high quality, short-term securities or may invest in short-, intermediate-, or long-term U.S. Treasury bonds and repurchase agreements in respect of those instruments. Short term investments in which the Trust may invest including obligations of the U.S. Government, its agencies or instrumentalities; commercial paper; and certificates of deposit and bankers acceptances. During a temporary defensive period, the Trust may also invest in shares of money market mutual funds. Money market mutual funds are investment companies. As a shareholder in a mutual fund, the Trust will bear its ratable share of its expenses, including management fees. There can be no assurance that such strategies will be successful. The Trust may not achieve its investment objective during a temporary defensive period or be able to sustain its historical distribution levels.
U.S. GOVERNMENT SECURITIES
U.S. government securities include (1) U.S. Treasury obligations, which differ in their interest rates, maturities and times of issuance: U.S. Treasury bills (maturities of one year or less), U.S. Treasury notes (maturities of one year to ten years) and U.S. Treasury bonds (generally maturities of greater than ten years) and (2) obligations issued or guaranteed by U.S. Government agencies and instrumentalities that are supported by any of the following: (i) the full faith and credit of the U.S. Treasury, (ii) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. Treasury, (iii) discretionary authority of the U.S. government to purchase certain obligations of the U.S. government agency or instrumentality or (iv) the credit of the agency or instrumentality. The Trust also may invest in any other security or agreement collateralized or otherwise secured by U.S. government securities. Agencies and instrumentalities of the U.S. government include but are not limited to: Federal Land Banks, Federal Financing Banks, Banks for Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks, Federal Home Loan Banks, FHLMC, FNMA, GNMA, Student Loan Marketing Association, United States Postal Service, Small Business Administration, Tennessee Valley Authority and any other enterprise established or sponsored by the U.S. government. Because the U.S. government generally is not obligated to provide support to its instrumentalities, the Trust will invest in obligations issued by these instrumentalities only if the Sub-Adviser determines that the credit risk with respect to such obligations is minimal.
PORTFOLIO TURNOVER
The Trust will buy and sell securities to seek to accomplish its investment objective. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Trust. Portfolio turnover generally involves some expense to the Trust, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. Higher portfolio
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The Trusts investments
turnover may decrease the after-tax return to individual investors in the Trust to the extent it results in an increase in the short-term capital gains portion of distributions to shareholders. The Trusts portfolio turnover rate may vary greatly from year to year.
INVESTMENT RESTRICTIONS
The Trust has adopted certain other investment limitations designed to limit investment risk. These limitations are fundamental and may not be changed without the approval of the holders of a majority of the outstanding Common Shares, as defined in the 1940 Act (and preferred shares, if any, voting together as a single class), which is defined by the 1940 Act as the lesser of (i) 67% or more of the Trusts voting securities present at a meeting, if the holders of more than 50% of the Trusts outstanding voting securities are present or represented by proxy; or (ii) more than 50% of the Trusts outstanding voting securities, or such higher voting standard as set forth herein. See Investment Restrictions in the SAI for a complete list of the fundamental investment policies of the Trust.
The Trust currently anticipates utilizing leverage to seek to enhance total return and income. The Trust may use leverage through (i) Indebtedness, including through borrowing from financial institutions or issuance of debt securities, including notes or commercial paper, (ii) the issuance of Preferred Shares and/or (iii) reverse repurchase agreements, securities lending, short sales or derivatives, such as swaps, futures or forward contracts, that have the effect of leverage (portfolio leverage). Under current market conditions, the Trust initially expects to utilize leverage through Indebtedness in an aggregate amount of approximately 25%-30% of the Trusts Managed Assets (including the proceeds of leverage). The Trust will not utilize leverage, either through Indebtedness, Preferred Shares or portfolio leverage, in an aggregate amount in excess of 40% of the Trusts Managed Assets (including the proceeds of leverage).
The Adviser and the Sub-Adviser anticipate that the use of leverage may result in higher total return to Common Shareholders over time; however, there can be no assurance that such expectations will be realized or that a leveraging strategy will be successful in any particular time period. Use of leverage creates an opportunity for increased income and capital appreciation but, at the same time, creates special risks. The use of leverage will cause the Trusts net asset value, market price and level of distributions to be more volatile than if leverage were not used. The costs associated with the issuance of leverage will be borne by the Trust, which will result in a reduction of net asset value of the Common Shares and as a result such costs will be borne by Common Shareholders. The fees paid to the Adviser, and thereby to the Sub-Adviser, will be calculated on the basis of the Trusts Managed Assets, including proceeds from leverage, so the fees paid to the Adviser and Sub-Adviser will be higher when leverage is utilized. Common Shareholders bear the portion of the investment advisory fee attributable to the assets purchased with the proceeds of leverage, which means that Common Shareholders effectively bear the entire management fee. There can be no assurance that a leveraging strategy will be utilized or, if utilized, will be successful.
INDEBTEDNESS
Under the 1940 Act the Trust may not incur Indebtedness if, immediately after incurring such Indebtedness, the Trust would have asset coverage (as defined in the 1940 Act) of less than 300% (i.e., for every dollar of Indebtedness outstanding, the Trust is required to have at least three dollars of total assets, including the proceeds of leverage). In addition, the Trust generally is not permitted to declare any cash dividend or other distribution on its common shares unless, at the time of such declaration and after deducting the amount of such dividend or other distribution, the Trust maintains asset coverage of 300%. However, the foregoing restriction does not apply with respect to certain types of Indebtedness of the Trust, including a line of credit or other privately arranged borrowings from a financial institution.
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Use of leverage
Pursuant to the Trusts Indebtedness, lenders would have the right to receive interest on and repayment of principal of any such Indebtedness, which right will be senior to those of common shareholders. The terms of any such Indebtedness may require the Trust to pay a fee to maintain a line of credit, such as a commitment fee, or to maintain minimum average balances with a lender. Any such requirements would increase the cost of such Indebtedness over the stated interest rate. If the Trust utilizes Indebtedness, the Common Shareholders will indirectly bear the offering costs of the issuance of any Indebtedness.
The 1940 Act grants to the lenders, under certain circumstances, certain voting rights in the event of default in the payment of interest on or repayment of principal. Failure to maintain certain asset coverage requirements could result in an event of default and entitle the debt holders to elect a majority of the Board of Trustees.
Credit facility
The Trust currently intends to arrange a floating rate credit facility with one or more banks or other financial institutions pursuant to which the Trust would be entitled to borrow funds from time to time in accordance with the terms of such credit facility after the consummation of this offering. Any such borrowings, as well as the issuance of notes or other forms of Indebtedness, would constitute leverage and would be subject to the 300% asset coverage requirements imposed by the 1940 Act described above. No assurance can be provided that such Credit Facility will be entered into and the Trust may choose not to enter into a credit facility.
Under the terms of a credit facility, the Trust may be required to prepay outstanding amounts or incur a penalty rate of interest upon the occurrence of certain events of default. The Trust expects that a credit facility would contain customary covenants that, among other things, likely would limit the Trusts ability to pay distributions in certain circumstances, incur additional debt, change its fundamental investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the 1940 Act. The Trust may be required to pledge some or all of its assets and to maintain a portion of its assets in cash or high-grade securities as a reserve against interest or principal payments and expenses. The Trust expects that any credit facility would have customary covenant, negative covenant and default provisions. There can be no assurance that the Trust will enter into an agreement for a credit facility, or, if it does, that the Trust would receive terms and conditions representative of the foregoing, or that additional material terms will not apply. In addition, if entered into, the credit facility may in the future be replaced or refinanced by one or more credit facilities having substantially different terms or by the issuance of preferred shares or debt securities.
Notes
The Trust may also issue notes or other debt securities. As a condition to obtaining financing or obtaining ratings on the notes or other debt securities, the terms of any notes or other debt securities issued would be expected to include asset coverage maintenance provisions that would require the redemption of the notes or other debt securities in the event of non-compliance by the Trust and might also prohibit dividends and other distributions on the Common Shares in such circumstances. In order to meet such redemption requirements, the Trust might have to liquidate portfolio securities. These liquidations and redemptions, or reductions in Indebtedness, would cause the Trust to incur related transaction costs and could result in capital losses. Prohibitions on dividends and other distributions could impair the Trusts ability to qualify as a RIC under the Code.
If the Trust issues notes or other debt securities, it may be subject to certain restrictions imposed by guidelines of one or more ratings agencies that may issue ratings for the notes or may be subject to covenants or other restrictions imposed by its lenders. These guidelines would be expected to impose asset coverage or portfolio composition requirements that would be more stringent than those imposed on the Trust by the 1940 Act. It is not anticipated that these covenants or guidelines would impede the Sub-Adviser from managing the Trust portfolio in accordance with its investment objective and policies. If the Trust were
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Use of leverage
to issue notes or other debt securities as well as utilize a credit facility, such notes would have an equal security interest, if any, with and rank pari passu , or equally in right of payment, with any borrowings under the credit facility.
PREFERRED SHARES
Under the 1940 Act, the Trust may not issue Preferred Shares if, immediately after issuance, the Trust would have asset coverage (as defined in the 1940 Act) of less than 200% (i.e., for every dollar of Preferred Shares outstanding, the Trust is required to have at least two dollars of total assets, including the proceeds of leverage). The Trust would not be permitted to declare any distribution (unless payable in stock) on its capital stock or purchase its capital stock unless, at the time of such declaration or purchase, the Trust has an asset coverage of at least 200% after deducting the amount of such distribution or purchase price, as applicable.
If the Trust has Preferred Shares outstanding, two of the Trusts trustees will be elected by the holders of Preferred Shares voting separately as a class. The remaining trustees of the Trust will be elected by Common Shareholders and preferred shareholders voting together as a single class. In the event dividends on the preferred shares are unpaid in an amount equal to two full years dividends on such securities, holders of Preferred Shares would be entitled to elect a majority of the directors of the Trust (subject to any prior rights, if any, of the holders of any other class of senior securities outstanding) and continue to be so represented until all dividends in arrears shall have been paid or otherwise provided for. Additionally, the holders of Preferred Shares would have separate voting rights for certain matters pursuant to the 1940 Act and the terms of the Preferred Shares.
In addition, as a condition to obtaining ratings on the Preferred Shares, the terms of the Preferred Shares would be expected to include asset coverage maintenance provisions that would require the redemption of Preferred Shares in the event of non-compliance by the Trust and might also prohibit dividends and other distributions on the Common Shares in such circumstances. In order to meet such redemption requirements, the Trust might have to liquidate portfolio securities. These liquidations and redemptions would cause the Trust to incur related transaction costs and could result in capital losses. Prohibitions on dividends and other distributions could impair the Trusts ability to qualify as a RIC under the Code.
If the Trust issues Preferred Shares, it may be subject to certain restrictions imposed by guidelines of one or more ratings agencies that may issue ratings for Preferred Shares issued by the Trust. These guidelines would be expected to impose asset coverage or portfolio composition requirements that would be more stringent than those imposed on the Trust by the 1940 Act. It is not anticipated that these covenants or guidelines would impede the Sub-Adviser from managing the Trusts portfolio in accordance with its investment objective and policies.
The Trust has no present intention to issue preferred shares, although it may do so in the future.
DERIVATIVES
In addition, the Trust may engage in certain derivatives transactions that have economic characteristics similar to leverage. To the extent the terms of such transactions obligate the Trust to make payments, the Trust intends to earmark or segregate cash or liquid securities in an amount at least equal to the current value of the amount then payable by the Trust under the terms of such transactions or otherwise cover such transactions in accordance with applicable interpretations of the staff of the SEC. As a result of such segregation or cover, the Trusts obligations under such transactions will not be considered indebtedness for purposes of the 1940 Act, including the asset coverage requirements applicable to indebtedness under the 1940 Act, but the leverage effect of such transactions will be treated as portfolio leverage subject to the Trusts policy not to use leverage in excess of 40% of its Managed Assets. To the extent that the Trusts obligations under such transactions are not so segregated or covered, such obligations may be considered senior securities representing indebtedness under the 1940 Act and therefore subject to the 300% asset
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Use of leverage
coverage requirement described above. The Trusts calculation of its portfolio leverage includes leverage incurred by the Trust through portfolio transactions (reverse repurchase agreements, securities lending, short sales or derivatives, such as swaps, futures or forward contracts), that have the effect of leverage. For the avoidance of doubt, the Trusts calculation of its portfolio leverage does not include the leveraged nature of credit instruments, such as structured credit instruments, in which the Trust invests.
EFFECTS OF LEVERAGE
Assuming Indebtedness representing approximately 30% of the Trusts Managed Assets, at an annual interest rate of 2.55% payable on such Indebtedness, the income generated by the Trusts portfolio (net of non-leverage expenses) must exceed 0.77% in order to cover such interest payments and other expenses specifically related to Indebtedness. Of course, these numbers are merely estimates, used for illustration. Actual interest rates may vary frequently and may be significantly higher or lower than the rate assumed above.
The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on Common Share total return, assuming investment portfolio total returns (comprised of income and changes in the value of securities held in the Trusts portfolio) of -10%, -5%, 0%, 5% and 10%. The table further reflects the use of Indebtedness representing approximately 30% of the Trusts Managed Assets, net of expenses, and the Trusts currently projected annual interest rate on its borrowings of 2.55%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Trust, and therefore the Trust. See Risks.
Assumed Portfolio Total Return (Net of Expenses) |
-10 | % | -5 | % | 0 | % | 5 | % | 10 | % | ||||||||||
Common Share Total Return |
-15.38 | % | -8.23 | % | -1.09 | % | 6.05 | % | 13.20 | % |
Common Share Total Return is composed of two elements: the distributions paid by the Trust (the amount of which is largely determined by the net investment income of the Trust after paying interest and other expenses on its leverage) and gains or losses on the value of the securities the Trust owns. As required by SEC rules, the table above assumes that the Trust, and therefore the Trust, is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0% the Trust must assume that the interest received on the Trusts portfolio investments is entirely offset by losses in the value of those investments.
Investors should consider the following risk factors and special considerations associated with investing in the Trust. An investment in the Trust is subject to investment risk, including the possible loss of your entire investment.
NO PRIOR HISTORY
The Trust is a newly-organized, diversified, closed-end management investment company with no history of operations. As a result, prospective investors have no track record or operational history upon which to base their investment decision.
INVESTMENT AND MARKET RISK
An investment in Common Shares is subject to investment risk, including the possible loss of the entire principal amount that you invest. Your investment in Common Shares represents an indirect investment in the securities owned by the Trust. Your Common Shares at any point in time may be worth less than your original investment, even after taking into account the reinvestment of distributions. A prospective investor should invest in the Common Shares only if the investor can sustain a complete loss in its investment.
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MARKET DISCOUNT RISK
Shares of closed-end management investment companies frequently trade at a discount from their net asset value, which is a risk separate and distinct from the risk that the Trusts net asset value could decrease as a result of its investment activities. Although the value of the Trusts net assets is generally considered by market participants in determining whether to purchase or sell Common Shares, whether investors will realize gains or losses upon the sale of Common Shares will depend entirely upon whether the market price of Common Shares at the time of sale is above or below the investors purchase price for Common Shares. Because the market price of Common Shares will be determined by factors such as net asset value, dividend and distribution levels (which are dependent, in part, on expenses), supply of and demand for Common Shares, stability of dividends or distributions, trading volume of Common Shares, general market and economic conditions and other factors beyond the control of the Trust, the Trust cannot predict whether Common Shares will trade at, below or above net asset value or at, below or above the initial public offering price. This risk may be greater for investors expecting to sell their Common Shares soon after the completion of the public offering, as the net asset value of the Common Shares will be reduced immediately following the offering as a result of the payment of certain offering costs. Common Shares of the Trust are designed primarily for long-term investors; investors in Common Shares should not view the Trust as a vehicle for trading purposes.
BELOW INVESTMENT GRADE SECURITIES RISK
The Trust intends to invest primarily in below investment grade credit instruments, which are commonly referred to as high-yield securities or junk bonds. Investment in securities of below investment grade quality involves substantial risk of loss. Securities of below investment grade quality are considered predominantly speculative with respect to the issuers capacity to pay interest and repay principal when due and therefore involve a greater risk of default or decline in market value due to adverse economic and issuer-specific developments. Issuers of below investment grade securities are not perceived to be as strong financially as those with higher credit ratings. These issuers face ongoing uncertainties and exposure to adverse business, financial or economic conditions and are more vulnerable to financial setbacks and recession than more creditworthy issuers, which may impair their ability to make interest and principal payments. Securities of below investment grade quality display increased price sensitivity to changing interest rates and to a deteriorating economic environment. The market values of certain below investment grade securities tend to reflect individual issuer developments to a greater extent than do higher-rated securities, which react primarily to fluctuations in the general level of interest rates. The market values for securities of below investment grade quality tend to be more volatile and such securities tend to be less liquid than investment grade debt securities, which could result in the Trust being unable to sell such securities for an extended period of time, if at all. The market for high-yield securities has historically been subject to disruptions that have caused substantial volatility in the prices of such securities. Consolidation in the financial services industry has resulted in there being fewer market makers for high-yield securities, which may result in further risk of illiquidity and volatility with respect to high-yield securities, and this trend may continue in the future. To the extent that a secondary market does exist for certain below investment grade securities, the market for them may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Because of the substantial risks associated with investments in below investment grade securities, you could have an increased risk of losing money on your investment in Common Shares, both in the short-term and the long-term.
The ratings of Moodys, S&P, Fitch and other nationally recognized statistical rating organizations (NRSRO) represent their opinions as to the quality of the obligations which they undertake to rate. Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. To the extent that the Trust invests in securities that have not been rated by an NRSRO, the Trusts ability to achieve its investment objectives will be more dependent on the Sub-Advisers credit analysis than would be the case when the Trust invests in rated securities.
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The Trust may invest in securities rated in the lower rating categories (rated Caa1/CCC+ or below, or unrated but judged to be of comparable quality by the Sub-Adviser). For these securities, the risks associated with below investment grade instruments are more pronounced. Investments in the securities of financially distressed issuers involve substantial risks. See RisksStressed and Distressed Investments Risk.
STRUCTURED CREDIT INSTRUMENTS RISK
Holders of structured credit instruments bear risks of the underlying investments, index or reference obligation as well as risks associated with the issuer of the instrument, which is often a special purpose vehicle, and may also be subject to counterparty risk. As an investor in structured credit instruments, the Trust typically will have the right to receive payments only from the issuer of the structured credit instrument, and generally would not have direct rights against the issuer of or entity that sold the underlying assets. While certain structured credit instruments enable the Trust to obtain exposure to a pool of credit instruments without the brokerage and other expenses associated with directly holding the same instruments, investors in structured credit instruments generally pay their share of the administrative and other expenses of the issuer of the instrument. The prices of indices and instruments underlying structured credit instruments, and, therefore, the prices of structured credit instruments, will be influenced by, and will rise and fall in response to, the same types of political and economic events that affect issuers of securities and capital markets generally. If the issuer of a structured credit instrument uses shorter term financing to purchase longer term instruments, the issuer may be forced to sell its instruments at below market prices if it experiences difficulty in obtaining short-term financing, which may adversely affect the value of the structured credit instruments owned by the Trust. Certain structured credit instruments may be thinly traded or have a limited trading market.
The Trust may invest in structured credit instruments collateralized by low grade or defaulted loans or securities. Investments in such structured credit instruments are subject to the risks associated with below investment grade securities. Such securities are characterized by high risk.
The Trust may invest in senior classes and subordinated classes, including residual or equity interests, issued by structured credit vehicles. The payment of cash flows from the underlying assets to senior classes take precedence over those of subordinated classes, and therefore subordinated classes are subject to greater risk. Furthermore, the leveraged nature of each subordinated class may magnify the adverse impact on such class of changes in the value of the assets, changes in the distributions on the assets, defaults and recoveries on the assets, capital gains and losses on the assets, prepayment on the assets and availability, price and interest rates of the assets.
CLO RISK
CLOs often involve risks that are different from or more acute than risks associated with other types of credit instruments. Generally, there may be less information available to the Trust regarding the underlying investments held by CLOs than if the Trust had invested directly in credit securities of the underlying issuers. Trust shareholders will not know the details of the underlying investments of the CLOs in which the Trust invests. Due to their often complicated structures, various CLOs may be difficult to value and may constitute illiquid investments. In addition, there can be no assurance that a liquid market will exist in any CLO when the Trust seeks to sell its interest therein. Moreover, the value of CLOs may decrease if the ratings agencies reviewing such securities revise their ratings criteria and, as a result, lower their original rating of a CLO in which the Trust has invested. Further, the complex structure of the security may produce unexpected investment results. Also, it is possible that the Trusts investment in a CLO will be subject to certain contractual limitations on transfer.
The market value of CLO securities may be affected by, among other things, changes in the market value of the underlying assets held by the CLOs, changes in the distributions on the underlying assets, defaults and recoveries on the underlying assets, capital gains and losses on the underlying assets, prepayments on
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underlying assets and the availability, prices and interest rate of underlying assets. Therefore, changes in the market value of the Trusts CLO investments could be greater than the change in the market value of the underlying instruments.
CLOs in which the Trust invests in may hold underlying instruments that are concentrated in a limited number of industries or borrowers. A downturn in any particular industry or borrower in which a CLO is heavily invested may subject that vehicle, and in turn the Trust, to a risk of significant loss and could significantly impact the aggregate returns realized by the Trust.
Restructuring of investments held by CLOs
The manager of a CLO has broad authority to direct and supervise the investment and reinvestment of the investments held by the CLO, which may include the execution of amendments, waivers, modifications and other changes to the investment documentation in accordance with the collateral management agreement. During periods of economic uncertainty and recession, the incidence of amendments, waivers, modifications and restructurings of investments may increase. Such amendments, waivers, modifications and other restructurings will change the terms of the investments and in some cases may result in the CLO holding assets not meeting the CLOs criteria for investments. This could adversely impact the coverage tests under an indenture governing the notes issued by the CLO. Any amendment, waiver, modification or other restructuring that reduces the CLOs compliance with certain financial tests will make it more likely that the CLO will need to utilize cash to pay down the unpaid principal amount of secured notes to cure any breach in such test instead of making payments on subordinated notes. Any such use of cash would reduce distributions available and delay the timing of payments to the Trust.
The Trust cannot be certain that any particular restructuring strategy pursued by the CLO manager will maximize the value of or recovery on any investment. Any restructuring can fundamentally alter the nature of the related investment, and restructurings are not subject to the same underwriting standards that are employed in connection with the origination or acquisition of investments. Any restructuring could alter, reduce or delay the payment of interest or principal on any investment, which could delay the timing and reduce the amount of payments made to the Trust. Restructurings of investments might also result in extensions of the term thereof, which could delay the timing of payments made to the Trust.
If as a result of any such restructurings, the Sub-Adviser determines that continuing to hold instruments issued by such CLO is no longer in the best interest of the Trust, the Sub-Adviser may dispose of such CLO instruments. In certain instances, the Trust may be unable to dispose of such investments at advantageous prices and/or may be required to reinvest the proceeds of such disposition in lower-yielding investments.
CLO management risk
The activities of any CLO in which the Trust may invest will generally be directed by a collateral manager. In the Trusts capacity as holder of CLO securities, the Trust is generally not able to make decisions with respect to the management, disposition or other realization of any investment, or other decisions regarding the business and affairs, of that CLO. Consequently, the success of any CLOs in which the Trust invests will depend, in large part, on the financial and managerial expertise of the collateral managers investment professionals. Subject to certain exceptions, any change in the investment professionals of the collateral manager will not present grounds for termination of the collateral management agreement. In addition, such investment professionals may not devote all of their professional time to the affairs of the CLOs in which the Trust invests. There can be no assurance that for any CLO, in the event that underlying instruments are prepaid, the collateral manager will be able to reinvest such proceeds in new instruments with equivalent investment returns. If the collateral manager cannot reinvest in new instruments with equivalent investment returns, the interest proceeds available to pay interest on the CLO securities may be adversely affected.
The transaction documents relating to the issuance of CLO securities may impose eligibility criteria on the assets of the CLO, restrict the ability of the CLOs investment manager to trade investments and impose certain portfolio-wide asset quality requirements. These criteria, restrictions and requirements may limit the
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ability of the CLOs investment manager to maximize returns on the CLO securities. In addition, other parties involved in CLOs, such as third-party credit enhancers and investors in the rated tranches, may impose requirements that have an adverse effect on the returns of the various tranches of CLO securities. Furthermore, CLO securities issuance transaction documents generally contain provisions that, in the event that certain tests are not met (generally interest coverage and over-collateralization tests at varying levels in the capital structure), proceeds that would otherwise be distributed to holders of a junior tranche must be diverted to pay down the senior tranches until such tests are satisfied. Failure (or increased likelihood of failure) of a CLO to make timely payments on a particular tranche will have an adverse effect on the liquidity and market value of such tranche.
CLO SUBORDINATED NOTES RISK
The Trust may invest in subordinated notes issued by a CLO (often referred to as the residual or equity tranche), which are junior in priority of payment and are subject to certain payment restrictions generally set forth in an indenture governing the notes. In addition, CLO subdordinated notes generally do not benefit from any creditors rights or ability to exercise remedies under the indenture governing the notes. The subordinated notes are not guaranteed by another party. Subordinated notes are subject to greater risk that the senior notes issued by the CLO. CLOs are typically highly levered, utilizing up to approximately 10 times leverage, and therefore subordinated notes are subject to a higher risk of total loss. There can be no assurance that distributions on the assets held by the CLO will be sufficient to make any distributions or that the yield on the subordinated notes will meet the Trusts expectations.
CLOs typically have no significant assets other than their underlying instruments. Accordingly, payments on CLO investments are and will be payable solely from the cash flows from such instruments, net of all management fees and other expenses. CLOs generally may make payments on subordinated notes only to the extent permitted by the payment priority provisions of an indenture governing the notes issued by the CLO. CLO indentures generally provide that principal payments on subordinated notes may not be made on any payment date unless all amounts owing under secured notes are paid in full. In addition, if a CLO does not meet the asset coverage tests or the interest coverage test set forth in the indenture governing the notes issued by the CLO, cash would be diverted from the subordinated notes to first pay the secured notes in amounts sufficient to cause such tests to be satisfied.
The subordinated notes are unsecured and rank behind all of the secured creditors, known or unknown, of the issuer, including the holders of the secured notes it has issued. Consequently, to the extent that the value of the issuers portfolio of loan investments has been reduced as a result of conditions in the credit markets, defaulted loans, capital gains and losses on the underlying assets, prepayment or changes in interest rates, the value of the subordinated notes realized at their redemption could be reduced. Accordingly, the subordinated notes may not be paid in full and may be subject to up to 100% loss. As a result, relatively small numbers of defaults of instruments underlying CLOs in which the Trust holds subordinated notes may adversely impact the Trusts returns.
The market value of subordinated notes may be significantly affected by a variety of factors, including changes in the market value of the investments held by the issuer, changes in distributions on the investments held by the issuer, defaults and recoveries on those investments, capital gains and losses on those investments, prepayments on those investments and other risks associated with those investments. The leveraged nature of subordinated notes are likely to magnify the adverse impact on the subordinated notes of changes in the market value of the investments held by the issuer, changes in the distributions on those investments, defaults and recoveries on those investments, capital gains and losses on those investments, prepayments on those investments and availability, prices and interest rates of those investments. The Trust must be prepared to hold subordinated notes for an indefinite period of time or until their stated maturity.
CLO subordinated notes do not have a fixed coupon and payments on CLO subordinated notes will be based on the income received from the underlying collateral and the payments made to the secured notes, both of which may be based on floating rates. While the payments on CLO subordinated notes will vary,
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CLO subordinated notes may not offer the same level of protection against changes in interest rates as other floating rate instruments. An increase in interest rates would materially increase the financing costs of CLOs. Since underlying instruments held by a CLO may have LIBOR floors, there may not be corresponding increases in investment income to the CLO (if LIBOR increases but stays below the LIBOR floor rate of such instruments) resulting in smaller distribution payments on CLO subordinated notes.
Subordinated notes are illiquid investments and subject to extensive transfer restrictions, and no party is under any obligation to make a market for subordinated notes. At times, there may be no market for subordinated notes, and the Trust may not be able to sell or otherwise transfer subordinated notes at their fair value, or at all, in the event that it determines to sell them. Since 2007, subordinated notes issued in securitization transactions generally have experienced historically high volatility and significant fluctuations in market value. Additionally, some potential buyers of such notes may view securitization products as an inappropriate investment, thereby reducing the number of potential buyers and/or potentially affecting liquidity in the secondary market.
Subordinated notes are subject to certain transfer restrictions and can only be transferred to certain specified transferees. The issuer may, in the future, impose additional transfer restrictions to comply with changes in applicable law. Restrictions on the transfer of subordinated notes may further limit their liquidity.
Investments in CLO subordinated notes may have complicated accounting and tax implications.
CORPORATE CREDIT INVESTMENTS RISK
Corporate debt instruments pay fixed, variable or floating rates of interest. Some debt securities, such as zero coupon bonds, do not make regular interest payments but are issued at a discount to their principal or maturity value. The value of fixed-income securities in which the Trust invests will change in response to fluctuations in interest rates. In addition, the value of certain fixed-income securities can fluctuate in response to perceptions of creditworthiness, political stability or soundness of economic policies. Fixed-income securities are subject to the risk of the issuers inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk).
The reorganization of an issuer under the Federal or other bankruptcy laws may result in the issuers debt securities being cancelled without repayment, repaid only in part, or repaid in part or in whole through an exchange thereof for any combination of cash, debt securities, convertible securities, equity securities, or other instruments or rights in respect of the same issuer or a related entity. Fixed income securities generally are not traded on exchanges. The off-exchange market may be illiquid and there may be times when no counterparty is willing to purchase or sell certain securities. The nature of the market may make valuations difficult or unreliable.
SENIOR LOAN RISK
Senior Loans are generally of below investment grade credit quality and therefore are subject to greater risks than investment grade corporate obligations. The prices of these investments may be volatile and will generally fluctuate due to a variety of factors that are inherently difficult to predict, including, but not limited to, changes in interest rates, prevailing credit spreads, general economic conditions, financial market conditions, U.S. and non-U.S. economic or political events, developments or trends in any particular industry, and the financial condition of certain Borrowers. Additionally, Senior Loans have significant liquidity and market value risks since they are not traded in organized exchange markets but are traded by banks and other institutional counterparties. Furthermore, because such loans are privately syndicated and the applicable loan agreements are privately negotiated and customized, such loans are not purchased or sold as easily as publicly listed securities.
While such loans are generally intended to be secured by collateral, losses could result from default and foreclosure. Therefore, the value of the underlying collateral, the creditworthiness of the Borrower and the
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priority of the lien are each of great importance. The Adviser and the Sub-Adviser cannot guarantee the adequacy of the protection of the Trusts interests. If the terms of a Senior Loan do not require the Borrower to pledge additional collateral in the event of a decline in the value of the already pledged collateral, the Trust will be exposed to the risk that the value of the collateral will not at all times equal or exceed the amount of the Borrowers obligations under the Senior Loans. Furthermore, the Adviser and the Sub-Adviser cannot assure investors that claims may not be asserted that might interfere with enforcement of the Trusts rights. In the event of a foreclosure, the Trust may assume direct ownership of the underlying collateral. The liquidation proceeds upon sale of collateral may not satisfy the entire outstanding balance of principal and interest on the loan, resulting in a loss. Any costs or delays involved in the effectuation of a foreclosure of the loan or a liquidation of the underlying property will further reduce the proceeds and thus increase the loss. To the extent that a Senior Loan is collateralized by stock in the Borrower or its subsidiaries, such stock may lose all of its value in the event of the bankruptcy of the Borrower. Such Senior Loans involve a greater risk of loss.
Senior Loans are subject to legislative risk. If legislation or state or federal regulations impose additional requirements or restrictions on the ability of financial institutions to make loans, the availability of Senior Loans for investment by the Trust may be adversely affected. In addition, such requirements or restrictions could reduce or eliminate sources of financing for certain Borrowers. This would increase the risk of default. If legislation or federal or state regulations require financial institutions to increase their capital requirements this may cause financial institutions to dispose of Senior Loans that are considered highly levered transactions. Such sales could result in prices that, in the opinion of the Adviser and the Sub-Adviser, do not represent fair value. If the Trust attempts to sell a Senior Loan at a time when a financial institution is engaging in such a sale, the price the Trust could receive for the Senior Loan may be adversely affected.
SECOND LIEN LOANS RISK
Second lien loans are secured by liens on the collateral securing the loan that are subordinated to the liens of at least one other class of obligations of the related obligor, and thus, the ability of the Trust to exercise remedies after a second lien loan becomes a defaulted loan is subordinated to, and limited by, the rights of the senior creditors holding such other classes of obligations. In many circumstances, the Trust may be prevented from foreclosing on the collateral securing a second lien loan until the related senior loan is paid in full. Moreover, any amounts that might be realized as a result of collection efforts or in connection with a bankruptcy or insolvency proceeding involving a second lien loan must generally be turned over to the senior secured lender until the senior secured lender has realized the full value of its own claims. In addition, certain of the second lien loans may contain provisions requiring the Trusts interest in the collateral to be released in certain circumstances. These lien and payment obligation subordination provisions may materially and adversely affect the ability of the Trust to realize value from second lien loans.
UNSECURED LOAN RISK
Unsecured loans do not benefit from any security interest in the assets of the Borrower. Liens on such Borrowers assets, if any, will secure the applicable Borrowers obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by the Borrower under its secured loan agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before repayment of unsecured instruments held by the Trust. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy the Trusts unsecured obligations after payment in full of all secured loan obligations. If such proceeds were not sufficient to repay the outstanding secured loan obligations, then the Trusts unsecured claims would rank equally with the unpaid portion of such secured creditors claims against the borrowers remaining assets, if any.
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LOAN PARTICIPATION AND ASSIGNMENT RISK
The Trust may purchase Senior Loans, second lien loans and unsecured loans on a direct assignment basis from a participant in the original syndicate of lenders or from subsequent assignees of such interests. The Trust may also purchase, without limitation, participations in Senior Loans, second lien loans and unsecured loans. The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to the debt obligation; however, the purchasers rights can be more restricted than those of the assigning institution, and, in any event, the Trust may not be able to unilaterally enforce all rights and remedies under the loan and with regard to any associated collateral. A participation typically results in a contractual relationship only with the institution participating out the interest, not with the Borrower. In purchasing participations, the Trust generally will have no right to enforce compliance by the Borrower with the terms of the loan agreement against the Borrower, and the Trust may not directly benefit from the collateral supporting the debt obligation in which it has purchased the participation. As a result, the Trust will be exposed to the credit risk of both the Borrower and the institution selling the participation. Further, in purchasing participations in lending syndicates, the Trust may not be able to conduct the same due diligence on the Borrower with respect to a loan hat the Trust would otherwise conduct. In addition, as a holder of the participations, the Trust may not have voting rights or inspection rights that the Trust would otherwise have if it were investing directly in the loan, which may result in the Trust being exposed to greater credit or fraud risk with respect to the Borrower.
ILLIQUID INVESTMENTS RISK
The Trust expects to invest in restricted, as well as thinly traded, instruments and securities (including privately placed securities and instruments, which are assets which are subject to Rule 144A). There may be no trading market for these securities and instruments, and the Trust might only be able to liquidate these positions, if at all, at disadvantageous prices. As a result, the Trust may be required to hold such securities despite adverse price movements. Privately issued securities have additional risk considerations than investments in comparable public investments. Whenever the Trust invests in companies that do not publicly report financial and other material information, it assumes a greater degree of investment risk and reliance upon the Sub-Advisers ability to obtain and evaluate applicable information concerning such companies creditworthiness and other investment considerations.
Certain stressed and distressed investments, for various reasons, may not be capable of an advantageous disposition prior to the date the Trust is to be dissolved. The Trust may be required to sell, distribute in kind or otherwise dispose of investments at a disadvantageous time as a result of any such dissolution.
STRESSED AND DISTRESSED INVESTMENTS RISK
The Trust may invest in stressed and distressed credit instruments. The ability of the Trust to obtain a profit from these investments may often depend upon factors that are intrinsic to the particular issuer, rather than the market as a whole. Appreciation in the value of such investments may be contingent upon the occurrence of certain events, such as a successful reorganization or merger. If the expected event does not occur, the Trust may incur a loss on the position. Stressed and distressed investments may have a limited trading market, resulting in limited liquidity and presenting difficulties to the Trust in valuing its positions. Stressed and distressed investments by the nature of their issuers leveraged capital structures, will involve a high degree of financial risk. These investments may be unsecured and subordinated to substantial amounts of senior indebtedness, all or a significant portion of which may be secured. In addition, these investments may not be protected by financial covenants or limitations upon additional indebtedness, may have limited liquidity and may not be rated by a credit rating agency. Adverse changes in the financial condition of an issuer or in general economic conditions (or both) may impair the ability of such issuer to make payments on the subordinated securities and result in defaults on and declines in the value of such securities more quickly than in the case of the senior obligations of such issuer.
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Uncertain exit strategies
Due to the illiquid nature of many stressed and distressed investments, as well as the uncertainties of the reorganization and active management process, the Sub-Adviser may be unable to predict with confidence what the exit strategy will ultimately be for any given position, or that one will definitely be available. Exit strategies that appear to be viable when an investment is initiated may be precluded by the time the investment is ready to be realized, due to economic, legal, political or other factors.
Control position risk
Certain stressed and distressed investment opportunities may allow a holder to have significant influence on the management, operations and strategic direction of the portfolio companies in which it invests. The exercise of control and/or significant influence over a company imposes additional risks of liability for environmental damage, product defects, failure to supervise management and other types of liability in which the limited liability generally characteristic of business operations may be ignored. The exercise of control and/or significant influence over a portfolio company could expose the assets of the Trust to claims by such portfolio company, its securities holders and its creditors. While the Sub-Adviser intends to manage the Trust in a way that will minimize exposure to these risks, the possibility of successful claims cannot be precluded.
LEVERAGE RISK
The Trust currently anticipates utilizing leverage to seek to enhance total return and income. The Trust initially expects to employ leverage through the issuance of Indebtedness. There can be no assurance that the Advisers and the Sub-Advisers expectations will be realized or that a leveraging strategy will be successful in any particular time period. Use of leverage creates an opportunity for increased income and capital appreciation but, at the same time, creates special risks. Leverage is a speculative technique that exposes the Trust to greater risk and increased costs than if it were not implemented. There can be no assurance that a leveraging strategy will be utilized or will be successful.
The use of leverage by the Trust will cause the net asset value of the Common Shares to fluctuate significantly in response to changes in interest rates and other economic indicators. As a result, the net asset value, market price and dividend rate of the Common Shares is likely to be more volatile than those of a closed-end management investment company that is not exposed to leverage. In a declining market the use of leverage may result in a greater decline in the net asset value and market price of the Common Shares than if the Trust were not leveraged.
Leverage will increase operating costs, which may reduce total return. The Trust will have to pay interest on its Indebtedness, if any, which may reduce the Trusts return. This interest expense may be greater than the Trusts return on the underlying investment, which would negatively affect the performance of the Trust. Increases in interest rates that the Trust must pay on its Indebtedness will increase the cost of leverage and may reduce the return to Common Shareholders. This risk may be greater in the current market environment because interest rates are near historically low levels.
Certain types of Indebtedness subject the Trust to covenants in credit agreements relating to asset coverage and portfolio composition requirements. Certain Indebtedness issued by the Trust also may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for such Indebtedness. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act.
The Trust may have leverage outstanding during a shorter-term period during which such leverage may not be beneficial if the Trust believes that the long-term benefits of such leverage would outweigh the costs and portfolio disruptions associated with redeeming and reissuing such leverage. However, there can be no assurance that the Trusts judgment in weighing such costs and benefits will be correct.
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During the time in which the Trust is utilizing leverage, the amount of the fees paid to the Adviser, and thereby to the Sub-Adviser, for investment advisory services will be higher than if the Trust did not utilize leverage because the fees paid will be calculated based on the Trusts Managed Assets, including proceeds of leverage. This may create a conflict of interest between the Adviser and the Sub-Adviser on the one hand and the Common Shareholders, as holders of Indebtedness, Preferred Shares or other forms of leverage do not bear the management fee. Rather, Common Shareholders bear the portion of the management fee attributable to assets purchased with the proceeds of leverage, which means that Common Shareholders effectively bear the entire management fee. There can be no assurance that a leveraging strategy will be utilized or, if utilized, will be successful.
In addition, the Trust may engage in certain derivatives transactions that have economic characteristics similar to leverage. To the extent the terms of any such transaction obligate the Trust to make payments, the Trust intends to earmark or segregate cash or liquid securities in an amount at least equal to the current value of the amount then payable by the Trust under the terms of such transactions or otherwise cover such transactions in accordance with applicable interpretations of the staff of the SEC. To the extent the terms of any such transaction obligate the Trust to deliver particular securities to extinguish the Trusts obligations under such transactions, the Trust may cover its obligations under such transaction by either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or collateral without additional cash consideration.
OTHER INVESTMENT COMPANIES RISK
Investments in other investment companies present certain special considerations and risks not present in making direct investments in securities in which the Trust may invest. Investments in other investment companies involve operating expenses and fees that are in addition to the expenses and fees borne by the Trust. Such expenses and fees attributable to the Trusts investments in other investment companies are borne indirectly by Common Shareholders. Accordingly, investment in such entities involves expense and fee layering. Investments in other investment companies may expose the Trust to an additional layer of financial leverage. To the extent management fees of other investment companies are based on total gross assets, it may create an incentive for such entities managers to employ financial leverage, thereby adding additional expense and increasing volatility and risk. Investments in other investment companies also expose the Trust to additional management risk; the success of the Trusts investments in other investment companies will depend in large part on the investment skills and implementation abilities of the advisers or managers of such entities. Decisions made by the advisers or managers of such entities may cause the Trust to incur losses or to miss profit opportunities. To the extent the Trust invests in ETFs or other investment companies that seek to track a specified index, such investments will be subject to tracking error risk.
EXCHANGE-TRADED FUND RISK
For ETFs tracking an index of securities, the cumulative percentage increase or decrease in the net asset value of the shares of an ETF may over time diverge significantly from the cumulative percentage increase or decrease in the relevant index due to the compounding effect experienced by an ETF which results from a number of factors, including, leverage (if applicable), daily rebalancing, fees, expenses and interest income, which in turn results in greater non-correlation between the return of an ETF and its corresponding index. Moreover, because an ETFs portfolio turnover rate may be very high due to daily rebalancing, holding both long and short futures contracts, leverage (if applicable) and and/or market volatility, such ETF will incur additional brokerage costs, operating costs and may generate increased taxable capital gains, which, in turn, would adversely affect the value of the shares of such ETF. In addition, fixed-income ETFs that track an index often require some type of sampling or optimization because they are typically market benchmarks but not tradable portfolios. Such ETFs often include many more securities than equity ETFs, and the securities included are often less liquid, resulting in fewer opportunities and greater costs to replicate the relevant index. Many instruments in fixed-income indices are illiquid or hard to obtain, as many investors may buy them at issuance and hold them to maturity.
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SHORT SALES RISK
Short sales involve selling securities of an issuer short in the expectation of covering the short sale with securities purchased in the open market at a price lower than that received in the short sale. If the price of the issuers securities declines, the Trust may then cover the short position with securities purchased in the market. The profit realized on a short sale will be the difference between the price received in the sale and the cost of the securities purchased to cover the sale. The possible losses from selling short a security differ from losses that could be incurred from a cash investment in the security; the former may be unlimited, whereas the latter can only equal the total amount of the cash investment. Short selling activities are also subject to restrictions imposed by the federal securities laws and the various national and regional securities exchanges, which restrictions could limit the Trusts investment activities. There can be no assurance that securities necessary to cover a short position will be available for purchase.
Synthetically created short positions will involve both hedging situations, where the position is intended to wholly or partially offset risk associated with another position in a related security, and speculative situations, where the Sub-Adviser uses shorting techniques to take advantage of the decline in the price of particular assets. The Trust will generally realize a profit or a loss as a result of a synthetically created short position if the value of the underlying asset decreases or increases respectively during the relevant term of the short position. In addition, the Trust will be required to post collateral on such positions as required pursuant to the agreement with the relevant transaction counterparty. The use of short selling through credit default swaps and total return swaps will subject the Trust to counterparty credit risk in the event of a default by the counterparty which could result in the loss of collateral posted with such counterparty and gains to which the Trust would otherwise be entitled absent the default of the counterparty. In addition, depending on the nature of the synthetic instrument used by the Trust to create short exposure, the Trust could be subject to the risk of unlimited losses.
DERIVATIVES RISK
Derivatives are financial contracts in which the value depends on, or is derived from, the value of an underlying asset, reference rate or index. The Trust may, but is not required to, engage in various derivatives transactions for hedging and risk management purposes, to facilitate portfolio management and to seek to enhance total return of earn income. The Trusts use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of risks, such as interest rate risk, market risk, counterparty risk, and credit risk. They also involve the risk of mispricing or improper valuation and the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. If the Trust invests in a derivative instrument it could lose more than the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurance that the Trust will engage in these transactions to reduce exposure to other risks when that would be beneficial.
The instruments, indices and rates underlying derivative transactions expected to be entered into by the Trust may be extremely volatile in the sense that they are subject to sudden fluctuations of varying magnitude, and may be influenced by, among other things, government trade, fiscal, monetary and exchange control programs and policies; national and international political and economic events; and changes in interest rates. The volatility of such instruments, indices or rates, which may render it difficult or impossible to predict or anticipate fluctuations in the value of instruments traded by the Trust, could result in losses.
OFF-EXCHANGE DERIVATIVES RISK
The Trust may invest a portion of its assets in investments which are not traded on organized exchanges and as such are not standardized. Such transactions may include forward contracts, swaps or options. While some markets for such derivatives are highly liquid, transactions in off-exchange derivatives may involve greater risk than investing in exchange-traded derivatives because there is no exchange market on which to close out an open position. It may be impossible to liquidate an existing position, to assess the value of the position arising from an off-exchange transaction or to assess the exposure to risk. Bid and offer prices need
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not be quoted and, even where they are, they will be established by dealers in these instruments and consequently it may be difficult to establish what is a fair price. In respect of such trading, the Trust is subject to the risk of counterparty failure or the inability or refusal by a counterparty to perform with respect to such contracts. Market illiquidity or disruption could result in major losses to the Trust.
OPTIONS RISK
Trading in options involves a number of risks. Specific market movements of the option and the instruments underlying an option cannot be predicted. No assurance can be given that a liquid offset market will exist for any particular option or at any particular time. If no liquid offset market exists, the Trust might not be able to effect an offsetting transaction in a particular option. To realize any profit in the case of an option, therefore, the option holder would need to exercise the option and comply with margin requirements for the underlying instrument. A writer could not terminate the obligation until the option expired or the writer was assigned an exercise notice. The purchaser of an option is subject to the risk of losing the entire purchase price of the option. The writer of an option is subject to the risk of loss resulting from the difference between the premium received for the option and the price of the futures contract underlying the option that the writer must purchase or deliver upon exercise of the option. The writer of a naked option may have to purchase the underlying contract in the market for substantially more than the exercise price of the option in order to satisfy his delivery obligations. This could result in a large net loss.
FUTURES RISK
Futures contracts markets are highly volatile and are influenced by a variety of factors, including national and international political and economic developments. In addition, because of the low margin deposits normally required in futures trading, a high degree of leverage is typical of a futures trading account. As a result, a relatively small price movement in a futures contract may result in substantial losses to the trader. Moreover, futures positions are marked to market each day and variation margin payment must be paid to or by a trader. Positions in futures contracts may be closed out only on the exchange on which they were entered into or through a linked exchange, and no secondary market exists for such contracts. Certain futures exchanges do not permit trading in particular futures contracts at prices that represent a fluctuation in price during a single days trading beyond certain set limits. If prices fluctuate during a single days trading beyond those limits, the Trust could be prevented from promptly liquidating unfavorable positions and thus be subjected to substantial losses. When used for hedging purposes, an imperfect or variable degree of correlation between price movements of the futures contracts and the underlying investment sought to be hedged may prevent the Trust from achieving the intended hedging effect or expose the Trust to the risk of loss.
SWAPS RISK
The Trust may utilize swap agreements including, without limitation, interest rate, index and currency swap agreements. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than a year. In a standard swap transaction, two parties agree to exchange the returns earned on specified assets, such as the return on, or increase in value of, a particular dollar amount invested at a particular interest rate, in a particular foreign currency. The use of swaps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary securities transactions. There are risks relating to the financial soundness and creditworthiness of the counterparty to swap agreements. If the other party to an interest rate swap defaults, the Trusts risk of credit loss may be the amount of interest payments that the Trust is contractually obligated to receive on a net basis. However, where swap agreements require one partys payments to be up-front and timed differently than the other partys payments (such as is often the case with currency swaps), the entire principal value of the swap may be subject to the risk that the other party to the swap will default on its contractual delivery obligations. The investment performance of the Trust, however, may be adversely affected by the use of swaps if the Sub-Advisers forecasts of market values, interest rates or currency exchange rates are inaccurate.
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CREDIT DEFAULT SWAPS RISK
The Trust 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. The Trust may be either the buyer or seller in a credit default swap transaction. If the Trust is a buyer and no event of default occurs, the Trust may lose its investment and recover nothing. However, if an event of default occurs, the Trust (if the buyer) will receive the full notional value of the reference obligation that may have little or no value. As a seller, the Trust receives a fixed rate of income throughout the term of the contract provided that there is no default event. If an event of default occurs, the Trust must pay the buyer the full notional value of the reference obligation. Credit default swap transactions involve greater risks than if a Trust had invested in the reference obligation directly. Credit default swaps are subject to the risk of non-performance by the swap counterparty, including risks relating to the financial soundness and creditworthiness of the swap counterparty.
HEDGING TRANSACTIONS RISK
The success of any hedging strategy utilized by the Trusts will be subject to the Sub-Advisers ability to correctly assess the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the investments in the portfolio being hedged. Since the characteristics of many securities change as markets change or time passes, the success of the Trusts hedging strategy will also be subject to the Sub-Advisers ability to continually recalculate, readjust, and execute hedges in an efficient and timely manner.
While the Trust may enter into hedging transactions to seek to reduce risk, such transactions may result in a poorer overall performance for the Trust than if it had not engaged in any such hedging transactions. Hedging against a decline in the value of a portfolio position does not eliminate fluctuations in the values of those portfolio positions or prevent losses if the values of those positions decline. Rather, it establishes other positions designed to gain from those same declines, thus seeking to moderate the decline in the portfolio positions value. Such hedging transactions also limit the opportunity for gain if the value of the portfolio position should increase. For a variety of reasons, the Sub-Adviser may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Such imperfect correlation may prevent the Trust from achieving the intended hedge or expose the Trust to risk of loss. In addition, it is not possible to hedge fully or perfectly against any risk, and hedging entails its own costs. The Sub-Adviser may determine, in its sole discretion, not to hedge against certain risks and certain risks may exist that cannot be hedged. Furthermore, the Sub-Adviser may not anticipate a particular risk so as to hedge against it effectively. The successful utilization of hedging and risk management transactions requires skills complementary to those needed in the selection of the Trusts portfolio holdings.
The Trust may seek to hedge currency risks by investing in currencies, currency exchange forward or futures contracts, swaps, swaptions or any combination thereof (whether or not exchange-traded), but these or other instruments necessary to hedge such currency risks may not generally be available, may not provide a perfect hedge or may not be, in the Sub-Advisers judgment, economically priced. There can be no assurance that these strategies will be effective, and such techniques entail costs and additional risks.
COUNTERPARTY RISK
The Trust will be subject to credit risk with respect to the counterparties to the derivative contracts entered into by the Trust. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Trust may experience significant delays in obtaining any recovery under the derivative contract in bankruptcy or other reorganization proceeding. The Trust may obtain only a limited recovery or may obtain no recovery in such circumstances. Concerns about, or a default by, one large market participant could lead to significant liquidity problems for other participants. If a counterpartys credit becomes significantly impaired, multiple requests for collateral posting in a short period of time could increase the risk that the Trust may not receive adequate collateral.
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The counterparty risk for cleared derivatives is generally lower than for uncleared derivatives transactions since generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties performance under the contract as each party to a trade looks only to the clearing organization for performance of financial obligations under the derivative contract. However, there can be no assurance that a clearing organization, or its members, will satisfy its obligations to the Trust.
SYNTHETIC INVESTMENT RISK
The Trust may be exposed to certain additional risks should the Sub-Adviser uses derivatives transactions as a means to synthetically implement the Trusts investment strategies. Customized derivative instruments will likely be highly illiquid, and it is possible that the Trust will not be able to terminate such derivative instruments prior to their expiration date or that the penalties associated with such a termination might impact the Trusts performance in a materially adverse manner. Synthetic investments may be imperfectly correlated to the investment the Sub-Adviser is seeking to replicate. There can be no assurance that the Sub-Advisers judgments regarding the correlation of any particular synthetic investment will be correct. The Trust may be exposed to certain additional risks associated with derivatives transactions should the Sub-Adviser use derivatives as a means to synthetically implement the Trusts investment strategies. The Trust would be subject to counterparty risk in connection with such transactions. If the Trust enters into a derivative instrument whereby it agrees to receive the return of a security or financial instrument or a basket of securities or financial instruments, it will typically contract to receive such returns for a predetermined period of time. During such period, the Trust may not have the ability to increase or decrease its exposure. In addition, such customized derivative instruments will likely be highly illiquid, and it is possible that the Trust will not be able to terminate such derivative instruments prior to their expiration date or that the penalties associated with such a termination might impact the Trusts performance in a material adverse manner. Furthermore, derivative instruments typically contain provisions giving the counterparty the right to terminate the contract upon the occurrence of certain events, such as a decline in the value of the reference securities and material violations of the terms of the contract or the portfolio guidelines as well as other events determined by the counterparty. If a termination were to occur, the Trusts return could be adversely affected as it would lose the benefit of the indirect exposure to the reference securities and it may incur significant termination expenses.
SEGREGATION AND COVER RISK
In connection with certain derivatives transactions, the Trust may be required to segregate liquid assets or otherwise cover such transactions and/or to deposit amounts as premiums or to be held in margin accounts. Regulators have adopted rules that generally require margin to be posted and collected for off-exchange derivatives. Such amounts may not otherwise be available to the Trust for investment purposes. The Trust may earn a lower return on its portfolio than it might otherwise earn if it did not have to segregate assets in respect of, or otherwise cover, its derivatives transactions positions. To the extent the Trusts assets are segregated or committed as cover, it could limit the Trusts investment flexibility. Segregating assets and covering positions will not limit or offset losses on related positions.
INTEREST RATE RISK
Interest rate risk is the risk that credit securities will decline in value because of changes in market interest rates. When market interest rates rise, the market value of fixed income credit securities generally will fall. These risks may be greater in the current market environment because interest rates are near historically low levels. Prevailing interest rates may be adversely impacted by market and economic factors. If interest rates rise the markets may experience increased volatility, which may adversely affect the value and/or liquidity of certain of the Trusts investments. The prices of longer-term securities fluctuate more than prices of shorter-term securities as interest rates change. The Trusts use of leverage will tend to increase the interest rate risk to which its Common Shares are subject. The Trust invests primarily in variable and floating rate credit instruments and other structured credit investments, which generally are less sensitive to interest rate changes than fixed rate instruments, but generally will not increase in value if interest rates decline.
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PREPAYMENT RISK
The frequency at which prepayments (including voluntary prepayments by the obligors and accelerations due to defaults) occur on bonds and loans will be affected by a variety of factors including the prevailing level of interest rates and spreads as well as economic, demographic, tax, social, legal and other factors. Generally, obligors tend to prepay their fixed rate obligations when prevailing interest rates fall below the coupon rates on their obligations. Similarly, floating rate issuers and borrowers tend to prepay their obligations when spreads narrow.
In general, premium securities (securities whose market values exceed their principal or par amounts) are adversely affected by faster than anticipated prepayments, and discount securities (securities whose principal or par amounts exceed their market values) are adversely affected by slower than anticipated prepayments. Since many fixed rate obligations will be discount securities when interest rates and/or spreads are high, and will be premium securities when interest rates and/or spreads are low, such securities and asset-backed securities may be adversely affected by changes in prepayments in any interest rate environment.
The adverse effects of prepayments may impact the Trusts portfolio in several ways. During periods of declining interest rates, when the issuer of a security exercises its option to prepay principal earlier than scheduled, the Trust may be required to reinvest the proceeds of such prepayment in lower-yielding securities. Particular investments may experience outright losses, as in the case of an interest-only security in an environment of faster actual or anticipated prepayments. In addition, particular investments may underperform relative to hedges that the Sub-Adviser may have constructed for these investments, resulting in a loss to the Trusts overall portfolio. In particular, prepayments (at par) may limit the potential upside of many securities to their principal or par amounts, whereas their corresponding hedges often have the potential for unlimited loss.
INFLATION/DEFLATION RISK
Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Shares and distributions can decline. In addition, during any periods of rising inflation, the dividend rates or borrowing costs associated with the Trusts use of leverage would likely increase, which would tend to further reduce returns to Common Shareholders. Deflation risk is the risk that prices throughout the economy decline over timethe opposite of inflation. Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Trusts portfolio.
DURATION AND MATURITY RISK
The Trust has no set policy regarding maturity or duration of credit instruments in which it may invest or of the Trusts portfolio generally. The price of fixed rate securities with longer maturities or duration generally is more significantly impacted by changes in interest rates than those of fixed rate securities with shorter maturities or duration. Therefore, generally speaking, the longer the duration of the Trusts portfolio, the more exposure the Trust will have to interest rate risk described above. The Sub-Adviser may seek to adjust the portfolios duration or maturity based on its assessment of current and projected market conditions and all factors that the Sub-Adviser deems relevant. Any decisions as to the targeted duration or maturity of any particular category of investments or of the Trusts portfolio generally will be made based on all pertinent market factors at any given time. The Trust may incur costs in seeking to adjust the portfolio average duration or maturity. There can be no assurance that the Sub-Advisers assessment of current and projected market conditions will be correct or that any strategy to adjust the portfolios duration or maturity will be successful at any given time.
CREDIT RISK
Credit risk is the risk that an issuer of securities will be unable to pay principal and interest when due, or that the value of the security will suffer because investors believe the issuer is less able to pay. This is broadly
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gauged by the credit ratings of the securities in which the Trust invests. However, ratings are only the opinions of the agencies issuing them, may change less quickly than relevant circumstances and are not absolute guarantees of the quality of the securities. Furthermore, the Trusts investments may not be rated by any rating agency or may be below investment grade. The Trust will be more dependent upon the judgment of the Sub-Adviser as to the credit quality of such unrated securities. A default, downgrade or credit impairment of any of its investments could result in a significant or even total loss of the investment.
NON-U.S. INVESTMENTS RISK
Issuers of foreign securities are not subject to United States reporting and accounting requirements. Foreign reporting requirements may result in less information being available or in a lack of uniformity in the manner in which information is presented. The risk of loss associated with investments in securities of foreign issuers, particularly in less developed markets, include currency exchange risks, expropriation, or limits on repatriating an investment, government intervention, confiscatory taxation, political, economic or social instability, illiquidity, less efficient markets, price volatility and market manipulation.
Some foreign securities may be subject to brokerage or stock transfer taxes levied by foreign governments, which would have the effect of increasing the cost of investment and which may reduce the realized gain or increase the loss on such securities at the time of sale. The issuers of some of these securities, such as banks and other financial institutions, may be subject to less stringent or different regulations than would be the case for U.S. issuers and therefore potentially carry greater risk. Custodial expenses for a portfolio of non-U.S. securities generally are higher than for a portfolio of U.S. securities. In addition, dividend and interest payments from, and capital gains in respect of, certain foreign securities may be subject to foreign taxes that may or may not be reclaimable.
In addition, costs associated with transactions in non-U.S. markets (including brokerage, execution, clearing and custodial costs) may be substantially higher than costs associated with transactions in U.S. markets. Such non-U.S. transactions may also involve additional costs for the purchase or sale of currencies in which the Trusts assets are denominated in order to settle such transactions. Furthermore, clearing and registration procedures may be under-developed enhancing the risks of error, fraud, or default.
Many of the laws that govern foreign investment, securities transactions and other contractual relationships in non-U.S. securities markets are different than or not as fully developed as those in the United States. As a result, the Trust may be subject to a number of risks, including inadequate investor protection, contradictory legislation, incomplete, unclear and changing laws, ignorance or breaches of regulations on the part of other market participants, lack of established or effective avenues for legal redress, lack of standard practices and confidentiality customs characteristic of U.S. markets, and lack of enforcement of existing regulations. There can be no assurance that this difficulty in protecting and enforcing rights will not have a material adverse effect on the Trust and its operations. In addition, the income and gains of the Trust may be subject to withholding taxes imposed by foreign governments for which investors may not receive a full foreign tax credit. Furthermore, it may be more difficult to obtain and enforce a judgment in a court outside of the United States than to enforce one in the United States.
BANKRUPTCY CASES RISK
Many of the events within a bankruptcy case are adversarial and often beyond the control of the creditors. While creditors generally are afforded an opportunity to object to significant actions, there can be no assurance that a bankruptcy court would not approve actions that may be contrary to the interests of the partners. Furthermore, there are instances where creditors lose their ranking and priority as such if they are considered to have taken over management and functional operating control of a debtor. Generally, the duration of a bankruptcy case can only be roughly estimated. The reorganization of a Borrower usually involves the development and negotiation of a plan of reorganization, plan approval by creditors and confirmation by the bankruptcy court. This process can involve substantial legal, professional and
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administrative costs to the Borrower and the Trust; it is subject to unpredictable and lengthy delays; and during the process the Borrowers competitive position may erode, key management may depart and the company may not be able to invest adequately.
U.S. bankruptcy law permits the classification of substantially similar claims in determining the classification of claims in a reorganization for the purpose of voting on a plan of reorganization. Because the standard for classification is vague, there exists a significant risk that the Trusts influence with respect to a class of securities can be lost by the inflation of the number and the amount of claims in, or other gerrymandering of, the class.
In addition, certain administrative costs and claims that have priority by law over the claims of certain creditors (for example, claims for taxes) may be quite high. The administrative costs in connection with a bankruptcy proceeding are frequently high and will be paid out of the debtors estate prior to any return to creditors (other than out of assets or proceeds thereof, which are subject to valid and enforceable liens and other security interests). In addition, certain claims that have priority by law over the claims of certain creditors (for example, claims for taxes) may be quite high.
CREDITOR COMMITTEE RISK
The Sub-Adviser, on behalf of the Trust as a holder of distressed investments and other credit instruments, may participate on committees formed by creditors to negotiate with the management of financially troubled companies that may or may not be in bankruptcy or seek to negotiate directly with debtors with respect to restructuring issues. In situations where the Sub-Adviser chooses to join creditors committees, the Trust would likely be only one of many participants, each of whom would be interested in obtaining an outcome that is in its individual best interests. There can be no assurance that participation on a creditors committee will yield favorable results in such proceedings, and such participation may entail significant legal fees and other expenses. Participation on such committees may expose the Trust to liability to other creditors.
Participation in restructuring activities may provide the Sub-Adviser with material non-public information that may restrict the Trusts ability to trade in the Borrowers securities or other instruments. Determination of whether information is material and non-public and how long knowledge of such information restricts trading is a matter of considerable uncertainty and judgment. While the Sub-Adviser intends to comply with all applicable securities laws and to make judgments concerning restrictions on trading in good faith, there may be circumstances where the Trust may trade in a Borrowers securities or instruments while engaged in restructuring activities relating to that Borrower. Such trading creates a risk of litigation and liability that may result in significant legal fees and potential losses.
BOARD PARTICIPATION RISK
From time to time, an investment by the Trust may provide the Trust with the right to appoint or more members of the board of directors of a portfolio company or to appoint representatives to serve as observers to such boards of directors. Although such positions in certain circumstances enhance the ability to manage such investment, due to the duties imposed on the Trusts representatives on boards of directors or receipt of material nonpublic information by such representatives, these positions may also have the effect of impairing the Trusts ability to sell the related securities or instruments when, and upon the terms, it may otherwise desire. These restrictions may subject the Trust or its representatives to claims they would not otherwise be subject to as an investor, including claims of breach of duty of loyalty, securities claims and other director related claims.
CERTAIN OTHER CREDITOR RISKS
Debt securities are also subject to other creditor risks, including, without limitation, (a) the possible invalidation of an investment transaction as a fraudulent conveyance under relevant creditors rights laws, (b) so-called lender liability claims by the issuer of the obligations and (c) environmental liabilities that may arise with respect to collateral securing the obligations.
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EQUITY INVESTMENTS RISK
Incidental to the Trusts investments in credit instruments, the Trust may acquire or hold equity securities, or warrants to purchase equity securities, of a Borrower or issuer. Common equity securities prices fluctuate for a number of reasons, including changes in investors perceptions of the financial condition of an issuer, the general condition of the relevant stock market and broader domestic and international political and economic events. They may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. The value of a particular common stock held by the Trust may decline for a number of other reasons which directly relate to the issuer, such as management performance, financial leverage, the issuers historical and prospective earnings, the value of its assets and reduced demand for its goods and services. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. The prices of common equity securities are also sensitive to general movements in the stock market, so a drop in the stock market may depress the prices of common stocks and other equity securities to which the Trust has exposure. Dividends on common equity securities are not fixed but are declared at the discretion of an issuers board of directors. There is no guarantee that the issuers of the common equity securities will declare dividends in the future or that, if declared, they will remain at current levels or increase over time.
Warrants give holders the right, but not the obligation, to buy common stock of an issuer at a given price, usually higher than the market price at the time of issuance, during a specified period. The risk of investing in a warrant is that the warrant may expire prior to the market value of the common stock exceeding the price fixed by the warrant. Warrants have a subordinate claim on a borrowers assets compared with debt securities. As a result, the values of warrants generally are dependent on the financial condition of the borrower and less dependent on fluctuations in interest rates than are the values of many debt securities. The values of warrants may be more volatile than those of Senior Loans or corporate bonds and this may increase the volatility of the net asset value of the Common Shares.
The Trusts goal is ultimately to dispose of equity interests and realize gains upon its disposition of such interests. However, the equity interests the Trust receives may not appreciate in value and, in fact, may decline in value. Accordingly, the Trust may not be able to realize gains from its equity interests, and any gains that it does realize on the disposition of any equity interests may not be sufficient to offset any other losses the Trust experiences.
ALLEGATIONS OF EQUITABLE SUBORDINATION RISK
Under common law principles that, in some cases, form the basis for lender liability claims, certain actions by creditors may result in the subordination of the claim of the offending lending institution to the claims of the disadvantaged creditor or creditors, called equitable subordination. Because of the nature of certain distressed investments, a fund holding such investments could be subject to allegations of lender liability and/or subject to claims from creditors of an obligor that investments issued by such obligor should be equitably subordinated. A portion of the Trusts investments may involve situations in which the Trust will not be the lead creditor. Accordingly, it is possible that lender liability or equitable subordination claims that affect the Trusts investments could arise without the direct involvement of the Trust.
LIMITED TERM RISK
Unless the Trust completes an Eligible Tender Offer and converts to perpetual existence, the Trust will terminate on or about the Termination Date. The Trust should not be confused with a so called target date or life cycle fund whose asset allocation becomes more conservative over time as the funds target date, often associated with retirement, approaches, and does not typically terminate on the target date. In addition, the Trust should not be confused with a target term fund whose investment objective is to return the funds original net asset value on the termination date. The Trusts investment objective and policies are not designed to seek to return to investors that purchase Common Shares in this offering their initial investment of $10.00 per Common Share on the Termination Date or in an Eligible Tender Offer, and such
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investors and investors that purchase Common Shares after the completion of this offering may receive more or less than their original investment upon termination or in an Eligible Tender Offer.
Because the assets of the Trust will be liquidated in connection with the termination, the Trust will incur transaction costs in connection with dispositions of portfolio securities. The Trust does not limit its investments to securities having a maturity date prior to the Termination Date and may be required to sell portfolio securities when it otherwise would not, including at times when market conditions are not favorable, which may cause the Trust to lose money. In particular, the Trusts portfolio may still have significant remaining average maturity and duration, and large exposures to below investment grade securities, as the Termination Date approaches, losses due to portfolio liquidation may be significant. Beginning one year before the Termination Date (the wind-down period), the Trust may begin liquidating all or a portion of the Trusts portfolio, and may deviate from its investment policies, including its policy of investing at least 80% of its Managed Assets in floating rate credit instruments and other structured credit investments and may not achieve its investment objective. During the wind-down period, the Trusts portfolio composition may change as more of its portfolio holdings are called or sold and portfolio holdings are disposed of in anticipation of liquidation. Rather than reinvesting the proceeds of matured, called or sold securities, the Trust may such proceeds in short term or other lower yielding securities or hold the proceeds in cash, which may adversely affect its performance. The Trust may distribute the proceeds in one or more liquidating distributions prior to the final liquidation, which may cause fixed expenses to increase when expressed as a percentage of assets under management. Upon a termination, it is anticipated that the Trust will have distributed substantially all of its net assets to shareholders, although securities for which no market exists or securities trading at depressed prices, if any, may be placed in a liquidating trust. Common Shareholders will bear the costs associated with establishing and maintaining a liquidating trust, if necessary. Securities placed in a liquidating trust may be held for an indefinite period of time until they can be sold or pay out all of their cash flows. The Trust cannot predict the amount, if any, of securities that will be required to be placed in a liquidating trust.
If the Trust conducts an Eligible Tender Offer, the Trust anticipates that funds to pay the aggregate purchase price of Common Shares accepted for purchase pursuant to the tender offer will be first derived from any cash on hand and then from the proceeds from the sale of portfolio investments held by the Trust. In addition, the Trust may be required to dispose of portfolio investments in connection with any reduction in the Trusts outstanding leverage necessary in order to maintain the Trusts desired leverage ratios following a tender offer. The disposition of portfolio investments by the Trust could cause market prices of such instruments, and hence the net asset value of the Common Shares, to decline. In addition, disposition of portfolio investments will cause the Trust to incur increased brokerage and related transaction expenses. The Trust may receive proceeds from the disposition of portfolio investments that are less than the valuations of such investments by the Trust. It is likely that during the pendency of a tender offer, and possibly for a time thereafter, the Trust will hold a greater than normal percentage of its total assets in cash and cash equivalents, which may impede the Trusts ability to achieve its investment objective and decrease returns to shareholders. If the Trusts tax basis for the investments sold is less than the sale proceeds, the Trust will recognize capital gains, which the Trust will be required to distribute to shareholders. In addition, the Trusts purchase of tendered Common Shares pursuant to a tender offer will have tax consequences for tendering shareholders and may have tax consequences for non-tendering shareholders. The purchase of Common Shares by the Trust pursuant to a tender offer will have the effect of increasing the proportionate interest in the Trust of non-tendering shareholders. All shareholders remaining after a tender offer will be subject to proportionately higher expenses due to the reduction in the Trusts total assets resulting from payment for the tendered Common Shares. Such reduction in the Trusts total assets may also result in less investment flexibility, reduced diversification and greater volatility for the Trust, and may have an adverse effect on the Trusts investment performance.
The Trust is not required to conduct an Eligible Tender Offer. If the Trust conducts an Eligible Tender Offer, there can be no assurance that tendered Common Shares will not exceed the Termination Threshold, in which case the Eligible Tender Offer will be terminated, no Common Shares will be repurchased pursuant
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to the Eligible Tender Offer and the Trust will terminate on or before the Termination Date (subject to possible extensions). Following the completion of an Eligible Tender Offer in which the tendered Common Shares do not exceed the Termination Threshold, the Board of Trustees may eliminate the Termination Date upon the affirmative vote of a majority of the Board of Trustees and without a shareholder vote. Thereafter, the Trust will have a perpetual existence. The Trust is not required to conduct additional tender offers following an Eligible Tender Offer and conversion to perpetual existence. Therefore, remaining shareholders may not have another opportunity to participate in a tender offer. Shares of closed-end management investment companies frequently trade at a discount from their net asset value, and as a result remaining shareholders may only be able to sell their Common Shares at a discount to net asset value.
MANAGEMENT RISK
The Trust is subject to management risk because the Trust has an actively managed portfolio. The Adviser and Sub-Adviser will apply investment techniques and risk analysis in making investment decisions for the Trust, but there can be no guarantee that these will produce the desired results.
NEW ADVISER RISK
The Trust is dependent upon services and resources provided by the Adviser and the Sub-Adviser. The Adviser is a newly formed entity that has filed an application for registered under the Investment Advisers Act of 1940, as amended (the Advisers Act) and will be registered as an investment adviser under the Advisers Act prior to the commencement of operations of the Trust. The Adviser has not previously served as investment adviser to a registered investment company. The Sub-Adviser has not previously served as investment adviser or sub-adviser to a registered investment company. As a result, the Adviser and the Sub-Adviser will be addressing certain operational and compliance requirements of the 1940 Act and the Advisers Act for the first time in connection with the commencement of operations of the Trust.
VALUATION RISK
Because the secondary markets for certain investments may be limited, they may be difficult to value. Where market quotations are not readily available or deemed unreliable, the Trust will value such securities in accordance with fair value procedures adopted by the Board of Trustees. Valuations of some or all of the Trusts investments may require input from the Sub-Adviser and third parties. Valuations requiring input from the Sub-Adviser or third parties may be based on subjective inputs of the Sub-Adviser or such third parties. Valuation of such securities may require more research than for more liquid investments. In addition, elements of judgment may play a greater role in valuation in such cases than for investments with a more active secondary market because there is less reliable objective data available. In some cases, valuation of certain investments may be based upon models, indicative quotes or estimates of value and not actual executed historical trades. Reasonable efforts will be made to base such inputs on observable market prices and inputs but there can be no assurances that such information will be readily available. A security that is fair valued may be valued at a price higher or lower than the value determined by other funds using their own fair valuation procedures. Prices obtained by the Trust upon the sale of such securities may not equal the value at which the Trust carried the investment on its books, which would adversely affect the net asset value of the Trust. The Trust may incur costs in connection with valuing its investments, including costs associated with the retention of valuation firms to value certain of the Trusts investments.
DEPENDENCE ON OCCURRENCE OF EVENTS RISK
The ability to realize a profit on many of the Trusts investments is dependent upon the occurrence (or non-occurrence) of certain events, including, among other things, reorganization transactions involving portfolio companies, restructurings or renegotiations of the terms of loans or debt securities issued by portfolio companies or the successful implementation of business strategies or completion of certain projects by portfolio companies. If the event that the Sub-Adviser is expecting does not occur (or an unexpected event occurs), the Trust may sustain a significant loss.
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COMPETITION RISK
Since an inherent part of the Sub-Advisers strategy will be to identify securities that provide for attractive risk adjusted yield, competitive investment activity by other firms may reduce the Trusts opportunity for profit by reducing mispricings in the market as well as the margins available on such mispricings as can still be identified.
CONFLICTS OF INTEREST RISKS
Various potential and actual conflicts of interest may arise from the overall investment activity of the Trust, the Sub-Adviser and its affiliates. Certain inherent conflicts of interest may arise from the fact that the Sub-Adviser and its affiliates may in the future carry on substantial investment activities for other client accounts, including discretionary accounts and other investment vehicles (collectively, the Other Accounts).
Some of the Other Accounts may invest in the same or different securities as the Trust, compete with the Trust for the same investment opportunities (which may be limited) and/or engage in transactions or other activities or pursue investment strategies which are inconsistent with those effected for the Trust or which are contrary to or conflict with the interests of the Trust.
The Sub-Adviser and its affiliates may give advice to or effect transactions on behalf of Other Accounts that are inconsistent with or contrary to advice given or transactions effected on behalf of the Trust.
The Sub-Adviser or its affiliates could manage one or more Other Accounts that may invest in different levels of the capital structure of a portfolio company, the debt or equity of which is held by the Trust. If a common portfolio company were to experience financial difficulty, the interests of the Trust could be different from the interest in such portfolio company held by one or more Other Accounts. To the extent that such a conflict arises, the Sub-Adviser and its affiliates will seek to resolve such conflicts on a case-by-case basis in the best interest of Trust and such Other Accounts, and in accordance with the restrictions of the 1940 Act.
Allocation of investment opportunities
The Sub-Adviser and its affiliates are not obligated to allocate all investment opportunities that may be appropriate for the Trust to the Trust. Allocation of investment opportunities among the Trust and the Other Accounts will be subject to the Sub-Advisers allocation procedures which generally provide that investments will be allocated on a fair and equitable basis (but not necessarily on a pro rata basis), having regard to such matters as available capital, relative exposure to market trends, risk tolerance, expected duration of the Trust or the investments, the investment programs and portfolio positions of the Trust and the affiliated entities for which participation is appropriate, guidelines, concentration limits and other limitations established by the respective entities, and applicable tax and regulatory considerations.
Allocation of personnel
Such Other Accounts may be managed by current employees of the Sub-Adviser or by new portfolio managers hired by the Sub-Adviser and may follow a similar investment strategy as that employed by the Trust. The Sub-Adviser may have an incentive to retain such portfolio managers to manage the assets of such Other Accounts rather than or in addition to managing the assets of the Trust. Although the officers and employees of the Sub-Adviser will devote as much time to the Trust as the Sub-Adviser deems appropriate, the officers and employees, if any, may have conflicts in allocating their time and services among the Trust and other accounts now or hereafter advised by the Sub-Adviser and/or its affiliates.
Lack of information barriers
Situations may occur where the Trust may be deemed to have possession of material non-public information, including material non-public information concerning specific companies, as a result of other activities by the Sub-Adviser, including on behalf of Other Clients. Under applicable securities laws, this may limit the Sub-Advisers ability to buy or sell securities issued by such companies and the Trust may be unable to
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engage in certain transactions they would otherwise find attractive, or may be able to engage in such transactions only during limited periods of time. Due to these restrictions, the Trust may not be able to initiate a transaction that it otherwise might have initiated and may not be able to sell an investment that it otherwise might have sold. Similarly, the Sub-Adviser may decline to receive material nonpublic information in order to avoid trading restrictions with regard to any Other Account, even though access to such information may have been advantageous to the Trust. Clients and investors may be adversely affected by such restrictions.
While the Sub-Adviser has procedures in place to manage the risk associated with insider trading, the management of material non-public information could fail and result in the Sub-Adviser or one of its investment professionals, buying and selling a security while, at least constructively, in possession of material non-public information. Inadvertent trading on material non-public information could have adverse effects on the Sub-Advisers reputation, or result in the imposition of regulatory or financial sanctions, and as a consequence, negatively impact the Sub-Advisers ability to perform its investment management services on behalf of regulations, or decide that it is advisable to establish information barriers in the future, which may affect how they provides advice.
Restrictions on transactions with affiliates
The 1940 Act limits the Trusts ability to enter into certain transactions with certain of its affiliates. As a result of these restrictions, the Trust may be prohibited from buying or selling any security directly from or to any portfolio company of a registered investment company or other pooled investment vehicle managed by the Sub-Adviser or any of its affiliates. The 1940 Act also prohibits certain joint transactions with certain of the Trusts affiliates, which could include investments in the same portfolio company (whether at the same or different times). The analysis of whether a particular transaction constitutes a joint transaction requires a review of the relevant facts and circumstances then existing. These limitations may limit the scope of investment opportunities that would otherwise be available to the Trust.
CONFIDENTIAL INFORMATION RISK
The Trust frequently may possess material non-public information about an issuer as a result of its ownership of a credit instrument of an issuer. Because of prohibitions on trading in securities while in possession of material non-public information, the Trust might be unable to enter into a transaction in a security of the issuer when it would otherwise be advantageous to do so.
TAX RISK
The Trust intends to elect to be treated and to qualify each year as a RIC under the Code. As a RIC, the Trust generally would not be subject to U.S. federal income tax to the extent that it distributes its investment company taxable income and net capital gains. To qualify for the special tax treatment available to RICs, the Trust must comply with certain income, distribution, and diversification requirements. If the Trust failed to meet any of these requirements, subject to the opportunity to cure such failures under applicable provisions of the Code, the Trust would be subject to U.S. federal income tax at regular corporate rates on its taxable income, including its net capital gain, even if such income were distributed to shareholders. All distributions by the Trust from earnings and profits, including distributions of net capital gain (if any), would be taxable to shareholders as dividends.
Certain of the Trusts investments will cause the Trust to take into account taxable income in a taxable year in excess of the cash generated on those investments during that year. In particular, the Trust expects to invest in loans and other debt obligations that will be treated as having market discount and/or original issue discount (OID) for U.S. federal income tax purposes. Because the Trust may be allocated taxable income in respect of these investments before, or without receiving, cash representing such income, the Trust may have difficulty satisfying the annual distribution requirements applicable to RICs and avoiding Trust-level U.S. federal income and/or excise taxes. Accordingly, the Trust may be required to sell assets, including at potentially disadvantageous times or prices, raise additional debt or equity capital or reduce new
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investments, to obtain the cash needed to make these income distributions. If the Trust liquidates assets to raise cash, the Trust may realize gain or loss on such liquidations. In the event the Trust realizes net capital gains from such liquidation transactions, the Trust and, ultimately, its Common Shareholders, may receive larger capital gain distributions than it or they would in the absence of such transactions.
The Trust may invest a portion of its net assets in below investment grade instruments. Investments in these types of instruments may present special tax issues for the Trust. U.S. federal income tax rules are not entirely clear about issues such as when the Trust may cease to accrue interest, OID or market discount, when and to what extent deductions may be taken for bad debts or worthless instruments, how payments received on obligations in default should be allocated between principal and income and whether exchanges of debt obligations in a bankruptcy or workout context are taxable. These and other issues will be addressed by the Trust to the extent necessary in order to seek to ensure that it distributes sufficient income that it does not become subject to U.S. federal income or excise tax.
PORTFOLIO TURNOVER RISK
The Trust may engage in active and frequent trading of its portfolio securities. High portfolio turnover may result in increased transaction costs to the Trust, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of securities and on reinvestment in other securities. The sale of portfolio securities may result in the realization and/or distribution to shareholders of higher capital gains or losses as compared to a fund with less active trading policies. These effects of higher than normal portfolio turnover may adversely affect Trust performance.
RELIANCE ON SERVICE PROVIDERS
The Trust must rely upon the performance of service providers to perform certain functions, which may include functions that are integral to the operations and financial performance of the Trust. Fees and expenses of these service providers are borne by the Trust, and therefore indirectly by Common Shareholders. Failure by any service provider to carry out its obligations to the Trust in accordance with the terms of its appointment, to exercise due care and skill, or to perform its obligations to the Trust at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Trusts performance and ability to achieve its investment objective. The termination of the Trusts relationship with any service provider, or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Trust and could have a material adverse effect on the Trusts performance and ability to achieve its investment objective.
TECHNOLOGY RISK
Markets and market participants are increasingly reliant upon both publicly available and proprietary information data systems. Data imprecision, software or other technology malfunctions, programming inaccuracies, unauthorized use or access, and similar circumstances may impair the performance of these systems and may have an adverse impact upon a single issuer, a group of issuers, or the market at large. As the use of internet technology has become more prevalent, the Trust and their respective service providers have become more susceptible to potential operational risks through breaches in cyber security (generally, intentional and unintentional events that may cause the Trust, or a service provider to lose proprietary information, suffer data corruption or lose operational capacity). There can be no guarantee that any risk management systems established by the Trust, their service providers, or issuers of the securities in which the Trust invests that are intended to reduce cyber security risks will succeed. The Trust cannot control such systems put in place by service providers or other third parties whose operations may affect the Trust and Common Shareholders.
RECENT MARKET DEVELOPMENTS RISK
Global and domestic financial markets have experienced periods of unprecedented turmoil. The debt and equity capital markets in the United States have been negatively impacted by significant write-offs in the
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financial services sector relating to sub-prime mortgages and the re-pricing of credit risk in the broadly syndicated market, among other things. These events, along with the deterioration of the housing market, the failure of major financial institutions and the resulting United States federal government actions led to worsening general economic conditions, which materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial firms in particular. Such market conditions may increase the volatility of the value of securities owned by the Trust, may make it more difficult for the Trust to accurately value its securities or to sell its securities on a timely basis and may adversely affect the ability of the Trust to borrow for investment purposes and increase the cost of such borrowings, which would reduce returns to Common Shareholders. These developments adversely affected the broader economy, and may continue to do so, which in turn may adversely affect issuers of securities owned by the Trust. Such developments could, in turn, reduce the value of securities owned by the Trust and adversely affect the net asset value of the Common Shares.
Recently markets have witnessed more stabilized economic activity as expectations for an economic recovery increased. However, risks to a robust resumption of growth persist. A return to unfavorable economic conditions or sustained economic slowdown could adversely impact the Trusts portfolio. Financial market conditions, as well as various social and political tensions in the United States and around the world, have contributed to increased market volatility and may have long-term effects on the U.S. and worldwide financial markets and cause further economic uncertainties or deterioration in the United States and worldwide. Moreover, Federal Reserve policy, including with respect to certain interest rates and the decision to end its quantitative easing policy, may adversely affect the value, volatility and liquidity of dividend- and interest-paying securities. The Adviser and Sub-Adviser do not know how long the financial markets will continue to be affected by these events and cannot predict the effects of these or similar events in the future on the U.S. and global economies and securities markets in the Trusts portfolio. The Adviser and the Sub-Adviser intend to monitor developments and seek to manage the Trusts portfolio in a manner consistent with achieving the Trusts investment objective, but there can be no assurance that they will be successful in doing so.
MARKET DISRUPTION AND GEOPOLITICAL RISK
The aftermath of the war in Iraq, instability in Afghanistan, Pakistan, Egypt, Libya, Syria, Russia, Ukraine and the Middle East, possible terrorist attacks in the United States and around the world, growing social and political discord in the United States, the European debt crisis, the response of the international communitythrough economic sanctions and otherwiseto Russias recent annexation of the Crimea region of Ukraine and posture vis-a-vis Ukraine, continued tensions between North Korea and the United States and the international community generally, new and continued political unrest in various countries, such as Venezuela, the United Kingdoms pending withdrawal from the European Union and the resulting profound and uncertain impacts on the economic and political future of the United Kingdom, the European Union and global financial markets, further downgrade of U.S. Government securities, the change in the U.S. president and the new administration and other similar events, may have long-term effects on the U.S. and worldwide financial markets and may cause further economic uncertainties in the United States and worldwide. The Trust does not know and cannot predict how long the securities markets may be affected by these events and the effects of these and similar events in the future on the U.S. economy and securities markets. The Trust may be adversely affected by uncertainties such as terrorism, international political developments, and changes in government policies, taxation, restrictions on foreign investment and currency repatriation, currency fluctuations and other developments in the laws and regulations of the countries in which it is invested.
UK DEPARTURE FROM EU RISK
On Thursday June 23, 2016, voters in the United Kingdom referendum on the question of whether to remain or leave the European Union (the EU) voted in a majority in favor of leaving the EU. This historic event is widely expected to have consequences that are both profound and uncertain for the economic and political future of the United Kingdom and the EU, and those consequences include significant legal and
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business uncertainties pertaining to an investment in the Trust. In March 2017, the British Parliament passed a bill authorizing the British Government to invoke Article 50 of the Treaty on European Unionthe formal process of withdrawing from the EU. Invoking Article 50 will give the United Kingdom two years to negotiate a separation with the other members of the EU. The full scope and nature of the consequences of the United Kingdoms withdrawal from the EU are not at this time known and are unlikely to be known for a significant period of time. However, this process has led to significant uncertainty in the business, legal and political environment.
Risks associated with the United Kingdoms withdrawal from the EU include short and long term market volatility and currency volatility (including volatility of the value of the British pound sterling relative to the United States dollar and other currencies and volatility in global currency markets generally), macroeconomic risk to the UK and European economies, impetus for further disintegration of the EU and related political stresses (including those related to sentiment against cross border capital movements and activities of investors like the Trust), prejudice to financial services businesses that are conducting business in the EU and which are based in the UK, legal uncertainty regarding achievement of compliance with applicable financial and commercial laws and regulations in view of the expected steps to be taken pursuant to or in contemplation of Article 50 of the Treaty on European Union and negotiations undertaken under Article 218 of the Treaty on the Functioning of the European Union, and the unavailability of timely information as to expected legal, tax and other regimes.
EUROZONE RISK
The result of the Referendum and continuing uncertainty as to the status of the Euro and the European Monetary Union (the EMU) has created significant volatility in currency and financial markets generally. Investing in Euro-denominated securities entails risk of being exposed to a currency that may not fully reflect the strengths and weaknesses of the disparate European economies. In addition, it is possible that the Euro could be abandoned in the future by additional countries that have adopted its use. The effects of the collapse of the Euro, or of the exit of more countries from the EMU, on the United States and global economy and securities markets could have a significant adverse impact on the value and risk profile of the Trusts investments.
LEGISLATION AND REGULATION RISK
At any time after the date of this Prospectus, legislation may be enacted that could negatively affect the companies in which the Trust invests. Changing approaches to regulation may also have a negative impact companies in which the Trust invests. In addition, legislation or regulation may change the way in which the Trust is regulated. There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Trust or will not impair the ability of the Trust to achieve its investment objective.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which was signed into law in July 2010, has resulted in significant revisions to the U.S. financial regulatory framework. The Dodd-Frank Act covers a broad range of topics, including, among many others: a reorganization of federal financial regulators; the creation of a process designed to ensure financial system stability and the resolution of potentially insolvent financial firms; the enactment of new rules for derivatives trading; the creation of a consumer financial protection watchdog; the registration and regulation of managers of private funds; the regulation of rating agencies; and the enactment of new federal requirements for residential mortgage loans. The regulation of various types of derivative instruments pursuant to the Dodd-Frank Act may adversely affect the Trust or its counterparties.
On December 11, 2015, the SEC published a proposed rule that, if adopted, would change the regulation of the use of derivative instruments and financial commitment transactions by registered investment companies. The SEC sought public comments on numerous aspects of the proposed rule, and as a result the nature of any final regulations is uncertain at this time. Such regulations could limit the implementation of the Trusts
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use of derivatives and reverse repurchase agreement transactions and impose additional compliance costs on the Trust, which could have an adverse impact on the Trust. The Adviser and the Sub-Adviser cannot predict the effects of these regulations on the Trusts portfolio. The Adviser and the Sub-Adviser intend to monitor developments and seek to manage the Trusts portfolio in a manner consistent with achieving the Trusts investment objective, but there can be no assurance that they will be successful in doing so.
Commodity Futures Trading Commission (CFTC) Rule 4.5 permits investment advisers to registered investment companies to claim an exclusion from the definition of commodity pool operator under the Commodity Exchange Act (CEA) with respect to a fund, provided certain requirements are met. In order to permit the Adviser to claim this exclusion with respect to the Trust, the Trust will limit its transactions in futures, options on futures and swaps (excluding transactions entered into for bona fide hedging purposes, as defined under CFTC regulations) such that either: (i) the aggregate initial margin and premiums required to establish its futures, options on futures and swaps do not exceed 5% of the liquidation value of the Trusts portfolio, after taking into account unrealized profits and losses on such positions; or (ii) the aggregate net notional value of its futures, options on futures and swaps does not exceed 100% of the liquidation value of the Trusts portfolio, after taking into account unrealized profits and losses on such positions. Accordingly, the Trust is not subject to regulation under the CEA or otherwise regulated by the CFTC. If the Adviser was unable to claim the exclusion with respect to the Trust, the Adviser would become subject to registration and regulation as a commodity pool operator, which would subject the Adviser and the Trust to additional registration and regulatory requirements and increased operating expenses.
The change in presidential administration could significantly impact the regulation of United States financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank Act, including the Volcker Rule, the authority of the Federal Reserve and Financial Stability Oversight Council, and renewed proposals to separate banks commercial and investment banking activities. The Financial CHOICE Act, which was passed by the U.S. House of Representatives in June 2017, would, if enacted, roll back parts of the Dodd-Frank Act. Other potential changes that could be pursued by the new presidential administration could include the United States withdrawal from, or attempt to renegotiate, various trade agreements or the taking of other actions that would change current trade policies of the United States. It is not possible to predict which, if any, of these actions will be taken or, if taken, their effect on the economy, securities markets or the financial stability of the United States. The Trust may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Trust and its ability to achieve its investment objective.
LIBOR RISK
Instruments in which the Trust invests may pay interest at floating rates based on LIBOR or may be subject to interest caps or floors based on LIBOR. The Trust and issuers of instruments in which the Trust investments may also obtain financing at floating rates based on LIBOR. The underlying collateral of CLOs in which the Trust invests may pay interest at floating rates based on LIBOR. Derivative instruments utilized by the Trust and/or issuers of instruments in which the Trust may invest may also reference LIBOR. Regulators and law-enforcement agencies from a number of governments, including entities in the United States, Japan, Canada and the United Kingdom, have conducted or are conducting civil and criminal investigations into whether the banks that contribute to the British Bankers Association, or the BBA, in connection with the calculation of daily LIBOR may have been manipulating or attempting to manipulate LIBOR. Several financial institutions have reached settlements with the CFTC, the U.S. Department of Justice Fraud Section and the United Kingdom Financial Conduct Authority in connection with investigations by such authorities into submissions made by such financial institutions to the bodies that set LIBOR and other interbank offered rates. Additional investigations remain ongoing with respect to other major banks. There can be no assurance that there will not be additional admissions or findings of rate-setting manipulation or that manipulations of LIBOR or other similar interbank offered rates will not be shown to have occurred. ICE Benchmark Administration Limited assumed the role of LIBOR administrator from the BBA on February 1, 2014. Any new administrator of LIBOR may make methodological changes to the way in which LIBOR is calculated or may alter, discontinue or suspend calculation or dissemination of
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LIBOR. Additional findings of manipulation may decrease the confidence of the market in LIBOR and lead market participants to look for alternative, non-LIBOR based types of financing, such as fixed rate loans or bonds or floating rate loans based on non-LIBOR indices.
Recently, regulators in the United Kingdom have called for the LIBOR to be abandoned by the end of 2021. Abandonment of or modifications to LIBOR could have adverse impacts on newly issued financial instruments and existing financial instruments which reference LIBOR. While some instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate setting methodology, not all instruments may have such provisions and there are significant uncertainty regarding the effectiveness of any such alternative methodologies. Abandonment of or modifications to LIBOR could lead to significant short-term and long-term uncertainty and market instability. It remains uncertain how such changes would be implemented and the effects such changes would have on the Trust, issuers of instruments in which the Trust invests and financial markets generally.
LARGE INVESTOR RISK
Ownership of Common Shares of the Trust may be concentrated among certain institutional investors who purchase Common Shares in this Offering. In addition, The Adviser, the Sub-Adviser and certain of their respective affiliates, associates and employees (management investors), have indicated an interest in purchasing an aggregate of $15 million of Common Shares in this offering at the initial offering price. However, because indications of interest are not binding agreements or commitments to purchase, the Underwriters may determine to sell more, less or no Common Shares in this offering to the management investors. In addition, the management investors may determine to purchase more, less or no Common Shares in this offering. If the Trust sells more Common Shares in the offering than currently assumed herein, the management investors intend to purchase fewer Common Shares so as not to reduce the number of Common Shares available to the general public. The purchase of Common Shares by one or more institutional investors or by the management investors could, depending on the size of such ownership, result in such investors being a position to exercise significant influence on matters put to a vote of shareholders. Dispositions of shares by large investors could adversely impact the market price and premium or discount to NAV at which the Common Shares trade. In certain circumstances, dispositions of Common Shares by large investors could potentially limit the Trusts use of any capital loss carryforwards and certain other losses to offset future realized capital gains (if any).
ANTI-TAKEOVER PROVISIONS IN THE TRUSTS GOVERNING DOCUMENTS RISK
The Trusts Governing Documents include provisions that could limit the ability of other entities or persons to acquire control of the Trust or convert the Trust to open-end status. These provisions could have the effect of depriving Common Shareholders of opportunities to sell their Common Shares at a premium over the then current market price of the Common Shares. See Certain Provisions in the Trusts Governing Documents.
TRUSTEES AND OFFICERS
The Board of Trustees is broadly responsible for the management of the Trust, including general supervision of the duties performed by the Adviser and Sub-Adviser. The names and business addresses of the Trustees and officers of the Trust and their principal occupations and other affiliations during the past five years are set forth under Management of the Trust in the SAI.
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Management of the Trust
ADVISER
XA Investments LLC acts as investment adviser to the Trust and is responsible for overseeing the Trusts overall investment strategy and its implementation, including the use of leverage by the Trust. XAI has filed an application for registration under the Advisers Act and will be registered as an investment adviser under the Advisers Act prior to the commencement of operations of the Trust. XAI is a Delaware limited liability company, with its principal offices located at 321 North Clark Street, Suite 2430, Chicago, Illinois 60654. XAI is controlled by Theodore J. Brombach, Co-Chief Executive Officer of the Adviser and a founding partner of XMS Capital Partners, LLC, and John Yogi Spence, Co-Chief Executive Officer of XAI and a founding partner of XMS Capital Partners, LLC.
XAI was founded by the principals of XMS Capital Partners, LLC in April 2016. The XAI leadership team believes that the investing public needs better access to a broader range of alternative investment strategies and managers. XAI sponsors registered investment companies designed to provide investors with access to institutional caliber alternative investments, by partnering with established alternative asset managers selected from among numerous alternative credit managers, hedge fund managers and private debt and equity firms to sub-adviser XAI funds.
XAI will be responsible for the management of the Trust, will furnish offices, necessary facilities and equipment on behalf of the Trust, will oversee the activities of the Sub-Adviser, will provide personnel, including certain officers required for the Trusts administrative management, and will pay the compensation of all officers and Trustees of the Trust who are its affiliates.
SUB-ADVISER
Octagon Credit Investors, LLC acts as investment sub-adviser to the Trust and is responsible for investing the Trusts assets. The Sub-Adviser is an investment adviser registered under the Advisers Act. The Sub-Adviser is a Delaware limited liability company, with its principal offices located at 250 Park Avenue, 15th Floor, New York, NY 10177. Octagon Credit Investors, LLC is majority-owned by Conning & Company, which is an indirect subsidiary of Cathay Financial Holding Co., Ltd., a Taiwan-based company.
The Sub-Advisers experienced team of investment professionals has worked together for many years and managed funds through multiple credit cycles over Octagons 23 year history. The Sub-Adviser currently manages $16 billion in assets under management as of June 30, 2017 across twenty-one CLOs, fourteen separately managed accounts and nine commingled private fund structures.
The Sub-Adviser, under the direction and supervision of the Board of Trustees and the Adviser, will be responsible for the management of the Trusts investment portfolio and will provide certain facilities and personnel related to such management.
INVESTMENT ADVISORY AGREEMENT AND SUB-ADVISORY AGREEMENT
Investment advisory agreement
Pursuant to an investment advisory agreement between the Trust and the Adviser, the Trust will pay the Adviser a fee, payable monthly in arrears, in an annual amount equal to 1.70% of the Trusts average daily Managed Assets (from which the Adviser will pay the Sub-Advisers fees).
Sub-advisory agreement
Pursuant to an investment sub-advisory agreement among the Trust, the Adviser and the Sub-Adviser, the Adviser will pay to the Sub-Adviser a sub-advisory fee out of the management fee received by the Adviser. The sub-advisory fee, payable monthly in arrears, is calculated as a specified percentage of the advisory fee payable by the Trust to the Adviser (before giving effect to any fees waived or expenses reimbursed by the Adviser). The specified percentage is equal to the blended percentage computed by applying the following
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Management of the Trust
percentages to the aggregate average daily Managed Assets of all registered investment companies in the XAI fund complex for which the Sub-Adviser (or an affiliate of the Sub-Adviser) serves as investment sub-adviser, including the Trust (Eligible Funds):
Aggregate Eligible Funds
Average Daily Managed Assets |
Percentage of
Advisory Fee |
|||
First $500 million |
60 | % | ||
Over $500 million |
50 | % |
The Trust is currently the only Eligible Fund. Therefore, assuming Managed Assets of the Trust of $100 million following the completion of the offering and the utilization of leverage by the Trust, the sub-advisory fee would equal 60% of the advisory fee payable to the Adviser.
No performance or incentive fees
The Trust does not pay a performance or incentive fee to the Adviser or the Sub-Adviser.
Board considerations
The investment advisory agreement and the investment sub-advisory agreement of the Trust were approved by the Board of Trustees on July 13, 2017. A discussion regarding the basis for such approval by the Board of Trustees will be available in the Trusts initial [semi-]annual report to shareholders for the period ending.
CONFLICTS OF INTEREST
During the time in which the Trust is utilizing leverage, the amount of the management fees paid to the Adviser and Sub-Adviser for investment advisory services will be higher than if the Trust did not utilize leverage because the fees paid will be calculated based on the Trusts Managed Assets, including proceeds of leverage. This may create a conflict of interest between the Adviser and the Sub-Adviser, on the one hand, and the Common Shareholders, on the other hand, as holders of Indebtedness, Preferred Shares or other forms of leverage do not bear the management fee. Rather, Common Shareholders bear the portion of the management fee attributable to the assets purchased with the proceeds of leverage, which means that Common Shareholders effectively bear the entire management fee. In addition, because the percentage of the advisory fee paid by the Adviser to the Sub-Adviser may vary based on Managed Assets, conflicts of interest may exist between the Adviser and Common Shareholder, with respect to subsequent opportunities to raise additional assets for the Trust.
PORTFOLIO MANAGEMENT
The Sub-Adviser personnel responsible for the management of the Trusts portfolio are:
Andrew D. Gordon, Chief Executive Officer, Co-Chief Investment Officer and member of the Investment Committee of the Sub-Adviser. Mr. Gordon co-founded Octagon in 1994 and subsequently managed numerous Octagon funds before assuming his current position. He has over 30 years of experience in the below-investment grade leveraged loan and high yield bond asset classes, in both sell-side and buy-side capacities. Prior to co-founding Octagon, Mr. Gordon was a Managing Director at Chemical Securities, Inc., where he focused primarily on the oil and gas industries. Mr. Gordon advised on and arranged below-investment grade loans for corporate clients, while also undertaking special projects in M&A advisory and distressed credit situations. He previously served as Vice President in the Acquisition Finance Division of Manufacturers Hanover Trust Company. In this capacity, Mr. Gordon structured, syndicated and managed leveraged buyout transactions. Mr. Gordon graduated cum laude with an A.B. in Economics from Duke University.
Michael B. Nechamkin, Co-Chief Investment Officer, Senior Portfolio Manager and member of the Investment Committee of the Sub-Adviser. Mr. Nechamkin joined Octagon in 1999. He has 26 years of industry experience, including 17 years at Octagon. Mr. Nechamkin is a member of Octagons Investment
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Management of the Trust
Committee and serves as the Senior Portfolio Manager of three CLOs, four Separately Managed Accounts, and three Private Commingled Funds. Prior to joining Octagon, Mr. Nechamkin was a Vice President in the High Yield Research Group at Bankers Trust. He previously served as a Convertible Securities Analyst at Mabon Securities and a Financial Consultant at Merrill Lynch. Mr. Nechamkin holds a Bachelors degree and a Masters of Talmudic Law and an M.B.A from the University of Baltimore.
Lauren M. Basmadjian , Portfolio Manager and member of the Investment Committee of the Sub-Adviser. Ms. Basmadjian joined Octagon in 2001. She has 15 years of industry experience. Ms. Basmadjian is a member of Octagons Investment Committee and serves as the Portfolio Manager of ten CLOs, two Separately Managed Accounts, and two Private Commingled Fund. Prior to becoming a Portfolio Manager, Ms. Basmadjian managed Octagons workout efforts and also oversaw Octagons investments in the leisure and entertainment, retail, consumer products, business services, food and beverage and technology industries. Prior to joining Octagon, Ms. Basmadjian worked in the Acquisition Finance Group at Chase Securities, Inc. She graduated cum laude from the Stern School of Business at New York University with a B.S. in Finance and Economics.
Gretchen M. Lam, CFA , Portfolio Manager and member of the Investment Committee of the Sub-Adviser. Ms. Lam joined Octagon in 1999. She has 17 years of industry experience. Ms. Lam is a member of Octagons Investment Committee and serves as the Portfolio Manager of six CLOs, two Separately Managed Accounts, and three Private Commingled Funds. Prior to becoming a Portfolio Manager, Ms. Lam oversaw Octagons investments in the software, business services, finance and insurance, paper and packaging, gaming and lodging, homebuilding and real estate industries. She was also responsible for the structured credit exposure held in Octagons CLO vehicles. Ms. Lam received her CFA Charter in 2006. She graduated summa cum laude from Babson College with a B.S. in Investments.
The SAI provides additional information about the portfolio managers compensation, other accounts managed by the portfolio managers and the portfolio managers ownership of securities of the Trust.
INVESTOR SUPPORT SERVICES AND SECONDARY MARKET SUPPORT SERVICES
The Trust has retained the Adviser to provide investor support services and secondary market support services in connection with the ongoing operation of the Trust. Such services include responding to questions about the Trust from financial intermediaries; assisting in drafting and editing mailings to financial intermediaries; distributing mailings to financial intermediaries; scheduling, organizing and preparing conference calls, meetings and other communications with financial intermediaries; communicating with the NYSE specialist for the Common Shares, and with the closed-end fund analyst community regarding the Trust on a periodic basis; assisting in producing communications targeted to current Trust shareholders and the investment community generally (excluding marketing materials targeted to prospective investors or prepared for use in an offering of Common Shares); assisting in the formatting, development and maintenance of the Trusts website; assisting with administrative matters (including in connection with the preparation of press releases, shareholder reports and regulatory filings) with respect to the Trust. In exchange for such services, the Trust will pay the Adviser a service fee, payable monthly in arrears, in an annual amount equal to 0.20% of the Trusts average daily Managed Assets.
EXPENSES
The Trust pays all costs and expenses of its operations (in addition to the advisory fee and investor support services and secondary market support services fee paid to XAI), including compensation of its trustees (other than those affiliated with the Adviser), custodian fees, transfer agency and dividend disbursing agent fees, administration fees, fund accounting agent fees, legal fees, expenses of its independent registered public accounting firm, expenses of pricing services or valuation agents, expenses of repurchasing Common Shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies, listing fees and taxes, if any. All fees and expenses are accrued daily and deducted before paying distributions to shareholders.
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Management of the Trust
The Adviser has contractually agreed, for the period ending two years after the date of this Prospectus, to waive a portion of the advisory fee and/or reimburse the Trust for certain operating expenses so that the annual expenses of the Trust do not exceed 0.30% of the Trusts Managed Assets (exclusive of investment advisory fees, investor support and secondary market services fees, taxes, expenses incurred directly or indirectly by the Trust as a result of an investment in a permitted investment (including, without limitation, acquired fund fees and expenses), expenses associated with the acquisition or disposition of portfolio investments (including, without limitation, brokerage commissions and other trading or transaction expenses), leverage expenses (including, without limitation, costs associated with the issuance or incurrence of leverage, commitment fees, interest expense or dividends on preferred shares), expenses incurred in connection with issuances and sales of shares of the Trust (including, without limitation, fees, commissions and offering costs), dividends on short sales, if any, securities lending costs, if any, expenses of holding, and soliciting proxies for, meetings of shareholders of the Trust (except to the extent relating to routine items such as the election of trustees), expenses of a reorganization, restructuring, redomiciling or merger of the Trust or the acquisition of all or substantially all of the assets of another fund, or any extraordinary expenses not incurred in the ordinary course of the Trusts business (including, without limitation, expenses related to litigation, derivative actions, demands related to litigation, regulatory or other government investigations and proceeding)). The expense limitation agreement, during its term, may be terminated only by the Board of Trustees. After its initial two-year term, the expense limitation agreement may be renewed with the consent of the Adviser and the Board of Trustees. The Adviser may recoup waived or reimbursed amounts for up to three years following the date of such waiver or reimbursement, provided total expenses, including such recoupment, do not exceed the lesser of the annual expense limit at the time such expenses were waived or reimbursed or the annual expense limit at the time of recoupment.
Offering expenses relating to the offering Trusts Common Shares (other than the sales load) that do not exceed $0.02 per Common Share will be payable by the Trust upon completion of the offering of Common Shares, will be charged to capital upon the commencement of investment operations of the Trust, and will be attributable to the Common Shares. The Adviser and the Sub-Adviser have agreed to (i) pay all organizational expenses of the Trust and (ii) pay or reimburse offering expenses of the Trust (other than sales load) that exceed $0.02 per Common Share. Organizational expenses and offering expenses in excess of $0.02 per Common Share that are borne by the Adviser and the Sub-Adviser are not subject to recoupment from the Trust. In addition, the Adviser (and not the Trust) has agreed to pay to FDCC a fee equal to 0.90% of the total price to the public of the Common Shares sold in this offering (inclusive of the over-allotment option), as payment for providing certain distribution-related services, and to reimburse reasonable out of pocket expenses related to the Trusts roadshow. Such fees and expenses paid to FDCC constitute underwriting compensation and are a component of the total compensation to Underwriters. See Underwriting.
CONTROL PERSONS
Prior to the public offering of the Common Shares, the Adviser purchased Common Shares from the Trust in an amount satisfying the net worth requirements of Section 14(a) of the 1940 Act. As of the date of this Prospectus, the Adviser owned 100% of the outstanding Common Shares. The Adviser may be deemed to control the Trust until such time as it owns less than 25% of the outstanding Common Shares, which is expected to occur as of the completion of the offering of the Common Shares.
PARTICIPATION IN THE OFFERING
The Adviser, the Sub-Adviser and certain of their respective affiliates, associates and employees (management investors), have indicated an interest in purchasing an aggregate of up to $15 million of Common Shares in this offering at the initial offering price. However, because indications of interest are not binding agreements or commitments to purchase, the Underwriters may determine to sell more, less or no Common Shares in this offering to the management investors. In addition, the management investors may determine to purchase more, less or no Common Shares in this offering. If the Trust sells more Common Shares in the offering than currently assumed herein, the management investors intend to purchase fewer
71
Management of the Trust
Common Shares so as not to reduce the number of Common Shares available to the general public. The Underwriters will receive the same underwriting discount on any Common Shares purchased by the management investors as they will on any other Common Shares sold to the public in this offering; provided, however, that the Underwriters will not be paid the additional compensation of $0.10 per Common Share From the Adviser on Common Shares purchased by the management investors. Management investors will be restricted from selling Common Shares purchased in the offering for a period of 180 days following completion of this offering.
The net asset value of the Common Shares of the Trust is calculated by subtracting the Trusts total liabilities (including from Indebtedness) and the liquidation preference of any outstanding Preferred Shares from total assets (the market value of the securities the Trust holds plus cash and other assets). The per share net asset value of the Common Shares is calculated by dividing the net asset value of the Trust by the number of Common Shares outstanding and rounding the result to the nearest full cent. The Trust calculates its net asset value as of the close of regular trading on the NYSE on each day on which there is a regular trading session on the NYSE and at such other times as may be determined by the Board of Trustees from time to time.
The Trust values debt securities at the last available bid price for such securities or, if such prices are not available, at prices for securities of comparable maturity, quality, and type. The Trust values exchange-traded options and other exchange-traded derivative contracts at the midpoint of the best bid and asked prices at the close on those exchanges on which they are traded.
The Trust values equity securities at the last reported sale price on the principal exchange or in the principal off-exchange market in which such securities are traded, as of the close of regular trading on the NYSE on the day the securities are being valued or, if there are no sales, at the mean between the last available bid and asked prices on that day. Securities traded primarily on the Nasdaq Stock Market (Nasdaq) are normally valued by the Trust at the Nasdaq Official Closing Price (NOCP) provided by Nasdaq each business day. The NOCP is the most recently reported price as of 4:00 p.m., Eastern time, unless that price is outside the range of the inside bid and asked prices (i.e., the bid and asked prices that dealers quote to each other when trading for their own accounts); in that case, Nasdaq will adjust the price to equal the inside bid or asked price, whichever is closer. Because of delays in reporting trades, the NOCP may not be based on the price of the last trade to occur before the market closes.
Generally, trading in many foreign securities that the Trust may hold will be substantially completed each day at various times prior to the close of the NYSE. The values of these securities used in determining the net asset value generally will be computed as of such times. Occasionally, events affecting the value of foreign securities may occur between such times and the close of the NYSE which will not be reflected in the computation of net asset value unless it is determined that such events would materially affect the net asset value, in which case adjustments would be made and reflected in such computation pursuant to the fair valuation procedures described herein. Such adjustments may be based upon factors such as developments in non-U.S. markets, the performance of U.S. securities markets and the performance of instruments trading in U.S. markets that represent non-U.S. securities.
Short-term securities with remaining maturities of less than 60 days may be valued at amortized cost, to the extent that amortized cost is determined to approximate fair value.
The Trust values derivatives transactions in accordance with valuation guidelines adopted by the Board of Trustees. Accrued payments to the Trust under such transactions will be assets of the Trust and accrued payments by the Trust will be liabilities of the Trust.
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Net asset value
The Trust may utilize independent pricing services or, if independent pricing services are unavailable, bid quotations provided by dealers to value certain of its securities and other instruments at their market value. The Trust may use independent pricing services to value certain securities held by the Trust at their market value. The Trust periodically verifies valuations provided by independent pricing services.
If independent pricing services or dealer quotations are not available for a given security, such security will be valued in accordance with valuation guidelines adopted by the Board of Trustees that the Board of Trustees believes are designed to accurately reflect the fair value of securities valued in accordance with such guidelines.
The Board of Trustees has delegated the day-to-day responsibility for fair value determinations to a valuation committee comprised of representatives from the Adviser, the Sub-Adviser and the Trusts administrator (the Valuation Committee). All fair value determinations made by the Valuation Committee are subject to review and ratification by the Board of Trustees. As a general principle, the fair value of a portfolio instrument is the amount that an owner might reasonably expect to receive upon the instruments current sale. A range of factors and analysis may be considered when determining fair value, including relevant market data, interest rates, credit considerations and/or issuer specific news. For certain securities, fair valuations may include input from the Sub-Adviser utilizing a wide variety of market data including yields or prices of investments of comparable quality, type of issue, coupon, maturity, rating, indications of value from security dealers, evaluations of anticipated cash flows or collateral, spread over U.S. Treasury obligations, and other information and analysis. In addition, the Valuation Committee may consider valuations provided by valuation firms retained to assist in the valuation of certain of the Trusts investments. Fair valuation involves subjective judgments. While the Trusts use of fair valuation is intended to result in calculation of net asset value that fairly reflects values of the Trusts portfolio securities as of the time of pricing, the Trust cannot guarantee that any fair valuation will, in fact, approximate the amount the Trust would actually realize upon the sale of the securities in question. It is possible that the fair value determined for a portfolio instrument may be materially different from the value that could be realized upon the sale of that instrument.
Information that becomes known after the Trusts net asset value has been calculated on a particular day will not be used to retroactively adjust the price of a security or the Trusts previously determined net asset value.
The Trust intends to distribute substantially all of its net investment income, if any, to Common Shareholders through monthly distributions. In addition, the Trust intends to distribute any net long-term capital gains to Common Shareholders at least annually.
The Trust expects that distributions paid on the Common Shares will consist primarily of (i) investment company taxable income, which includes ordinary income (such as interest, dividends, and certain income from hedging or derivatives transactions) and the excess, if any, of net short-term capital gain over net long-term capital loss, and (ii) net capital gain (which is the excess of net long-term capital gain over net short-term capital loss).
The Trust expects to declare initial distributions approximately 45 to 60 days after completion of the Common Share offering, and to pay such initial distributions approximately 60 to 90 days after the completion of the Common Share offering, depending upon market conditions.
To permit the Trust to maintain more stable monthly distributions, the Trust may initially distribute less than the entire amount of the net investment income earned in a particular period. The undistributed net investment income may be available to supplement future distributions. As a result, the distributions paid by the Trust for
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Distributions
any particular period may be more or less than the amount of net investment income actually earned by the Trust during the period, and the Trust may have to sell a portion of its investment portfolio to make a distribution at a time when independent investment judgment might not dictate such action. Undistributed net investment income is included in the Common Shares net asset value, and, correspondingly, distributions from net investment income will reduce the Common Shares net asset value.
Pursuant to the requirements of the 1940 Act, in the event the Trust makes distributions from sources other than income, a notice will be provided in connection with each monthly distribution with respect to the estimated source of the distribution made. Such notices will describe the portion, if any, of the monthly dividend which, in the Trusts good faith judgment, constitutes long-term capital gain, short-term capital gain, investment company taxable income or a return of capital. The actual character of such dividend distributions for U.S. federal income tax purposes, however, will only be determined finally by the Trust at the close of its fiscal year, based on the Trusts full year performance and its actual net investment company taxable income and net capital gains for the year, which may result in a recharacterization of amounts distributed during such fiscal year from the characterization in the monthly estimates.
If the Trusts total distributions in any year exceed the amount of its investment company taxable income and net capital gain for the year, any such excess would generally be characterized as a return of capital for U.S. federal income tax purposes, to the extent such amounts exceed the Trusts current and accumulated earnings and profits. The amount by which the Trusts total distributions exceed investment company taxable income and net capital gain would generally be treated as a return of capital up to the amount of the Common Shareholders tax basis in their Common Shares, which would reduce such tax basis, with any amounts exceeding such basis treated as a gain from the sale of their Common Shares. Consequently, although a return of capital may not be taxable, it will generally increase the Common Shareholders potential gain, or reduce the Common Shareholders potential loss, on any subsequent sale or other disposition of Common Shares. A return of capital distribution is in effect a partial return of the amount a Common Shareholder invested in the Trust. Because of the manner in which the Trust will account for certain income received from its investments, a greater portion of the Trusts distributions in its initial year of operation may be characterized as return of capital. Shareholders who periodically receive the payment of a distribution consisting of a return of capital may be under the impression that they are receiving net income or profits when they are not. Shareholders should not assume that the source of a distribution from the Trust is net income or profit.
The Trust may, but is not required to, seek to obtain exemptive relief to permit the Trust to make periodic distributions of long-term capital gains with respect to its Common Shares as frequently as monthly. Such relief, if obtained, would permit the Trust to implement a managed distribution policy pursuant to which the Trust would distribute a fixed percentage of the net asset value (or market price if then applicable) of the Common Shares at a particular point in time or a fixed monthly amount, any of which may be adjusted from time to time. It is anticipated that under such a distribution policy, the minimum annual distribution rate with respect to the Common Shares would be independent of the Trusts performance during any particular period but would be expected to correlate with the Trusts performance over time.
The Trust reserves the right to change its distribution policy and the basis for establishing the rate of distributions at any time and may do so without prior notice to Common Shareholders.
Under the Trusts Dividend Reinvestment Plan, a Common Shareholder whose Common Shares are registered in his or her own name will have all distributions reinvested automatically by DST Systems, Inc., which is agent under the Plan (the Plan Agent), unless the Common Shareholder elects to receive cash.
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Dividend reinvestment plan
Distributions with respect to Common Shares registered in the name of a broker-dealer or other nominee (that is, in street name) will be reinvested in additional Common Shares under the Plan, unless the broker or nominee does not participate in the Plan or the Common Shareholder elects to receive distributions in cash. Investors who own Common Shares registered in street name should consult their broker-dealers for details regarding reinvestment. All distributions to investors who do not participate in the Plan will be paid by check mailed directly to the record holder by DST Systems, Inc., as dividend disbursing agent. A participant in the Plan who wishes to opt out of the Plan and elect to receive distributions in cash should contact DST Systems, Inc. in writing at the address specified below or by calling the telephone number specified below.
Under the Plan, whenever the market price of the Common Shares is equal to or exceeds net asset value at the time Common Shares are valued for purposes of determining the number of Common Shares equivalent to the cash dividend or capital gains distribution, participants in the Plan are issued new Common Shares from the Trust, valued at the greater of (i) the net asset value as most recently determined or (ii) 95% of the then-current market price of the Common Shares. The valuation date is the dividend or distribution payment date or, if that date is not a NYSE trading day, the next preceding trading day. If the net asset value of the Common Shares at the time of valuation exceeds the market price of the Common Shares, the Plan Agent will buy the Common Shares for the Plan in the open market, on the NYSE or elsewhere, for the participants accounts, except that the Plan Agent will endeavor to terminate purchases in the open market and cause the Trust to issue Common Shares at the greater of net asset value or 95% of market value if, following the commencement of such purchases, the market value of the Common Shares exceeds net asset value. If the Trust should declare a distribution or capital gains distribution payable only in cash, the Plan Agent will buy the Common Shares for the Plan in the open market, on the NYSE or elsewhere, for the participants accounts. There is no charge from the Trust for reinvestment of dividends or distributions in Common Shares pursuant to the Plan and no brokerage charges will be incurred with respect to Common Shares issued directly by the Trust pursuant to the Plan; however, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open-market purchases.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes written confirmations of all transactions in the account, including information needed by shareholders for personal and tax records. Common Shares in the account of each Plan participant will be held by the Plan Agent in non-certificated form in the name of the participant.
In the case of shareholders such as banks, brokers or nominees, which hold Common Shares for others who are the beneficial owners, and participate in the Plan, the Plan Agent will administer the Plan on the basis of the number of Common Shares certified from time to time by the Common Shareholder as representing the total amount registered in the shareholders name and held for the account of beneficial owners who participate in the Plan.
Participants that request a sale of shares through the Plan Agent will incur brokerage charges in connection with such sales.
The automatic reinvestment of dividends and other distributions will not relieve participants of any income tax that may be payable or required to be withheld on such dividends or distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly, the Trust reserves the right to amend or terminate its Plan as applied to any voluntary cash payments made and any dividend or distribution paid subsequent to written notice of the change sent to the members of such Plan at least 90 days before the record date for such dividend or distribution. The Plan also may be amended or terminated by the Plan Agent on at least 90 days prior written notice to the participants in such Plan. All correspondence concerning the Plan should be directed to the Plan Agent, DST Systems, Inc., 430 W. 7 th Street, Kansas City, Missouri 64105-1594.
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Description of capital structure
The Trust is an unincorporated statutory trust organized under the laws of Delaware pursuant to a Certificate of Trust, dated as of April 4, 2017. The following is a brief description of the terms of the Common Shares, Indebtedness and Preferred Shares which may be issued by the Trust. This description does not purport to be complete and is qualified by reference to the Trusts Governing Documents.
COMMON SHARES
Pursuant to the Declaration of Trust, the Trust is authorized to issue an unlimited number of Common Shares of beneficial interest, par value $0.01 per share. Each Common Share has one vote and, when issued and paid for in accordance with the terms of this offering, will be fully paid and non-assessable. All Common Shares are equal as to dividends, assets and voting privileges and have no conversion, preemptive or other subscription rights. The Trust will send annual and semi-annual reports, including financial statements, to all holders of its shares.
Any additional offerings of Common Shares will require approval by the Board of Trustees. Any additional offering of Common Shares will be subject to the requirements of the 1940 Act, which provides that shares may not be issued at a price below the then current net asset value, exclusive of sales load, except in connection with an offering to existing Common Shareholders or with the consent of a majority of the Trusts outstanding voting securities.
The Trusts Common Shares have been approved for listing on the NYSE, subject to notice of issuance, under the symbol XFLT.
The Trusts net asset value per Common Share generally increases and decreases based on the market value of the Trusts securities. Net asset value per Common Share will be reduced immediately following the offering of Common Shares by the amount of the sales load and offering expenses paid by the Trust. See Use of Proceeds.
The Trust will not issue certificates for Common Shares.
INDEBTEDNESS
The Trusts Declaration of Trust provides that the Board of Trustees may authorize the borrowing of money by the Trust, without the approval of the holders of the Common Shares. The Trust may issue notes or other evidences of indebtedness (including bank borrowings or commercial paper) and may secure any such borrowings by mortgaging, pledging or otherwise subjecting the Trusts assets as security.
Under the 1940 Act, the Trust may not incur Indebtedness if, immediately after incurring such Indebtedness, the Trust would have an asset coverage (as defined in the 1940 Act) of less than 300% (i.e., the value of the Trusts total assets less liabilities other than the principal amount represented by Indebtedness must be at least 300% of the principal amount represented by Indebtedness at the time of issuance). In addition, the Trust generally is not permitted to declare any cash dividend or other distribution on the Common Shares unless, at the time of such declaration and after deducting the amount of such dividend or other distribution, the Trust maintains asset coverage of 300%. However, the foregoing restriction does not apply with respect to certain types of Indebtedness of the Trust, including a line of credit or other privately arranged borrowings from a financial institution. If the Trust utilizes Indebtedness, the Trust intends, to the extent possible, to prepay all or a portion of the principal amount of any outstanding Indebtedness to the extent necessary to maintain the required asset coverage. The Trust may also utilize Indebtedness in excess of such limit for temporary purposes such as the settlement of transactions.
The terms of any such Indebtedness may require the Trust to pay a fee to maintain a line of credit, such as a commitment fee, or to maintain minimum average balances with a lender. Any such requirements would
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Description of capital structure
increase the cost of such Indebtedness over the stated interest rate. Such lenders would have the right to receive interest on and repayment of principal of any such Indebtedness, which right will be senior to those of the Common Shareholders. Any such Indebtedness may contain provisions limiting certain activities of the Trust, including the payment of dividends to Common Shareholders in certain circumstances. Any Indebtedness will likely be ranked senior or equal to all other existing and future Indebtedness of the Trust. If the Trust utilizes Indebtedness, the Common Shareholders will bear the offering costs of the issuance of any Indebtedness.
Certain types of Indebtedness subject the Trust to covenants in credit agreements relating to asset coverage and portfolio composition requirements. Certain Indebtedness issued by the Trust also may subject the Trust to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for such Indebtedness. Such guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. It is not anticipated that these covenants or guidelines will impede the Adviser from managing the Trusts portfolio in accordance with the Trusts investment objective and policies.
The 1940 Act grants to the lenders to the Trust, under certain circumstances, certain voting rights in the event of default in the payment of interest on or repayment of principal. Failure to maintain certain asset coverage requirements could result in an event of default and entitle the debt holders to elect a majority of the Board of Trustees.
See Use of LeverageIndebtedness.
PREFERRED SHARES
The Trusts Governing Documents provide that the Board of Trustees may authorize and issue Preferred Shares with rights as determined by the Board of Trustees, by action of the Board of Trustees without prior approval of the holders of the Common Shares.
Common Shareholders have no preemptive right to purchase any Preferred Shares that might be issued. Any such Preferred Share offering would be subject to the limits imposed by the 1940 Act. Any Preferred Shares issued by the Trust would have special voting rights and a liquidation preference over the Common Shares. Issuance of Preferred Shares would constitute leverage and would entail special risks to the Common Shareholders.
Under the 1940 Act, the Trust may not issue Preferred Shares unless, immediately after such issuance, it has an asset coverage of at least 200% of the liquidation value of the outstanding Preferred Shares (i.e., such liquidation value may not exceed 50% of the value of the Trusts total assets). For these purposes, asset coverage means the ratio of (i) total assets less all liabilities and indebtedness not represented by senior securities to (ii) the amount of senior securities representing indebtedness plus the involuntary liquidation preference of the Preferred Shares. Senior security generally means any bond, note, or similar security evidencing indebtedness and any class of shares having priority over any other class as to distribution of assets or payment of dividends. Senior security representing indebtedness means any senior security other than equity shares. The involuntary liquidation preference of the Preferred Shares is the amount that holders of Preferred Shares would be entitled to receive in the event of an involuntary liquidation of the Trust in preference to the Common Shares.
In addition, the Trust is not permitted to declare any dividend (except a dividend payable in Common Shares), or to declare any other distribution on the Common Shares, or to purchase any Common Shares, unless the Preferred Shares have at the time of the declaration of any such dividend or other distribution, or at the time of any such purchase of Common Shares, an asset coverage of at least 200% after deducting the amount of such dividend, distribution or purchase price. If Preferred Shares are issued, the Trust intends, to the extent possible, to purchase or redeem Preferred Shares from time to time to the extent necessary to maintain asset coverage of any Preferred Shares of at least 200%.
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Description of capital structure
If Preferred Shares are outstanding, two of the Trusts Trustees will be elected by the holders of Preferred Shares, voting separately as a class. The remaining Trustees of the Trust will be elected by Common Shareholders and Preferred Shares voting together as a single class. In the unlikely event the Trust failed to pay dividends on Preferred Shares for two years, Preferred Shares would be entitled to elect a majority of the Trustees of the Trust.
The Trust may be subject to certain restrictions imposed by guidelines of one or more rating agencies that may issue ratings for Preferred Shares issued by the Trust. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Trust by the 1940 Act.
The Trust has no present intention to issue Preferred Shares, although it may do so in the future. See Use of LeveragePreferred Shares.
Limited term and eligible tender offer
The Trust will terminate on or before the Termination Date of December 31, 2029; provided, that if the Board of Trustees believes that under then-current market conditions it is in the best interests of the Trust to do so, the Trust may extend the Termination Date (i) once for up to one year (i.e., up to December 31, 2030), and (ii) once for up to an additional six months (i.e., up to June 30, 2031), in each case upon the affirmative vote of a majority of the Board of Trustees and without a shareholder vote. In addition, as of a date within twelve months preceding the Termination Date, the Board of Trustees may cause the Trust to conduct an Eligible Tender Offer, which is a tender offer by the Trust to purchase 100% of the then outstanding Common Shares of the Trust at a price equal to the net asset value per Common Share on the expiration date of the tender offer. Following the completion of an Eligible Tender Offer, the Board of Trustees may eliminate the Termination Date and convert the Trust to a perpetual trust upon the affirmative vote of a majority of the Board of Trustees and without a shareholder vote.
The Trust should not be confused with a so called target date or life cycle fund whose asset allocation becomes more conservative over time as the funds target date, often associated with retirement, approaches, and does not typically terminate on the target date. In addition, the Trust should not be confused with a target term fund whose investment objective is to return the funds original net asset value on the termination date. The Trusts investment objective and policies are not designed to seek to return to investors that purchase Common Shares in this offering their initial investment of $10.00 per Common Share on the Termination Date or in an Eligible Tender Offer, and such investors and investors that purchase Common Shares after the completion of this offering may receive more or less than their original investment upon termination or in an Eligible Tender Offer.
LIQUIDATION OF THE TRUST
Upon its termination, the Trust will distribute substantially all of its net assets to shareholders, after paying or otherwise providing for all charges, taxes, expenses and liabilities, whether due or accrued or anticipated, of the Trust, as may be determined by the Board Trustees. Beginning one year before the Termination Date (the wind-down period), the Trust may begin liquidating all or a portion of the Trusts portfolio, and may deviate from its investment policies, including its policy of investing at least 80% of its Managed Assets in floating rate credit instruments and other structured credit investments and may not achieve its investment objective. During the wind-down period, the Trusts portfolio composition may change as more of its portfolio holdings are called or sold and portfolio holdings are disposed of in anticipation of liquidation. Rather than reinvesting the proceeds of matured, called or sold securities, the Trust may such proceeds in short term or other lower yielding securities or hold the proceeds in cash, which may adversely affect its performance. The Trusts distributions during the wind-down period may decrease, and such distributions may include a return of capital. The Trust may distribute the proceeds in one or more liquidating
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Limited term and eligible tender offer
distributions prior to the final liquidation, which may cause fixed expenses to increase when expressed as a percentage of assets under management. It is expected that shareholders will receive cash in any liquidating distribution from the Trust, regardless of their participation in the Trusts Dividend Reinvestment Plan. However, if on the Termination Date the Trust owns securities for which no market exists or securities trading at depressed prices, such securities may be placed in a liquidating trust. Shareholders generally will realize capital gain or loss upon the termination of the Trust in an amount equal to the difference between the amount of cash or other property received by the shareholder (including any property deemed received by reason of its being placed in a liquidating trust) and the shareholders adjusted tax basis in shares of the Trust for U.S. federal income tax purposes.
If the Board of Trustees believes that under then-current market conditions it is in the best interests of the Trust to do so, the Trust may extend the Termination Date (i) once for up to one year (i.e., up to December 31, 2030), and (ii) once for up to an additional six months (i.e. up to June 30, 2031), in each case upon the affirmative vote of a majority of the Board of Trustees and without a shareholder vote. In determining whether to extend the Termination Date, the Board of Trustees may consider the inability to sell the Trusts assets in a time frame consistent with termination due to lack of market liquidity or other extenuating circumstances. Additionally, the Board of Trustees may determine that market conditions are such that it is reasonable to believe that, with an extension, the Trusts remaining assets will appreciate and generate income in an amount that, in the aggregate, is meaningful relative to the cost and expense of continuing the operation of the Trust.
ELIGIBLE TENDER OFFER
The Board of Trustees may cause the Trust to conduct an Eligible Tender Offer. An Eligible Tender Offer would consist of a tender offer to purchase 100% of the then outstanding Common Shares of the Trust at a price equal to the net asset value per Common Share on the expiration date of the tender offer, which shall be as of a date within twelve months preceding the Termination Date. The terms of an Eligible Tender Offer will include a condition pursuant to which in the event that the number of Common Shares properly tendered in the Eligible Tender Offer exceeds the Termination Threshold, which will be a stated percentage of the outstanding Common Shares, with such percentage to be established at the time of such Eligible Tender Offer by the Board of Trustees representing the minimum threshold for the continued viability of the Trust, the Eligible Tender Offer will be terminated and no Common Shares will be repurchased pursuant to the Eligible Tender Offer. Instead, the Trust will begin (or continue) liquidating its portfolio and proceed to terminate on or before the Termination Date.
If the number of properly tendered Common Shares is less than the Termination Threshold, all Common Shares properly tendered and not withdrawn will be purchased by the Trust pursuant to the terms of the Eligible Tender Offer. See RisksLimited Term Risk. Following such completion of the Eligible Tender Offer, the Board of Trustees may eliminate the Termination Date and convert the Trust to a perpetual trust upon the affirmative vote of a majority of the Board of Trustees and without a shareholder vote. In making a decision to eliminate the Termination Date and provide for the Trusts perpetual existence, the Board of Trustees will take such actions with respect to the continued operations of the Trust as it deems to be in the best interests of the Trust, based on market conditions at such time, the extent of Common Shareholder participation in the Eligible Tender Offer and all other factors deemed relevant by the Board of Trustees in consultation with the Adviser and Sub-Adviser.
An Eligible Tender Offer would be made, and Common Shareholders would be notified thereof, in accordance with the requirements of the 1940 Act, the Exchange Act and the applicable tender offer rules thereunder. The repurchase of tendered Common Shares by the Trust in a tender offer would be a taxable event to Common Shareholders. The Adviser will pay all costs and expenses associated with the making of an Eligible Tender Offer, other than brokerage and related transaction costs associated with disposition of portfolio investments in connection with the Eligible Tender Offer, which will be borne by the Trust and its shareholders.
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Limited term and eligible tender offer
An Eligible Tender Offer may be commenced upon approval of a majority of the Trustees, without a shareholder vote. The Trust is not required to conduct an Eligible Tender Offer. If no Eligible Tender Offer is conducted, the Trust will liquidate on or before the Termination Date (subject to extension as described above), unless the limited term provisions of the Declaration of Trust are amended with the vote of shareholders, as described below.
AMENDMENT OF LIMITED TERM PROVISIONS
Other than with respect to (i) an extension of the Termination Date by the Board of Trustees for a period of up to one year and an additional period of up to six months, as described above, or (ii) the elimination of the Termination Date by the Board of Trustees following an Eligible Tender Offer, any extension or modification of the Termination Date requires an amendment to the limited term provisions of the Declaration of Trust of the Trust, which must be approved by the affirmative vote of a majority of the Board of Trustees followed by the affirmative vote of the holders of at least 75% of the outstanding shares of each affected class of shares of the Trust, voting separately as a class or series, unless approved by at least 80% of the Board of Trustees, in which case the affirmative vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Trust shall be required.
Anti-takeover provisions in the Trusts Governing Documents
The Trust presently has provisions in its Governing Documents which could have the effect of limiting, in each case, (i) the ability of other entities or persons to acquire control of the Trust, (ii) the Trusts freedom to engage in certain transactions or (iii) the ability of the Trusts Board of Trustees or shareholders to amend the Governing Documents or effectuate changes in the Trusts management. These provisions of the Governing Documents of the Trust may be regarded as anti-takeover provisions. The Board of Trustees is divided into three classes, with the terms of one class expiring at each annual meeting of shareholders. At each annual meeting, one class of Trustees is elected to a three-year term. This provision could delay for up to two years the replacement of a majority of the Board of Trustees. A Trustee may be removed from office by the action of 80% of the remaining Trustees or a majority of the remaining Trustees followed by a vote of the holders of at least 75% of the shares then entitled to vote for the election of the respective Trustee.
The Declaration of Trust requires the affirmative vote of a majority of the Board of Trustees followed by the affirmative vote of the holders of at least 75% of the outstanding shares of each affected class or series of the Trust, voting separately as a class or series, to approve, adopt or authorize certain transactions with 5% or greater holders of a class or series of shares and their associates, unless the transaction has been approved by at least 80% of the Board of Trustees, in which case a majority of the outstanding voting securities (as defined in the 1940 Act) of the Trust shall be required. For purposes of these provisions, a 5% or greater holder of a class or series of shares (a Principal Shareholder) refers to any person who, whether directly or indirectly and whether alone or together with its affiliates and associates, beneficially owns 5% or more of the outstanding shares of any class or series of shares of beneficial interest of the Trust.
The 5% holder transactions subject to these special approval requirements are:
Ø |
the merger or consolidation of the Trust or any subsidiary of the Trust with or into any Principal Shareholder; |
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the issuance of any securities of the Trust to any Principal Shareholder for cash (other than pursuant to any automatic dividend reinvestment plan); |
Ø |
the sale, lease or exchange of all or any substantial part of the assets of the Trust to any Principal Shareholder, except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period; or |
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Anti-takeover provisions in the Trusts Governing Documents
Ø |
the sale, lease or exchange to the Trust or any subsidiary of the Trust, in exchange for securities of the Trust, of any assets of any Principal Shareholder, except assets having an aggregate fair market value of less than $1,000,000, aggregating for purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period. |
At any time prior to the earlier of (i) the Termination Date or (ii) the date of an amendment to the limited term provisions of the Declaration of Trust that causes the Trust to have perpetual existence, the Trust may be liquidated only upon approval of not less than eighty percent (80%) of the Trustees. At any time after the date of an amendment to Section to the limited term provisions of the Declaration of Trust that causes the Trust to have perpetual existence, the Trust may be dissolved only upon the affirmative vote of a majority of the Board of Trustees followed by the affirmative vote of the holders of at least 75% of the outstanding shares of each affected class or series of the Trust, voting separately as a class or series, unless such liquidation has been approved by at least 80% of the Board of Trustees, in which case a majority of the outstanding voting securities (as defined in the 1940 Act) of the Trust shall be required.
For the purposes of calculating a majority of the outstanding voting securities under the Declaration of Trust, each class and series of the Trust shall vote together as a single class, except to the extent required by the 1940 Act or the Declaration of Trust with respect to any class or series of shares. If a separate vote is required, the applicable proportion of shares of the class or series, voting as a separate class or series, also will be required. A majority of the outstanding voting securities means the lesser of (i) 67% or more of the Trusts voting securities present at a meeting, if the holders of more than 50% of the Trusts outstanding voting securities are present or represented by proxy; or (ii) more than 50% of the Trusts outstanding voting securities.
The Board of Trustees has determined that provisions with respect to the Board and shareholder voting requirements described above, which voting requirements are greater than the minimum requirements under Delaware law or the 1940 Act, are in the best interest of shareholders generally. Reference should be made to the Declaration of Trust on file with the SEC for the full text of these provisions. See Additional Information.
CLOSED-END FUND STRUCTURE
Closed-end management investment companies (closed-end funds) differ from open-end management investment companies (commonly referred to as mutual funds) in that closed-end funds generally list their shares for trading on a securities exchange and do not redeem their shares at the option of the shareholder. By comparison, mutual funds issue securities redeemable at net asset value at the option of the shareholder and typically engage in a continuous offering of their shares. Mutual funds are subject to continuous asset in-flows and out-flows that can complicate portfolio management, whereas closed-end funds generally can stay more fully invested in securities consistent with the closed-end funds investment objective and policies. In addition, in comparison to open-end funds, closed-end funds have greater flexibility in their ability to make certain types of investments, including investments in illiquid securities.
However, shares of closed-end funds listed for trading on a securities exchange frequently trade at a discount from net asset value, but in some cases trade at a premium. The market price may be affected by trading volume of the shares, general market and economic conditions and other factors beyond the control of the closed-end fund. The foregoing factors may result in the market price of the Common Shares being greater than, less than or equal to net asset value. The Board of Trustees has reviewed the structure of the Trust in light of its investment objective and policies and has determined that the closed-end structure is in the best interests of the shareholders. Investors should assume, therefore, that it is unlikely that the Board of Trustees would vote to convert the Trust to an open-end management investment company.
REPURCHASE OF COMMON SHARES
The Board of Trustees will review periodically the trading range and activity of the Trusts shares with respect to its net asset value and the Board of Trustees may take certain actions to seek to reduce or
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Anti-takeover provisions in the Trusts Governing Documents
eliminate any such discount. Such actions may include open market repurchases or tender offers for the Common Shares at net asset value. There can be no assurance that the Board of Trustees will decide to undertake any of these actions or that, if undertaken, such actions would result in the Common Shares trading at a price equal to or close to net asset value per Common Share.
CONVERSION TO OPEN-END FUND
To convert the Trust to an open-end management investment company, the Declaration of Trust requires the affirmative vote of a majority of the Board of Trustees followed by the affirmative vote of the holders of at least 75% of the outstanding shares of each affected class or series of shares of the Trust, voting separately as a class or series, unless such action has been approved by at least 80% of the Board of Trustees, in which case a majority of the outstanding voting securities (as defined in the 1940 Act) of the Trust shall be required. The foregoing vote would satisfy a separate requirement in the 1940 Act that any conversion of the Trust to an open-end management investment company be approved by the shareholders. If approved in the foregoing manner, conversion of the Trust to an open-end management investment company could not occur until 90 days after the shareholders meeting at which such conversion was approved and would also require at least 30 days prior notice to all shareholders.
In the event of conversion, the Common Shares would cease to be listed on the NYSE or other national securities exchange or market system. If the Trust were converted to an open-end management investment company, it is likely that new Common Shares would be sold at net asset value plus a sales load. Shareholders of an open-end management investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less such redemption charge, if any, as might be in effect at the time of a redemption. In the event of conversion, the Trust would expect to pay all such redemption requests in cash, but would intend to reserve the right to pay redemption requests in a combination of cash or securities. If such partial payment in securities were made, investors could incur brokerage costs in converting such securities to cash.
The Board of Trustees has reviewed the structure of the Trust in light of its investment objective and policies and has determined that the closed-end structure is in the best interests of the shareholders. Any conversion to an open-end management investment company would require material changes to the Trusts investment strategy, including with respect to the use of leverage and investment in illiquid securities, which may adversely impact the Trusts ability to achieve its investment objective. Investors should assume, therefore, that it is unlikely that the Board of Trustees would vote to convert the Trust to an open-end management investment company.
The following is a summary of the material U.S. federal income tax considerations generally applicable to the Trust, U.S. Common Shareholders (as defined below) and Non-U.S. Common Shareholders (as defined below) that acquire Common Shares and that hold such Common Shares as capital assets within the meaning of the Code (generally, property held for investment). The discussion is based upon the Code, Treasury Regulations, judicial authorities, published positions of the Internal Revenue Service (the IRS) and other applicable authorities, all as in effect on the date hereof and all of which are subject to change or differing interpretations (possibly with retroactive effect). This summary does not address all of the potential U.S. federal income tax consequences that may be applicable to the Trust or to all categories of investors, some of which may be subject to special tax rules. No ruling has been or will be sought from the IRS regarding any matter discussed herein. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax aspects set forth below. This summary of U.S. federal income tax consequences is for general information only. Prospective investors should consult their tax advisors as to the U.S. federal income tax consequences of acquiring, holding and disposing of Common Shares, as well as the effects of state, local and non-U.S. tax laws.
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For purposes of this summary, the term U.S. Common Shareholder means a beneficial owner of shares of the Trust that, for U.S. federal income tax purposes, is one of the following:
1. | an individual who is a citizen or resident of the United States; |
2. | a corporation or other entity taxable as a corporation created in or organized under the laws of the United States, any state thereof or the District of Columbia; |
3. | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
4. | a trust (x) if a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of such trust or (y) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
If a partnership (including any other entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares, the U.S. federal income tax treatment of a partner in such partnership generally will depend upon the status of the partner and the activities of the partnership. Partners of partnerships that hold shares should consult their tax advisors.
TAXATION OF THE TRUST
The Trust intends to elect to be treated, and to qualify annually, as a RIC under Subchapter M of the Code. Accordingly, the Trust must, among other things, meet certain income, asset diversification and distribution requirements:
(i) | The Trust must derive in each taxable year at least 90% of its gross income from the following sources: (a) dividends, interest (including tax-exempt 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 gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies; and (b) net income derived from interests in qualified publicly traded partnerships (as defined in the Code). Generally, a qualified publicly traded partnership includes a partnership the interests of which are traded on an established securities market or readily tradable on a secondary market (or the substantial equivalent thereof) and that derives less than 90% of its gross income from the items described in (a) above. |
(ii) | The Trust must diversify its holdings so that, at the end of each quarter of each taxable year, (a) at least 50% of the market value of the Trusts total assets is represented by cash and cash items, including receivables, U.S. Government securities, the securities of other RICs and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of the Trusts total assets and not more than 10% of the outstanding voting securities of such issuer and (b) not more than 25% of the market value of the Trusts total assets is invested in the securities (other than U.S. Government securities and the securities of other RICs) of (I) any one issuer, (II) any two or more issuers that the Trust controls and that are determined to be engaged in the same business or similar or related trades or businesses or (III) any one or more qualified publicly traded partnerships (as defined in the Code). |
As long as the Trust qualifies as a RIC, the Trust generally will not be subject to U.S. federal income tax on income and gains that the Trust distributes to its Common Shareholders, provided that it distributes each taxable year at least 90% of the sum of (i) the Trusts investment company taxable income (which includes, among other items, dividends, interest, the excess of any net short-term capital gain over net long-term capital loss, and other taxable income, other than any net capital gain (defined below), reduced by deductible expenses) determined without regard to the deduction for dividends and distributions paid and (ii) the Trusts net tax-exempt interest (the excess of its gross tax-exempt interest over certain disallowed deductions) (the Annual Distribution Requirement). The Trust intends to distribute substantially all of such income each year. The Trust will be subject to income tax at regular corporate rates on any taxable income or gains that it does not distribute to its Common Shareholders.
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Tax matters
The Trust will either distribute or retain for reinvestment all or part of its net capital gain (which consists of the excess of its net long-term capital gain over its net short-term capital loss). If any such gain is retained, the Trust will be subject to a corporate income tax (currently at a maximum rate of 35%) on such retained amount. In that event, the Trust expects to report the retained amount as undistributed capital gain in a notice to its Common Shareholders, each of whom, if subject to U.S. federal income tax on long-term capital gains, (i) will be required to include in income for U.S. federal income tax purposes as long-term capital gain its share of such undistributed amounts, (ii) will be entitled to credit its proportionate share of the tax paid by the Trust against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its basis in its Common Shares by the amount of undistributed capital gain included in such Common Shareholders gross income net of the tax deemed paid by such Common Shareholder under clause (ii).
The Code imposes a 4% nondeductible excise tax on the Trust to the extent the Trust does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98.2% of its capital gain in excess of its capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Trusts fiscal year) (the Excise Tax Avoidance Requirement). In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year. For purposes of the excise tax, the Trust will be deemed to have distributed any income on which it paid federal income tax in the taxable year ending within the calendar year. While the Trust intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4% nondeductible excise tax, there can be no assurance that sufficient amounts of the Trusts taxable income and capital gain will be distributed to entirely avoid the imposition of the excise tax. In that event, the Trust will be liable for the excise tax only on the amount by which it does not meet the foregoing distribution requirement.
If for any taxable year the Trust does not qualify as a RIC, all of its taxable income (including its net capital gain) will be subject to tax at regular corporate rates without any deduction for distributions to Common Shareholders, and such distributions will be taxable to the Common Shareholders as ordinary dividends to the extent of the Trusts current and accumulated earnings and profits. Such dividends, however, would be eligible (i) to be treated as qualified dividend income in the case of non-corporate U.S. Common Shareholders and (ii) for the dividends-received deduction in the case of U.S. Common Shareholders taxed as corporations, in each case provided that certain holding period and other requirements are met. The Trust could be required to recognize unrealized gains, pay taxes and make distributions (which could be subject to interest charges) before requalifying for taxation as a RIC.
TAXATION OF THE TRUSTS INVESTMENTS
Certain of the Trusts investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gains or qualified dividend income into higher taxed short-term capital gains or ordinary income, (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (iv) cause the Trust to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (vi) adversely alter the characterization of certain complex financial transactions and (vii) produce income that will not be qualified income for purposes of the 90% gross income requirement described above. These U.S. federal income tax provisions could therefore affect the amount, timing and character of distributions to Common Shareholders. The Trust intends to structure and monitor its transactions and may make certain tax elections and may be required to dispose of securities to mitigate the effect of these provisions and prevent disqualification of the Trust as a RIC (which may adversely affect the net after-tax return to the Trust).
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If the Trust acquires shares in a passive foreign investment company (a PFIC), the Trust may be subject to U.S. federal income tax on a portion of any excess distribution or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the Trust to Common Shareholders. Additional charges in the nature of interest may be imposed on the Trust in respect of deferred taxes arising from such distributions or gains. If the Trust invests in a PFIC and elects to treat the PFIC as a qualified electing fund under the Code (a QEF), in lieu of the foregoing requirements, the Trust will be required to include in income each year a portion of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed to the Trust. The Trusts ability to make this election will depend on factors beyond the Trusts control. Alternatively, the Trust can elect to mark to market at the end of each taxable year the Trusts shares in a PFIC; in this case, the Trust will recognize as ordinary income any increase in the value of such shares, and as ordinary loss any decrease in such value to the extent it does not exceed prior increases included in income. Under either election, the Trust may be required to recognize in a year income in excess of the Trusts distributions from PFICs and the Trusts proceeds from dispositions of PFIC stock during that year, and such income will nevertheless be subject to the Annual Distribution Requirement and will be taken into account for purposes of the 4% excise tax.
If the Trust holds more than 10% of the shares in a foreign corporation that is treated as a controlled foreign corporation (CFC), the Trust may be treated as receiving a deemed distribution (taxable as ordinary income) each year from such foreign corporation in an amount equal to the Trusts pro rata share of the corporations income for the taxable year (including both ordinary earnings and capital gains), whether or not the corporation makes an actual distribution during such year. In general, a foreign corporation will be classified as a CFC if more than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or by attribution) by U.S. Stockholders. A U.S. Stockholder, for this purpose, is any U.S. person that possesses (actually or constructively) 10% or more of the combined voting power of all classes of shares of a corporation. If the Trust is treated as receiving a deemed distribution from a CFC, the Trust will be required to include such distribution in its investment company taxable income regardless of whether the Trust receives any actual distributions from such CFC, and the Trust must distribute such income to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement.
Although the Code generally provides that income inclusions from a QEF and subpart F income from CFCs will be good income for purposes of the 90% gross income requirement to the extent it is distributed to a RIC in the year it is included in the RICs income, the Code does not specifically provide whether income inclusions from a QEF and subpart F income for which no distribution is received during the RICs taxable year would be good income for the 90% gross income requirement. The IRS has issued a series of private rulings in which it has concluded that all income inclusions from a QEF and subpart F income included in a RICs income would constitute good income for purposes of the 90% gross income requirement. The Department of the Treasury, however, has recently proposed regulations that would treat such income as not being good income for purposes of the 90% gross income requirement. In its explanation accompanying the recently proposed regulations, the Department of the Treasury takes the position that, notwithstanding prior private letter rulings to the contrary, the current language of the Code would treat such income as not being good income for purposes of the 90% gross income requirement even in the absence of the proposed regulations. Accordingly, such income may not be treated as good income if the recently proposed regulations are finalized or if the Department of the Treasurys interpretation of current law applies. In such a case, the Trust may fail to qualify as a RIC if it realizes a material amount of such income.
TAXATION OF U.S. COMMON SHAREHOLDERS
Distributions
Distributions paid to you by the Trust from its net capital gains, which is the excess of net long-term capital gain over net short-term capital loss, if any, that the Trust properly reports as capital gains dividends (capital gain dividends) are taxable as long-term capital gains, regardless of how long you have held your
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Tax matters
Common Shares. All other dividends paid to you by the Trust (including dividends from short-term capital gains) from its current or accumulated earnings and profits (ordinary income dividends) are generally subject to tax as ordinary income.
In the case of corporate U.S. Common Shareholders, ordinary income dividends paid by the Trust generally will be eligible for the dividends received deduction to the extent that the Trusts income consists of dividend income from U.S. corporations and certain holding period requirements are satisfied by both the Trust and the corporate U.S. Common Shareholders. In the case of individuals, any such ordinary income dividend that you receive from the Trust generally will be eligible for taxation at the rates applicable to long-term capital gains to the extent that (i) the ordinary income dividend is attributable to qualified dividend income (i.e., generally dividends paid by U.S. corporations and certain foreign corporations) received by the Trust, (ii) the Trust satisfies certain holding period and other requirements with respect to the stock on which such qualified dividend income was paid and (iii) you satisfy certain holding period and other requirements with respect to your Common Shares. Qualified dividend income eligible for these special rules are not actually treated as capital gains, however, and thus will not be included in the computation of your net capital gain and generally cannot be used to offset any capital losses. In general, you may include as qualified dividend income only that portion of the dividends that may be and are so reported by the Trust as qualified dividend income. Dividend income from PFICs and, in general, dividend income from real estate investment trusts is not eligible for the reduced rate for qualified dividend income and is taxed as ordinary income. Due to the nature of the Trusts investments, the Trust does not expect that a significant portion of its distributions will be eligible for the dividends received deduction or for the reduced rates applicable to qualified dividend income.
Any distributions you receive that are in excess of the Trusts current and accumulated earnings and profits will be treated as a return of capital to the extent of your adjusted tax basis in your Common Shares, and thereafter as capital gain from the sale of Common Shares. The amount of any Trust distribution that is treated as a return of capital will reduce your adjusted tax basis in your Common Shares, thereby increasing your potential gain, or reducing your potential loss, on any subsequent sale or other disposition of your Common Shares.
Dividends and other taxable distributions are taxable to you even if they are reinvested in additional Common Shares of the Trust. Dividends and other distributions paid by the Trust are generally treated as received by you at the time the dividend or distribution is made. If, however, the Trust pays you a dividend in January that was declared in the previous October, November or December and you were the U.S. Common Shareholder of record on a specified date in one of such months, then such dividend will be treated for U.S. federal income tax purposes as being paid by the Trust and received by you on December 31 of the year in which the dividend was declared.
The Trust will send you information after the end of each year setting forth the amount and tax status of any distributions paid to you by the Trust.
Sale of Common Shares
The sale or other disposition of Common Shares of the Trust will generally result in capital gain or loss to you and will be long-term capital gain or loss if you have held such Common Shares for more than one year. Any loss upon the sale or other disposition of Common Shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain) by you with respect to such Common Shares. Any loss you recognize on a sale or other disposition of Common Shares will be disallowed if you acquire other Common Shares (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after your sale or exchange of the Common Shares. In such case, your tax basis in the Common Shares acquired will be adjusted to reflect the disallowed loss.
Current U.S. federal income tax law taxes both long-term and short-term capital gain of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, short-term capital gain is currently taxed
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at rates applicable to ordinary income, while long-term capital gain generally is taxed at reduced maximum rates. The deductibility of capital losses is subject to limitations under the Code.
Medicare tax
An additional 3.8% Medicare tax will be imposed on certain net investment income (including ordinary dividends and capital gain distributions received from a Trust and net gains from redemptions or other taxable dispositions of Trust shares) of U.S. individuals, estates and trusts to the extent that such persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceed certain threshold amounts.
Backup withholding
The Trust may be required to withhold, for U.S. federal backup withholding tax purposes, a portion of the dividends, distributions and redemption proceeds payable to non-corporate Common Shareholders who fail to provide the Trust (or its agent) with their correct taxpayer identification number (in the case of individuals, generally, their social security number) or to make required certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any, provided that you timely furnish the required information to the IRS.
Taxation of Non-U.S. Common Shareholders
The following discussion only applies to Non-U.S. Common Shareholders. A Non-U.S. Common Shareholder is a holder, other than a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes), that is not a U.S. Common Shareholder for U.S. federal income tax purposes. Whether an investment in Common Shares is appropriate for a Non-U.S. Common Shareholder will depend upon that Non-U.S. Common Shareholders particular circumstances. An investment in the Common Shares by a Non-U.S. Common Shareholder may have adverse tax consequences. Non-U.S. Common Shareholders should consult their tax advisors before investing in Common Shares.
Distributions of ordinary income dividends to Non-U.S. Common Shareholders, subject to the discussion below, will generally be subject to withholding of U.S. federal tax at a 30% rate (or lower rate provided by an applicable treaty) to the extent of the Trusts current and accumulated earnings and profits. Different tax consequences may result if the Non-U.S. Common Shareholder is engaged in a trade or business in the United States or, in the case of an individual, is present in the United States for 183 days or more during a taxable year and certain other conditions are met. Special certification requirements apply to a Non-U.S. Common Shareholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their tax advisors.
Actual or deemed distributions of the Trusts net capital gain to a Non-U.S. Common Shareholder, and gain recognized by a Non-U.S. Common Shareholder upon the sale of Common Shares, generally will not be subject to U.S. federal withholding tax and will not be subject to U.S. federal income tax unless the distributions or gain, as the case may be, are effectively connected with a U.S. trade or business of the Non-U.S. Common Shareholder (and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. Common Shareholder in the United States) or, in the case of an individual, is present in the United States for 183 days or more during a taxable year.
Under certain legislation, no U.S. source withholding taxes will be imposed on dividends paid by RICs to Non-U.S. Common Shareholders to the extent the dividends are designated as interest related dividends or short term capital gain dividends. Under this exemption, interest related dividends and short term capital gain dividends generally represent distributions of interest or short term capital gain that would not have been subject to U.S. withholding tax at the source if they had been received directly by a Non-U.S. Common Shareholder, and that satisfy certain other requirements. No assurance can be given that the Trust will distribute any interest related or short term capital gain dividends.
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If the Trust distributes its net capital gains in the form of deemed rather than actual distributions (which the Trust may do in the future), a Non-U.S. Common Shareholder will be entitled to a U.S. federal income tax credit or tax refund equal to the Non-U.S. Common Shareholders allocable share of the tax that the Trust pays on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. Common Shareholder must obtain a U.S. taxpayer identification number and file a federal income tax return even if the Non-U.S. Common Shareholder is not otherwise required to obtain a U.S. taxpayer identification number or file a federal income tax return. For a corporate Non-U.S. Common Shareholder, distributions (both actual and deemed), and gains realized upon the sale of Common Shares that are effectively connected with a U.S. trade or business (or, where an applicable treaty applies, are attributable to a permanent establishment in the United States) may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate (or at a lower rate if provided for by an applicable tax treaty). Accordingly, investment in Common Shares may not be appropriate for certain Non-U.S. Common Shareholders.
Certain provisions of the Code referred to as FATCA require withholding at a rate of 30% on dividends in respect of, and, after December 31, 2018, gross proceeds from the sale of, Common Shares held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Treasury to report, on an annual basis, information with respect to interests in, and accounts maintained by, the institution to the extent such interests or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which Common Shares are held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and, after December 31, 2018, gross proceeds from the sale of, Common Shares held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies to the Trust that such entity does not have any substantial United States owners or (ii) provides certain information regarding the entitys substantial United States owners, which the Trust will in turn provide to the Secretary of the Treasury. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations or other guidance, may modify these requirements. The Trust will not pay any additional amounts to Non-U.S. Common Shareholders in respect of any amounts withheld. Non-U.S. Common Shareholders are encouraged to consult their tax advisors regarding the possible implications of the legislation on their investment in Common Shares.
A Non-U.S. Common Shareholder who is a nonresident alien individual, and who is otherwise subject to withholding of federal income tax, may be subject to backup withholding of federal income tax on dividends unless the Non-U.S. Common Shareholder provides the Trust or the dividend paying agent with an IRS Form W 8BEN or IRS Form W-8BEN-E (or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. Common Shareholder or otherwise establishes an exemption from backup withholding. Backup withholding is not an additional tax. Any amounts withheld from payments made to you may be refunded or credited against your U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS. Non-U.S. Common Shareholders may also be subject to information reporting.
The foregoing is a general and abbreviated summary of the provisions of the Code and the Treasury regulations in effect as they directly govern the taxation of the Trust and its U.S. Common Shareholders. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive. A more complete discussion of the tax rules applicable to the Trust, its U.S. Common Shareholders and Non-U.S. Common Shareholders can be found in the SAI that is incorporated by reference into this Prospectus. Common Shareholders are urged to consult their tax advisers regarding specific questions as to U.S. federal, state, local and foreign income or other taxes.
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The underwriters named below (the Underwriters), acting through UBS Securities LLC, 1285 Avenue of the Americas, New York, New York 10019, as their representative (the Representative), have severally agreed, subject to the terms and conditions of an underwriting agreement with the Trust, the Adviser and the Sub-Adviser (the Underwriting Agreement), to purchase from the Trust the number of Common Shares set forth opposite their respective names. The Underwriters are committed to purchase and pay for all such Common Shares (other than those covered by the over-allotment option described below) if any are purchased.
Underwriter |
Number of Common Shares |
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UBS Securities LLC |
||||
BB&T Capital Markets, a division of BB&T Securities, LLC |
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Ladenburg Thalmann & Co. Inc. |
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Maxim Group LLC |
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National Securities Corporation |
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Newbridge Securities Corporation |
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Wedbush Securities Inc. |
||||
Wunderlich Securities, Inc. |
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|
|
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Total |
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|
|
If an Underwriter fails to purchase the Common Shares it has agreed to purchase, the Underwriting Agreement provides that one or more substitute underwriters may be found, the purchase commitments of the remaining Underwriters may be increased or the Underwriting Agreement may be terminated.
The Adviser, the Sub-Adviser and certain of their respective affiliates, associates and employees (management investors), have indicated an interest in purchasing an aggregate of up to $15 million of Common Shares in this offering at the initial offering price. However, because indications of interest are not binding agreements or commitments to purchase, the Underwriters may determine to sell more, less or no Common Shares in this offering to the management investors. In addition, the management investors may determine to purchase more, less or no Common Shares in this offering. If the Trust sells more Common Shares in the offering than currently assumed herein, the management investors intend to purchase fewer Common Shares so as not to reduce the number of Common Shares available to the general public. The Underwriters will receive the same underwriting discount on any Common Shares purchased by the management investors as they will on any other Common Shares sold to the public in this offering; provided, however, that the Underwriters will not be paid the additional compensation of $0.10 per Common Share from the Adviser on Common Shares purchased by the management investors.
The Trust has granted to the Underwriters an option, exercisable for 45 days from the date of this Prospectus, to purchase up to an additional Common Shares to cover over-allotments, if any, at the initial offering price. The Underwriters may exercise such option solely for the purpose of covering over-allotments incurred in the sale of the Common Shares offered hereby. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase an additional number of Common Shares proportionate to such Underwriters initial commitment.
The Underwriting Agreement provides that the obligations of the Underwriters to purchase the Common Shares included in this offering are subject to approval of certain legal matters by counsel and certain other conditions.
The sales load the investors in the Trust will pay of $0.20 per Common Share is equal to 2.00% of the initial offering price. The Representative has advised the Trust that the Underwriters may pay up to $ per Common
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Underwriting
Share from such commission to selected dealers who sell the Common Shares and that such dealers may reallow a concession of up to $ per Common Share to certain other dealers who sell Common Shares.
Investors must pay for any Common Shares purchased on or before , 2017.
The Adviser and the Sub-Adviser have agreed to (i) pay all organizational expenses of the Trust and (ii) pay or reimburse offering expenses of the Trust (other than sales load) that exceed $0.02 per Common Share. Assuming the Trust issues 7,000,000 Common Shares ($70,000,000), the offering expenses (other than sales load) are estimated to be approximately $940,000. The Trust, and therefore Common Shareholders, will bear $140,000 or approximately $0.02 per Common Share of offering expenses, and the Adviser and the Sub-Adviser will bear any offering expenses above that amount. Organizational expenses and offering expenses in excess of $0.02 per Common Share borne by the Adviser and the Sub-Adviser are not subject to recoupment from the Trust.
The Adviser has agreed to pay expenses related to the reasonable fees and disbursements of counsel to the Underwriters in connection with the review by the Financial Industry Regulatory Authority, Inc. (FINRA) of the terms of the sale of the Common Shares, the filing fees incident to the filing of marketing materials with FINRA and the transportation and other expenses incurred by the Underwriters in connection with presentations to prospective purchasers of the Common Shares, such expenses will not exceed $25,000 in the aggregate.
Prior to this offering, there has been no public or private market for the Common Shares or any other securities of the Trust. Consequently, the offering price for the Common Shares was determined by negotiation among the Trust and the Representative. There can be no assurance, however, that the price at which the Common Shares sell after this offering will not be lower than the price at which they are sold by the Underwriters or that an active trading market in the Common Shares will develop and continue after this offering. The Trusts Common Shares have been approved for listing on the NYSE, subject to notice of issuance, under the trading or ticker symbol XFLT.
In connection with the requirements for listing the Common Shares on the NYSE, the Underwriters have undertaken to sell lots of 100 or more Common Shares to a minimum of 400 beneficial owners in the United States. The minimum investment requirement is 500 Common Shares.
The Trust, the Adviser and the Sub-Adviser have each agreed to indemnify the several Underwriters for or to contribute to the losses arising out of certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect of those liabilities, except in the cases of willful misfeasance, bad faith, gross negligence or reckless disregard of applicable obligations and duties.
The Trust has agreed not to offer, sell or register with the SEC any additional equity securities of the Trust, other than issuances (1) of Common Shares hereby, (2) of preferred shares or (3) pursuant to the Trusts Divided Reinvestment Plan, for a period of 180 days after the date of the Underwriting Agreement without the prior written consent of the Representative.
The management investors have agreed that, for a period of 180 days from the date of this Prospectus (the Lock-up Period), such party will not, without the prior written consent of UBS Securities LLC, on behalf of the Underwriters, offer, pledge, sell, contract to sell or otherwise dispose of or agree to sell or otherwise dispose of, directly or indirectly or hedge any Common Shares or any securities convertible into or exchangeable for Common Shares, provided, however, that management investors may issue and sell Common Shares pursuant to the Trusts dividend reinvestment plan and other limited exceptions. UBS Securities LLC in its sole discretion may release any of the securities subject to these lock-up agreements at any time.
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Underwriting
In connection with this offering, the Underwriters may purchase and sell Common Shares in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with this offering. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the Common Shares and syndicate short positions involve the sale by the Underwriters of a greater number of Common Shares than they are required to purchase from the Trust in this offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the Common Shares sold in this offering for their account may be reclaimed by the syndicate if such Common Shares are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Shares, which may be higher than the price that might otherwise prevail in the open market; and these activities, if commenced, may be discontinued at any time without notice. These transactions may be effected on the NYSE or otherwise.
In connection with the offering, certain of the Underwriters or selected dealers may distribute Prospectuses electronically.
The Trust anticipates that from time to time certain of the Underwriters may act as brokers or dealers in connection with the execution of the Trusts portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as brokers while they are Underwriters. Certain Underwriters have performed investment banking and advisory services for the Adviser, the Sub-Adviser and their respective affiliates from time to time, for which they have received customary fees and expenses. Certain Underwriters may, from time to time, engage in transactions with or perform services for the Adviser, the Sub-Adviser and their respective affiliates in the ordinary course of business.
ADDITIONAL COMPENSATION TO BE PAID BY THE ADVISER
The Adviser (and not the Trust) has agreed to pay, from its own assets, additional compensation of $0.10 per Common Share (1.00% of the public offering price per Common Share) to the Underwriters in connection with this offering (other than with respect to Common Shares purchased by the management investors).
Separately, the Adviser and the Sub-Adviser (and not the Trust) has agreed to pay to each of UBS Securities LLC, BB&T Capital Markets, a division of BB&T Securities, LLC, Ladenburg Thalmann & Co. Inc., Maxim Group LLC, National Securities Corporation, Newbridge Securities Corporation, Wedbush Securities Inc. and Wunderlich Securities, Inc., from their own assets, a fee for advice relating to the structure, design and organization of the Trust as well as for services related to the sale and distribution of the Trusts Common Shares in the amount of $ , $ , $ , $ , $ , $ , $ and $ , respectively. If the over-allotment option is not exercised, the structuring fee paid to UBS Securities LLC, BB&T Capital Markets, a division of BB&T Securities, LLC, Ladenburg Thalmann & Co. Inc., Maxim Group LLC, National Securities Corporation, Newbridge Securities Corporation, Wedbush Securities Inc. and Wunderlich Securities, Inc., will not exceed %, %, %, %, %, %, % and %, respectively, of the total public offering price of the Common Shares sold in this offering.
The Adviser and the Sub-Adviser (and not the Trust) also may pay certain qualifying underwriters, including those named above, a structuring fee, additional compensation or a sales incentive fee in connection with the offering. The total amount of these payments paid to any qualifying underwriters will not exceed 1.5% of the total price to the public of the Common Shares sold in this offering.
Pursuant to a closed-end fund distribution services agreement among the Adviser, FDCC, a registered broker-dealer, and Vision 4 Fund Distributors, LLC, an affiliate of FDCC (Vision), FDCC will provide the Adviser with certain distribution support services in connection with the offering. Distribution support services provided by FDCC include making its registered representatives available to aid in the distribution of the Common Shares and generally providing sales services with respect to the Common Shares; developing and coordinating a targeted road show with respect to the offering; assisting in the customization of marketing materials for use by, and presentations to the sales networks at, broker-dealers
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Underwriting
that distribute the Common Shares; assisting in the review of materials made available to prospective investors and broker-dealers; assisting in scheduling and marketing national, informational conference calls in targeted broker-dealer channels for the offering; organizing and hosting meetings with key financial advisers, closed-end fund wholesalers, analysts, service providers and ratings and information organizations that cover closed-end funds; replying to requests for information from broker-dealers or prospective investors concerning the Common Shares, the offering or the Trust; assisting in the drafting of press releases in connection with the offering; providing the sales support and marketing services typical for an offering of the Common Shares; and providing such other services as the parties may mutually agree from time to time. The Adviser (and not the Trust) has agreed to pay FDCC a fee equal to 0.90% of the total price to the public of the Common Shares sold in this offering (inclusive of the over-allotment option), as payment for providing such services, and to reimburse reasonable out of pocket expenses related to the Trusts roadshow. If the over-allotment option is not exercised, the aggregate fee paid to FDCC will not exceed % of the total public offering price of the Common Shares sold in this offering. Neither FDCC nor Vision will purchase or resell as principal or agent any Common Shares in connection with the offering.
The sum of all compensation to the Underwriters in connection with this public offering of Common Shares, including the sales load, the structuring and sales incentive fees and all forms of additional payments to the Underwriters, the fees and expenses paid to FDCC for distribution assistance, and the amounts paid by the Trust to reimburse certain underwriters and certain other expenses, will not exceed 9.00% of the total public offering price of the Common Shares sold in this offering.
Custodian, transfer agent, and administrator
CUSTODIAN
U.S. Bank N.A. serves as the custodian of the Trusts assets pursuant to a custody agreement. Under the custody agreement, the custodian is required to hold the Trusts assets in compliance with the 1940 Act. For its services, the custodian will receive a monthly fee based upon, among other things, the average value of the total assets of the Trust, plus certain charges for securities transactions. U.S. Bank N.A. is located at 1555 N. River Center Drive, Milwaukee, Wisconsin 53212.
TRANSFER AGENT
DST Systems, Inc. serves as the Trusts dividend disbursing agent, agent under the Trusts Plan, transfer agent and registrar with respect to the Common Shares of the Trust. DST Systems, Inc. is located at 430 W. 7 th Street, Kansas City, Missouri 64105-1594.
ADMINISTRATOR
ALPS Fund Services Inc. serves as the administrator of the Trust. Pursuant to an administration, bookkeeping and pricing services agreement, the administrator provides certain administrative services to the Trust. ALPS Fund Services Inc. receives a fee equal to 0.08% for the first $250 million in assets, 0.06% for assets greater than $250 million and up to $501 million, 0.04% for assets greater than $501 million and up to $1 billion and 0.03% for assets greater than $1 billion, subject to a minimum fee of $207,500 in the first year of the Trusts operations, and $232,500 in subsequent years. ALPS Fund Services Inc. is located at 1290 Broadway, Suite 1100, Denver, CO 80203.
Certain legal matters will be passed on for the Trust by Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, Illinois, in connection with the offering of the Common Shares. Certain legal matters will be passed on for the Underwriters by Clifford Chance US LLP, New York, New York.
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Fiscal year end and reports to shareholders
Independent registered public accounting firm
KPMG LLP, 200 E. Randolph Drive, Chicago, IL 60601, is the independent registered public accounting firm of the Trust. The independent registered public accounting firm is expected to render an opinion annually on the financial statements of the Trust.
Fiscal year end and reports to shareholders
The Trusts fiscal year end is September 30.
As soon as practicable after the end of each calendar year, the Trust will furnish to Common Shareholders a statement on Form 1099-DIV identifying the sources of the distributions paid by the Trust to Common Shareholders for tax purposes.
In addition, the Trust will prepare and transmit to Common Shareholders a semi-annual report and annual report within 60 days after the close of the period for which the report is being made, or as otherwise required by the 1940 Act.
This Prospectus constitutes part of a Registration Statement filed by the Trust with the SEC under the Securities Act, and the 1940 Act. This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Trust and the Common Shares offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by its rules and regulations or free of charge through the SECs website (www.sec.gov).
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Privacy principles of the Trust
The Trust is committed to maintaining the privacy of its shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information the Trust collects, how the Trust protects that information and why, in certain cases, the Trust may share information with select other parties.
Generally, the Trust does not receive any non-public personal information relating to its shareholders, although certain non-public personal information of its shareholders may become available to the Trust. The Trust does not disclose any non-public personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service shareholder accounts (for example, to a transfer agent or third party administrator).
The Trust restricts access to non-public personal information about its shareholders to employees of the Adviser and its delegates and affiliates with a legitimate business need for the information. The Trust maintains physical, electronic and procedural safeguards designed to protect the non-public personal information of its shareholders.
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Table of contents of the Statement of Additional Information
S-2 | ||||
S-2 | ||||
S-6 | ||||
S-8 | ||||
S-16 | ||||
S-17 | ||||
S-24 | ||||
Report of Independent Registered Public Accounting Firm of the Trust |
FS-1 | |||
FS-2 | ||||
A-1 | ||||
B-1 |
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UBS Investment Bank
BB&T Capital Markets
Ladenburg Thalmann
Maxim Group LLC
National Securities Corporation
Newbridge Securities Corporation
Wedbush Securities
Wunderlich
The information in this statement of additional information is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This statement of additional information is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion, dated September 25, 2017
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST
Statement of Additional Information
XAI Octagon Floating Rate & Alternative Income Term Trust (the Trust) is a newly-organized, diversified, closed-end management investment company. The Trusts common shares of beneficial interest (the Common Shares) are expected to be listed on the New York Stock Exchange (NYSE), subject to notice of issuance, under the symbol XFLT.
The Trusts investment objective is to seek attractive total return with an emphasis on income generation across multiple stages of the credit cycle. There can be no assurance that the Trust will achieve its investment objective, and you could lose some or all of your investment.
This Statement of Additional Information (SAI) is not a prospectus, but should be read in conjunction with the Prospectus for the Trust dated , 2017. Investors should obtain and read the Prospectus prior to purchasing common shares of the Trust. A copy of the Prospectus may be obtained, without charge, by calling the Trust at (888) 903-3358.
The Prospectus and this SAI omit certain of the information contained in the registration statement filed with the Securities and Exchange Commission (the SEC). The registration statement may be obtained from the SEC upon payment of the fee prescribed, or inspected at the SECs office or via its website (www.sec.gov) at no charge. Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus.
Page | ||
S-2 | ||
S-2 | ||
S-6 | ||
S-8 | ||
S-16 | ||
S-17 | ||
S-24 | ||
Report of Independent Registered Public Accounting Firm (Registrant) |
FS-1 | |
FS-2 | ||
A-1 | ||
B-1 |
This Statement of Additional Information is dated , 2017.
The Trust is a newly-organized, diversified, closed-end management investment company organized as a statutory trust under the laws of the State of Delaware.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Trusts investment objective, policies and techniques that are described in the Prospectus. The Trust may make the following investments, among others, some of which are part of its principal investment strategies and some of which are not. The principal risks of the Trusts principal investment strategies are discussed in the Prospectus. The Trust may not buy all of the types of securities or use all of the investment techniques that are described.
Convertible Securities
A convertible security is a preferred stock, warrant or other security that may be converted into or exchanged for a prescribed amount of common stock or other security of the same or a different issuer or into cash within a particular period of time at a specified price or formula. A convertible security generally entitles the holder to receive the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities generally have characteristics similar to both fixed income and equity securities. The value of convertible securities tends to decline as interest rates rise and, because of the conversion feature, tends to vary with fluctuations in the market value of the securities in to which they would convert. Convertible securities ordinarily provide a stream of income with generally higher yields than those of common stock of the same or similar issuers. Convertible securities generally rank senior to common stock in a corporations capital structure but are usually subordinated to comparable non-convertible securities. Convertible securities generally do not participate directly in any dividend increases or decreases of the underlying securities although the market prices of convertible securities may be affected by any dividend changes or other changes in the underlying securities.
The market value of a convertible security generally is a function of its investment value and its conversion value. A securitys investment value represents the value of the security without its conversion feature (i.e., a comparable nonconvertible fixed-income security). The investment value is determined by, among other things, reference to its credit quality and the current value of its yield to maturity or probable call date. At any given time, investment value is dependent upon such factors as the general level of interest rates, the yield of similar nonconvertible securities, the financial strength of the issuer and the seniority of the security in the issuers capital structure. A securitys conversion value is determined by multiplying the number of shares the holder is entitled to receive upon conversion or exchange by the current price of the underlying security. If the conversion value of a convertible security is significantly below its investment value, the convertible security will trade like nonconvertible debt or a preferred security in the sense that its market value will not be influenced greatly by fluctuations in the market price of the underlying security into which it can be converted. Instead, the convertible securitys price will tend to move in the opposite direction from interest rates. Conversely, if the conversion value of a convertible security is significantly above its investment value, the market value of the convertible security will be more heavily influenced by fluctuations in the market price of the underlying stock. In that case, the convertible securitys price may be as volatile as that of the common stock. Because both interest rate and market movements can influence its value, a convertible security is not generally as sensitive to interest rates as a similar fixed-income security, nor is it generally as sensitive to changes in share price as its underlying stock.
The Trusts investments in convertible securities, particularly securities that are convertible into securities of an issuer other than the issuer of the convertible security, may be illiquid that is, the Trust may not be able to dispose of such securities in a timely fashion or for a fair price, which could result in losses to the Trust. The Trusts investments in convertible securities may at times include securities that have a mandatory conversion feature, pursuant to which the securities convert automatically into common stock or other equity securities (of the same or a different issuer) at a specified date and a specified conversion ratio, or that are convertible at the option of the
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issuer. For issues where the conversion of the security is not at the option of the holder, the Trust may be required to convert the security into the underlying common stock even at times when the value of the underlying common stock or other equity security has declined substantially.
Zero Coupon Securities
The Trust may invest in zero dividend preferred securities and zero coupon bonds. These are instruments that typically do not pay interest either for the entire life of the obligation or for an initial period after the issuance of the obligation. When held to its redemption or maturity, a holder receives the par value (or the accreted value) of the zero (rate) coupon security, which generates a return equal to the difference between the purchase price and its redemption or maturity value. A zero dividend preferred security or a zero coupon security is normally issued and traded at a deep discount from face value. This original issue discount (OID) approximates the total amount of interest the security will accrue and compound prior to its redemption or maturity. Because these securities and other OID instruments do not pay cash dividends or interest at regular intervals, the instruments ongoing accruals require ongoing judgments concerning the collectability of stated par value of the instrument at its redemption or maturity, as well as the value of any associated collateral. As a result, these securities may be subject to greater value fluctuations and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash on a current basis. Because zero dividend preferred securities and zero coupon bonds, and OID instruments generally, allow an issuer to delay the need to generate cash to meet current dividend or interest payments (unless there is a prescribed accumulated funding of the payment), they may involve greater payment and credit risk than dividend or coupon securities that pay dividends or interest currently or in cash. In order to maintain its status as a regulated investment company (RIC), the Trust generally will be required to distribute dividends to shareholders representing the income of these instruments as it accrues, even though the Trust will not receive all of the income on a current basis or in cash. Thus, the Trust may have to sell other investments, including when it may not be advisable to do so, and use the cash proceeds to make income distributions to its shareholders. For accounting purposes, these cash distributions to shareholders will not treated as a return of capital.
Exchange-Traded Notes
Exchange-traded notes (ETNs) are a type of senior, unsecured, unsubordinated debt security issued by financial institutions that combines both aspects of bonds and ETFs. An ETNs returns are based on the performance of a market index minus fees and expenses. Similar to ETFs, ETNs are listed on an exchange and traded in the secondary market. However, unlike an ETF, an ETN can be held until the ETNs maturity, at which time the issuer will pay a return linked to the performance of the market index to which the ETN is linked minus certain fees. Unlike regular bonds, ETNs do not make periodic interest payments and principal is not protected. ETNs are subject to credit risk and the value of an ETN may drop due to a downgrade in the issuers credit rating, despite the underlying market benchmark or strategy remaining unchanged. The value of an ETN may also be influenced by time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying assets, changes in the applicable interest rates, changes in the issuers credit rating, and economic, legal, political, or geographic events that affect the referenced underlying asset. When the Trust invests in ETNs it will bear its proportionate share of any fees and expenses borne by the ETN. The Trusts decision to sell its ETN holdings may be limited by the availability of a secondary market. In addition, although an ETN may be listed on an exchange, the issuer may not be required to maintain the listing and there can be no assurance that a secondary market will exist for an ETN.
ETNs are also subject to tax risk. No assurance can be given that the Internal Revenue Service (IRS) will accept, or a court will uphold, how the Trust characterizes and treats ETN investments for tax purposes. Further, the IRS and Congress have considered proposals that would change the timing and character of income and gains from ETNs.
An ETN that is tied to a specific market benchmark or strategy may not be able to replicate and maintain exactly the composition and relative weighting of securities, commodities or other components in the applicable market benchmark or strategy. Some ETNs that use leverage can, at times, be relatively illiquid and, thus, they may be difficult to purchase or sell at a fair price. Leveraged ETNs are subject to the same risk as other instruments that use leverage in any form.
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The market value of ETN shares may differ from their market benchmark or strategy. This difference in price may be due to the fact that the supply and demand in the market for ETN shares at any point in time is not always identical to the supply and demand in the market for the securities, commodities or other components underlying the market benchmark or strategy that the ETN seeks to track. As a result, there may be times when an ETN share trades at a premium or discount to its market benchmark or strategy.
Commercial Paper
Commercial paper represents short-term unsecured promissory notes issued in bearer form by corporations such as banks or bank holding companies and finance companies. The rate of return on commercial paper may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
When Issued, Delayed Delivery Securities And Forward Commitments
The Trust may enter into forward commitments for the purchase or sale of securities. The Trust may enter into transactions 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 it will only enter into a forward commitment with the intention of actually acquiring the security, the Trust may sell the security before the settlement date if it is deemed advisable. Securities purchased under a forward commitment are subject to market fluctuation, and generally no interest (or dividends) accrues to the Trust prior to the settlement date.
Securities purchased on a when-issued or delayed delivery basis may expose the Trust to counterparty risk of default as well as the risk that securities may experience fluctuations in value prior to their actual delivery. The Trust generally will not accrue income with respect to a when-issued or delayed delivery security prior to its stated delivery date. Purchasing securities on a when-issued or delayed delivery basis can involve the additional risk that the price or yield available in the market when the delivery takes place may not be as favorable as that obtained in the transaction itself.
Reverse Repurchase Agreements
In reverse repurchase agreement transactions, the Trust sells portfolio securities to financial institutions such as banks and broker-dealers and agrees to repurchase them at a particular date and price. The Trust may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. Proceeds of the sale will be invested in additional instruments for the Trust, and the income from these investments will generate income for the Trust. If such income does not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the reverse repurchase transaction, the use of this technique will diminish the investment performance of the Trust compared with what the performance would have been without the use of reverse repurchase transactions.
With respect to any reverse repurchase agreement, the Trusts Managed Assets shall include any proceeds from the sale of an asset of the Trust to a counterparty in such a transaction, in addition to the value of the underlying asset as of the relevant measuring date. With respect to leverage incurred through investments in reverse repurchase agreements and economically similar transactions, the Trust intends to earmark or segregate cash or liquid securities in accordance with applicable interpretations of the staff of the SEC. As a result of such segregation, the Trusts obligations under such transactions will not be considered senior securities representing indebtedness for purposes of the 1940 Act and the Trusts use of leverage through reverse repurchase agreements and economically similar transactions will not be limited by the 1940 Act.
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Reverse repurchase agreements involve the risks that the interest income earned on the investment of the proceeds will be less than the interest expense and expenses associated with the repurchase agreement, that the market value of the securities sold by the Trust may decline below the price at which the Trust is obligated to repurchase such securities and that the securities may not be returned to the Trust. There is no assurance that reverse repurchase agreements can be successfully employed. In connection with reverse repurchase agreements, the Trust will also be subject to counterparty risk with respect to the purchaser of the securities. If the broker/dealer to whom the Trust sells securities becomes insolvent, the Trusts right to purchase or repurchase securities may be restricted.
Depositary Receipts
The Trusts investments in non-U.S. issuers may include investment in depositary receipts, including American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). U.S. dollar-denominated ADRs, which are traded in the United States on exchanges in off exchange markets, are issued by domestic banks. ADRs represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all the risk inherent in investing in the securities of foreign issuers. However, by investing in ADRs rather than directly in foreign issuers stock, the Trust can avoid currency risks during the settlement period for either purchases or sales. In general, there is a large, liquid market in the United States for many ADRs. The information available for ADRs is subject to the accounting, auditing and financial reporting standards of the domestic market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be subject. The Trust also may invest in EDRs, GDRs, and in other similar instruments representing securities of foreign companies. EDRs and GDRs are securities that are typically issued by foreign banks or foreign trust companies, although U.S. banks or U.S. trust companies may issue them. EDRs and GDRs are structured similarly to the arrangements of ADRs. EDRs, in bearer form, are designed for use in European securities markets and are not necessarily denominated in the currency of the underlying security.
Certain depositary receipts, typically those denominated as unsponsored, require the holders thereof to bear most of the costs of the facilities while issuers of sponsored facilities normally pay more of the costs thereof. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through the voting rights to facility holders in respect to the deposited securities, whereas the depository of a sponsored facility typically distributes shareholder communications and passes through voting rights.
Preferred Securities
Preferred securities are generally equity securities of the issuer that have priority over the issuers common shares as to the payment of dividends (i.e., the issuer cannot pay dividends on its common shares until the dividends on the preferred shares are current) and as to the payout of proceeds of bankruptcy or other liquidation, but are subordinate to an issuers senior debt and junior debt as to both types of payments. Additionally, in a bankruptcy or other liquidation, preferred securities are generally subordinate to an issuers trade creditors and other general obligations.
Preferred securities pay a dividend, typically contingent both upon declaration by the issuers board and on the existence of current earnings (or retained earnings) in sufficient amount to source the payment. Preferred securities typically have no ordinary right to vote for the board of directors, except in some cases voting rights may arise if the issuer fails to pay the preferred share dividends. Preferred securities may be perpetual or have a term and typically have a fixed liquidation (or par) value.
Hybrid-preferred securities often behave as investments similarly to traditional preferred securities and are regarded by investors as being part of the preferred securities market. Hybrid-preferred securities possess varying combinations of features of both debt and preferred shares, and they may constitute senior debt, junior debt or preferred shares in an issuers capital structure. As such, hybrid-preferred securities may not be subordinate to a companys debt securities (as are traditional preferred securities). Given the various debt and equity characteristics of hybrid-preferred securities, whether a hybrid-preferred security is classified as debt or equity for purposes of
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reporting the Trusts portfolio holdings may be based on the portfolio managers determination as to whether its debt or preferred features are preponderant, or based on the assessment of an independent data provider. Such determinations may be subjective.
Dividend or interest payments on preferred securities may be cumulative or non-cumulative and often can be skipped or deferred, without limitation. The dividend rates on preferred securities may be fixed or floating, or convert from fixed to floating at a specified future time. Floating-rate and fixed-to-floating-rate preferred securities may be traditional preferred or hybrid-preferred securities. Floating-rate preferred securities pay a rate of income that resets periodically based on short- and/or longer-term interest rate benchmarks. If the associated interest rate benchmark rises, the return offered by the floating-rate security may rise as well, making such securities less price-sensitive to rising interest rates (or yields). Similarly, a fixed-to-floating-rate security may be less price-sensitive to rising interest rates (or yields), because the period over which the rate of payment is fixed is shorter than the maturity term of the security, after which period a floating rate of payment applies.
Loans of Portfolio Securities
To increase income, the Trust may, consistent with applicable regulatory requirements, lend its portfolio securities to securities broker-dealers or financial institutions if (i) the loan is collateralized in accordance with applicable regulatory requirements and (ii) no loan will cause the value of all loaned securities to exceed 33 1/3% of the value of the Trusts total assets. If the borrower fails to maintain the requisite amount of collateral, the loan automatically terminates and the Trust could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over the value of the collateral. As with any extension of credit, there are risks of delay in recovery and in some cases even loss of rights in collateral should the borrower of the securities fail financially. There can be no assurance that borrowers will not fail financially. On termination of the loan, the borrower is required to return the securities to the Trust, and any gain or loss in the market price during the term of the loan would inure to the Trust. If the other party to the loan petitions for bankruptcy or becomes subject to the U.S. Bankruptcy Code, the law regarding the rights of the Trust is unsettled. As a result, under extreme circumstances, there may be a restriction on the Trusts ability to sell the collateral and the Trust would suffer a loss.
The Trust operates under the following restrictions that constitute fundamental policies that, except as otherwise noted, cannot be changed without the affirmative vote of the holders of a majority of the outstanding voting securities of the Trust voting together as a single class, which is defined by the 1940 Act as the lesser of (i) 67% or more of the Trusts voting securities present at a meeting, if the holders of more than 50% of the Trusts outstanding voting securities are present or represented by proxy; or (ii) more than 50% of the Trusts outstanding voting securities. Except as otherwise noted, all percentage limitations set forth below apply immediately after a purchase or initial investment and any subsequent change in any applicable percentage resulting from market fluctuations does not require any action. These restrictions provide that the Trust shall not:
(1) | Issue senior securities, as defined in the 1940 Act, except as permitted by the 1940 Act, the rules and regulation promulgated by the SEC under the 1940 Act, as amended from time to time, or an exemption or other relief applicable to the Trust from the provisions of the 1940 Act. |
(2) | Borrow money, except as permitted by the 1940 Act, the rules and regulation promulgated by the SEC under the 1940 Act, as amended from time to time, or an exemption or other relief applicable to the Trust from the provisions of the 1940 Act. |
(3) | Act as underwriter of another issuers securities, except to the extent that the Trust may be deemed to be an underwriter within the meaning of the Securities Act in connection with the purchase and sale of portfolio securities. |
(4) |
Invest more than 25% of its total assets in securities of issuers in any one industry, provided, however, that such limitation shall not apply to (i) securities issued or guaranteed by the U.S. Government or its |
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agencies or instrumentalities, (ii) securities issued by state and municipal governments or their political subdivisions, agencies, authorities and instrumentalities (other than those securities backed only by the assets and revenues of non-governmental users with respect to which the Trust will not invest 25% or more of the value of the Trusts total assets in securities backed by the same source of revenue), and (iii) securities issued by other investment companies, which shall not constitute any industry. |
(5) | Purchase or sell real estate, except that the Trust may (i) acquire or lease office space for its own use, (ii) invest in instruments of issuers that deal in real estate or are engaged in the real estate business, including real estate investment trusts, (iii) invest in instruments secured by real estate or interests therein, (iv) hold and sell real estate or mortgages on real estate acquired through default, liquidation, or other distributions of an interest in real estate as a result of the Trusts ownership of such instruments. |
(6) | Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments except to the extent that interests in instruments the Trust may invest in are considered to be interests in commodities and this shall not prevent the Trust from purchasing or selling options, futures contracts, swaps, or other derivative instruments or from investing in securities or other instruments backed by physical commodities. |
(7) | Make loans except, (i) to the extent that instruments in which the Trust may invest are considered to be loans, (ii) through the loan of portfolio securities in accordance with the Trusts investment policies, or (iii) by engaging in repurchase agreement transactions or as otherwise permitted by the 1940 Act, the rules and regulation promulgated by the SEC under the 1940 Act, as amended from time to time, or an exemption or other relief applicable to the Trust from the provisions of the 1940 Act. |
(8) | With respect to 75% of the value of the Trusts total assets, purchase any securities (other than obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities), if as a result more than 5% of the Trusts total assets would then be invested in securities of a single issuer or if as a result the Trust would hold more than 10% of the outstanding voting securities of any single issuer. |
With respect to investment restriction (1) and (2) above, Section 18(c) of the 1940 Act generally limits a registered closed-end investment company to issuing one class of senior securities representing indebtedness and one class of senior securities representing stock, except that the class of indebtedness or stock may be issued in one or more series, and promissory notes or other evidences of indebtedness issued in consideration of any loan, extension, or renewal thereof, made by a bank or other person and privately arranged, and not intended to be publicly distributed, are not deemed a separate class of senior securities.
With respect to investment restriction (2) above, Section 18(a) of the 1940 Act generally prohibits a registered closed-end fund from incurring borrowings if, immediately thereafter, the aggregate amount of its borrowings exceeds 33 1/3% of its total assets.
With respect to investment restriction (4) above, the Sub-Adviser will, on behalf of the Trust, make reasonable determinations as to the appropriate industry classification to assign to each instrument in which the Trust invests, generally using industry classifications such as those provided by MSCI and Standard & Poors (The Global Industry Classification Standard (GICS)), Bloomberg, Barclays or similar sources commonly used in the financial industry. The definition of what constitutes a particular industry is an evolving one, particularly for industries or sectors within industries that are new or are undergoing rapid development. Some securities could reasonably fall within more than one industry category. The Trusts industry concentration policy does not preclude it from focusing investments in issuers in a broad economic sectors. In connection with investments in other investment companies, the Trust will consider the concentration of the underlying investments by such investment companies when determining the Trusts compliance with investment restriction (4) above.
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With respect to investment restriction (7) above, Section 21 of the 1940 Act makes it unlawful for a registered investment company, like the Trust, to lend money or other property if (i) the investment companys policies set forth in its registration statement do not permit such a loan or (ii) the borrower controls or is under common control with the investment company.
All other investment policies of the Trust set forth in the Prospectus and this SAI are not considered fundamental policies and may be changed by the Board of Trustees without any vote of shareholders.
Board of Trustees
Overall responsibility for management and supervision of the Trust rests with the Board of Trustees (the Board or Board of Trustees). The Board of Trustees approves all significant agreements between the Trust and the companies that furnish the Trust with services, including agreements with the Adviser and the Sub-Adviser.
Trustees serve until their successors have been duly elected. Following is a list of the names, business addresses, dates of birth, present positions with the Trust, length of time served with the Trust, principal occupations during the past five years and other directorships held by each Trustee.
Name, Address (1) and Year of Birth |
Position(s) Held with Trust |
Term of Office (2) and Length of Time Served |
Principal Occupation During The Past Five Years |
Number of
Portfolios in Fund Complex (3) Overseen by Trustee |
Other Directorships held by Trustee During the Past Five Years |
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INDEPENDENT TRUSTEES: | ||||||||||
Danielle Cupps Year of Birth: 1970 |
Trustee |
Trustee since 2017 |
Former: Managing Director, BLG Capital Advisors (2016-2017) (family office); Director, Finance and Chief of Staff to CFO, Boeing Company (2006-2012); Vice President, Code Hennessy & Simmons LLC (2000-2005) (private equity); Associate, Goldman, Sachs & Co. (1998-2000). |
1 | None. | |||||
Gregory G. Dingens Year of Birth: 1964 |
Trustee | Trustee since 2017 |
Current: Executive Vice President, Monroe Financial Partners, Inc. (2006-present) (investment banking and trading); Member, Siena Capital Management (2006-present) (private investment fund); Director, Qwickrate LLC (2012-present) (online marketplace for financial institutions).
Former: Managing Director, Lehman Brothers (2004-2006); Managing Director, Merrill Lynch (1993-2003). |
1 | None. | |||||
Philip G. Franklin Year of Birth: 1951 |
Trustee | Trustee since 2017 |
Current: Consultant to Littelfuse, Inc. (2016-present) (electronics components manufacturer).
Former: Chief Financial Officer and Executive Vice President (1998-2016), Littelfuse, Inc.; Chief Financial Officer and Vice President, OmniQuip International (1995-1998) (construction equipment). |
1 | Current: Tribune Publishing Company (2010-present); TTM Technologies Inc. (2014-present); tronc, inc. (2014-present). | |||||
Scott Craven Jones Year of Birth: 1962 |
Trustee | Trustee since 2017 |
Current: Director, Carne Global Financial Services (US) LLC (2013-present).
Former: Adviser, Wanzenburg Partners LLC (2012-2013); Chief Operating Officer, Chief Financial Officer and Treasurer, Aurora Investment Management LLC (2010-2012); Executive Vice President and Chief Administrative Officer, Calamos Asset Management, Inc. (2005-2008); Managing Director, Northern Trust Global Investments (2000-2005). |
1 |
Current: Manager Directed Portfolios, a U.S. Bancorp series trust (2016-present). Former: Guestlogix Inc. (2015-2016) (travel technology). |
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* | Mr. Brombach is an interested person of the Trust because of his position as an officer of the Adviser and certain of its affiliates. |
(1) | The business address of each Trustee of the Trust is 321 North Clark Street, Suite 2430, Chicago, Illinois 60654, unless otherwise noted. |
(2) | After a Trustees initial term, each Trustee is expected to serve a three year term concurrent with the class of Trustees for which he serves. |
| Mr. Brombach and Ms. Cupps, as Class I Trustees, are expected to stand for re-election at the Trusts initial annual meeting of shareholders. |
| Mr. Dingens and Mr. Franklin, as Class II Trustees, are expected to stand for re-election at the Trusts second annual meeting of shareholders. |
| Mr. Jones, as the Class III Trustee, is expected to stand for re-election at the Trusts third annual meeting of shareholders. |
(3) | As of the date of this SAI, the Trust is the only fund in the Fund Complex. |
Trustee Qualifications
The Trustees were selected to serve on the Board based upon their skills, experience, judgment, analytical ability, diligence, ability to work effectively with other Trustees, availability and commitment to attend meetings and perform the responsibilities of a Trustee and a willingness to take an independent and questioning view of management.
The following is a summary of the experience, qualifications, attributes and skills of each Trustee that support the conclusion, as of the date of this SAI, that each Trustee should serve as a Trustee in light of the Trusts business and structure. References to the qualifications, attributes and skills of Trustees do not constitute the holding out of any Trustee as being an expert under Section 7 of the Securities Act or the rules and regulations of the SEC.
Theodore J. Brombach . Mr. Brombach has served as a Trustee of the Trust since its inception in 2017. Through his over 30 years of investment experience in the financial industry, including as Co-Chief Executive Officer of XAI, founding partner of XMS Capital Partners, LLC, and Co-Head of Midwest Investment Banking at Morgan Stanley, Mr. Brombach is experienced in financial, regulatory and investment matters.
Danielle Cupps . Ms. Cupps has served as a Trustee of the Trust since its inception in 2017. Through her experience as a Managing Director at BLG Capital Advisors a family office managing a global portfolio of alternative assets, in various roles, including Director of Corporate and Strategic Development and Chief of Staff in the Office of the Chief Financial Officer, at Boeing Company, Vice President at Code Hennessy & Simmons LLC, a private equity firm, and Associate in the private equity funds group at Goldman, Sachs & Co., Ms. Cupps is experienced in financial, regulatory and investment matters.
Gregory G. Dingens . Mr. Dingens has served as a Trustee of the Trust since its inception in 2017. Through his over 25 years of investment management experience, including as Executive Vice President of Monroe Financial Partners, Inc., Member of Siena Capital Partners, a private investment fund, director of Qwickrate LLC, and Managing Director at both Lehman Brothers and Merrill Lynch, Mr. Dingens is experienced in financial, regulatory and investment matters.
Philip G. Franklin . Mr. Franklin has served as a Trustee of the Trust since its inception in 2017. Through his experience as Chief Financial Officer and Executive Vice President of Littelfuse, Inc. and Chief Financial Officer and Vice President at OmniQuip International, Mr. Franklin is experienced in financial, accounting and regulatory matters.
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Scott Craven Jones . Mr. Jones has served as a Trustee of the Trust since its inception in 2017. Through his experience as a director at Carne Global Financial Services (US) LLC, Chief Operating Officer, Chief Financial Officer and Treasurer of Aurora Investment Management LLC, Executive Vice President and Chief Administrative Officer of Calamos Asset Management, Inc., Managing Director at Northern Trust Global Investments, and in various roles at Nuveen Investments, Mr. Jones is experienced in financial, accounting, regulatory and investment matters.
Executive Officers
The following information relates to the executive officers of the Trust who are not Trustees.
Name, Business
Address
(1)
and Year of
|
Position |
Term of Office
(2)
|
Principal Occupations During the Past Five Years |
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John Yogi Spence Year of Birth: 1962 |
Chief Financial Officer and Treasurer | Officer since 2017 | Current: Co-Chief Executive Officer, XAI (2016-present); Co-Founding Partner, XMS Capital Partners, LLC (2006-present). | |||
John P. McGarrity Year of Birth: 1961 |
Chief Legal Officer and Secretary | Officer since 2017 |
Current: Managing Director and General Counsel, XAI (2016-present).
Former: Managing Director and General Counsel, Chief Compliance Officer and AML Officer, River Branch Holdings LLC and River Branch Capital LLC (now Piper Jaffray) (2011-2015); Senior Vice President, General Counsel and Corporate Secretary, The Warranty Group (2009-2011); Executive Vice President, Head of Product Development, Man Investments (2004-2009). |
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Kimberly Ann Flynn Year of Birth: 1977 |
Vice President | Officer since 2017 |
Current: Managing Director of XAI (2016-present).
Former: Senior Vice President, Head of Product Development (2013-2016), Vice President (2009-2013), Assistant Vice President (2004-2007) and Associate (2004-2007), Nuveen Investments. |
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Theodore J. Uhl Year of Birth: 1974 |
Chief Compliance Officer | Officer since 2017 |
Current: Vice President and Deputy Chief Compliance Officer, ALPS Fund Services, Inc. (2006-present); Chief Compliance Officer, Financial Investors Trust (2010-present), Centre Funds (2013-present), Reality Shares ETF Trust (2014-present), Reaves Utility Income Fund (2015-present), Boulder Growth & Income Fund, Inc. (2015-present), Index Funds (2016-present), and Elevation ETF Trust (2016-present).
Former: Internal Audit Manager/Senior Risk Manager, ALPS Fund Services, Inc. (2006-2010). |
(1) | The business address of each officer of the Trust is 321 North Clark Street, Suite 2430, Chicago, Illinois 60654, unless otherwise noted. |
(2) | Officers serve at the pleasure of the Board and until his or her successor is appointed and qualified or until his or her resignation or removal. |
Mr. Uhl serves as Chief Compliance Officer of the Trust pursuant to a Chief Compliance Officer Services Agreement, between the Trust and ALPS Fund Services Inc. The Trust pays ALPS Fund Services Inc. an annual fee, payable monthly, and reimburses of out-of-pocket expenses. Notwithstanding the Chief Compliance Officer Services Agreement the designation of the Chief Compliance Officer must be approved by the Board, including a majority of the Independent Trustees, and such Chief Compliance Officer may be removed from his responsibilities by action of (and only with the approval of) the Board, including a majority of the Independent Trustees.
Board Leadership Structure
The primary responsibility of the Board of Trustees is to represent the interests of the Trust and to provide oversight of the management of the Trust. The Trusts day-to-day operations are managed by the Adviser and other service providers who have been approved by the Board. The Board is currently comprised of five Trustees, four of whom (including the chairperson) are classified under the 1940 Act as non-interested persons of the Trust (Independent Trustees) and one of whom is classified as an interested person of the Trust (Interested Trustee). Generally, the Board acts by majority vote of all the Trustees, including a majority vote of the Independent Trustees if required by applicable law.
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The Board has appointed an independent chairperson, Gregory G. Dingens, who presides at Board meetings and who is responsible for, among other things, setting the tone of Board meetings and seeking to encourage open dialogue and independent inquiry among the trustees and management. The Board meets regularly four times each year to discuss and consider matters concerning the Trust, and also holds special meetings to address matters arising between regular meetings. Regular meetings generally take place in-person; other meetings may take place in-person or by telephone. The Board has established two standing committees (as described below) and has delegated certain responsibilities to those committees, each of which is comprised solely of Independent Trustees. The Board and its committees will meet periodically throughout the year to oversee the Trusts activities, review contractual arrangements with service providers, review the Trusts financial statements, oversee compliance with regulatory requirements, and review performance. The Independent Trustees are represented by independent legal counsel at Board and committee meetings and regularly meet outside the presence of Trust management. The Board has determined that this leadership structure, including an independent chairperson, a supermajority of Independent Trustees and committee membership limited to Independent Trustees, is appropriate in light of the characteristics and circumstances of the Trust.
Board Committees
Audit Committee . Ms. Cupps and Messrs. Dingens, Franklin and Jones, who are not interested persons of the Trust, as defined in the 1940 Act, serve on the Trusts Audit Committee. Mr. Jones serves as chairperson of the Audit Committee. The Audit Committee is generally responsible for reviewing and evaluating issues related to the accounting and financial reporting policies and internal controls of the Trust and, as appropriate, the internal controls of certain service providers, overseeing the quality and objectivity of the Trusts financial statements and the audit thereof and acting as a liaison between the Board of Trustees and the Trusts independent registered public accounting firm.
Governance Committee . Ms. Cupps and Messrs. Dingens, Franklin and Jones, who are not interested persons of the Trust, as defined in the 1940 Act, serve on the Trusts Governance Committee. Mr. Franklin serves as chairperson of the Governance Committee. The Governance Committee is responsible for recommending qualified candidates to the Board of Trustees in the event that a position is vacated or created. In considering trustee nominee candidates, the Governance Committee takes into account a wide variety of factors, including the overall diversity of the Boards composition. The Governance Committee believes the Board generally benefits from diversity of background, experience and views among its members, and considers this a factor in evaluating the composition of the Board, but has not adopted any specific policy in this regard. The Governance Committee would consider recommendations by shareholders if a vacancy were to exist. Such recommendations should be forwarded to the Secretary of the Trust. The Trust does not have a standing compensation committee.
Boards Role in Risk Oversight
Consistent with its responsibility for oversight of the Trust, the Board, among other things, oversees risk directly and through the committee structure it has established. The Board has established the Audit Committee and the Governance Committee to assist in its oversight functions, including its oversight of the risks the Trust faces. Each committee will report its activities to the Board on a regular basis.
The Board has adopted, and will periodically review, policies, procedures and controls designed to address different types of risks, including, among others, investment risk, liquidity risk, operational risk, and valuation risk, as well as the overall business risk relating to the Trust. Under the Boards supervision, the Trust, the Adviser, the Sub-Adviser and other service providers to the Trust also have implemented a variety of processes, procedures and controls to address various risks. In addition, as part of the Boards periodic review of the Trusts investment advisory agreement, sub-advisory agreement and other service provider agreements, the Board may consider risk management aspects of the service providers operations and the functions for which they are responsible.
The Board has appointed a Chief Compliance Officer (CCO). The CCO oversees the development of compliance policies and procedures of the Trust that are reasonably designed to minimize the risk of violations of the federal securities laws (compliance policies). The CCO reports directly to the Independent Trustees, and will
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provide presentations to the Board at its quarterly meetings and an annual report on the application of the compliance policies. The Board will discuss relevant risks affecting the Trust with the CCO at these meetings. The Board has approved the compliance policies and will review the CCOs reports. Further, the Board will annually review the effectiveness of the compliance policies, as well as the appointment and compensation of the CCO.
The Board will require officers of the Trust to report to the Board on a variety of matters at regular and special meetings of the Board and its committees, as applicable, including matters relating to risk management. The Audit Committee will also receive reports from the Trusts independent registered public accounting firm on internal control and financial reporting matters. In addition, the Board will receive reports from the Adviser and the Sub-Adviser on the investments and securities trading of the Trust. The Board will also require the Adviser and the Sub-Adviser to report to the Board on other matters relating to risk management on a regular and as-needed basis.
Remuneration of Trustees and Officers
Each Trustee who is not an affiliated person (as defined in the 1940 Act) of the Adviser or its affiliates receives as compensation for his services to the Trust an annual retainer and meeting fees. The chairperson of the Board, if any, and the chairperson of each committee of the Board also receive fees for their services. The annual retainer and fees for service as chairperson of Board and committees of the Board are allocated among the Trust and certain other funds in the Trust Complex. Officers who are employed by the Adviser receive no compensation or expense reimbursement from the Trust.
Because the Trust is newly-organized and has not yet completed a full fiscal year of operations, the table below shows the estimated compensation that is contemplated to be paid to Trustees assuming a full fiscal year of operations of the Trust.
Name (1) |
Aggregate
Estimated Compensation from the Trust |
Pension or Retirement
Benefits Accrued as Part of Trust Expenses (2) |
Estimated Annual
Benefits Upon Retirement (2) |
Total Compensation
from the Trust and Fund Complex (3) Paid to Trustee (4) |
||||||||||||
INDEPENDENT TRUSTEES: |
||||||||||||||||
Danielle Cupps |
$36,000 | None | None | $36,000 | ||||||||||||
Gregory G. Dingens |
$46,000 | None | None | $46,000 | ||||||||||||
Philip G. Franklin |
$41,000 | None | None | $41,000 | ||||||||||||
Scott Craven Jones |
$41,000 | None | None | $41,000 |
(1) | Trustees not entitled to compensation are not included in the table. |
(2) | Reflects total compensation assuming a full fiscal year of operations for the Trust. |
(3) | As of the date of this SAI, the Trust is the only fund in the Fund Complex. |
(4) | The Trust does not accrue or pay retirement or pension benefits to Trustees as of the date of this SAI. |
Trustee Share Ownership
As of December 31, 2016, the most recently completed calendar year prior to the date of this Statement of Additional Information, each Trustee of the Trust beneficially owned equity securities of the Trust and all of the registered investment companies in the family of investment companies overseen by the Trustee in the dollar range amounts specified below.
Name |
Dollar Range of Equity Securities in the Trust (1) |
Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies (2) |
||
INDEPENDENT TRUSTEES: | ||||
Danielle Cupps | None | None | ||
Gregory G. Dingens | None | None | ||
Philip G. Franklin | None | None | ||
Scott Craven Jones | None | None | ||
INTERESTED TRUSTEE: | ||||
Theodore J. Brombach | None | None |
(1) | The Trustees could not own shares in the Trust as of December 31, 2016 because the Trust had not yet begun investment operations as of that date. |
(2) | As of the date of this SAI, the Trust is the only fund in the Family of Investment Companies. |
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Indemnification of Officers and Trustees; Limitations on Liability
The governing documents of the Trust provide that the Trust will indemnify its Trustees and officers and may indemnify its employees or agents against liabilities and expenses incurred in connection with litigation in which they may be involved because of their positions with the Trust, to the fullest extent permitted by law. However, nothing in the governing documents of the Trust protects or indemnifies a trustee, officer, employee or agent of the Trust against any liability to which such person would otherwise be subject in the event of such persons willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her position.
Adviser
XA Investments LLC acts as investment adviser to the Trust and is responsible for overseeing the Trusts overall investment strategy and its implementation, including the use of leverage by the Trust. XAI is an investment adviser registered under the Advisers Act and acts as investment adviser to certain other management investment companies. XAI is a Delaware limited liability company, with its principal offices located at 321 North Clark Street, Suite 2430, Chicago, Illinois 60654. The Adviser is controlled by Theodore J. Brombach, Co-Chief Executive Officer of XAI and a founding partner of XMS Capital Partners, LLC, and John Yogi Spence, Co-Chief Executive Officer of XAI and a founding partner of XMS Capital Partners, LLC.
XAI was founded by the principals of XMS Capital Partners, LLC in April 2016. The XAI leadership team believes that the investing public needs better access to a broader range of alternative investment strategies and managers. XAI sponsors registered investment companies designed to provide investors with access to institutional caliber alternative investments, by partnering with established alternative asset managers selected from among numerous alternative credit managers, hedge fund managers and private debt and equity firms to sub-adviser XAI funds.
The Adviser will be responsible for the management of the Trust, will furnish offices, necessary facilities and equipment on behalf of the Trust, will oversee the activities of the Sub-Adviser, will provide personnel, including certain officers required for the Trusts administrative management, and will pay the compensation of all officers and Trustees of the Trust who are its affiliates.
Sub-Adviser
Octagon Credit Investors, LLC acts as investment sub-adviser to the Trust and is responsible for investing the Trusts assets. The Sub-Adviser is an investment adviser registered under the Advisers Act. The Sub-Adviser is a Delaware limited liability company, with its principal offices located at 250 Park Avenue, 15th Floor, New York, NY 10177. Octagon Credit Investors, LLC is majority-owned by Conning & Company, which is an indirect subsidiary of Cathay Financial Holding Co., Ltd., a Taiwan-based company.
The Sub-Adviser, under the direction and supervision of the Board of Trustees and the Adviser, will be responsible for the management of the Trusts investment portfolio and will provide certain facilities and personnel related to such management.
Investment Advisory Agreement
Under the terms of the Trusts investment advisory agreement, the Adviser is responsible for the management of the Trust; furnishes offices, necessary facilities and equipment on behalf of the Trust; oversees the activities of the Sub-Adviser and other service providers to the Trust; provides personnel, including certain officers required for the Trusts administrative management; and pays the compensation of all officers and Trustees of the Trust who are its affiliates.
The Trusts investment advisory agreement will remain in effect until , 2019, and from year to year thereafter if approved annually (i) by the Board of Trustees or by the holders of a majority of the Trusts outstanding
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voting securities and (ii) by a majority of the Trustees who are not interested persons (as defined in the 1940 Act) of any party to the investment advisory agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. The Trusts investment advisory agreement terminates automatically on its assignment and may be terminated without penalty on 60 days written notice at the option of either party thereto or by a vote of a majority of the Trusts outstanding shares, which is defined by the 1940 Act as the lesser of (i) 67% or more of the Trusts voting securities present at a meeting, if the holders of more than 50% of the Trusts outstanding voting securities are present or represented by proxy; or (ii) more than 50% of the Trusts outstanding voting securities.
The Trust may, if and to the extent approved by the Board of Trustees, including a majority of the Independent Trustees, from time to time reimburse the Adviser for certain costs and expenses incurred by the Adviser in connection with the management of the Trusts assets, which may include the Trusts allocable share of portfolio management and trading software costs, research expenses (including modeling and analytic software costs), diligence expenses and out-of-pocket travel costs incurred in connection with the management of the Trusts assets. The Trust does not currently reimburse any such expenses.
The Trusts investment advisory agreement provides that, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations and duties thereunder, the Adviser is not liable for any error or judgment or mistake of law or for any loss suffered by the Trust.
Sub-Advisory Agreement
Under the terms of the Trusts investment sub-advisory agreement, the Sub-Adviser manages the investment portfolio of the Trust in accordance with its stated investment objective and policies, makes investment decisions for the Trust, places orders to purchase and sell securities on behalf of the Trust, all subject to the supervision and direction of the Board of Trustees and the Adviser.
The Trusts investment sub-advisory agreement will remain in effect until , 2019, and from year to year thereafter if approved annually (i) by the Board of Trustees or by the holders of a majority of the Trusts outstanding voting securities and (ii) by a majority of the Trustees who are not interested persons (as defined in the 1940 Act) of any party to the investment sub-advisory agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. The Trusts investment sub-advisory agreement terminates automatically on its assignment and may be terminated without penalty on 60 days written notice at the option of either party thereto, by the Board of Trustees or by a vote of a majority of the Trusts outstanding shares, which is defined by the 1940 Act as the lesser of (i) 67% or more of the Trusts voting securities present at a meeting, if the holders of more than 50% of the Trusts outstanding voting securities are present or represented by proxy; or (ii) more than 50% of the Trusts outstanding voting securities.
The Trust may, if and to the extent approved by the Board of Trustees, including a majority of the Independent Trustees, from time to time reimburse the Sub-Adviser for certain costs and expenses incurred by the Sub-Adviser in connection with the management of the Trusts assets, which may include the Trusts allocable share of portfolio management and trading software costs, research expenses (including modeling and analytic software costs), diligence expenses and out-of-pocket travel costs incurred in connection with the management of the Trusts assets. The Trust does not currently reimburse any such expenses.
The Trusts investment sub-advisory agreement provides that, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations and duties thereunder, the Sub-Adviser is not liable for any error or judgment or mistake of law or for any loss suffered by the Trust.
Portfolio Managers
The personnel with the most significant responsibility for the day-to-day management of the Trusts portfolio are Andrew D. Gordon, Michael B. Nechamkin, Lauren M. Basmadjian and Gretchen M. Lam.
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Other Accounts Managed by the Portfolio Managers . The following table sets forth information about funds and accounts other than the Trust for which the portfolio managers are primarily responsible for the day-to-day portfolio management as of June 30, 2017.
Name of Portfolio Manager |
Number of Other Accounts
Managed by Account Type |
Number of Other Accounts for
Which Advisory Fee is Performance-Based |
||||||||||
Other Registered Investment Companies |
Other Pooled
Investment
|
Other Accounts |
Other Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
|||||||
Andrew D. Gordon |
0 | 0 | 0 | 0 | 0 | 0 | ||||||
Michael B. Nechamkin |
0 | 8 | 3 | 0 | 3 | 0 | ||||||
Lauren M. Basmadjian |
0 | 12 | 4 | 0 | 10 | 0 | ||||||
Gretchen M. Lam |
0 | 10 | 7 | 0 | 10 | 1 | ||||||
Name of Portfolio Manager |
Assets of Other Accounts by Account Type |
Assets of Other Accounts for Which
Advisory Fee is Performance-Based |
||||||||||
Other Registered Investment Companies |
Other Pooled
Investment
|
Other Accounts |
Other Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
|||||||
Andrew D. Gordon |
$0 | $0 | $0 | $0 | $0 | $0 | ||||||
Michael B. Nechamkin |
$0 | $2,769,852,227 | $2,192,483,643 | $0 | $2,062,874,850 | $0 | ||||||
Lauren M. Basmadjian |
$0 | $6,655,903,001 | $384,764,752 | $0 | $5,887,335,240 | $0 | ||||||
Gretchen M. Lam |
$0 | $3,709,884,716 | $288,934,863 | $0 | $3,709,884,716 | $50,320,835 |
Potential Conflicts of Interest . In addition to the Trust, the Sub-Adviser manages CLOs, separate accounts and private funds, which may follow similar, complementary or competing investment objectives, policies or strategies. Side-by-side management gives rise to a variety of potential and actual conflicts of interest for Octagon and its employees and affiliates, including, as discussed below, the incentive to favor certain accounts with performance-based fees or accounts that generate multiple levels of fees (i.e., when fee earning clients invest in Octagon managed CLOs), accounts with respect to which Octagon receives or retains relatively higher fees, or accounts in which Octagon and its related persons have a pecuniary interest. Octagon and its affiliates, as well as their respective personnel, including persons who serve on Octagons investment committees, act as portfolio manager to various clients or are otherwise in a position to influence Octagons management, may invest in funds or may take interests in a funds general partner and thus participate in the performance fees or carried interest paid to the general partner by that fund. Octagon also acts as sub-adviser to its affiliate for certain mandates. Accordingly, Octagon, its affiliate, and their respective personnel, including persons involved in the management of one or more clients, may have differing pecuniary interests with respect to different clients. These persons may have an incentive to favor those clients in which they have greater pecuniary interests, including any CLOs in which Octagon or a majority-owned affiliate is required to hold retention interests pursuant to risk retention regulations.
The Sub-Adviser may have an incentive to allocate investment opportunities based on pecuniary interest. For certain accounts under management, Octagon and its related persons may: (1) be entitled to a performance fee; and (2) directly or indirectly maintain investments in one or more funds or accounts. Octagon and certain of its personnel are also eligible to receive performance-based compensation in their capacity as the investment manager, general partner or managing member of certain clients. Accordingly, Octagon and its personnel face a conflict of interest when considering how to allocate investment opportunities among accounts having different fee structures or pecuniary interests. Through its trade allocation policies and procedures and Code of Ethics, Octagon seeks to promote fair and equitable treatment of accounts, over time, based on considerations that are unrelated to pecuniary interests, which mitigate any actual or potential conflict of interest that may exist with respect to, for example, Octagons allocation of time, resources and investment opportunities to the clients that have performance-based compensation arrangements over those clients that: (1) do not have performance-based compensation arrangements or, if applicable, (2) are not expected to pay performance-based compensation (e.g., with respect to a CLO, when a specified internal rate of return has not been, or is not expected to be, achieved).
Portfolio Manager Compensation . Octagon investment professionals receive a fixed base salary and annual discretionary bonus, each determined by the Compensation Committee, which is a committee of the Board of
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Managers of the Sub-Adviser. The fixed base salary is reviewed periodically and is intended to reflect a base compensation that is competitive with base salaries provided by similar investment adviser firms in the industry. The discretionary bonus is determined taking into account the overall performance and profitability of the Sub-Adviser, and an individuals contributions and achievement of objectives linked to their function, including both quantitative performance, and qualitative factors. Portions of the discretionary bonus are paid on a deferred basis over several years. In addition, certain members of senior management, including the portfolio managers, own interests in the Sub-Adviser, and therefore participate in the long-term growth and performance of the firm.
Securities Ownership of the Portfolio Managers . Because the Trust is newly-organized, none of the portfolio managers own shares of the Trust.
Investor Support Services and Secondary Market Support Services Agreement
Pursuant to an investor support services and secondary market support services agreement, the Adviser provides investor support services and secondary market support services in connection with the ongoing operation of the Trust. Such services include responding to questions about the Trust from financial intermediaries; assisting in drafting and editing mailings to financial intermediaries; distributing mailings to financial intermediaries; scheduling, organizing and preparing conference calls, meetings and other communications with financial intermediaries; communicating with the NYSE specialist for the Common Shares, and with the closed-end fund analyst community regarding the Trust on a periodic basis; assisting in producing communications targeted to current Trust shareholders and the investment community generally (excluding marketing materials targeted to prospective investors or prepared for use in an offering of Common Shares); assisting in the formatting, development and maintenance of the Trusts website; assisting with administrative matters (including in connection with the preparation of press releases, shareholder reports and regulatory filings) with respect to the Trust. In exchange for such services, the Trust will pay the Adviser a service fee, payable monthly in arrears, in an annual amount equal to 0.20% of the Trusts average daily Managed Assets.
The investor support services and secondary market support services agreement will remain in effect until , 2019, and from year to year thereafter if approved annually (i) by the Board of Trustees or by the holders of a majority of the Trusts outstanding voting securities and (ii) by a majority of the Trustees who are not interested persons (as defined in the 1940 Act) of any party to the investment advisory agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. The investor support services and secondary market support services agreement terminates automatically on its assignment and may be terminated without penalty on 60 days written notice at the option of either party thereto or by a vote of a majority of the Trusts outstanding shares, which is defined by the 1940 Act as the lesser of (i) 67% or more of the Trusts voting securities present at a meeting, if the holders of more than 50% of the Trusts outstanding voting securities are present or represented by proxy; or (ii) more than 50% of the Trusts outstanding voting securities.
The investor support services and secondary market support services agreement provides that, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations and duties thereunder, the Adviser is not liable for any error or judgment or mistake of law or for any loss suffered by the Trust.
Subject to policies established by the Board of Trustees, the Sub-Adviser is responsible for placing purchase and sale orders and the allocation of brokerage on behalf of the Trust.
The Sub-Adviser will employ a variety of criteria in selecting brokers to execute trades for the account of the Trust, and will, at all times, seek best execution of such trades. The Sub-Adviser is responsible for selecting the broker or dealer used in each investment transaction for the Trust. When a transaction is effected on an exchange, the Sub-Adviser seeks to use brokers whose commissions it considers to be fair and reasonable without necessarily
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determining that the lowest possible commissions are paid in all circumstances. The Sub-Adviser also considers the relative creditworthiness of counterparties, including brokers and dealers, when choosing a broker or dealer as counterparty in respect of investment transactions.
The Sub-Adviser does not currently utilize soft-dollar arrangements, pursuant to which brokers provide research services to the Sub-Adviser in return for allocating brokerage transactions. However, the Sub-Adviser may from time to time receive or be offered research services from brokers at no stated cost or requirement to execute transactions, and may trade with such brokers.
This section and the discussion in the Prospectus (see Tax Matters) provide a summary of the material U.S. federal income tax considerations generally applicable to the Trust, U.S. Common Shareholders (as defined in the Prospectus) and Non-U.S. Common Shareholders (as defined in the Prospectus) that hold Common Shares of the Trust as capital assets within the meaning of the code (generally, property held for investment). The discussion is based upon the Internal Revenue Code of 1986, as amended (the Code), U.S. Treasury Regulations, judicial authorities, published positions of the Internal Revenue Service (the IRS) and other applicable authorities, all as in effect on the date hereof and all of which are subject to change or differing interpretations (possibly with retroactive effect). This summary does not address all of the potential U.S. federal income tax consequences that may be applicable to the Trust or to all categories of investors, some of which may be subject to special tax rules. No ruling has been or will be sought from the IRS regarding any matter discussed herein. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax aspects set forth below. Prospective investors should consult their tax advisors as to the U.S. federal income tax consequences of acquiring, holding and disposing of Common Shares, as well as the effects of state, local and non-U.S. tax laws.
Taxation of the Trust
The Trust intends to elect to be treated, and to qualify each year, as a RIC under Subchapter M of the Code. Accordingly, the Trust must, among other things, (i) derive in each taxable year at least 90% of its gross income from (a) dividends, interest (including tax-exempt 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 gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies and (b) net income derived from interests in qualified publicly traded partnerships (as defined in the Code); and (ii) diversify its holdings so that, at the end of each quarter of each taxable year (a) at least 50% of the market value of the Trusts total assets is represented by cash and cash items, U.S. Government securities, the securities of other RICs and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of the Trusts total assets and not more than 10% of the outstanding voting securities of such issuer and (b) not more than 25% of the market value of the Trusts total assets is invested in the securities (other than U.S. Government securities and the securities of other RICs) of (I) any one issuer, (II) any two or more issuers that the Trust controls and that are determined to be engaged in the same business or similar or related trades or businesses or (III) any one or more qualified publicly traded partnerships. Generally, a qualified publicly traded partnership includes a partnership the interests of which are traded on an established securities market or readily tradable on a secondary market (or the substantial equivalent thereof) and that derives less than 90% of its gross income from the items described in (i)(a) above.
As long as the Trust qualifies as a RIC, the Trust generally will not be subject to U.S. federal income tax on income and gains that the Trust distributes to its Common Shareholders, provided that it distributes each taxable year at least 90% of the sum of (i) the Trusts investment company taxable income (which includes, among other items, dividends, interest, the excess of any net short-term capital gain over net long-term capital loss, and other taxable income, other than any net capital gain (defined below), reduced by deductible expenses) determined without regard to the deduction for dividends and distributions paid and (ii) the Trusts net tax-exempt interest (the excess of its gross tax-exempt interest over certain disallowed deductions) (the Annual Distribution Requirement). The Trust intends to distribute substantially all of such income each year. The Trust will be subject to income tax at regular corporate rates on any taxable income or gains that it does not distribute to its Common Shareholders.
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The Code imposes a 4% nondeductible excise tax on the Trust to the extent the Trust does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98.2% of its capital gain in excess of its capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Trusts taxable year) (the Excise Tax Avoidance Requirements). In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year. For purposes of the excise tax, the Trust will be deemed to have distributed any income on which it paid federal income tax in the taxable year ending within the calendar year. While the Trust intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4% nondeductible excise tax, there can be no assurance that sufficient amounts of the Trusts taxable income and capital gain will be distributed to avoid entirely the imposition of the excise tax. In that event, the Trust will be liable for the excise tax only on the amount by which it does not meet the foregoing distribution requirement.
If for any taxable year the Trust does not qualify as a RIC, all of its taxable income (including its net capital gain, which consists of the excess of its net long-term capital gain over its net short-term capital loss) will be subject to tax at regular corporate rates without any deduction for distributions to Common Shareholders, and such distributions will be taxable to the Common Shareholders as ordinary dividends to the extent of the Trusts current and accumulated earnings and profits. As described below, such dividends, however, would be eligible (i) to be treated as qualified dividend income in the case of Common Shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate Common Shareholders, subject, in each case, to certain holding period and other requirements. To qualify again to be taxed as a RIC in a subsequent year, the Trust would generally be required to distribute to its Common Shareholders its earnings and profits attributable to non-RIC years. If the Trust fails to qualify as a RIC for a period greater than two taxable years, the Trust may be required to recognize and pay tax on any net built-in gains with respect to certain of its assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the Trust had been liquidated) or, alternatively, to elect to be subject to taxation on such built-in gain recognized for a period of ten years, in order to qualify as a RIC in a subsequent year.
Taxation of the Trusts Investments
Certain of the Trusts investment practices are subject to special and complex U.S. federal income tax provisions (including mark-to-market, constructive sale, straddle, wash sale, short sale and other rules) that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, including the dividends received deduction, (ii) convert lower taxed long-term capital gains or qualified dividend income into higher taxed short-term capital gains or ordinary income, (iii) convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited), (iv) cause the Trust to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (vi) adversely alter the characterization of certain complex financial transactions and (vii) produce income that will not be qualified income for purposes of the 90% annual gross income requirement described above. These U.S. federal income tax provisions could therefore affect the amount, timing and character of distributions to Common Shareholders. The Trust intends to monitor its transactions and may make certain tax elections and may be required to dispose of securities to mitigate the effect of these provisions and prevent disqualification of the Trust as a RIC. Additionally, the Trust may be required to limit its activities in derivative instruments in order to enable the Trust to maintain its RIC status.
If the Trust acquires shares in a passive foreign investment company (a PFIC), the Trust may be subject to U.S. federal income tax on a portion of any excess distribution or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the Trust to Common Shareholders. Additional charges in the nature of interest may be imposed on the Trust in respect of deferred taxes arising from such distributions or gains. If the Trust invests in a PFIC and elects to treat the PFIC as a qualified electing fund under the Code (a QEF), in lieu of the foregoing requirements, the Trust will be required to include in income each year a portion of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed to the Trust. Alternatively, the Trust can elect to mark to market at the end of each taxable year the Trusts shares in a PFIC; in this case, the
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Trust will recognize as ordinary income any increase in the value of such shares, and as ordinary loss any decrease in such value to the extent it does not exceed prior increases included in income. The Trusts ability to make either election will depend on factors beyond the Trusts control. Under either election, the Trust may be required to recognize in a year income in excess of the Trusts distributions from PFICs and the Trusts proceeds from dispositions of PFIC stock during that year, and such income will nevertheless be subject to the Annual Distribution Requirement and will be taken into account for purposes of the 4% excise tax.
If the Trust holds more than 10% of the shares in a foreign corporation that is treated as a controlled foreign corporation (CFC), the Trust may be treated as receiving a deemed distribution (taxable as ordinary income) each year from such foreign corporation in an amount equal to the Trusts pro rata share of the corporations income for the taxable year (including both ordinary earnings and capital gains), whether or not the corporation makes an actual distribution during such year. In general, a foreign corporation will be classified as a CFC if more than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or by attribution) by U.S. Stockholders. A U.S. Stockholder, for this purpose, is any U.S. person that possesses (actually or constructively) 10% or more of the combined voting power of all classes of shares of a corporation. If the Trust is treated as receiving a deemed distribution from a CFC, the Trust will be required to include such distribution in its investment company taxable income regardless of whether the Trust receives any actual distributions from such CFC, and the Trust must distribute such income to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement.
Although the Code generally provides that income inclusions from a QEF and subpart F income from CFCs will be good income for purposes of the 90% gross income requirement to the extent it is distributed to a RIC in the year it is included in the RICs income, the Code does not specifically provide whether income inclusions from a QEF and subpart F income for which no distribution is received during the RICs taxable year would be good income for the 90% gross income requirement. The IRS has issued a series of private rulings in which it has concluded that all income inclusions from a QEF and subpart F income included in a RICs income would constitute good income for purposes of the 90% gross income requirement. The Department of the Treasury, however, has recently proposed regulations that would treat such income as not being good income for purposes of the 90% gross income requirement. In its explanation accompanying the recently proposed regulations, the Department of the Treasury takes the position that, notwithstanding prior private letter rulings to the contrary, the current language of the Code would treat such income as not being good income for purposes of the 90% gross income requirement even in the absence of the proposed regulations. Accordingly, such income may not be treated as good income if the recently proposed regulations are finalized or if the Department of the Treasurys interpretation of current law applies. In such a case, the Trust may fail to qualify as a RIC if it realizes a material amount of such income.
Certain types of income received by the Trust from REITs, real estate mortgage investment conduits (REMICs), taxable mortgage pools or other investments may cause the Trust to designate some or all of its distributions as excess inclusion income. To Common Shareholders such excess inclusion income will (i) constitute taxable income, as unrelated business taxable income (UBTI) for those Common Shareholders who would otherwise be tax-exempt such as individual retirement accounts, 401(k) accounts, Keogh plans, pension plans and certain charitable entities, (ii) not be offset against net operating losses for tax purposes, (iii) not be eligible for reduced U.S. withholding for Non-U.S. Common Shareholders even from tax treaty countries and (iv) cause the Trust to be subject to tax if certain disqualified organizations, as defined by the Code (which includes charitable remainder trusts), are Common Shareholders.
The Trust may invest a portion of its net assets in below investment grade securities, commonly known as junk securities. Investments in these types of securities may present special tax issues for the Trust. U.S. federal income tax rules are not entirely clear about issues such as when the Trust may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income and whether exchanges of debt instruments in a bankruptcy or workout context are taxable. These and other issues will be addressed by the Trust, to the extent necessary, in order to seek to ensure that the Trust distributes sufficient income to preserve its status as a RIC and does not become subject to U.S. federal income or excise tax.
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Certain credit securities acquired by the Trust may be treated as credit securities that were originally issued at a discount. Generally, the amount of the original issue discount is treated as interest income and is included in taxable income (and, to the extent allocable to the Trust, is required to be distributed by the Trust in order to qualify as a RIC or avoid the 4% excise tax) over the term of the security, even though payment of that amount is not received until a later time, usually when the debt instrument matures. If the Trust purchases a debt instrument on a secondary market at a price lower than its adjusted issue price, the excess of the adjusted issue price over the purchase price is market discount. Unless the Trust makes an election to accrue market discount on a current basis, generally, any gain realized on the disposition of, and any partial payment of principal on, a debt instrument having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on the debt instrument. Market discount generally accrues in equal daily installments.
The Trust may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be clear or may be subject to recharacterization by the IRS. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by the Trust, it could affect the timing or character of income recognized by the Trust, requiring the Trust to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to RICs under the Code.
Gain or loss on the sales of securities by the Trust will generally be long-term capital gain or loss if the securities have been held by the Trust for more than one year. Gain or loss on the sale of securities held for one year or less will be short-term capital gain or loss.
Because the Trust may invest in foreign securities, its income from such securities may be subject to non-U.S. taxes. The Trust will not be eligible to elect to pass through to Common Shareholders of the Trust the ability to use the foreign tax deduction or foreign tax credit allocable to it for foreign taxes paid by the Trust with respect to qualifying taxes.
Income from options on individual stocks written by the Trust will not be recognized by the Trust for tax purposes until an option is exercised, lapses or is subject to a closing transaction (as defined by applicable regulations) pursuant to which the Trusts obligations with respect to the option are otherwise terminated. If the option lapses without exercise or is otherwise subject to a closing transaction, the premiums received by the Trust from the writing of such options will generally be characterized as short-term capital gain. If an option written by the Trust is exercised, the Trust may recognize gain depending on the exercise price of the option, the option premium, and the fair market value of the security underlying the option. The character of any gain on the sale of the underlying security as short-term or long-term capital gain will depend on the holding period of the Trust in the underlying security. In general, distributions received by U.S. Common Shareholders of the Trust that are attributable to short-term capital gains recognized by the Trust from option writing activities of the Trust will be taxed to such U.S. Common Shareholders as ordinary income and will not be eligible for the reduced tax rate applicable to qualified dividend income.
Options on indices of securities and sectors of securities that qualify as section 1256 contracts will generally be marked-to-market for U.S. federal income tax purposes. As a result, the Trust will generally recognize gain or loss on the last day of each taxable year equal to the difference between the value of the option on that date and the adjusted basis of the option. The adjusted basis of the option will consequently be increased by such gain or decreased by such loss. Any gain or loss with respect to options on indices and sectors that qualify as section 1256 contracts will be treated as short-term capital gain or loss to the extent of 40% of such gain or loss and long-term capital gain or loss to the extent of 60% of such gain or loss. Because the mark-to-market rules may cause the Trust to recognize gain in advance of the receipt of cash, the Trust may be required to dispose of investments in order to meet its distribution requirements. Mark-to-market losses may be suspended or otherwise limited if such losses are part of a straddle or similar transaction.
Taxation of U.S. Common Shareholders
The Trust will either distribute or retain for reinvestment all or part of its net capital gain. If any such gain is retained, the Trust will be subject to a corporate income tax (currently at a maximum rate of 35%) on such retained
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amount. In that event, the Trust expects to designate the retained amount as undistributed capital gain in a notice to its Common Shareholders, each of whom, if subject to U.S. federal income tax on long-term capital gains, (i) will be required to include in income for U.S. federal income tax purposes as long-term capital gain its share of such undistributed amounts, (ii) will be entitled to credit its proportionate share of the tax paid by the Trust against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its basis in its Common Shares by the amount of undistributed capital gain included in such Common Shareholders gross income net of the tax deemed paid by such Common Shareholder under clause (ii).
Distributions paid to you by the Trust from its net capital gains, if any, that the Trust properly reports as capital gains dividends (capital gain dividends) are taxable as long-term capital gains, regardless of how long you have held your Common Shares. All other dividends paid to you by the Trust (including dividends from net short-term capital gains) from its current or accumulated earnings and profits (ordinary income dividends) are generally subject to tax as ordinary income. Special rules apply, however, to ordinary income dividends paid to individuals. For corporate taxpayers, both ordinary income dividends and capital gain dividends are taxed at a maximum rate of 35%. Capital gain dividends are not eligible for the dividends received deduction.
Properly reported ordinary income dividends received by corporate holders of Common Shares generally will be eligible for the dividends received deduction to the extent that the Trusts income consists of dividend income from U.S. corporations and certain holding period and other requirements are satisfied by both the Trust and the corporate U.S. Common Shareholders. In the case of U.S. Common Shareholders who are individuals, any ordinary income dividends that you receive from the Trust generally will be eligible for taxation at the rates applicable to long-term capital gains to the extent that (i) the ordinary income dividend is attributable to qualified dividend income (i.e., generally dividends paid by U.S. corporations and certain foreign corporations) received by the Trust, (ii) the Trust satisfies certain holding period and other requirements with respect to the stock on which such qualified dividend income was paid and (iii) you satisfy certain holding period and other requirements with respect to your Common Shares. In addition, for dividends to be eligible for the dividends received deduction or for reduced rates applicable to individuals, the Trust cannot have an option to sell or be under a contractual obligation to sell (pursuant to a short sale or otherwise) substantially identical stock or securities. Qualified dividend income eligible for these special rules is not actually treated as capital gains, however, and thus will not be included in the computation of your net capital gain and generally cannot be used to offset any capital losses.
Any distributions you receive that are in excess of the Trusts current and accumulated earnings and profits will be treated as a return of capital to the extent of your adjusted tax basis in your Common Shares, and thereafter as capital gain from the sale of Common Shares (assuming the Common Shares are held as a capital asset). The amount of any Trust distribution that is treated as a return of capital will reduce your adjusted tax basis in your Common Shares, thereby increasing your potential gain or reducing your potential loss on any subsequent sale or other disposition of your Common Shares.
U.S. Common Shareholders may be entitled to offset their capital gain dividends with capital losses. The Code contains a number of statutory provisions affecting when capital losses may be offset against capital gain, and limiting the use of losses from certain investments and activities. Accordingly, Common Shareholders that have capital losses are urged to consult their tax advisers.
Dividends and other taxable distributions are taxable to you even though they are reinvested in additional Shares of the Trust. Dividends and other distributions paid by the Trust are generally treated under the Code as received by you at the time the dividend or distribution is made. If, however, the Trust pays you a dividend in January that was declared in the previous October, November or December and you were the U.S. Common Shareholder of record on a specified date in one of such months, then such dividend will be treated for U.S. federal income tax purposes as being paid by the Trust and received by you on December 31 of the year in which the dividend was declared. In addition, certain other distributions made after the close of the Trusts taxable year may be spilled back and treated as paid by the Trust (except for purposes of the 4% nondeductible excise tax) during such taxable year. In such case, you will be treated as having received such dividends in the taxable year in which the distributions were actually made.
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The price of Common Shares purchased at any time may reflect the amount of a forthcoming distribution. Those purchasing Common Shares just prior to a distribution will receive a distribution which will be taxable to them even though it represents in part a return of invested capital.
The Trust will send you information after the end of each year setting forth the amount and tax status of any distributions paid to you by the Trust.
Ordinary income dividends and capital gain dividends also may be subject to state, local or foreign taxes. Common Shareholders are urged to consult their tax advisers regarding specific questions about U.S. federal (including the application of the alternative minimum tax rules), state, local or foreign tax consequences to them of investing in the Trust.
The sale or other disposition of Common Shares will generally result in capital gain or loss to you and will be long-term capital gain or loss if you have held such Common Shares for more than one year at the time of sale. Any loss upon the sale or other disposition of Common Shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain dividend) by you with respect to such Common Shares. Any loss you recognize on a sale or other disposition of Common Shares will be disallowed if you acquire other Common Shares (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after your sale or exchange of the Common Shares. In such case, your tax basis in the Common Shares acquired will be adjusted to reflect the disallowed loss.
Adjusted cost basis information for covered securities, which generally include shares of a RIC, must be reported to the IRS and to taxpayers. Common Shareholders should contact their financial intermediaries with respect to reporting of cost basis and available elections for their accounts.
Current U.S. federal income tax law taxes both long-term and short-term capital gain of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, short-term capital gain is currently taxed at rates applicable to ordinary income while long-term capital gain generally is taxed at reduced maximum rates. The deductibility of capital losses is subject to limitations under the Code.
An additional 3.8% Medicare tax will be imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the Trust and net gains from redemptions or other taxable dispositions of Trust shares) of U.S. individuals, estates and trusts to the extent that such persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceeds certain threshold amounts.
Taxation of Non-U.S. Common Shareholders
The following discussion only applies to Non-U.S. Common Shareholders. Whether an investment in the shares is appropriate for a Non-U.S. Common Shareholder will depend upon that Non-U.S. Common Shareholders particular circumstances. An investment in the shares by a Non-U.S. Common Shareholder may have adverse tax consequences. Non-U.S. Common Shareholders should consult their tax advisors before investing in our Common Shares.
A Non-U.S. Common Shareholder generally will be subject to U.S. federal withholding tax at the rate of 30% (or possibly a lower rate provided by an applicable tax treaty) on ordinary income dividends (except as discussed below). In general, U.S. federal withholding tax and U.S. federal income tax will not apply to any gain or income realized by a Non-U.S. Common Shareholder in respect of any distribution of net capital gain (including amounts credited as an undistributed capital gain dividend) or upon the sale or other disposition of Common Shares of the Trust. Different tax consequences may result if the Non-U.S. Common Shareholder is engaged in a trade or business in the United States or, in the case of an individual, is present in the United States for 183 days or more during a taxable year and certain other conditions are met.
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Dividends properly reported by the Trust are generally exempt from U.S. federal withholding tax where they (i) are paid in respect of the Trusts qualified net interest income (generally, the Trusts U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which the Trust is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the Trusts qualified short-term capital gains (generally, the excess of the Trusts net short-term capital gain over the Trusts long-term capital loss for such taxable year). Depending on its circumstances, the Trust may report all, some or none of its potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains, and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a Non-U.S. Common Shareholder needs to 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). In the case of Common Shares held through an intermediary, the intermediary may withhold even if the Trust reports the payment as qualified net interest income or qualified short-term capital gain. Non-U.S. Common Shareholders should contact their intermediaries with respect to the application of these rules to their accounts. There can be no assurance as to what portion of the Trusts distributions will qualify for favorable treatment as qualified net interest income or qualified short-term capital gains.
If the Trust distributes its net capital gains in the form of deemed rather than actual distributions, a Non-U.S. Common Shareholder will be entitled to a U.S. federal income tax credit or tax refund equal to the Non-U.S. Common Shareholders allocable share of the tax that the Trust pays on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. Common Shareholder must obtain a U.S. taxpayer identification number and file a federal income tax return even if the Non-U.S. Common Shareholder is not otherwise required to obtain a U.S. taxpayer identification number or file a federal income tax return. For a corporate Non-U.S. Common Shareholder, distributions (both actual and deemed), and gains realized upon the sale of Common Shares that are effectively connected with a U.S. trade or business (or, where an applicable treaty applies, are attributable to a permanent establishment in the United States) may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate (or at a lower rate if provided for by an applicable tax treaty). Accordingly, investment in the shares may not be appropriate for certain Non-U.S. Common Shareholders.
In addition, withholding at a rate of 30% is required on dividends in respect of, and, after December 31, 2018, gross proceeds from the sale of, Common Shares held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Secretary of the Treasury to report, on an annual basis, information with respect to interests in, and accounts maintained by, the institution to the extent such interests or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which Common Shares are held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and, after December 31, 2018, gross proceeds from the sale of, Common Shares held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies to the Trust that such entity does not have any substantial United States owners or (ii) provides certain information regarding the entitys substantial United States owners, which the Trust will in turn provide to the Secretary of the Treasury. The Trust will not pay any additional amounts to Common Shareholders in respect of any amounts withheld. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations or other guidance, may modify these requirements. Common Shareholders are encouraged to consult their tax advisors regarding the possible implications of the legislation on their investment in Common Shares.
The Trust may be required to withhold, for U.S. federal backup withholding tax purposes, a portion of the dividends, distributions and redemption proceeds payable to certain non-exempt Common Shareholders who fail to provide the Trust (or its agent) with their correct taxpayer identification number (in the case of individuals, generally, their social security number) or to make required certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any, provided that you timely furnish the required information to the IRS.
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Failure to Qualify as a RIC
If the Trust is unable to qualify for treatment as a RIC, and relief is not available, the Trust would be subject to tax on all of its taxable income at regular corporate rates. The Trust would not be able to deduct distributions to Common Shareholders nor would the Trust be required to make distributions for tax purposes. Distributions would generally be taxable to Common Shareholders as ordinary dividend income eligible for reduced maximum rates for non-corporate Common Shareholders to the extent of the Trusts current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate U.S. Common Shareholders would be eligible for the dividends received deduction. Distributions in excess of the Trusts current and accumulated earnings and profits would be treated first as a return of capital to the extent of the Common Shareholders tax basis, and any remaining distributions would be treated as a capital gain. If the Trust were to fail to meet the RIC requirements for more than two consecutive years and then to seek to requalify as a RIC, the Trust would be required to recognize gain to the extent of any unrealized appreciation in the Trusts assets unless the Trust made a special election to pay corporate level tax on any such unrealized appreciation recognized during the succeeding five year period.
Proxy Voting Policy and Procedures and Proxy Voting Record
The Sub-Adviser will be responsible for voting proxies on securities held in the Trusts portfolio. The Sub-Advisers Proxy Voting Policy and Procedures are included as Appendix B to this Statement of Additional Information.
Information on how the Trust voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 will be available without charge, upon request, by calling (312) 262-6930 or by visiting the Trusts website at www.xainvestments.com. This information is also available on the SECs website at www.sec.gov.
Principal Shareholders
No person beneficially owns more than 5% of the voting securities of any class of equity securities of the Trust, except for the Adviser. Prior to the public offering of Common Shares, the Adviser purchased Common Shares from the Trust in an amount satisfying the net worth requirements of Section 14(a) of the 1940 Act. As of the date of this Statement of Additional Information, the Adviser owned 100% of the outstanding Common Shares. The Adviser may be deemed to control the Trust until such time as it owns less than 25% of the outstanding Common Shares, which is expected to occur as of the completion of the offering of Common Shares.
Independent Registered Public Accounting Firm
KPMG LLP, 200 E. Randolph Drive, Chicago, IL 60601, is the independent registered public accounting firm of the Trust. The independent registered public accounting firm is expected to render an opinion annually on the financial statements of the Trust.
The Trusts audited financial statements appearing in this SAI and the report of KPMG thereon, will be included in this SAI in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
Codes of Ethics
The Trust, the Adviser and the Sub-Adviser each have adopted its own code of ethics. The codes of ethics sets forth restrictions on the trading activities of trustees/directors, officers and employees of the Trust, the Adviser and the Sub-Adviser and their affiliates, as applicable. The codes of ethics of the Trust, the Adviser and the Sub-Adviser are on file with the SEC and can be reviewed and copied at the SECs Public Reference Room in
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Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. The codes of ethics are also available on the EDGAR Database on the SECs Internet site at www.sec.gov, and copies of the code of ethics may be obtained, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing the SECs Public Reference Section, Washington, D.C. 20549-0102.
Additional Information
This Statement of Additional Information constitutes part of a Registration Statement filed by the Trust with the SEC under the Securities Act, and the 1940 Act. This Statement of Additional Information omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Trust and the Common Shares offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by its rules and regulations or free of charge through the SECs website (www.sec.gov).
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholder of
XAI Octagon Floating Rate & Alternative Income Term Trust:
We have audited the accompanying statement of assets and liabilities of XAI Octagon Floating Rate & Alternative Income Term Trust (the Fund) as of August 29, 2017. This financial statement is the responsibility of the Funds management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of the Fund as of August 29, 2017, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
August 31, 2017
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XAI Octagon Floating Rate & Alternative Income Term Trust
Statement of Assets and Liabilities
August 29, 2017
Assets: |
||||
Cash |
$ | 100,009 | ||
Deferred offering costs (See Note 3) |
140,000 | |||
|
|
|||
Total Assets |
$ | 240,009 | ||
|
|
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Liabilities: |
||||
Accrued offering costs (See Note 3) |
$ | 140,000 | ||
|
|
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Total Liabilities |
$ | 140,000 | ||
|
|
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Net Assets |
$ | 100,009 | ||
|
|
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Components of Net Assets: |
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Paid-in-capital |
$ | 100,009 | ||
|
|
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Net Assets |
$ | 100,009 | ||
|
|
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Common shares of beneficial interest outstanding, at $0.01 par value,
|
10,205 | |||
Net asset value per common share |
$ | 9.80 | ||
|
|
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Offering price per common share |
$ | 10.00 | ||
|
|
The accompanying notes are an integral part of this financial statement.
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XAI Octagon Floating Rate & Alternative Income Term Trust
Notes to Statement of Assets and Liabilities
August 29, 2017
Note 1Organization and Registration
XAI Octagon Floating Rate & Alternative Income Term Trust (the Trust) is a closed-end management investment company that was organized as a Delaware statutory trust on April 4, 2017. The investment objective of the Trust is to seek attractive total return with an emphasis on income generation across multiple stages of the credit cycle. The Trust has not had any operations other than the sale and issuance of 10,205 common shares of beneficial interest at an aggregate purchase price of $100,009 to XA Investments LLC (the Adviser), the Trusts investment adviser at a net asset value of $9.80 per share. Shares issued by the Trust are subject to a sales load of 2.00%.
Note 2Significant Accounting Policies
The Trusts financial statement is prepared in accordance with accounting principles generally accepted in the United States of American (U.S. GAAP) This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement. Actual results could differ from these estimates.
Note 3Organizational Expenses and Offering Costs
Organizational Expenses The Adviser, has agreed to pay all of the Trusts organizational expenses. As a result, organizational expenses of the Trust are not reflected in the Trusts financial statement.
Offering Costs Offering costs are incurred by the Trust. The Adviser has agreed to pay the amount, if any, by which the Trusts offering costs (other than the sales load) exceed $0.02 per share (0.20% of the offering price). Management estimates total offering costs of $940,000 based on a $70 million offering, of which the Adviser will pay $800,000 of such expenses in excess of the offering costs limit, resulting in net offering costs charged to the Fund of $140,000, or .20% of the estimated $70 million offering. The Statement of Assets and Liabilities reflects $140,000 as deferred offering costs at August 29, 2017. These offering costs, as well as any additional offering costs incurred by the Trust subsequent to August 29, 2017 and within the offering expense cost limit, will be charged to paid-in-capital upon sale of the shares to the public.
Note 4Investment Advisory and Other Agreements
XA Investments LLC will serve as the Trusts investment adviser pursuant to an Investment Advisory Agreement with the Trust. As compensation for its services to the Trust, the Adviser will receive an annual investment advisory fee of 1.70% based on the Trusts average daily Managed Assets. For these purposes, the term Managed Assets is defined as the total assets of the Trust, including assets attributable to the proceeds of financial leverage (including through the issuance of preferred shares or the issuance of senior securities representing indebtedness, minus liabilities, other than liabilities related to any financial leverage. XA Investments LLC plans to retain Octagon Credit Investors, LLC (the Sub-Adviser) and will pay to the Sub-Adviser a sub-advisory fee out of the management fee received by the Adviser. The sub-advisory fee, payable monthly in arrears, is calculated as a specified percentage of the advisory fee payable by the Trust to the Adviser (before giving effect to any fees waived or expenses reimbursed by the Adviser). The specified percentage is equal to the blended percentage computed by applying the following percentages to the aggregate average daily Managed Assets of all registered investment companies in the XAI fund complex for which the Sub-Adviser (or an affiliate of the Sub-Adviser) serves as investment sub-adviser, including the Trust (Eligible Funds):
Aggregate Eligible Funds Average Daily Managed Assets |
Percentage of
Advisory Fee |
|||
First $500 million |
60 | % | ||
Over $500 million |
50 | % |
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The Trust is currently the only Eligible Fund. Therefore, assuming Managed Assets of the Trust of $100 million following the completion of the offering and the utilization of leverage by the Trust, the sub-advisory fee would equal 60% of the advisory fee payable to the Adviser.
The Trust plans to retain the Adviser to provide investor support services and secondary market support services in connection with the ongoing operation of the Trust. The Trust will pay the Adviser a service fee, payable monthly in arrears, in an annual amount equal to 0.20% of the Trusts average daily Managed Assets.
Note 5Income Taxes
The Fund intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, and, if so qualified, will not be liable for federal income taxes to the extent earnings are distributed to shareholders on a timely basis.
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DESCRIPTION OF SECURITIES RATINGS
Moodys Investors Service Inc.
A brief description of the applicable Moodys Investors Service, Inc. (Moodys) rating symbols and their meanings (as published by Moodys) follows:
Global Rating Scales
Ratings assigned on Moodys global long-term and 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. 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. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default on contractually promised payments.
Moodys differentiates structured finance ratings from fundamental ratings (i.e., ratings on nonfinancial corporate, financial institution, and public sector entities) on the global long-term scale by adding (sf) to all structured finance ratings. The addition of (sf) to structured finance ratings should eliminate any presumption that such ratings and fundamental ratings at the same letter grade level will behave the same. The (sf) indicator for structured finance security ratings indicates that otherwise similarly rated structured finance and fundamental securities may have different risk characteristics. Through its current methodologies, however, Moodys aspire to achieve broad expected equivalence in structured finance and fundamental rating performance when measured over a long period of time.
Global Long-Term Rating Scale
Aaa | Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk. |
Aa | Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. |
A | Obligations rated A are judged to be upper-medium grade and are subject to low credit risk. |
Baa | Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics. |
Ba | Obligations rated Ba are judged to be speculative and are subject to substantial credit risk. |
B | Obligations rated B are considered speculative and are subject to high credit risk. |
Caa | Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk. |
Ca | Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. |
C | Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest. |
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
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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.
Medium-Term Note Ratings
Moodys assigns provisional ratings to medium-term note (MTN) programs and definitive ratings to the individual debt securities issued from them (referred to as drawdowns or notes).
MTN program ratings are intended to reflect the ratings likely to be assigned to drawdowns issued from the program with the specified priority of claim (e.g. senior or subordinated). To capture the contingent nature of a program rating, Moodys assigns provisional ratings to MTN programs. A provisional rating is denoted by a (P) in front of the rating and is defined elsewhere in this document.
The rating assigned to a drawdown from a rated MTN or bank/deposit note program is definitive in nature, and may differ from the program rating if the drawdown is exposed to additional credit risks besides the issuers default, such as links to the defaults of other issuers, or has other structural features that warrant a different rating. In some circumstances, no rating may be assigned to a drawdown.
Moodys encourages market participants to contact Moodys Ratings Desks or visit www.moodys.com directly if they have questions regarding ratings for specific notes issued under a medium-term note program. Unrated notes issued under an MTN program may be assigned an NR (not rated) symbol.
Global Short-Term Rating Scale
P-1 | Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations. |
P-2 | Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations. |
P-3 | Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations. |
NP | Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories. |
Standard & Poors
A brief description of the applicable Standard & Poors rating symbols and their meanings (as published by Standard & Poors) follows:
Issue Credit Ratings Definitions
A Standard & Poors issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects Standard & Poors view of the obligors capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long term or short term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example, that means obligations with an
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original maturity of no more than 365 daysincluding commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on Standard & Poors analysis of the following considerations:
| Likelihood of paymentcapacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation. |
| Nature of and provisions of the obligation, and the promise we impute. |
| 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 Standard & Poors. 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. |
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CCC | An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. |
CC | An obligation rated CC is currently highly vulnerable to nonpayment. The CC rating is used when a default has not yet occurred, but Standard & Poors expects default to be a virtual certainty, regardless of the anticipated time to default. |
C | An obligation rated C is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared to obligations that are rated higher. |
D | An obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an obligation are not made on the date due, unless Standard & Poors 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, that there is insufficient information on which to base a rating, or that Standard & Poors 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 Standard & Poors. 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-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 its 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 commitment on the obligation. |
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 Standard & Poors 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 |
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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 is subject to a distressed exchange offer. |
SPUR (Standard & Poors 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. Standard & Poors maintains surveillance of an issue with a published SPUR.
Dual Ratings
Dual ratings may be assigned to debt issues that have a put option or demand feature. The first component of the rating addresses the likelihood of repayment of principal and interest as due, and the second component of the rating addresses only the demand feature. The first component of the rating can relate to either a short-term or longterm transaction and accordingly use either short-term or long-term rating symbols. The second component of the rating relates to the put option and is assigned a short-term rating symbol (for example, AAA/A-1+ or A-1+/A-1). With U.S. municipal short-term demand debt, the U.S. municipal short-term note rating symbols are used for the first component of the rating (for example, SP-1+/A-1+).
Fitch Ratings
Long-Term Credit Ratings
Investment Grade
AAA: Highest credit quality. AAA ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High credit quality. A ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
Speculative Grade
BB: Speculative. BB ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial alternatives may be available to allow financial commitments to be met.
B: Highly speculative. B ratings indicate that material credit risk is present.
CCC: Substantial credit risk. Default is a real possibility.
CC: Very high levels of credit risk. Default of some kind appears probable.
C: Exceptionally high levels of credit risk. Near default.
Defaulted obligations typically are not assigned RD or D ratings, but are instead rated in the B to C rating categories, depending upon their recovery prospects and other relevant characteristics. This approach better aligns obligations that have comparable overall expected loss but varying vulnerability to default and loss.
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The modifiers + or - may be appended to a rating to denote relative status within major rating categories. For example, the rating category AA has three notch-specific rating levels (AA+; AA; AA-; each a rating level). Such suffixes are not added to the AAA obligation rating category, or to corporate finance obligation ratings in the categories below CCC.
The subscript emr is appended to a rating to denote embedded market risk that is beyond the scope of the rating. The designation is intended to make clear that the rating solely addresses the counterparty risk of the issuing bank. It is not meant to indicate any limitation in the analysis of the counterparty risk, which in all other respects follows published Fitch criteria for analyzing the issuing financial institution. Fitch does not rate these instruments where the principal is to any degree subject to market risk.
Recovery Ratings
Recovery Ratings are assigned to selected individual securities and obligations, most frequently for individual obligations of corporate issuers with Issuer Default Ratings (IDRs) in speculative grade categories.
Among the factors that affect recovery rates for securities are the collateral, the seniority relative to other obligations in the capital structure (where appropriate), and the expected value of the company or underlying collateral in distress.
The Recovery Rating scale is based upon the expected relative recovery characteristics of an obligation upon the curing of a default, emergence from insolvency or following the liquidation or termination of the obligor or its associated collateral.
Recovery Ratings are an ordinal scale and do not attempt to precisely predict a given level of recovery. As a guideline in developing the rating assessments, the agency employs broad theoretical recovery bands in its ratings approach based on historical averages and analytical judgement, but actual recoveries for a given security may deviate materially from historical averages.
RR1: Outstanding recovery prospects given default. RR1 rated securities have characteristics consistent with securities historically recovering 91%-100% of current principal and related interest.
RR2: Superior recovery prospects given default. RR2 rated securities have characteristics consistent with securities historically recovering 71%-90% of current principal and related interest.
RR3: Good recovery prospects given default. RR3 rated securities have characteristics consistent with securities historically recovering 51%-70% of current principal and related interest.
RR4: Average recovery prospects given default. RR4 rated securities have characteristics consistent with securities historically recovering 31%-50% of current principal and related interest.
RR5: Below average recovery prospects given default. RR5 rated securities have characteristics consistent with securities historically recovering 11%-30% of current principal and related interest.
RR6: Poor recovery prospects given default. RR6 rated securities have characteristics consistent with securities historically recovering 0%-10% of current principal and related interest.
Short-Term Credit Ratings
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-term deposit ratings may be adjusted for loss severity. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as short term based on market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations, and up to 36 months for obligations in U.S. public finance markets.
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F1: Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong credit feature.
F2: Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.
F3: Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate.
B: Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
C: High short-term default risk. Default is a real possibility.
RD: Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Typically applicable to entity ratings only.
D: Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation
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PROXY VOTING POLICIES AND PROCEDURES
OCTAGON CREDIT INVESTORS, LLC
PROXY VOTING POLICY
Scope
Octagons Proxy Voting Policy addresses procedures and policies related to Octagons voting of proxies in a manner consistent with Clients best interest.
This policy should be read in conjunction with the Account Administration Policy, Code of Ethics Overview, and Recordkeeping Policy. This policy applies to all Octagon Covered Persons which is defined to include all of the partners, owners, principals, directors, officers and employees of Octagon Credit Investors, LLC.
A. Overview of Applicable Law
A public companys shareholders typically have the right to vote on various corporate issues. Clients typically delegate to Octagon the authority to vote proxies for Securities of companies held in their Accounts. Under the Advisers Act, Octagon has a duty of care and loyalty with respect to all services undertaken for Clients, including proxy voting.
Rule 206(4)-6 under the Advisers Act requires that Octagon must vote proxies in a manner consistent with Clients best interest and must not place its interests above those of its Clients when doing so. It requires Octagon to: (i) adopt and implement written policies and procedures that are reasonably designed to ensure that Octagon votes proxies in the best interest of its Clients, and (ii) to disclose the Clients how they may obtain information on how Octagon voted. In addition, Rule 204-2 requires Octagon to keep records of proxy voting and Client requests for information.
B. Policies and Procedures Relating to Proxies
Due to the nature of Octagons business, it is very rare that Octagon will be asked to vote a proxy for a publicly traded equity security. In the event this does occur, the following policies and procedures will apply.
1. | Definitions. |
| Best Interest of the Client. Octagon believes that this means the Clients best economic interests over the long-term that is, the common interest that all Clients share in seeing the value of a common investment increase over time. |
| Material Conflicts of Interest. Such conflicts are typically based on the specific facts and circumstances associated with the issues that are the subject of the proxy and Octagons and its employees business dealings with a particular proxy issuer or closely affiliated entity. A material conflict of interest may exist where, for example: (1) the company soliciting the proxy, or a person known to be an affiliate of such company, is known to be a Client of, or an investor in an Account managed, by Octagon; (2) the company soliciting the proxy, or a person known to be an affiliate of such company, to the knowledge of the individual(s) charged with voting the proxy, is being actively solicited to be a Client of Octagon (or an investor in an Octagon Account); (3) a Client or investor, or an interest group supported by Client or investor, actively supports a proxy proposal; or (4) Octagon or an employee has personal or other business relationships with participants in proxy contests, corporate directors or candidates for corporate directorships, or in any other matter coming before shareholders. |
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2. | Responsibilities of Investment Professionals to Monitor Issuers for Upcoming Shareholder Meetings. |
Octagon Investment Professionals (Principals / Associates) shall monitor all of the issuers that such individuals cover where Octagon Client Accounts hold equity of such issuers for any upcoming shareholder meetings. Octagon Investment Professionals shall provide notice of such upcoming shareholder meetings in advance of such shareholder meetings to the Investment Committee, Head of Collateral Settlement and the CCO.
3. | Receipt and Reconciliation of Proxies. |
All proxy materials received by Octagon for Octagon funds shall be forwarded to the CCO or his/her designee. The CCO shall record on a log the name of the company to which the proxy materials relate (the Portfolio Company), the date the proxy materials are received and the date by which the proxy needs to be voted.
The CCO shall compare the number of shares represented by the proxy materials to the number of shares owned by Octagons Clients. If the number of shares reflected in the proxy materials does not match the number of shares reported owned by Clients, the CCO will resolve any difference and ensure that all eligible shares can be voted.
Upon completion of the reconciliation process, the CCO shall forward the proxy materials to the Investment Committee for voting.
4. | Proxy Voting Process. |
The Investment Committee or its designee shall vote all proxies in the best interests of Octagons Clients pursuant to the goals of the Clients investment strategy. The Investment Committee will follow the procedures set forth below in order to ensure that proxies are voted in the best interests of Octagons Clients.
The Investment Committee shall vote proxies concerning: (1) the selection of directors, (2) the approval of financial results and (3) the retention of auditors in accordance with the proxy voting guidelines.
Prior to exercising voting authority on any other matter, the Investment Committee shall review the proxy materials and undertake a reasonable investigation to determine whether any of the matters to be voted on present a material conflict of interest between Octagon and the interests of its Clients.
Where the Investment Committees investigation determines that a material conflict of interest may exist, it shall take reasonable steps to ensure that the conflict does not influence the Investment Committee to vote a proxy in a manner that is not in the best interests of Octagons Clients. These steps may include, but are not limited to any one or a combination of the following:
| Consult with Octagons Outside Counsel to determine how to vote in a manner that will be in the best interests of Octagons Clients; |
| Erecting information barriers around conflicted Octagon personnel to ensure that they do not influence the voting decision. |
The Investment Committee shall make and maintain a record describing any steps taken to prevent a potential material conflict of interest from causing a proxy to be voted in a manner that is not in the best interest of Octagons Clients.
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Where the Investment Committee determines that no material conflict of interest exists, the matter shall be analyzed based on its specific facts and circumstances and the Investment Committee shall vote on the matter in the best interests of Octagons Clients.
The CCO shall maintain records disclosing the date all proxies were voted and how they were voted.
5. | Requests for Voting Information, Communications and Record-Keeping. |
If a Client requests information regarding how proxies were voted or a copy of Octagons proxy voting policy and procedures, the Head of Investor Relations shall provide the Client with the requested information. The Head of Investor Relations shall make and retain a copy of each request received together with a copy of the response provided, and he/she shall notify the CCO of such request.
Octagon will maintain all records relating to proxy voting as set forth in the Recordkeeping Policy.
Communications by Octagon with other shareholders during the course of a proxy solicitation may also be deemed to be a solicitation for purposes of the federal proxy rules, which contain requirements regarding the filing and distribution of proxy materials. In addition, such communications could cause Octagon to be considered part of a group for federal reporting purposes, potentially triggering a filing on Forms 13D or 13G. Compliance shall make any determination regarding the applicability of the federal proxy rules in the event such a situation arises.
C. Opposing Votes
Note that if more than one Account invests in the same portfolio company, and such Accounts have different investment objectives, Client-specific voting policies or ultimate economic interests, Octagon may cast opposing votes in a proxy vote.
Oversight
The CCO, Investment Committee, and members of the Compliance Committee, and other senior management as appropriate, shall supervise compliance by Covered Persons with this policy. The CCO shall assess the adequacy of this policy and the firms adherence to the procedures outlined herein, periodically.
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PART C
OTHER INFORMATION
Item 25. Financial Statements And Exhibits
(*) | Filed herewith. |
(1) | Incorporated by reference to Registrants Registration Statement (File Nos. 333-217196 and 811-232247) filed on April 7, 2017. |
(2) | Incorporated by reference to Pre-Effective Amendment No. 1 to Registrants Registration Statement (File Nos. 333-217196 and 811-232247) filed on July 18, 2017. |
Item 26. Marketing Arrangements
Reference is made to Exhibit (h)(i)-(xiii) to this Registration Statement filed herewith.
Item 27. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in connection with the offering described in this Registration Statement:
Printing, Edgar Filing and Mailing | $206,200 | |||
Legal Counsel | 575,000 | |||
NYSE Fee | 15,000 | |||
Marketing Design | 52,710 | |||
SEC Fees | 11,010 | |||
FINRA Fees | 14,750 | |||
Independent Registered Public Accounting Firm | 25,000 | |||
Miscellaneous | 40,330 | |||
Total | 940,000 | |||
Item 28. Persons Controlled by or Under Common Control with Registrant
None
Item 29. Number of Holders of Securities
Title of Class |
Number of Record Shareholders as of September 22, 2017 |
|
Common shares of beneficial interest, par value $0.01 per share | 1 |
Item 30. Indemnification
Reference is made to Article V of the Registrants Amended and Restated Agreement and Declaration of the Registrant, which provides as follows:
5.1 No Personal Liability of Shareholders, Trustees, etc . No Shareholder of the Trust shall be subject in such capacity to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. Shareholders shall have the same limitation of personal liability as is extended to stockholders of a private corporation for profit incorporated under the Delaware General Corporation Law. No Trustee or officer of the Trust shall be subject in such capacity to any personal liability whatsoever to any Person, save only liability to the Trust or its Shareholders arising from bad faith, willful misfeasance, gross negligence or reckless disregard for his or her duty to such Person; and, subject to the foregoing exception, all such Persons shall look solely to the Trust Property for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee or officer, as such, of the Trust, is made a party to any suit or proceeding to enforce any such liability, subject to the foregoing exception, he or she shall not, on account thereof, be held to any personal liability. Any repeal or modification of this Section 5.1 shall not adversely affect any right or protection of a Trustee or officer of the Trust existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.
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5.2 Mandatory Indemnification .
(a) To the maximum extent permitted by law, the Trust shall indemnify any person who was or is a party or is threatened to be made a party to, or is involved as a witness in, any proceeding by reason of the fact that such person is or was a Covered Person, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding.
(b) To the maximum extent permitted by law, the Trust shall indemnify any person who was or is a party or is threatened to be made a party to, or is involved as a witness in, any proceeding by or in the right of the Trust to procure a judgment in its favor by reason of the fact that such person is or was a Covered Person, against expenses actually and reasonably incurred by that person in connection with the investigation, defense or settlement of such proceeding.
(c) Notwithstanding any provision to the contrary contained herein, no Covered Person shall be indemnified for any expenses, judgments, fines, amounts paid in settlement, or other liability or loss arising by reason of disabling conduct or for any proceedings by such Covered Person for which indemnification is precluded by applicable law. The termination of any proceeding by conviction, or a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the person engaged in disabling conduct.
(d) 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 (1) was 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 herein 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 Covered Person or otherwise entitled to indemnification hereunder in respect of any act or omission that occurred prior to such amendment, restatement or repeal.
(e) To the maximum extent permitted by law, the Trust shall advance to any person who was or is a party or is threatened to be made a party to, or is involved as a witness in, any proceeding by reason of the fact that such person is or was a Covered Person the expenses actually and reasonably incurred by such person in connection with the defense of such proceeding in advance of its final disposition.
(f) Any indemnification required or permitted under this Section 5.2 (unless ordered by a court) shall be made by the Trust only as authorized in the specific case upon a reasonable determination, based upon a review of the facts, that the Covered Person is entitled to indemnification because (i) he or she is not liable by reason of disabling conduct, or (ii) in cases where there is no liability, he or she has not engaged in disabling conduct. Such determination shall be made by (i) the vote of a majority of a quorum of qualifying Trustees; or (ii) if there are no such Trustees, or if such Trustees so direct, by independent legal counsel in a written opinion. Notwithstanding anything to the contrary in Section 5.2(e), if a determination that a Covered Person engaged in disabling conduct is made in accordance with this Section 5.2(f), no further advances of expenses shall be made, and all prior advances, and insurance premiums paid for by the Trust, if applicable, must be repaid.
(g) With respect to any person who was or is a party or is threatened to be made a party to, or is involved as a witness in, any proceeding by reason of the fact that such person is or was a Covered Person, the rights to indemnification conferred in Section 5.2(a), and with respect to any person who was or is a party or is threatened to be made a party to, or is involved as a witness in, any proceeding by reason of the fact that such person is or was a Trustee or officer of the Trust, the advancement of expenses conferred in Section 5.2(e) shall be contract rights. Any amendment, repeal, or modification of, or adoption of any provision inconsistent with, this Section 5.2 (or any provision hereof) shall not adversely affect any right to indemnification or advancement of expenses granted to any such person pursuant hereto with respect to any act or omission of such person occurring prior to the time of such amendment, repeal, modification, or adoption (regardless of whether the proceeding relating to such acts or omissions is commenced before or after the time of such amendment, repeal, modification, or
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adoption). Any amendment or modification of, or adoption of any provision inconsistent with, this Section 5.2 (or any provision hereof), that has the effect of positively affecting any right to indemnification or advancement of expenses granted to any such person pursuant hereto, shall not apply retroactively to any person who was not serving as a Covered Person at the time of such amendment, modification or adoption.
(h) If (i) a claim under Section 5.2(a) with respect to any right to indemnification is not paid in full by the Trust within sixty days after a written demand has been received by the Trust or (ii) a claim under Section 5.2(b) with respect to any right to the advancement of expenses is not paid in full by the Trust within thirty days after a written demand has been received by the Trust, then the Covered Person seeking to enforce a right to indemnification or to an advancement of expenses, as the case may be, may at any time thereafter bring suit against the Trust to recover the unpaid amount of the claim.
(i) If successful in whole or in part in any suit brought pursuant to Section 5.2(h), or in a suit brought by the Trust to recover an advancement of expenses (whether pursuant to the terms of an undertaking or otherwise), the Covered Person seeking to enforce a right to indemnification or an advancement of expenses hereunder or the Covered Person from whom the Trust sought to recover an advancement of expenses, as the case may be, shall be entitled to be paid by the Trust the reasonable expenses (including attorneys fees) of prosecuting or defending such suit.
(j) The rights accruing to any indemnitee under this Section 5.2 shall not exclude any other right which any person may have or hereafter acquire under this Declaration, the By-Laws of the Trust, any statute, agreement, vote of shareholders or qualifying Trustees or any other right to which he or she may be lawfully entitled. For the avoidance of doubt, to the extent the Trust enters into a written agreement with any Trustee to indemnify such Trustee, any indemnification of such Trustee by the Trust shall be governed by the terms of such written agreement, including with respect to determinations required, applicable presumptions and burden of proof with respect to such Trustees entitlement to indemnification and/or advancement of expenses.
(k) For purposes of this Section 5.2:
(i) references to Trust include any domestic or foreign predecessor entity of this Trust in a merger, consolidation, or other transaction in which the predecessors existence ceased upon consummation of the transaction;
(ii) the term Covered Person means a person who is or was a Trustee, officer, employee or agent of the Trust, or is or was serving at the request of the Trustees as a director, trustee, partner, officer, employee or agent of another foreign or domestic corporation, trust, partnership, joint venture or other enterprise;
(iii) the term disabling conduct means willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the Covered Persons office with the Trust;
(iv) the term expenses includes, without limitations, attorneys fees;
(v) the term proceeding means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative; and
(vi) the term qualifying Trustee means any Trustee who is not an interested person (as defined in the 1940 Act) of the Trust and is not a party to the proceeding.
5.3 Voluntary Indemnification . Subject to any limitations provided by the 1940 Act and this Declaration, the Trust shall have the power and authority 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 corporations organized under the Delaware General Corporation Law may
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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.
5.4 No Bond Required of Trustees . No Trustee shall, as such, be obligated to give any bond or other security for the performance of any of his or her duties hereunder.
5.5 No Duty of Investigation; etc. No purchaser, lender, transfer agent or other person dealing with the Trustees or with any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, loaned, or delivered to or on the order of the Trustees or of said officer, employee or agent. Every obligation, contract, undertaking, instrument, certificate, Share, other security of the Trust, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively taken to have been executed or done by the executors thereof only in their capacity as Trustees under this Declaration or in their capacity as officers, employees or agents of the Trust.
5.6 Insurance . The Trustees may maintain insurance for the protection of the Trust Property, its Shareholders, Trustees, officers, employees and agents in such amount as the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable or is required by the 1940 Act.
5.7 Reliance on Experts, etc. Each Trustee and officer or employee of the Trust 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 expert may also be a Trustee.
Reference is made to Section 14 of the Investment Advisory Agreement, between the Registrant and the Adviser, a form of which is filed herewith as Exhibit (g)(i) hereto.
Reference is made to Section 14 of the Investment Sub-Advisory Agreement, among the Registrant, the Adviser and the Sub-Adviser, a form of which is filed herewith as Exhibit (g)(ii) hereto.
Reference is made to Section 9 of the Underwriting Agreement, a form of which is filed herewith as Exhibit (h)(i) hereto.
Item 31. Business and Other Connections of the Adviser and the Sub-Adviser
The Adviser, a limited liability company organized under the laws of Delaware, acts as investment adviser to the Registrant. The Registrant is fulfilling the requirement of this Item 31 to provide a list of the officers and directors of the Adviser, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the Adviser or those officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV of the Adviser filed with the commission pursuant to the Investment Advisers Act of 1940 (Commission File No. 801-110653).
The Sub-Adviser, a limited liability company organized under the laws of Delaware, acts as investment sub-adviser to the Registrant. The Registrant is fulfilling the requirement of this Item 31 to provide a list of the officers and directors of the Sub-Adviser, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the Sub-Adviser or those officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV of the Sub-Adviser filed with the commission pursuant to the Investment Advisers Act of 1940 (Commission File No. 801-71998).
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Item 32. Location of Accounts and Records
The accounts and records of the Registrant are maintained in part at the offices of the Trust at 321 North Clark Street, Suite 2430, Chicago, Illinois 60654, in part at the offices of the Investment Adviser at 321 North Clark Street, Suite 2430, Chicago, Illinois 60654, in part at the offices of the Sub-Adviser at 250 Park Avenue, 15th Floor, New York, New York 10177, in part at the offices of the Administrator at 1290 Broadway, Suite 1100, Denver, CO 80203, in part at the offices of the Custodian, at 1555 N. River Center Drive, Milwaukee, Wisconsin 53212, and in part at the offices of the Transfer Agent at 430 W. 7th Street, Kansas City, Missouri 64105-1594.
Item 33. Management Services
Not applicable.
Item 34. Undertakings
1. | Registrant undertakes to suspend the offering of Common Shares until the prospectus is amended, if subsequent to the effective date of this registration statement, its net asset value declines more than ten percent from its net asset value, as of the effective date of the registration statement or its net asset value increases to an amount greater than its net proceeds as stated in the prospectus. |
2. | Not applicable. |
3. | Not applicable. |
4. | Not applicable. |
5. | Registrant undertakes that, for the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 497(h) will be deemed to be a part of the Registration Statement as of the time it was declared effective. |
Registrant undertakes that, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus will be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof.
6. | Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information constituting Part B of this Registration Statement. |
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SIGNATURES
As required by the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, this Registration Statement has been signed on behalf of the Registrant, in the City of Chicago, State of Illinois, on the 25 th day of September, 2017.
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST | ||
By: |
/s/ Theodore J. Brombach |
|
Theodore J. Brombach | ||
Trustee, President and Chief Executive Officer |
As required by the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities set forth below on the 25 th day of September, 2017.
Principal Executive Officer: | ||
/s/ Theodore J. Brombach Theodore J. Brombach |
Trustee, President and Chief Executive Officer | |
Principal Financial Officer: | ||
/s/ John Yogi Spence John Yogi Spence |
Chief Financial Officer and Treasurer | |
Trustees: | ||
/s/ * Danielle Cupps |
Trustee | |
/s/ * Gregory G. Dingens |
Trustee | |
/s/ * Philip G. Franklin |
Trustee | |
/s/ * Scott Craven Jones |
Trustee |
* | Signed by John P. McGarrity, Esq., an attorney-in-fact, pursuant to a power of attorney filed herewith. |
By: |
/s/ John P. McGarrity, Esq. |
|||
John P. McGarrity, Esq. Attorney-In-Fact September 25, 2017 |
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Exhibit Index
(a) | (ii) | Amendment to Second Amended and Restated Agreement and Declaration of Trust of Registrant | ||
(b) | (ii) | Amendment to By-Laws of Registrant | ||
(e) | Form of Dividend Reinvestment Plan of Registrant | |||
(g) | (i) | Form of Investment Advisory Agreement between Registrant and XA Investments LLC (the Adviser) | ||
(g) | (ii) | Form of Investment Sub-Advisory Agreement among Registrant, the Adviser and Octagon Credit Investors, LLC (the Sub-Adviser) | ||
(h) | (i) | Form of Underwriting Agreement | ||
(h) | (ii) | Form of Master Agreement Among Underwriters | ||
(h) | (iii) | Form of Master Selected Dealer Agreement | ||
(h) | (iv) | Closed-End Fund Distribution Services Agreement, among the Adviser, First Dominion Capital Corp. and Vision 4 Fund Distributors, LLC | ||
(h) | (v) | Form of Structuring Fee Agreement with UBS Securities LLC | ||
(h) | (vi) | Form of Structuring Fee Agreement with BB&T Capital Markets, a division of BB&T Securities, LLC | ||
(h) | (vii) | Form of Structuring Fee Agreement with Ladenburg Thalmann & Co. Inc. | ||
(h) | (viii) | Form of Structuring Fee Agreement with Maxim Group LLC | ||
(h) | (ix) | Form of Structuring Fee Agreement with National Securities Corporation | ||
(h) | (x) | Form of Structuring Fee Agreement with Newbridge Securities Corporation | ||
(h) | (xi) | Form of Structuring Fee Agreement with Wedbush Securities Inc. | ||
(h) | (xii) | Form of Structuring Fee Agreement with Wunderlich Securities, Inc. | ||
(h) | (xiii) | Form of Agreement with Qualifying Underwriter(s) | ||
(j) | Form of Custody Agreement between Registrant and U.S. Bank N.A. | |||
(k) | (i) | Form of Transfer Agency Agreement between Registrant and DST Systems, Inc. | ||
(k) | (ii) | Form of Administration, Bookkeeping and Pricing Services Agreement between Registrant and ALPS Fund Services, Inc. | ||
(k) | (iii) | Form of Chief Compliance Officer Services Agreement between Registrant and ALPS Fund Services, Inc. | ||
(k) | (iv) | Form of Investor Services and Secondary Market Support Services Agreement between Registrant and the Adviser | ||
(k) | (v) | Form of Expense Limitation Agreement between Registrant and the Adviser | ||
(k) | (vi) | Form of Offering Expense Limitation Agreement between Registrant, the Adviser and the Sub-Adviser | ||
(l) | Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom LLP | |||
(n) | Consent of Independent Registered Public Accounting Firm | |||
(p) | Initial Subscription Agreement | |||
(r) | (i) | Code of Ethics of the Registrant | ||
(r) | (ii) | Code of Ethics of the Adviser | ||
(r) | (iii) | Code of Ethics of the Sub-Adviser |
CERTIFICATE OF AMENDMENT
TO THE
SECOND AMENDED AND RESTATED AGREEMENT
AND DECLARATION OF TRUST
OF
XAI OCTAGON FLOATING RATE ALTERNATIVE INCOME TERM TRUST
WHEREAS, the Trustees of XAI Octagon Floating Rate Alternative Income Term Trust, a Delaware statutory trust (the Trust), have approved the amendment of the Trusts Second Amended and Restated Agreement and Declaration of Trust, dated July 13, 2017 (the Declaration of Trust), in accordance with Section 11.3 thereof;
WHEREAS, pursuant to this Certificate of Amendment, the name of the Trust will be changed to XAI Octagon Floating Rate & Alternative Income Term Trust;
NOW, THEREFORE, the Declaration of Trust is amended as follows:
1. |
The Section 1.1 is amended and restated in its entirety to read as follows: |
1.1 Name . This Trust shall be known as the XAI Octagon Floating Rate & Alternative Income Term Trust and the Trustees shall conduct the business of the Trust under that name or any other name or names as they may from time to time determine.
[ Signature Page Follows ]
IN WITNESS WHEREOF, the undersigned, being a Trustee of the Trust, has executed this Certificate of Amendment, to be effective as of the 31st day of August, 2017.
/s/ Theodore J. Brombach |
||
Theodore J. Brombach |
||
Trustee |
AMENDMENT
TO THE
AMENDED AND RESTATED AGREEMENT
BY-LAWS
OF
XAI OCTAGON FLOATING RATE ALTERNATIVE INCOME TERM TRUST
This Amendment, dated as of August 31, 2017, to the Amended and Restated By-Laws (the By-Laws), dated as of July 31, 2017, are made and adopted pursuant to Section 3.9 of the Second Amended and Restated Agreement and Declaration of Trust of XAI Octagon Floating Rate & Alternative Income Term Trust (the Trust), dated as of July 13, 2017, as amended on August 31, 2017, and as from time to time amended.
The By-Laws are hereby amended to reflect that the name of the Trust shall be XAI Octagon Floating Rate & Alternative Income Term Trust.
XAI OCTAGON FLOATING RATE INCOME & CREDIT ALTERNATIVE TRUST
DIVIDEND REINVESTMENT PLAN
XAI Octagon Floating Rate Income & Credit Alternative Trust, a Delaware statutory Trust (the Trust), hereby adopts the following plan (the Plan) with respect to the cash portion of dividends and distributions, including any capital gain distributions (Cash Dividends) declared by its board of trustees (the Board) on its common shares of beneficial interest, par value $0.01 per share (Common Shares)
1. Unless the registered owner of Common Shares elects to receive cash by contacting the Plan Agent (as defined herein), all Cash Dividends declared on Common Shares of the Trust will be automatically reinvested by DST Systems, Inc. (the Plan Agent), Agent for shareholders in the Trusts Dividend Reinvestment Plan (the Plan), in additional Common Shares.
2. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice to the Plan Agent as set forth below. Notice of termination or resumption will be effective with respect to a Cash Dividend if received by the Plan Agent no later than 6:00 p.m. Eastern time, no less than ten (10) days prior to the record date fixed by the Board for such Cash Dividend. If notice is received by the Plan Agent after such time, such termination or resumption will be effective with respect to any subsequently declared Cash Dividend.
3. If you hold your shares through a broker or other intermediary, and you wish for all Cash Dividends declared on your Common Shares to be automatically reinvested pursuant to the Plan, please contact your broker. Some brokers may automatically elect to receive cash on your behalf.
4. The Plan Agent will open an account for each common shareholder under the Plan in the same name in which such common shareholders common shares are registered. Whenever the Trust declares a Cash Dividend, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in Common Shares.
5. The common shares will be acquired by the Plan Agent for the participants accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized Common Shares from the Trust (Newly Issued Common Shares) or (ii) by purchase of outstanding Common Shares on the open market (Open-Market Purchases) on the New York Stock Exchange or elsewhere. If, on the payment date for any Cash Dividend, the closing market price plus estimated brokerage commission per Common Share is equal to or greater than the net asset value per Common Share, the Plan Agent will invest the Cash Dividend amount in Newly Issued Common Shares on behalf of the participants. The number of Newly Issued Common Shares to be credited to each participants account will be determined by dividing the
dollar amount of the Cash Dividend by the net asset value per Common Share on the payment date; provided that, if the net asset value is less than or equal to 95% of the closing market value on the payment date, the dollar amount of the Cash Dividend will be divided by 95% of the closing market price per Common Share on the payment date. If, on the payment date for any Cash Dividend, the net asset value per Common Share is greater than the closing market value plus estimated brokerage commission, the Plan Agent will invest the Cash Dividend amount in Common Shares acquired on behalf of the participants in Open-Market Purchases.
6. If, before the Plan Agent has completed its Open-Market Purchases, the market price per Common Share exceeds the net asset value per Common Share, the average per Common Share purchase price paid by the Plan Agent may exceed the net asset value of the Common Shares, resulting in the acquisition of fewer Common Shares than if the Cash Dividend had been paid in Newly Issued Common Shares on the Cash Dividend payment date. Because of the foregoing difficulty with respect to Open-Market Purchases, the Plan provides that if the Plan Agent is unable to invest the full Cash Dividend amount in Open-Market Purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Agent may cease making Open-Market Purchases and may invest the uninvested portion of the Cash Dividend amount in Newly Issued Common Shares at net asset value per Common Share at the close of business on the Last Purchase Date provided that, if the net asset value is less than or equal to 95% of the then current market price per Common Share; the dollar amount of the Cash Dividend will be divided by 95% of the market price on the payment date.
7. The Plan Agent maintains all shareholders accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders for tax records.
8. Common Shares in the account of each Plan participant will be held by the Plan Agent on behalf of the Plan participant, and each shareholder proxy will include those Common Shares received pursuant to the Plan. The Plan Agent will forward all proxy solicitation materials to participants and vote proxies for shares held under the Plan in accordance with the instruction of the participants.
9. There will be no brokerage charges with respect to Newly Issued Common Shares. However, each participant will incur a pro rata share of brokerage commission incurred in connection with Open Market Purchases. The automatic reinvestment of Cash Dividends will not relieve participants of any Federal, state or local income tax that may be payable (or required to be withheld) on such Cash Dividends.
10. These terms and conditions of the Plan may be amended or supplemented by the Trust at any time but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to each participant appropriate written notice at least 30 days prior to the effective date thereof. The amendment or supplement shall be deemed to be accepted by each Participant unless, prior to the effective date thereof, the
Plan Agent receives written notice from the participant of the termination of such participants account under the Plan. Any such amendment may include an appointment of a successor agent under these terms and conditions, with full power and authority to perform all or any of the acts to be performed by the Plan Agent under these terms and conditions.
11. There is no direct service charge to participants with regard to purchases in the Plan; however, the Trust reserves the right to amend the Plan to include a service charge payable by the participants.
12. All correspondence or questions concerning the Plan should be directed to the Plan Agent:
DST Systems, Inc. 430 W. 7th Street Kansas City, Missouri 64105-1594. |
13. The Plan Agent will at all times act in good faith and use its commercially reasonable best efforts to ensure its full and timely performance of all services to be performed by it under this Plan and to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, but assumes no responsibility and shall not be liable for loss or damage due to any errors unless such errors are caused by the Plan Agents negligence, bad faith or willful misconduct, or that of its employees or agents.
14. These terms and conditions shall be governed by the laws of the State of Delaware, without regard to its conflicts of laws rules.
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To record the adoption of the Plan as of September , 2017 the Trust has caused this Plan to be executed in the name and on behalf of the Trust by a duly authorized officer.
By and on behalf of: |
||
XAI OCTAGON FLOATING RATE INCOME &
CREDIT ALTERNATIVE TRUST |
||
By: |
||
Name: |
||
Title: |
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT (the Agreement), dated as of September , 2017 between XAI Octagon Floating Rate & Alternative Income Term Trust, a Delaware statutory trust (the Trust), and XA Investments LLC, a Delaware limited liability company (the Adviser).
WHEREAS, the Adviser has agreed to furnish investment management and advisory services to the Trust, a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act);
WHEREAS, the Adviser is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the Advisers Act);
WHEREAS, this Agreement has been approved in accordance with the provisions of the 1940 Act, and the Adviser is willing to furnish such services upon the terms and conditions herein set forth; and
NOW, THEREFORE, in consideration of the mutual premises and covenants herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is agreed by and between the parties hereto as follows:
1. Appointment
(a) The Trust hereby appoints the Adviser to act as the investment adviser to the Trust and to furnish the management and investment advisory services described herein, for the period and upon the terms herein set forth.
(b) The Adviser hereby agrees, all as more fully set forth herein, to act as investment adviser to the Trust with respect to the investment of the Trusts assets and to supervise and arrange for the day-to-day operations of the Trust and the purchase of securities for and the sale of securities held in the investment portfolio of the Trust.
(c) The Adviser for all purposes in this Agreement will be deemed to be an independent contractor and, unless otherwise expressly provided or authorized in this Agreement, will have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
2. Duties and Obligations of the Adviser with Respect to Investment of Assets of the Trust.
(a) Subject to the direction and control of the Trusts Board of Trustees, the Adviser shall:
(i) |
act as investment adviser for and supervise and manage the investment and reinvestment of the Trusts assets and, in connection therewith, have complete discretion in purchasing and selling securities and other assets for the Trust and in voting, |
exercising consents and exercising all other rights appertaining to such securities and other assets on behalf of the Trust; |
(ii) |
supervise the investment program of the Trust and the composition of its investment portfolio; and |
(iii) |
arrange, subject to the provisions of Section 5 hereof, for the purchase and sale of securities and other assets held in the investment portfolio of the Trust. |
(b) In performing its duties under this Section 2, the Adviser may delegate some or all of its duties and obligations under this Agreement to one or more investment sub-advisers; provided, however, that any such delegation shall be pursuant to an agreement with terms agreed upon by the Trust and approved in a manner consistent with the 1940 Act and provided, further, that no such delegation shall relieve the Adviser from its duties and obligations of management and supervision of the management of the Trusts assets pursuant to this Agreement and to applicable law.
3. Duties and Obligations of the Adviser with Respect to the Management of the Trust
The Adviser shall perform the management services necessary for the operation of the Trust, including providing the Trust necessary personnel and such other services as the Adviser, subject to review by the Board of Trustees, from time to time shall determine to be necessary or useful to perform its obligations under this Agreement. The Adviser, also on behalf of the Trust, shall conduct relations with administrators, custodians, depositories, transfer agents, pricing agents, investor support service providers, investor relations providers, dividend disbursing agents, other shareholder servicing agents, accountants, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable.
4. Covenants
(a) In the performance of its duties under this Agreement, the Adviser shall at all times conform to, and act in accordance with, any requirements imposed by:
(i) |
the provisions of the 1940 Act and the Advisers Act and all applicable Rules and Regulations of the SEC; |
(ii) |
any other applicable provision of law; |
(iii) |
the provisions of this Agreement and Declaration of Trust and By-Laws of the Trust, as such documents are amended from time to time; |
(iv) |
the investment objective, policies and restrictions of the Trust as set forth in its Registration Statement on Form N-2; and |
2
(v) |
any policies and determinations of the Board of Trustees of the Trust. |
(b) The Adviser will maintain a written code of ethics (the Code of Ethics) pursuant to Rule 17j-1 under the 1940 Act, a copy of which will be provided to the Trust, and will institute procedures reasonably necessary to prevent Access Persons (as defined in Rule 17j-1) from violating its Code of Ethics. The Adviser will follow such Code of Ethics in performing its services under this Agreement.
(c) The Adviser will maintain compliance policies and procedures adopted pursuant to Rule 206(4)-7 under the Advisers Act and Rule 38a-1 under the 1940 Act, a copy of which will be provided to the Trust, and follow such compliance policies and procedures in performing its services under this Agreement; and
(d) The Adviser will cooperate with the chief compliance officer of the Trust in connection with the implementation and operation of the Trusts compliance policies and procedures adopted pursuant to Rule 38a-1 under the 1940 Act, and will prepare necessary reports and provide the Trusts chief compliance officer with access to information reasonably necessary for the Trust to comply with Rule 38a-1.
5. Portfolio Transactions
(a) In the performance of its duties under this Agreement, the Adviser will place orders either directly with the issuer or with any broker or dealer. Subject to the other provisions of this paragraph, in placing orders with brokers and dealers, the Adviser will attempt to obtain the best price and the most favorable execution of its orders. In placing orders, the Adviser will consider the experience and skill of the firms securities traders as well as the firms financial responsibility and administrative efficiency. Consistent with this obligation, the Adviser may select brokers on the basis of the research, statistical and pricing services they provide to the Trust and other clients of the Adviser. Information and research received from such brokers will be in addition to, and not in lieu of, the services required to be performed by the Adviser hereunder. A commission paid to such brokers may be higher than that which another qualified broker would have charged for effecting the same transaction, provided that the Adviser determines in good faith that such commission is reasonable in terms either of the transaction or the overall responsibility of the Adviser to the Trust and its other clients and that the total commissions paid by the Trust will be reasonable in relation to the benefits to the Trust over the long-term. In no instance, however, will the Trusts securities be purchased from or sold to the Adviser, or any affiliated person thereof, except to the extent permitted by the SEC or by applicable law.
(b) At the request of the Board of Trustees of the Trust, the Adviser will identify and provide a written description to the Board of Trustees of soft dollar arrangements that the Adviser maintains with respect to the Trust or with brokers or dealers that execute transactions for the Trust, and of research and other services provided to the Adviser by a broker or dealer (whether prepared by such broker or dealer
3
or by a third party) as a result, in whole or in part, of the direction of Trust transactions to the broker or dealer.
(c) From time to time, the Adviser or brokers or dealers affiliated with it may find themselves in a position to buy for certain of their clients (each an Account) securities which the Advisers investment advisory clients wish to sell, and to sell for certain of their clients securities which other advisory clients wish to buy. Where one of the parties is an advisory client, the Adviser or the affiliated broker or dealer cannot participate in this type of transaction (known as a cross transaction) on behalf of an advisory client and retain commissions from one or both parties to the transaction without the advisory clients consent. This is because in a situation where the Adviser is making the investment decision (as opposed to a brokerage client who makes his own investment decisions), and the Adviser or an affiliate is receiving commissions from both sides of the transaction, there is a potential conflicting division of loyalties and responsibilities on the Advisers part regarding the advisory client. The SEC has adopted a rule under the Advisers Act that permits the Adviser or its affiliates to participate on behalf of an Account in agency cross transactions if the advisory client has given written consent in advance. By execution of this Agreement, the Trust authorizes the Adviser or its affiliates to participate in agency cross transactions involving an Account. The Trust may revoke its consent at any time by written notice to the Adviser.
6. Confidentiality
Each of the Trust and the Adviser acknowledge and agree that pursuant to this Agreement, either party may have access to the other partys confidential and proprietary information and materials concerning or pertaining to the others business. Each party will receive and hold such information in the strictest confidence, and acknowledge, represent, and warrant that it will use its best efforts to protect the confidentiality of this information. Each party agrees that, without the prior written consent of the other party, which approval shall not be unreasonably withheld, they will not use, copy, or divulge to third parties or otherwise use, except in accordance with the terms of this Agreement, any information obtained from or through the other party in connection with this Agreement; provided, however, this covenant shall not apply to information (i) which is in the public domain now or when it becomes in the public domain in the future, other than by reason of a breach of this Agreement, (ii) which has come to either party from a lawful source not bound to maintain the confidentiality of such information, other than from the other party or an affiliate or representative of that party, (iii) disclosures which are required by law, regulatory authority, regulation or legal process or are made to any regulatory agency in the normal course of an examination, audit or investigation involving such party, or (iv) disclosure as reasonably necessary in the course of business to third parties subject to a duty to maintain the confidentiality of the information.
7. Services Not Exclusive
(a) Nothing in this Agreement shall prevent the Adviser or any officer, employee or other affiliate thereof from acting as investment adviser for any other person, firm or corporation, or from engaging in any other lawful activity, and shall not in any
4
way limit or restrict the Adviser or any of its officers, employees or agents from buying, selling or trading any securities for its or their own accounts or for the accounts of others for whom it or they may be acting; provided, however, that the Adviser will undertake no activities which, in its judgment, will adversely affect the performance of its obligations under this Agreement.
(b) The Adviser may manage other investment accounts and funds, including those with investment objectives similar to the Trust. Securities considered as investments for the Trust may also be appropriate for other investment accounts and funds that may be managed by the Adviser. Subject to applicable laws and regulations, the Adviser will attempt to allocate equitably portfolio transactions among the portfolios of its other investment accounts and funds purchasing securities whenever decisions are made to purchase or sell securities by the Trust and one or more of such other accounts or funds simultaneously. In making such allocations, the main factors to be considered by the Adviser will be the respective investment objectives of the Trust and such other accounts and funds, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment by the Trust and such other accounts and funds, the size of investment commitments generally held by the Trust and such accounts and funds, and the opinions of the persons responsible for recommending investments to the Trust and such other accounts and funds.
8. Books and Records
(a) The Adviser undertakes and agrees to maintain or cause others to maintain, in the form and for the period required by Rule 31a-2 under the 1940 Act, all records relating to the Trusts investments that are required to be maintained by the Trust pursuant to the 1940 Act with respect to the Advisers responsibilities under this Agreement for the Trust, and which are not otherwise maintained by the administrator, fund accounting agent, custodian or other service providers to the Trust.
(b) In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Adviser hereby agrees that all records which it maintains for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust any such records upon the Trusts request.
9. Custody
Nothing in this Agreement will require the Adviser to take or receive physical possession of cash, securities, or other investments of the Trust.
10. Expenses
(a) During the term of this Agreement, the Adviser will bear all costs and expenses of its employees and any overhead incurred in connection with its duties hereunder, except as provided pursuant to paragraph (c) of this Section 10, and shall bear the costs of any salaries or trustees fees of any officers or trustees of the Trust who are affiliated persons (as defined in the 1940 Act) of the Adviser.
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(b) The Trust will bear all other costs, fees and expenses of its operations and transactions, including those relating to: (1) organization; (2) calculation of the Trusts net asset value (including the cost and expenses of any independent valuation firm, agent or other provider); (3) expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for the Trust and in monitoring the Trusts investments; (4) interest payable on indebtedness and dividends and distributions on preferred shares, as applicable, if any, incurred to finance the Trusts investments; (5) offerings of the Trusts common shares and other securities (including, all fees, costs and expenses related thereto); (7) fees payable to third parties, including agents, legal counsel, consultants or other advisors, relating to, or associated with, evaluating and making investments; (8) administrator, transfer agent and custodian fees; (9) federal and state registration fees; (10) all costs of registration and listing the Trusts shares on any securities exchange; (11) federal, state and local taxes; (12) independent trustees fees and expenses; (13) costs of preparing and filing reports or other documents required by governmental bodies (including the SEC), including printing costs; (14) costs of any reports, proxy statements or other notices to shareholders, including printing costs; (15) insurance premiums for fidelity bond and other insurance coverage, including the Trusts allocable portion of the fidelity bond, trustees and officers errors and omissions liability insurance, including independent trustees liability insurance, and any other insurance premium; (16) direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; (17) brokerage commissions, assignment fees and other costs in connection with the purchase, holding or sale of securities and other investment instruments (including, without limitation, security settlement costs; (18) expenses incidental to holding meetings of the Trusts shareholders, including proxy solicitations therefor; (19) unusual, non-recurring or extraordinary expenses as may arise, including those relating to actions, suits or proceedings to which the Trust is a party and legal obligations that the Trust may have to indemnify the Trusts directors, officers and/or employees or agents with respect to these actions, suits or proceedings; and (20) all other expenses incurred by the Trust in connection with administering the Trusts business.
(c) The Trust may, if and to the extent approved by the Board of Trustees, including a majority of the Trustees who are not parties to this Agreement or interested persons of any party to this Agreement, from time to time reimburse the Adviser for certain costs and expenses incurred by the Adviser in connection with the management of the Trusts assets, which may include the Trusts allocable share of portfolio management and trading software costs, research expenses (including modeling and analytic software costs), diligence expenses and out-of-pocket travel costs incurred in connection with the management of the Trusts assets. For the avoidance of doubt, in no event shall expenses associated with the general overhead of the Adviser be reimbursed by the Trust.
11. Compensation of the Adviser
(a) The Trust agrees to pay to the Adviser and the Adviser agrees to accept as full compensation for all services rendered by the Adviser as such, a monthly fee in arrears at an annual rate equal to 1.70% of the Trusts average daily Managed Assets. For any period less than a month during which this Agreement is in effect, the fee shall be
6
prorated according to the proportion which such period bears to a full month of 28, 29, 30 or 31 days, as the case may be.
(b) Managed Assets means the total assets of the Trust, including the assets attributable to the proceeds from financial leverage (including through the issuance of preferred shares or the issuance senior securities representing indebtedness), minus liabilities, other than liabilities related to any financial leverage.
(c) For purposes of this Agreement, the total assets of the Trust shall be calculated pursuant to the procedures adopted by resolutions of the Trustees of the Trust for calculating the value of the Trusts assets, and on days on which the value of the Trusts assets are not so determined, the asset value computation to be used will be as determined on the immediately preceding day on which the value of the Trusts assets was determined.
(d) The Adviser may elect from time to time, in its sole discretion, to waive its right to reimbursement or its receipt of the advisory fee.
12. Representations and Warranties
(a) The Trust represents and covenants to the Adviser as follows:
(i) |
The Trust is duly organized and validly existing under the laws of the State of Delaware with the power to own and possess its assets. |
(ii) |
The execution, delivery and performance by the Trust of this Agreement are within the Trusts powers and have been duly authorized by all necessary actions of the Board of Trustees, and the execution, delivery and performance of this Agreement by the parties to this Agreement do not contravene or constitute a default under (i) any provision of applicable law, rule or regulation, (ii) the Trusts governing instruments, or (iii) any agreement, judgment, injunction, order, decree or other instruments binding upon the Trust. |
(iii) |
The Trust is, or will be prior to commencing operations, registered as a closed-end management investment company under the 1940 Act and the Trusts shares are, or will be prior to commencing operations, registered under the Securities Act of 1933, as amended, and under any applicable state securities laws, or exempt from such registration. |
(b) The Adviser represents and covenants to the Trust as follows:
(i) |
The Adviser is duly organized and validly existing under the laws of the State of Delaware. |
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(ii) |
The execution, delivery and performance by the Adviser of this Agreement are within the Advisers powers and have been duly authorized by all necessary action, and no action by or in respect of, or filing with, any governmental body, agency or official is required on the part of the Adviser for the execution, delivery and performance of this Agreement by the parties to this Agreement, and the execution, delivery and performance of this Agreement by the parties to this Agreement do not contravene or constitute a default under (i) any provision of applicable law, rule or regulation, (ii) the Advisers governing instruments, or (iii) any agreement, judgment, injunction, order, decree or other instruments binding upon the Adviser. |
(iii) |
The Adviser is not prohibited by the 1940 Act or the Advisers Act from performing the services contemplated by this Agreement. |
13. Limitation on Liability
The Adviser will not be liable for any error of judgment or mistake of law or for any loss suffered by Adviser or by the Trust in connection with the performance of this Agreement, except a loss resulting from a breach of a fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its duties and obligations under this Agreement (as the same shall be determined in accordance with the 1940 Act and any interpretations or guidance by the SEC or its staff thereunder).
14. Indemnification
The Trust shall indemnify, defend and protect the Adviser, its members and their respective officers, managers, partners, agents, employees, controlling persons, members and any other person affiliated with any of them (collectively, the Indemnified Parties) (each of whom shall be deemed a third party beneficiary hereof) and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) incurred by the Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Trust or its security holders) arising out of or otherwise based upon the performance of any of the Advisers duties or obligations under this Agreement or otherwise as an investment adviser of the Trust. Notwithstanding the foregoing provisions of this Section 12 to the contrary, nothing contained herein shall protect or be deemed to protect the Indemnified Parties against or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect of, any liability to the Trust or its security holders to which the Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any Indemnified Partys duties or by reason of the reckless disregard of the Advisers duties and obligations under this
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Agreement (as the same shall be determined in accordance with the 1940 Act and any interpretations or guidance by the SEC or its staff thereunder).
15. Duration and Termination
(a) This Agreement shall become effective as of the date hereof and, unless sooner terminated with respect to the Trust as provided herein, shall continue in effect for a period of two years. Thereafter, if not terminated, this Agreement shall continue in effect with respect to the Trust for successive periods of 12 months, provided such continuance is specifically approved at least annually by both:
(i) |
the vote of a majority of the Trusts Board of Trustees or the vote of a majority of the outstanding voting securities of the Trust at the time outstanding and entitled to vote, and |
(ii) |
the vote of a majority of the Trustees who are not parties to this Agreement or interested persons of any party to this Agreement, cast in person at a meeting called for the purpose of voting on such approval. |
(b) Notwithstanding the foregoing, this Agreement may be terminated by the Trust at any time, without the payment of any penalty, upon giving the Adviser 60 days notice (which notice may be waived by the Adviser), provided that such termination by the Trust shall be directed or approved by the vote of a majority of the Trustees of the Trust in office at the time or by the vote of the holders of a majority of the voting securities of the Trust at the time outstanding and entitled to vote, or by the Adviser on 60 days written notice to the Trust (which notice may be waived by the Trust).
(c) This Agreement will immediately terminate in the event of its assignment.
(d) As used in this Agreement, the terms majority of the outstanding voting securities, interested person and assignment shall have the same meanings of such terms in the 1940 Act.
(e) The terms of Sections 6, 8, 13 and 14, 18, 19 and 20 of this Agreement shall survive the termination of this Agreement.
16. Notices
Any notice under this Agreement shall be in writing to the other party at such address as the other party may designate from time to time for the receipt of such notice and shall be deemed to be received on the earlier of the date actually received or on the fourth day after the postmark if such notice is mailed first class postage prepaid.
17. Amendment of this Agreement
No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which
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enforcement of the change, waiver, discharge or termination is sought. Any amendment of this Agreement shall be subject to the 1940 Act.
18. Governing Law
This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware for contracts to be performed entirely therein without reference to choice of law principles thereof and in accordance with the applicable provisions of the 1940 Act.
19. Use of the Name
The Adviser has consented to the use by the Trust of the name or identifying word XA, XAI or XA Investments in the name of the Trust. Such consent is conditioned upon the employment of the Adviser as the investment adviser to the Trust. The name or identifying word XA, XAI or XA Investments may be used from time to time in other connections and for other purposes by the Adviser and any of its affiliates. The Adviser may require the Trust to cease using XA, XAI or XA Investments in the name of the Trust, if the Trust ceases to employ, for any reason, the Adviser, any successor thereto or any affiliate thereof as investment adviser of the Trust. If so required by the Adviser, the Trust will cease using XA, XAI or XA Investments in its name as promptly as practicable and make all reasonable efforts to remove XA, XAI or XA Investments from its name.
20. Miscellaneous
(a) The captions 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.
(b) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
(c) Nothing contained in this Agreement will be deemed to require the Trust to take any action contrary to the Trusts Amended and Restated Agreement and Declaration of Trust or By-laws, as they may be amended and/or restated from time to time, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust.
(d) This Agreement shall be binding on, and shall inure to the benefit of the parties hereto and their respective successors.
(f) This Agreement may be executed in counterparts by the parties hereto, each of which shall constitute an original counterpart, and all of which, together, shall constitute one Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers, all as of the day and the year first above written.
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST | ||
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XA INVESTMENTS LLC |
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By: |
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Title: |
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INVESTMENT SUB-ADVISORY AGREEMENT
INVESTMENT SUB-ADVISORY AGREEMENT (the Agreement), dated as of September , 2017 (the Effective Date) among XAI Octagon Floating Rate & Alternative Income Term Trust, a Delaware statutory trust (the Trust), XA Investments LLC, a Delaware limited liability company (the Adviser), and Octagon Credit Investors, LLC, a Delaware limited liability company (the Sub-Adviser).
WHEREAS, the Adviser has agreed to furnish investment management and advisory services to the Trust, a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act);
WHEREAS, the investment advisory agreement between the Adviser and the Trust dated as of September , 2017 (such agreement or the most recent successor agreement between such parties relating to advisory services to the Trust is referred to herein as the Investment Advisory Agreement) contemplates that the Adviser may sub-contract investment advisory services with respect to the Trust to a sub-adviser(s) pursuant to a sub-advisory agreement(s) agreeable to the Trust and approved in accordance with the provisions of the 1940 Act;
WHEREAS, the Adviser wishes to retain the Sub-Adviser to provide certain sub-advisory services;
WHEREAS, the Sub-Adviser is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the Advisers Act); and
WHEREAS, this Agreement has been approved in accordance with the provisions of the 1940 Act, and the Sub-Adviser is willing to furnish such services upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual premises and covenants herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is agreed by and between the parties hereto as follows:
1. Appointment
(a) The Adviser hereby appoints the Sub-Adviser to act as the investment sub-adviser to the Trust and to furnish the services described herein, for the period and upon the terms herein set forth.
(b) The Sub-Adviser hereby agrees, all as more fully set forth herein, to act as investment sub-adviser to the Trust and to furnish the services described below with respect to the investment of the Trusts assets and the purchase of securities for and the sale of securities held in the investment portfolio of the Trust.
(c) The Sub-Adviser for all purposes in this Agreement will be deemed to be an independent contractor and, unless otherwise expressly provided or authorized in this Agreement, will have no authority to act for or represent the Adviser or the Trust in any way or otherwise be deemed an agent of the Adviser or the Trust.
2. |
Duties and Obligations of the Sub-Adviser with Respect to Investment of Assets of the Trust |
(a) Subject to the oversight and supervision of the Adviser and direction and control of the Trusts Board of Trustees, the Sub-Adviser will act as sub-adviser for the Trust and perform one or more of the following services at the request of the Adviser in connection with the investment and reinvestment of the Trusts assets:
(i) |
managing the investment and reinvestment of the assets of the Trust in accordance with the investment policies and guidelines of the Trust; |
(ii) |
subject to the provisions of Section 4 hereof, purchasing and selling securities and other assets for the Trust and placing orders for purchases and sales of assets of the Trust; |
(iii) |
providing investment research and credit analysis concerning the assets of the Trust; |
(iv) |
monitoring on a daily basis the investment activities and portfolio holdings relating to the Trust; |
(v) |
voting proxies relating to the Trusts portfolio securities in accordance with the proxy voting policies and procedures of the Sub-Adviser; and |
(vi) |
settlement of transactions and completing corporate actions. |
(b) At the request of the Adviser, the Sub-Adviser will also, subject to the oversight and supervision of the Adviser and the direction and control of the Trusts Board of Trustees, consult with the Adviser as to the overall management of the assets of the Trust and the investment policies and practices of the Trust, including (but not limited to) the use by the Trust of financial leverage and matters relating to such financial leverage (e.g., form, amount and costs) and the utilization by the Trust of any interest rate or other hedging or risk management transactions in connection therewith, and will perform any of the services described in the Investment Advisory Agreement.
(c) In addition, the Sub-Adviser will keep the Trust and the Adviser informed of developments relating to the Sub-Adviser or the Trusts investments materially affecting the Trust and shall, upon request, furnish to the Adviser and the Trust all information relevant to such developments.
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(d) The Sub-Adviser will periodically communicate to the Adviser or other services providers of the Trust, at such times as the Adviser may request, information concerning the purchase and sale of securities for the Trust and such other information as the Adviser may reasonably require for purposes of fulfilling its obligations to the Trust under the Investment Advisory Agreement.
(e) In addition to the investment policies and guidelines of the Trust, the Adviser may from time to time communicate to the Sub-Adviser instructions (the Instructions) in writing that limit or supplement the investment policies and guidelines and are subject to approval by the Sub-Adviser, which approval shall not be unreasonably withheld. Neither the investment policies and guidelines nor the Instructions shall require the Sub-Adviser to obtain capabilities or resources beyond those it possesses as of the Effective Date. The Adviser shall promptly notify the Sub-Adviser, in writing, of any change in the investment policies and guidelines that is made for any reason, including but not limited to a change by the Adviser, the Trust or in any applicable law or regulation. The Adviser acknowledges that the Sub-Adviser may be required to terminate delivery of certain data or services used in managing the Trust in the event the Sub-Adviser is no longer able to obtain such data or services.
(f) Nothing in this Agreement is deemed to impose on the Sub-Adviser responsibility for the preparation of the Trusts financial statements or the Trusts other financial and regulatory filing and reporting obligations, provided that the Sub-Adviser shall provide sub-certifications in the form reasonably requested by the Fund relating to the Sub-Advisers services under this Agreement to assist the Fund in complying with the provisions of the Sarbanes-Oxley Act of 2002.
3. |
Covenants |
(a) In the performance of its duties under this Agreement, the Sub-Adviser shall at all times conform to, and act in accordance with, any requirements imposed by:
(i) |
the provisions of the 1940 Act and the Advisers Act and all applicable Rules and Regulations of the SEC; |
(ii) |
any other applicable provision of law; |
(iii) |
the provisions of this Agreement and Declaration of Trust and By-Laws of the Trust, as such documents are amended from time to time; |
(iv) |
the investment objective, policies and restrictions of the Trust as set forth in its Registration Statement on Form N-2; and |
(v) |
any policies and determinations of the Board of Trustees of the Trust. |
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(b) The Sub-Adviser will not consult with any other sub-adviser of the Trust or any other sub-adviser to a fund under common control with the Trust concerning transactions of the Trust in securities or other assets.
(c) The Sub-Adviser will maintain a written code of ethics (the Code of Ethics) pursuant to Rule 17j-1 under the 1940 Act, a copy of which will be provided to the Trust and the Adviser, and will institute procedures reasonably necessary to prevent Access Persons (as defined in Rule 17j-1) from violating its Code of Ethics. The Sub-Adviser will follow such Code of Ethics in performing its services under this Agreement.
(d) The Sub-Adviser will maintain compliance policies and procedures adopted pursuant to Rule 206(4)-7 under the Advisers Act and Rule 38a-1 under the 1940 Act, a copy of which will be provided to the Trust and the Adviser, and follow such compliance policies and procedures in performing its services under this Agreement; and
(e) The Sub-Adviser will cooperate with the chief compliance officer of the Trust in connection with the implementation and operation of the Trusts compliance policies and procedures adopted pursuant to Rule 38a-1 under the 1940 Act, and will prepare necessary reports and provide the Trusts chief compliance officer with access to information reasonably necessary for the Trust to comply with Rule 38a-1.
4. |
Portfolio Transactions |
(a) In the performance of its duties under this Agreement, the Sub-Adviser will place orders either directly with the issuer or with any broker or dealer. Subject to the other provisions of this paragraph, in placing orders with brokers and dealers, the Sub-Adviser will attempt to obtain the best price and the most favorable execution of its orders. In placing orders, the Sub-Adviser will consider the experience and skill of the firms securities traders as well as the firms financial responsibility and administrative efficiency. Consistent with this obligation, the Sub-Adviser may select brokers on the basis of the research, statistical and pricing services they provide to the Trust and other clients of the Sub-Adviser. Information and research received from such brokers will be in addition to, and not in lieu of, the services required to be performed by the Sub-Adviser hereunder. A commission paid to such brokers may be higher than that which another qualified broker would have charged for effecting the same transaction, provided that the Sub-Adviser determines in good faith that such commission is reasonable in terms either of the transaction or the overall responsibility of the Sub-Adviser to the Trust and its other clients and that the total commissions paid by the Trust will be reasonable in relation to the benefits to the Trust over the long-term. In no instance, however, will the Trusts securities be purchased from or sold to the Sub-Adviser, or any affiliated person thereof, except to the extent permitted by the SEC or by applicable law.
(b) At the request of the Adviser or the Trust, the Sub-Adviser will identify and provide a written description to the Adviser and the Board of Trustees of the Trust of soft dollar arrangements that the Sub-Adviser maintains with respect to the Trust or with brokers or dealers that execute transactions for the Trust, and of research and other services provided to the Sub-Adviser by a broker or dealer (whether prepared by such
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broker or dealer or by a third party) as a result, in whole or in part, of the direction of Trust transactions to the broker or dealer.
(c) From time to time, the Sub-Adviser or brokers or dealers affiliated with it may find themselves in a position to buy for certain of their clients (each an Account) securities which the Sub-Advisers investment advisory clients wish to sell, and to sell for certain of their clients securities which advisory clients wish to buy. Where one of the parties is an advisory client, the Sub-Adviser or the affiliated broker or dealer cannot participate in this type of transaction (known as a cross transaction) on behalf of an advisory client and retain commissions from one or both parties to the transaction without the advisory clients consent. This is because in a situation where the Sub-Adviser is making the investment decision (as opposed to a brokerage client who makes his own investment decisions), and the Sub-Adviser or an affiliate is receiving commissions from both sides of the transaction, there is a potential conflicting division of loyalties and responsibilities on the Sub-Advisers part regarding the advisory client. However, the SEC has adopted a rule under the Advisers Act that permits the Sub-Adviser or its affiliates to participate on behalf of an Account in agency cross transactions if the advisory client has given written consent in advance. Therefore, by execution of this Agreement, the Trust authorizes the Sub-Adviser or its affiliates to participate in agency cross transactions involving an Account. The Trust may revoke its consent at any time by written notice to the Sub-Adviser.
5. |
Confidentiality |
Each of the Trust, the Adviser and the Sub-Adviser acknowledge and agree that in satisfying its respective obligations under and performing services in connection with this Agreement, any party may have access to another partys confidential and proprietary information and materials concerning or pertaining to the others business (confidential information). Each party will receive and hold such information in the strictest confidence, and acknowledge, represent, and warrant that it will use its best efforts to protect the confidentiality of this information to the same degree of care as it would its own confidential information. Each party agrees that, without the prior written consent of the other party, which approval shall not be unreasonably withheld, such party will not use, copy, or divulge to third parties or otherwise use, except in accordance with the terms of this Agreement, any confidential information of another party without the prior written consent of such other party; provided, however, this covenant shall not apply to (i) information which is in the public domain now or when it becomes in the public domain in the future, other than by reason of a breach of this Agreement, (ii) information which has come to a party from a lawful source not bound to maintain the confidentiality of such information, other than from any other party or an affiliate or representative of that party, (iii) information which is independently developed without the use of confidential information, (iv) disclosures which are required by law, regulatory authority, regulation or legal process or are made to any regulatory agency in the normal course of an examination, audit or investigation involving such party, or (v) disclosure as reasonably necessary in the course of business to third parties subject to a duty to maintain the confidentiality of the information. Notwithstanding the foregoing, the Sub-Adviser may disclose information it receives from or on behalf of the Trust or the Adviser to officers
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and employees of the Sub-Adviser or any of its affiliates in the course of providing the services under this Agreement and the Sub-Adviser may disclose the Trusts TIN information to third parties as required to perform the Sub-Advisers services under this Agreement.
6. |
Services Not Exclusive |
(a) Nothing in this Agreement shall prevent the Sub-Adviser or any officer, employee or other affiliate thereof from acting as investment adviser for any other person, firm or corporation, or from engaging in any other lawful activity, and shall not in any way limit or restrict the Sub-Adviser or any of its officers, employees or agents from buying, selling or trading any securities for its or their own accounts or for the accounts of others for whom it or they may be acting; provided, however, that the Sub-Adviser will undertake no activities which, in its judgment, will adversely affect the performance of its obligations under this Agreement.
(b) The Sub Adviser currently manages, and may in the future manage, other investment accounts and funds, including those with investment objectives similar to the Trust. Securities considered as investments for the Trust may also be appropriate for other investment accounts and funds that may be managed by the Sub-Adviser. Subject to applicable laws and regulations, the Sub-Adviser will attempt to allocate equitably portfolio transactions among the portfolios of its other investment accounts and funds purchasing securities whenever decisions are made to purchase or sell securities by the Trust and one or more of such other accounts or funds over time. In making such allocations, the main factors to be considered by the Sub-Adviser will be the respective investment objectives of the Trust and such other accounts and funds, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment by the Trust and such other accounts and funds, the size of investment commitments generally held by the Trust and such accounts and funds, and the opinions of the persons responsible for recommending investments to the Trust and such other accounts and funds.
7. |
Books and Records |
(a) The Sub-Adviser undertakes and agrees to maintain or cause others to maintain, in the form and for the period required by Rule 31a-2 under the 1940 Act, all records relating to the Trusts investments that are required to be maintained by the Trust pursuant to the 1940 Act with respect to the Sub-Advisers responsibilities under this Agreement for the Trust, and which are not otherwise maintained by the administrator, fund accounting agent, custodian or other service providers to the Trust.
(b) In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Sub-Adviser hereby agrees that all records which it maintains for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust any such records upon the Trusts request, except for any software or other intellectual property that is proprietary to, or owned or licensed by, the Sub-Adviser or any of its affiliates, which shall remain the property of the Sub-Adviser. Notwithstanding the foregoing, the
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Sub-Adviser shall retain those original records or copies of records in order to comply with the Advisers Act record keeping requirement, applicable law and its own internal policies.
(c) Each of the Adviser and the Trust shall own, have custody of and maintain its general corporate accounts and records. At reasonable times and upon reasonable notice, the Trust shall provide the Sub-Adviser with access to all books, records, accounts, facilities, and personnel necessary or appropriate for the performance of the Sub-Adviser obligations under this Agreement.
8. |
Custody |
Nothing in this Agreement will require the Sub-Adviser to take or receive physical possession of cash, securities, or other investments of the Trust. The Trust shall select, engage and maintain at the Trusts expense one or more custodians meeting the requirements of Section 17(f) of the 1940 and the rules, regulations and interpretations thereunder (each a Custodian) to serve as Custodian(s) of the Trust assets. The Adviser shall provide the Sub-Adviser, in writing, the identity of each Custodian, any change in a Custodian and all other information regarding the Custodian(s) required for the Sub-Adviser to carry out its duties under this Agreement. The Adviser shall notify each Custodian of the appointment of the Sub-Adviser and of the authority of the Sub-Adviser to effect investments with respect to the Trust assets. All transactions authorized by this Agreement are made by payment to or delivery by the Custodian(s). The Sub-Adviser shall have no rights or responsibilities, including to direct payment or move cash or assets of the Trust, that would be defined as taking custody under the Advisers Act. In connection with the Trusts custody agreement(s), the Adviser and the Trust will ensure that no such rights are given to the Sub-Adviser. The Trust and the Adviser will ensure that the Sub-Adviser may use the Depositary Trust Companys Institutional Delivery System for trade confirmation and settlement.
9. |
Expenses |
(a) During the term of this Agreement, the Sub-Adviser will bear all costs and expenses of its employees and any overhead incurred in connection with its duties hereunder, except as provided pursuant to paragraph (d) of this Section 9, and shall bear the costs of any salaries or trustees fees of any officers or trustees of the Trust who are affiliated persons (as defined in the 1940 Act) of the Sub-Adviser.
(b) The Sub-Adviser shall not be responsible for any expenses of the Adviser or the Trust not specifically set forth in this Section 9 or otherwise in any written agreement between the Sub-Adviser and the Trust or the Adviser, as the case may be.
(c) The Trust will bear all other costs, fees and expenses of its operations and transactions, including those relating to: (1) organization; (2) calculation of the Trusts net asset value (including the cost and expenses of any independent valuation firm, agent or other provider); (3) expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for the Trust and in monitoring
7
the Trusts investments; (4) interest payable on indebtedness and dividends and distributions on preferred shares, as applicable, if any, incurred to finance the Trusts investments; (5) offerings of the Trusts common shares and other securities (including, all fees, costs and expenses related thereto); (7) fees payable to third parties, including agents, legal counsel, consultants or other advisors, relating to, or associated with, evaluating and making investments; (8) administrator, transfer agent and custodian fees; (9) federal and state registration fees; (10) all costs of registration and listing the Trusts shares on any securities exchange; (11) federal, state and local taxes; (12) independent trustees fees and expenses; (13) costs of preparing and filing reports or other documents required by governmental bodies (including the SEC), including printing costs; (14) costs of any reports, proxy statements or other notices to shareholders, including printing costs; (15) insurance premiums for fidelity bond and other insurance coverage, including the Trusts allocable portion of the fidelity bond, trustees and officers errors and omissions liability insurance, including independent trustees liability insurance, and any other insurance premium; (16) direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; (17) brokerage commissions, assignment fees and other costs in connection with the purchase, holding or sale of securities and other investment instruments (including, without limitation, security settlement costs; (18) expenses incidental to holding meetings of the Trusts shareholders, including proxy solicitations therefor; (19) unusual, non-recurring or extraordinary expenses as may arise, including those relating to actions, suits or proceedings to which the Trust is a party and legal obligations that the Trust may have to indemnify the Trusts directors, officers and/or employees or agents with respect to these actions, suits or proceedings; and (20) all other expenses incurred by the Trust in connection with administering the Trusts business.
(d) The Trust may, if and to the extent approved by the Board of Trustees, including a majority of the Trustees who are not parties to this Agreement or interested persons of any party to this Agreement, from time to time reimburse the Sub-Adviser for certain costs and expenses incurred by the Sub-Adviser in connection with the management of the Trusts assets, which may include the Trusts allocable share of portfolio management and trading software costs, research expenses (including modeling and analytic software costs), diligence expenses and out-of-pocket travel costs incurred in connection with the management of the Trusts assets. For the avoidance of doubt, in no event shall expenses associated with the general overhead of the Sub-Adviser be reimbursed by the Trust.
10. |
Compensation of the Sub-Adviser |
(a) The Adviser agrees to pay to the Sub-Adviser, and the Sub-Adviser agrees to accept as full compensation for all services rendered by the Sub-Adviser under this Agreement, a monthly fee in arrears in an amount equal to the Specified Percentage (as defined below) of the advisory fee payable to the Adviser from the Trust.
(b) The Specified Percentage shall equal the blended percentage computed by applying the following percentages to the total average daily Managed Assets of all Eligible Funds (as defined below):
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Eligible Funds |
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Average Daily Managed Assets |
Percentage | |||
First $500 million |
60% | |||
Over $500 million |
50% |
Eligible Funds means the Trust and any other investment company registered under the 1940 Act for which the Adviser (or an Affiliate of the Adviser) serves as investment adviser and the Sub-Adviser (or an Affiliate of the Sub-Adviser) serves as investment sub-adviser; provided that in the case of any Eligible Funds which are part of a master-feeder structure, only the assets of the master fund will be counted.
By way of example, and for the avoidance of doubt, in a theoretical scenario in which the Trust had Managed Assets of $300 million and there was one other Eligible Fund with Managed Assets of $400 million, total Managed Assets of all Eligible Funds would be $700 million, resulting in a Specified Percentage of 57.14%. The fee payable by the Adviser to the Sub-Adviser with respect to the Trust pursuant to this Agreement would equal 57.14% of the net advisory fee payable to the Adviser from the Trust.
(c) For any period less than a month during which this Agreement is in effect, the fee shall be prorated according to the proportion which such period bears to a full month of 28, 29, 30 or 31 days, as the case may be.
(d) Managed Assets means the total assets of the Trust or any other Eligible Fund, including the assets attributable to the proceeds from financial leverage (including through the issuance of preferred shares or the issuance senior securities representing indebtedness), minus liabilities, other than liabilities related to any financial leverage.
(e) For purposes of this Agreement, the total assets of the Trust or any Eligible Fund shall be calculated pursuant to the procedures adopted by resolutions of the board of trustees or directors thereof for calculating the value of the Trusts or any other Eligible Funds assets, and on days on which the value of the Trusts or any other Eligible Funds assets are not so determined, the asset value computation to be used will be as determined on the immediately preceding day on which the value of the Trusts or such other Eligible Funds assets was determined.
(f) The Sub-Adviser may elect from time to time, in its sole discretion, to waive its right to receipt of all or a portion of the sub-advisory fee.
11. |
Representations and Warranties |
(a) The Trust represents and covenants to the Sub-Adviser as follows:
(i) |
The Trust is duly organized and validly existing under the laws of the State of Delaware with the power to own and possess its assets. |
(ii) |
The execution, delivery and performance by the Trust of this Agreement are within the Trusts powers and have been duly authorized by all necessary actions of the Board of Trustees, and |
9
the execution, delivery and performance of this Agreement by the parties to this Agreement do not contravene or constitute a default under (1) any provision of applicable law, rule or regulation, (2) the Trusts governing instruments, or (3) any agreement, judgment, injunction, order, decree or other instruments binding upon the Trust. |
(iii) |
The Trust is, or will be prior to commencing operations, registered as a closed-end management investment company under the 1940 Act and the Trusts shares are, or will be prior to commencing operations, registered under the Securities Act of 1933, as amended, and under any applicable state securities laws, or exempt from such registration. |
(iv) |
Prior to the Sub-Adviser commencing services under this Agreement, the Trust will have legal title to the assets in the Trust and no restrictions shall exist as to the ownership or transfer of such assets unless specifically set forth in this Agreement. |
(b) The Adviser represents and covenants to the Sub-Adviser as follows:
(i) |
The Adviser is duly organized and validly existing under the laws of the State of Delaware. |
(ii) |
The execution, delivery and performance by the Adviser of this Agreement are within the Advisers powers and have been duly authorized by all necessary action, and no action by or in respect of, or filing with, any governmental body, agency or official is required on the part of the Adviser for the execution, delivery and performance of this Agreement by the parties to this Agreement, and the execution, delivery and performance of this Agreement by the parties to this Agreement do not contravene or constitute a default under (1) any provision of applicable law, rule or regulation, (2) the Advisers governing instruments, or (3) any agreement, judgment, injunction, order, decree or other instruments binding upon the Adviser. |
(iii) |
This Agreement constitutes a valid and binding obligation of the Adviser, enforceable against the Adviser in accordance with its terms, except to the extent such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, or similar laws affecting the rights of creditors generally and by general equity principles. |
(iv) |
The Adviser is not prohibited by the 1940 Act or the Advisers Act from serving as investment adviser to the Trust. |
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(v) |
The Adviser hereby acknowledges receipt of Sub-Advisers Form ADV, Part 2 before, or at the time of, signing this Agreement. |
(c) The Sub-Adviser represents and covenants to the Adviser and the Trust as follows:
(i) |
The Sub-Adviser is duly organized and validly existing under the laws of the State of Delaware. |
(ii) |
The execution, delivery and performance by the Sub-Adviser of this Agreement are within the Sub-Advisers powers and have been duly authorized by all necessary action, and no action by or in respect of, or filing with, any governmental body, agency or official is required on the part of the Sub-Adviser for the execution, delivery and performance of this Agreement by the parties to this Agreement, and the execution, delivery and performance of this Agreement by the parties to this Agreement do not contravene or constitute a default under (1) any provision of applicable law, rule or regulation, (2) the Sub-Advisers governing instruments, or (3) any agreement, judgment, injunction, order, decree or other instruments binding upon the Sub-Adviser. |
(iii) |
This Agreement constitutes a valid and binding obligation of the Sub-Adviser, enforceable against the Sub-Adviser in accordance with its terms, except to the extent such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, or similar laws affecting the rights of creditors generally and by general equity principles. |
(iv) |
The Sub-Adviser is not prohibited by the 1940 Act or the Advisers Act from performing the services contemplated by this Agreement. |
12. |
Certain Information |
The Adviser shall promptly notify the Sub-Adviser, and the Sub-Adviser shall promptly notify the Trust and the Adviser in writing of the occurrence of any of the following events:
(a) such party failing to be registered as an investment adviser under the Advisers Act;
(b) such party having been served or otherwise have notice of any action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, public board or body, involving the affairs of the Trust;
(c) the occurrence of any change in control of such party or any parent of such party within the meaning of the 1940 Act; or
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(d) the occurrence of any material adverse change in the business or financial position of such party.
13. |
Limitation on Liability |
The Sub-Adviser will not be liable for any error of judgment or mistake of law or for any loss suffered by Sub-Adviser, the Adviser or by the Trust in connection with the performance of this Agreement, except a loss resulting from a breach of a fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its duties and obligations under this Agreement (as the same shall be determined in accordance with the 1940 Act and any interpretations or guidance by the SEC or its staff thereunder). Nothing herein shall constitute a waiver or restriction of any partys rights under applicable federal or state securities laws.
14. |
Indemnification |
The Trust shall indemnify, defend and protect the Sub-Adviser, its members and their respective officers, managers, partners, parent, corporate group affiliates, agents, employees, controlling persons, members, and any other person affiliated with any of them (collectively, the Indemnified Parties) (each of whom shall be deemed a third party beneficiary hereof) and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) incurred by the Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Trust or its security holders) arising out of or otherwise based upon the performance of any of the Sub-Advisers duties or obligations under this Agreement or otherwise as an investment adviser of the Trust. Notwithstanding the foregoing provisions of this Section 14 to the contrary, nothing contained herein shall protect or be deemed to protect the Indemnified Parties against or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect of, any liability to the Trust or its security holders to which the Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any Indemnified Partys duties or by reason of the reckless disregard of the Sub-Advisers duties and obligations under this Agreement (as the same shall be determined in accordance with the 1940 Act and any interpretations or guidance by the SEC or its staff thereunder).
15. |
Duration and Termination |
(a) This Agreement shall become effective as of the Effective Date and, unless sooner terminated with respect to the Trust as provided herein, shall continue in effect for a period of two years. Thereafter, if not terminated, this Agreement shall continue in effect with respect to the Trust for successive periods of 12 months, provided such continuance is specifically approved at least annually by both:
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(i) |
the vote of a majority of the Trusts Board of Trustees or the vote of a majority of the outstanding voting securities of the Trust at the time outstanding and entitled to vote, and |
(ii) |
the vote of a majority of the Trustees who are not parties to this Agreement or interested persons of any party to this Agreement, cast in person at a meeting called for the purpose of voting on such approval. |
(b) Notwithstanding the foregoing, this Agreement may be terminated by (i) the Adviser or the Trust at any time, without the payment of any penalty, upon giving the Sub-Adviser 60 days notice (which notice may be waived by the Sub-Adviser), provided that such termination by the Trust shall be directed or approved by the vote of a majority of the Trustees of the Trust in office at the time or by the vote of the holders of a majority of the voting securities of the Trust at the time outstanding and entitled to vote, or (ii) the Sub-Adviser on 60 days written notice to the Trust and the Adviser (which notice may be waived by the Trust or the Adviser on behalf of both the Trust and the Adviser).
(c) This Agreement will immediately terminate in the event of its assignment and will immediately terminate upon any termination of the Investment Advisory Agreement between the Trust and the Adviser.
(d) As used in this Agreement, the terms majority of the outstanding voting securities, interested person and assignment shall have the same meanings of such terms in the 1940 Act.
(e) The terms of Sections 5, 7, 10, 13, 14, 18, 19 and 20 of this Agreement shall survive the termination of this Agreement.
16. |
Notices |
Any notice under this Agreement shall be in writing to the other parties and shall be considered as properly given or made if (a) sent by overnight delivery by a nationally recognized air courier service, (b) sent by electronic mail with no receipt of error in the delivery, or (c) mailed by registered or certified mail, return receipt requested, and if addressed to the respective address listed below:
If to Adviser, to:
XA Investments, LLC
321 North Clark Street #2430
Chicago, IL 60654
Attention: General Counsel
If to the Trust, to:
XAI Octagon Floating Rate & Alternative Income Term Trust
321 North Clark Street #2430
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Chicago, IL 60654
Attention: Chief Executive Officer
If to Sub-Adviser, to:
Octagon Credit Investors, LLC
250 Park Avenue, 15th Floor
New York, NY 10177
Attention: Thomas A. Connors, CFO/CAO
tconnors@octagoncredit.com
212-400-8440
with a copy to:
Lauren Basmadjian, Portfolio Manager
lbasmadjian@octagoncredit.com
212-400-8435
and
Geoffrey Dorment, General Counsel
gdorment@octagoncredit.com
212-400-8470
or at such address as the other party may designate from time to time for the receipt of such notice and shall be deemed effective on receipt.
17. |
Amendment of this Agreement |
No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. Any amendment of this Agreement shall be subject to the 1940 Act.
18. |
Governing Law |
This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware for contracts to be performed entirely therein without reference to choice of law principles thereof and in accordance with the applicable provisions of the 1940 Act. WAIVER OF JURY TRIAL AND PUNITIVE DAMAGES. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND ANY RIGHT TO SEEK PUNITIVE OR CONSEQUENTIAL DAMAGES.
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19. |
Use of the Name |
The Sub-Adviser has consented to the use by the Trust of the name or identifying word Octagon in the name of the Trust. Such consent is conditioned upon the employment of the Sub-Adviser as the investment adviser to the Trust. The name or identifying word Octagon may be used from time to time solely in connection with the Sub-Advisers services under this Agreement. The Sub-Adviser may require the Trust to cease using Octagon in the name of the Trust, if the Trust ceases to employ, for any reason, the Sub-Adviser, any successor thereto or any affiliate thereof as investment sub-adviser of the Trust. If so required by the Sub-Adviser, the Trust will cease using Octagon in its name as promptly as practicable and make all reasonable efforts to remove Octagon from its name.
20. |
Miscellaneous |
(a) The captions 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.
(b) If any provision of this Agreement is invalid, illegal, or unenforceable under applicable law of mandatory application, the validity, legality, and enforceability of that provision or condition in other instances and of the remaining provisions and conditions are not in any way affected thereby.
(c) Nothing contained in this Agreement will be deemed to require the Trust to take any action contrary to the Trusts Amended and Restated Agreement and Declaration of Trust or By-laws, as they may be amended and/or restated from time to time, with notice to the Sub-Adviser, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust.
(d) This Agreement shall be binding on, and shall inure to the benefit of the parties hereto and their respective successors.
(e) This Agreement may be executed in counterparts by the parties hereto, each of which when executed is deemed to be an original and all of which together are deemed to be one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
(f) This Agreement constitutes the entire understanding and agreement, and supersedes any and all other proposals, understandings, and agreements among the parties with respect to the subject matter hereof.
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IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers, all as of the day and the year first above written.
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST | ||
By: |
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Title: |
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XA INVESTMENTS LLC |
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By: |
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Name: |
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Title: |
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OCTAGON CREDIT INVESTORS, LLC |
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By: |
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Name: |
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Title: |
16
XAI Octagon Floating Rate & Alternative Income Term Trust
[●] Common Shares of Beneficial Interest
Par Value $0.01 Per Common Share
UNDERWRITING AGREEMENT
[●], 2017
[●], 2017
UBS Securities LLC
[●]
c/o UBS Securities LLC
299 Park Avenue
New York, New York 10171-0026
Ladies and Gentlemen:
XAI Octagon Floating Rate & Alternative Income Term Trust, a statutory trust organized under the laws of the State of Delaware (the Fund ), proposes to issue and sell to the underwriters named in Schedule A annexed hereto (the Underwriters ) an aggregate of [●] common shares of beneficial interest (the Firm Shares ), par value $0.01 per share (the Common Shares ), of the Fund. In addition, solely for the purpose of covering over-allotments, the Fund proposes to grant to the Underwriters the option to purchase from the Fund up to an additional [●] Common Shares (the Additional Shares ). The Firm Shares and the Additional Shares are hereinafter collectively sometimes referred to as the Shares . The Shares are described in the Prospectus, which is defined below. UBS Securities LLC, [●] (the Managing Representatives ) will act as managing representatives for the Underwriters in connection with the issuance and sale of the Shares.
The Fund has filed, in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively called the Securities Act ), and with the provisions of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (collectively called the Investment Company Act ), with the Securities and Exchange Commission (the Commission ) a registration statement on Form N-2 (File Nos. 333-217196 and 811-23247), including a prospectus and a statement of additional information, relating to the Shares. In addition, the Fund has filed a Notification of Registration on Form N-8A (the Notification ) pursuant to Section 8 of the Investment Company Act.
Except where the context otherwise requires, Preliminary Prospectus , as used herein, means each prospectus (including the statement of additional information incorporated therein by reference) included in such registration statement, or amendment thereof, before it became effective under the Securities Act and any prospectus (including the statement of additional information incorporated therein by reference) filed with the Commission by the Fund with the consent of the Managing Representatives on behalf of the Underwriters, pursuant to Rule 497(a) under the Securities Act.
Except where the context otherwise requires, Registration Statement , as used herein, means the registration statement, as amended at the time of such registration statements effectiveness for purposes of Section 11 of the Securities Act, as such section applies to the respective Underwriters (the Effective Time ), including (i) all documents filed as a part thereof or incorporated by reference therein, (ii) any information contained in a prospectus subsequently filed with the Commission pursuant to Rule 497 under the Securities Act and deemed to be part
2
of the registration statement at the Effective Time pursuant to Rule 430A under the Securities Act, and (iii) any registration statement filed to register the offer and sale of Shares pursuant to Rule 462(b) under the Securities Act.
Except where the context otherwise requires, Prospectus , as used herein, means the final prospectus (including the statement of additional information incorporated therein by reference) as filed by the Fund with the Commission (i) pursuant to Rule 497(h) under the Securities Act on or before the second business day after the date hereof (or such earlier time as may be required under the Securities Act) or (ii) pursuant to Rule 497(b) under the Securities Act on or before the fifth business day after the date hereof (or such earlier time as may be required under the Securities Act), or, if no such filing is required, the final prospectus (including the final statement of additional information) included in the Registration Statement at the Effective Time, in each case in the form furnished by the Fund to you for use by the Underwriters and by dealers in connection with the confirmation of sales in the offering of the Shares.
Pricing Prospectus means the Preliminary Prospectus, dated [●], 2017, including the statement of additional information incorporated therein by reference.
Pricing Information means the information relating to (i) the number of Shares issued and (ii) the offering price of the Shares included on the cover page of the Prospectus.
Disclosure Package means the Pricing Prospectus taken together with the Pricing Information.
Sales Materials means those advertising materials, sales literature or other promotional materials or documents, if any, constituting an advertisement pursuant to Rule 482 under the Securities Act authorized or prepared by the Fund or authorized or prepared on behalf of the Fund by the Investment Adviser (as defined below) or any representative thereof for use in connection with the public offering or sale of the Shares; provided , howeve r, that Sales Materials do not include any slides, tapes or other materials or documents that constitute a written communication (as defined in Rule 405 under the Securities Act) used in connection with a road show or a bona fide electronic road show (each as defined in Rule 433 under the Securities Act) related to the offering of Shares contemplated hereby (collectively, Road Show Materials ).
Applicable Time means the time as of which this Underwriting Agreement was entered into, which shall be [●] p.m. (New York City time) on the date of this Underwriting Agreement (or such other time as is agreed to by the Fund and the Managing Representatives on behalf of the Underwriters).
The Fund has prepared and filed, in accordance with Section 12 of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (collectively, the Exchange Act ), a registration statement (as amended, the Exchange Act Registration Statement ) on Form 8-A (File No. [●]) under the Exchange Act to register, under Section 12(b) of the Exchange Act, the class of securities consisting of the Common Shares.
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XA Investments LLC, a Delaware limited liability company (the Investment Adviser ), will act as the Funds investment adviser pursuant to an Investment Advisory Agreement by and between the Fund and the Investment Adviser, dated as of [●], 2017 (the Investment Advisory Agreement ). Octagon Credit Investors, LLC, a Delaware limited liability company (the Sub-Adviser , and together with the Investment Adviser, the Advisers ) will act as the Funds investment sub-adviser pursuant to an Investment Sub-Advisory Agreement between the Investment Adviser and the Sub-Adviser dated as of [●], 2017 (the Sub-Advisory Agreement ). U.S. Bank, N.A. will act as the custodian (the Custodian ) of the Funds cash and portfolio assets pursuant to the Custody Agreement, dated as of [●], 2017 (the Custody Agreement ). DST Systems, Inc. will act as the Funds transfer agent, registrar, and dividend disbursing agent (the Transfer Agent ) pursuant to the Stock Transfer Agency Agreement, dated as of [●], 2017 (the Transfer Agency Agreement ). ALPS Fund Services Inc. will act as the Funds administrator (the Administrator ) pursuant to the Administration Agreement dated [●], 2017 (the Administration Agreement ). The Investment Adviser and UBS Securities LLC have entered into a Structuring Fee Agreement dated [●], 2017 (the UBS Structuring Fee Agreement ). The Investment Adviser has also entered into a [●] Agreement with [●] dated [●], 2017 (the [ ● ] Agreement ), a [●] with [●] dated [●], 2017 (the [ ● ] Agreement ), and a [●] Agreement with [●] dated [●], 2017 (the [ ● ] Agreement and together with the UBS Structuring Fee Agreement, the [●] Agreement, the [●] Agreement and the [●] Agreement, the Fee Agreements ). [Other material agreements to be supplemented]
The Fund and the Investment Adviser have entered into an Initial Subscription Agreement dated as of [●], 2017 (the Subscription Agreement ). In addition, the Fund has adopted a dividend reinvestment plan (the Dividend Reinvestment Plan ) pursuant to which holders of Shares may have their dividends automatically reinvested in additional Common Shares of the Fund unless they elect to receive such dividends in cash.
As used in this Underwriting Agreement, business day shall mean a day on which the New York Stock Exchange (the NYSE ) is open for trading. The terms herein, hereof, hereto, hereinafter and similar terms, as used in this Underwriting Agreement, shall in each case refer to this Underwriting Agreement as a whole and not to any particular section, paragraph, sentence or other subdivision of this Underwriting Agreement. The term or , as used herein, is not exclusive.
The Fund, the Investment Adviser, the Sub-Adviser and the Underwriters agree as follows:
1. | Sale and Purchase . Upon the basis of the warranties and representations and subject to the terms and conditions herein set forth, the Fund agrees to sell to the respective Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase from the Fund the aggregate number of Firm Shares set forth opposite the name of such Underwriter in Schedule A attached hereto in each case at a purchase price of $[●] per Share (the Purchase Price ). The Fund is advised that the Underwriters intend (i) to make a public offering of their respective portions of the Firm Shares as soon after the Effective Time as is advisable and (ii) initially to offer the Firm Shares upon the terms set |
4
forth in the Prospectus. The Underwriters may from time to time increase or decrease the public offering price after the initial public offering to such extent as they may determine. |
In addition, the Fund hereby grants to the several Underwriters the option to purchase, and upon the basis of the warranties and representations and subject to the terms and conditions set forth herein, the Underwriters shall have the right to purchase, severally and not jointly, from the Fund, ratably in accordance with the number of Firm Shares to be purchased by each of them, all or a portion of the Additional Shares as may be necessary to cover over-allotments made in connection with the offering of the Firm Shares, at the Purchase Price less an amount per Share equal to any dividends or distributions declared by the Fund paid and payable on the Firm Shares, but not payable on the Additional Shares. This option may be exercised by the Managing Representatives on behalf of the several Underwriters at any time and from time to time on or before the forty-fifth (45 th ) day following the date hereof, by written notice to the Fund. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised, and the date and time when the Additional Shares are to be paid for and delivered (such date and time being herein referred to as the Additional Shares Closing Time ); provided , however , that the Additional Shares Closing Time shall not be earlier than the Firm Shares Closing Time (as defined below) nor earlier than the second business day after the date on which the option shall have been exercised no later than the tenth business day after the date of such notice. The number of Additional Shares to be sold to each Underwriter shall be the number that bears the same proportion to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter on Schedule A hereto bears to the total number of Firm Shares (subject, in each case, to such adjustment to eliminate fractional shares as the Representatives may determine).
2. | Payment and Delivery . Payment of the Purchase Price for the Firm Shares shall be made by the Underwriters to the Fund by Federal Funds wire transfer, against delivery of the certificates for the Firm Shares to the Representatives through the facilities of the Depository Trust Company for the respective accounts of the Underwriters. Such payment and delivery shall be made at a time mutually agreed upon by the parties on the third business day following the date of this Underwriting Agreement (unless another date shall be agreed to by the Fund and the Managing Representatives on behalf of the Underwriters). The time at which such payment and delivery are actually made is hereinafter sometimes called the Firm Shares Closing Time . Certificates, if any, for the Firm Shares shall be delivered to the Representatives in definitive form in such names and in such denominations as the Representatives shall specify on the second business day preceding the Firm Shares Closing Time. If the Firm Shares are to be certificated, for the purpose of expediting the checking of the certificates, if any, for the Firm Shares by the Representatives, the Fund agrees to make such certificates, if any, available to the Representatives for such purpose at least one full business day preceding the Firm Shares Closing Time. |
Payment of the purchase price for the Additional Shares shall be made at the Additional Shares Closing Time in the same manner and at the same office as the payment for the Firm Shares. Certificates, if any, for the Additional Shares shall be
5
delivered to the Representatives in definitive form in such names and in such denominations as the Representatives shall specify no later than the second business day preceding the Additional Shares Closing Time. If the Additional Shares, if any, are to be certificated, for the purpose of expediting the checking of the certificates, if any, for the Additional Shares by the Representatives, the Fund agrees to make such certificates, if any, available to the Representatives for such purpose at least one full business day preceding the Additional Shares Closing Time. The Firm Shares Closing Time and the Additional Shares Closing Time are sometimes referred to herein as the Closing Times .
3. | Representations and Warranties of the Fund, the Investment Adviser and the Sub-Adviser . Each of the Fund, the Investment Adviser and the Sub-Adviser jointly and severally represents and warrants to each Underwriter as of the date of this Underwriting Agreement, as of the Applicable Time, as of the Firm Shares Closing Time and as of each Additional Shares Closing Time, if any, as follows: |
(a) | (i)(A) The Registration Statement has heretofore become effective under the Securities Act or, with respect to any registration statement to be filed to register the offer and sale of Shares pursuant to Rule 462(b) under the Securities Act, will be filed with the Commission and become effective under the Securities Act no later than 10:00 p.m., New York City time, on the date of determination of the public offering price for the Shares; (B) no stop order of the Commission preventing or suspending the use of any Preliminary Prospectus or Sales Materials or of the Prospectus or the effectiveness of the Registration Statement has been issued, no revocation of registration has been issued and no proceedings for such purpose have been instituted or are contemplated by the Commission; and (C) the Exchange Act Registration Statement has become effective as provided in Section 12 of the Exchange Act; |
(ii)(A) The Registration Statement complied at the Effective Time, complies as of the date hereof and will comply, as amended or supplemented, at the Firm Shares Closing Time, at each Additional Shares Closing Time, if any, and at each and any time of a sale of Shares by an Underwriter during the period in which a prospectus is required by the Securities Act to be delivered in connection with any sale of Shares, with the requirements of the Securities Act and the Investment Company Act; (B) each Pricing Prospectus and the Prospectus complied or will comply, at the time it was or is filed with the Commission, and the Prospectus complies as of its date and will comply, as amended or supplemented, at the Firm Shares Closing Time, at each Additional Shares Closing Time, if any, and at each and any time of a sale of Shares by an Underwriter during the period in which a prospectus is required by the Securities Act to be delivered in connection with any sale of Shares, with the requirements of the Securities Act (including, without limitation, Section 10(a) of the Securities Act) and the Investment Company Act; and (C) each of the Sales Materials complied, at the time it was first used in connection with the public offering of the Shares, and complies as of the date hereof, with the requirements of the Securities Act (including, without limitation, Rule 482 thereunder), the Investment Company Act and the applicable rules and interpretations of the Financial Industry Regulatory Authority, Inc. ( FINRA );
6
(ii) (A) (1) The Registration Statement as of the Effective Time did not, (2) the Registration Statement (including any post-effective amendment thereto declared or deemed to be effective by the Commission) as of the date hereof does not, and (3) the Registration Statement (including any post-effective amendment thereto declared or deemed to be effective by the Commission), as of the Firm Shares Closing Time and each Additional Shares Closing Time, if any, will not, in each case, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (B) at no time during the period that begins as of the Applicable Time and ends at the Firm Shares Closing Time did or will the Disclosure Package, as then amended or supplemented, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; (C) at no time during the period that begins at the time each of the Sales Materials was first used in connection with the public offering of the Shares and ends at the Applicable Time did any of the Sales Materials (as materials deemed to be a prospectus under Section 10(b) of the Securities Act pursuant to Rule 482 under the Securities Act), as then amended or supplemented, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and (D) at no time during the period that begins on the earlier of the date of the Prospectus and the date the Prospectus is filed with the Commission and ends at the latest of the Firm Shares Closing Time, the latest Additional Shares Closing Time, if any, and the end of the period during which a prospectus is required by the Securities Act to be delivered in connection with any sale of Shares did or will the Prospectus, as then amended or supplemented, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided , however , that each of the Fund, the Investment Adviser and the Sub-Adviser makes no representation or warranty with respect to any statement contained in the Registration Statement, the Disclosure Package or the Prospectus in reliance upon and in conformity with information concerning an Underwriter furnished in writing by or on behalf of such Underwriter through the Managing Representatives to the Fund expressly for use in the Registration Statement, the Disclosure Package or the Prospectus as described in Section 9(f) hereof; and provided, further that if any event occurs during any of the periods referred to in clauses (B), (C) or (D) of this Section 3(a)(iii) as a result of which it is necessary to amend or supplement the Prospectus, the Disclosure Package or the Sales Materials, as applicable, in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and the Disclosure Package, the Sales Materials or the Prospectus, as applicable, is amended or supplemented in connection therewith in accordance with Section 5(d) of this Underwriting Agreement, such amendment or supplement shall be deemed, for purposes of this Section 3(a)(iii), to have been made contemporaneously with the occurrence of such event.
7
(b) | The Fund (i) has been duly organized and is validly existing as a statutory trust in good standing under the laws of the State of Delaware; (ii) has full power and authority to own, lease and operate its properties and assets, and conduct its business and other activities conducted by it as described in the Registration Statement, the Pricing Prospectus and the Prospectus; (ii) is duly licensed and qualified to do business and is in good standing in each jurisdiction where it owns or leases property or in which the conduct of its business or other activity requires such qualification; (iii) owns, possesses or has obtained and currently maintains all governmental licenses, permits, consents, orders, approvals and other authorizations (collectively, the Licenses and Permits ), whether foreign or domestic, necessary to carry on its business as contemplated in the Pricing Prospectus and the Prospectus; (iv) has no subsidiaries; and (v) has made all necessary filings required under any applicable federal, state, local or foreign law, regulation or rule. |
(c) | The capitalization of the Fund is as set forth in the Registration Statement, the Pricing Prospectus and the Prospectus. The Common Shares conform to the description of them in the Pricing Prospectus and the Prospectus. All the issued and outstanding Common Shares have been duly authorized and are validly issued, fully paid and nonassessable (except as described in the Registration Statement, the Pricing Prospectus and the Prospectus). The Shares to be issued and delivered to and paid for by the Underwriters in accordance with this Underwriting Agreement against payment therefor as provided by this Underwriting Agreement have been duly authorized and when issued and delivered to the Underwriters will have been validly issued and will be fully paid and nonassessable (except as described in the Registration Statement, the Pricing Prospectus and the Prospectus). The certificates, if any, for the Shares will be in due and proper form. The issuance of the Shares has been done in compliance with all applicable federal and state securities laws. No person is entitled to any preemptive or other similar rights with respect to the issuance of the Shares. |
(d) | The Fund is duly registered with the Commission under the Investment Company Act as a non-diversified, closed-end management investment company, and, subject to the filing of any final amendment to the Registration Statement (a Final Amendment ), if not already filed, all action under the Securities Act and the Investment Company Act, as the case may be, necessary to make the public offering and consummate the sale of the Shares as provided in this Underwriting Agreement has or will have been taken by the Fund; the provisions of the Funds declaration of trust (as amended and restated from time to time) and bylaws comply with the requirements of the Investment Company Act. |
(e) |
The Fund has full power and authority to enter into each of this Underwriting Agreement, the Investment Advisory Agreement, the Custody Agreement, the Transfer Agency Agreement, the Subscription Agreement and the Dividend Reinvestment Plan (collectively, the Fund Agreements ) and to perform all of the terms and provisions hereof and thereof to be carried out by it and (i) each Fund Agreement has been duly and validly authorized, executed and delivered by |
8
or on behalf of the Fund, (ii) each Fund Agreement complies with all applicable provisions of the Investment Company Act and the Investment Advisers Act of 1940, as amended, and the rules and regulations thereunder (collectively called the Advisers Act ), as the case may be, and (iii) assuming due authorization, execution and delivery by the other parties thereto, each of the Fund Agreements constitutes a legal, valid and binding obligation of the Fund enforceable in accordance with its terms, subject to the qualification that the enforceability of the Funds obligations thereunder may be limited by U.S. bankruptcy, insolvency and similar laws affecting creditors rights generally, whether statutory or decisional, and to general equitable principles (regardless of whether enforcement is sought in a proceeding in equity or at law), except as enforcement of rights to indemnity thereunder may be limited by federal or state securities laws. |
(f) | None of (i) the execution, delivery and performance by the Fund of the Fund Agreements, (ii) the issuance and sale by the Fund of the Shares as contemplated by this Underwriting Agreement, the Registration Statement, the Pricing Prospectus, the Prospectus or any of the Fund Agreements and (iii) the performance by the Fund of its obligations under any of the Fund Agreements or consummation by the Fund of the other transactions contemplated by the Fund Agreements (A) conflicts with or will conflict with, or results in or will result in a breach or violation of the declaration of trust (as amended and restated from time to time), bylaws or similar organizational documents of the Fund, (B) conflicts with or will conflict with, results in or will result in a breach or violation of, or constitutes or will constitute a default or an event of default under, or results in or will result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Fund under the declaration of trust (as amended and restated from time to time), bylaws or similar organizational documents of the Fund, or the terms and provisions of any agreement, indenture, mortgage, loan agreement, note, insurance or surety agreement, lease or other instrument to which the Fund is a party or by which it may be bound or to which any of the property or assets of the Fund is subject or (C) results in or will result in any violation of any order, law, rule or regulation of any court, governmental instrumentality, securities exchange or association or arbitrator, whether foreign or domestic, applicable to the Fund or having jurisdiction over the Funds properties, other than state securities or blue sky laws applicable in connection with the purchase and distribution of the Shares by the Underwriters pursuant to this Underwriting Agreement. |
(g) | The Fund is not currently in breach of, or in default under, any written agreement or instrument to which it is a party or by which it or its property is bound or affected. |
(h) | There are no restrictions, limitations or regulations with respect to the ability of the Fund to invest its assets as described in the Registration Statement, the Pricing Prospectus and the Prospectus, other than as described therein. |
9
(i) | No person has any right to the registration of any securities of the Fund because of the filing of the registration statement with the Commission. No person has tag along rights or other similar rights to have any securities included in the transaction contemplated by this Underwriting Agreement. |
(j) | No consent, approval, authorization, notification or order of, or filing with, or the issuance of any license or permit by, any federal, state, local or foreign court or governmental or regulatory agency, commission, board, authority or body or with any self-regulatory organization, other non-governmental regulatory authority, securities exchange or association, whether foreign or domestic, is required by the Fund for the consummation by the Fund of the transactions to be performed by the Fund or the performance by the Fund of all the terms and provisions to be performed by or on behalf of it in each case as contemplated in the Fund Agreements, the Registration Statement, the Pricing Prospectus or the Prospectus, except such as (i) have been obtained and such as may be required (and shall be obtained prior to commencement of the transactions contemplated by this Underwriting Agreement) under the Securities Act, the Exchange Act, the Investment Company Act or the Advisers Act, and (iii) may be required by the NYSE, FINRA or under state securities or blue sky laws, in connection with the purchase and distribution of the Shares by the Underwriters pursuant to this Underwriting Agreement. |
(k) | No transaction has occurred between or among the Fund and any of its officers or directors, stockholders or affiliates or any affiliate or affiliates of any such officer or director or stockholder or affiliate that is required to be described in and is not described in the Registration Statement, the Pricing Prospectus and the Prospectus. |
(l) | Neither the Fund nor any employee or agent of the Fund has made any payment of funds of the Fund or received or retained any funds, which payment, receipt or retention of funds is a character required to be disclosed in the Registration Statement, the Pricing Prospectus or the Prospectus. |
(m) | The Shares are duly authorized for listing, subject to official notice of issuance, on the NYSE and the Notification has become effective. |
(n) | [●] was engaged by the Fund to act as its independent registered public accounting firm in accordance with the Investment Company Act. [●], whose report appears in the Prospectus, is an independent registered public accounting firm with respect to the Fund as required by the Investment Company Act, the Securities Act and the rules of the Public Company Accounting Oversight Board. |
(o) | The statement of assets and liabilities, together with any related notes or schedules thereto, included or incorporated by reference in the Registration Statement, the Pricing Prospectus and the Prospectus presents fairly the financial position of the Fund as of the dates or for the periods indicated in accordance with generally accepted accounting principles in the United States applied on a |
10
consistent basis, and complies with all applicable accounting requirements under the Securities Act and the Investment Company Act. |
(p) | Since the date as of which information is given in the Registration Statement, the Pricing Prospectus and the Prospectus, except as otherwise stated therein, (i) there has been no adverse change in the condition (financial or otherwise), business, prospects, management, properties, net assets or results of operations of the Fund, whether or not arising in the ordinary course of business; (ii) the Fund has not incurred any liabilities or obligations, direct or contingent, or entered into any transactions, other than in the ordinary course of business or incident to its organization; (iii) there has been no dividend or distribution of any kind declared, paid or made on any class of the Funds capital shares; and (iv) the Fund has not incurred any long-term debt. |
(q) | Except as otherwise set forth in the Registration Statement, the Pricing Prospectus or the Prospectus, there is no action, threatened action, suit, claim, inquiry, investigation or proceeding affecting the Fund or to which the Fund is a party before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, whether foreign or domestic, now pending or threatened against the Fund. |
(r) | There are no contracts, franchises or other documents that are of a character required to be described in, or that are required to be filed as exhibits to, the Registration Statement which are not described or filed as required. |
(s) | Except for stabilization transactions conducted by the Underwriters, and except for the issuance or purchase of Shares pursuant to the Dividend Reinvestment Plan effected following the date on which the distribution of the Shares is completed in accordance with the policies of the Fund as set forth in the Pricing Prospectus or the Prospectus, the Fund has not taken and will not take, directly or indirectly, any action designed or which might be expected to cause or result in, or which will constitute, stabilization or manipulation of the price of the Shares in violation of applicable federal securities laws. |
(t) | The Fund will direct the investment of the proceeds of the offering of the Shares in such a manner as to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the Code ), and has qualified and will continue to qualify as a regulated investment company under Subchapter M of the Code. |
(u) | The Fund will direct the proceeds of the offering of the Shares in such a manner as to comply with the asset coverage requirements of the Investment Company Act. |
(v) |
The Fund has not distributed and, prior to the later to occur of the (i) date of the last Closing Time and (ii) completion of the distribution of the Shares, will not distribute any offering materials in connection with the public offering or sale of |
11
the Shares other than the Registration Statement, the Disclosure Package, the Sales Materials and the Prospectus. |
(w) | There are no Sales Materials other than the definitive client brochure and the broker selling memo, which were filed with the FINRA on [●], 2017, and no Road Show Materials authorized or prepared by the Fund or authorized or prepared on behalf of the Fund by the Investment Adviser or any representative thereof for use in connection with the public offering or sale of the Shares. No Sales Materials or Road Show Materials, if any, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. |
(x) | No person is serving or acting as an officer, director or investment adviser of the Fund except in accordance with the provisions of the Investment Company Act. Except as disclosed in the Registration Statement, the Pricing Prospectus and the Prospectus (or any amendment or supplement to any of them), no trustee of the Fund is (i) an interested person (as defined in the Investment Company Act) of the Fund or (ii) an affiliated person (as defined in the Investment Company Act) of any Underwriter listed in Schedule A hereto. |
(y) | There are no transfer taxes or other similar fees or charges under federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Underwriting Agreement or the issuance by the Fund or sale by the Fund of the Shares. |
(z) | The Fund has (i) appointed a Chief Compliance Officer and (ii) adopted and implemented written policies and procedures reasonably designed to prevent violation of the Federal Securities Laws (as that term is defined in Rule 38a-1 under the Investment Company Act) by the Fund, including policies and procedures that provide oversight of compliance for each investment adviser, administrator and transfer agent of the Fund. |
(aa) | Any statistical, demographic or market-related data included in the Registration Statement, the Preliminary Prospectus, the Prospectus, the Sales Materials or the Road Show Materials are based on or derived from sources that the Fund believes to be reliable and accurate, and all such data included in the Registration Statement, the Preliminary Prospectus, the Prospectus, the Sales Materials or the Road Show Materials accurately reflects the materials upon which it is based or from which it was derived. |
(bb) |
The Fund is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which it is engaged and which the Fund deems adequate; all policies of insurance insuring the Fund or its business, assets, employees, officers and trustees, including the Funds trustees and officers errors and omissions insurance policy and its fidelity bond required by Rule 17g-1 of the Investment Company |
12
Act, are in full force and effect; the Fund is in compliance with the terms of such policy and fidelity bond; and there are no claims by the Fund under any such policy or fidelity bond as to which any insurance company is denying liability or defending under a reservation of rights clause; the Fund has not been refused any insurance coverage sought or applied for; and the Fund has no reason to believe that it will not be able to renew its existing insurance coverage and fidelity bond as and when such coverage and fidelity bond expires or to obtain similar coverage and fidelity bond from similar insurers as may be necessary to continue its business. |
(cc) | The Fund owns or possesses, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems, or procedures), trademarks, service marks, trade names or other intellectual property (collectively, Intellectual Property) necessary to carry on the business operated by the Fund, and the Fund has not received any notice or is not otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Fund. |
(dd) | The Fund maintains a system of internal accounting controls sufficient to ensure that (i) transactions are executed in accordance with managements general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with U.S. generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with managements general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets through an asset reconciliation procedure or otherwise at reasonable intervals and appropriate action is taken with respect to any differences. |
(ee) | The Fund has established and maintains disclosure controls and procedures; such disclosure controls and procedures (as such term is defined in Rule 30a-3 under the Investment Company Act) are designed to ensure that material information relating to the Fund is made known to the Funds principal executive officer and its principal financial officer by others within the Fund, and such disclosure controls and procedures are effective to perform the functions for which they were established; the Fund is not aware of any material weakness in its internal controls over financial reporting. |
(ff) | The Fund and its officers and directors, in their capacities as such, are in compliance with the applicable provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder (the Sarbanes-Oxley Act ). |
(gg) | The Funds Board of Trustees has validly appointed an audit committee whose composition satisfies the requirements of Rules 303A.06 and 303A.07(a) of the |
13
NYSE Listed Company Manual and the Board of Trustees and/or the audit committee has adopted a charter that satisfies the requirements of Rule 303A.07(c) of the NYSE Listed Company Manual. |
(hh) | The Fund or any other person associated with or acting on behalf of the Fund including, without limitation, any trustee, officer, agent or employee of the Fund, has not, directly or indirectly, while acting on behalf of the Fund (i) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended ( FCPA ); or (iv) made any other unlawful payment. |
(ii) | The operations of the Fund are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the Money Laundering Laws ) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Fund with respect to the Money Laundering Laws is pending or threatened. |
(jj) | Neither the Fund nor any trustee, officer, agent, employee or affiliate of the Fund is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department ( OFAC ); and the Fund will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC. |
(kk) | All of the information provided to the Underwriters or to counsel for the Underwriters by the Fund, its officers and trustees in connection with letters, filings or other supplemental information provided to FINRA pursuant to FINRAs conduct rules is true, complete and correct. |
In addition, any certificate signed by any officer of the Fund or the Advisers and delivered to the Underwriters or counsel for the Underwriters in connection with the offering of the Share shall be deemed to be a representation and warranty by the Fund or the Advisers as to matters covered thereby, to each Underwriter.
4. | Representations and Warranties of the Investment Adviser and the Sub-Adviser . Each of the Investment Adviser and the Sub-Adviser represents, severally, as to itself only, and warrants to each Underwriter as of the date of this Underwriting Agreement, as of the Applicable Time, as of the Firm Shares Closing Time and as of each Additional Shares Closing Time, if any, as follows: |
14
(a) | Such Adviser (i) has been duly organized and is validly existing and in good standing as a (1) limited liability company under the laws of the State of Delaware; (ii) has full power and authority to own, lease and operate its properties and assets, and conduct its business and other activities conducted by it as described in the Registration Statement, the Pricing Prospectus and the Prospectus; (iii) is duly licensed and qualified to do business and is in good standing in each jurisdiction where it owns or leases property or in which the conduct of its business or other activity requires such qualification; (iv) owns, possesses or has obtained and currently maintains all Licenses and Permits, whether foreign or domestic, necessary to carry on its business as contemplated in the Registration Statement, the Pricing Prospectus and the Prospectus; and (v) has made all necessary filings required under any applicable federal, state, local or foreign law, regulation or rule. |
(b) | Such Adviser is (i) duly registered with the Commission as an investment adviser under the Advisers Act and (ii) not prohibited by the Advisers Act or the Investment Company Act from acting as an investment adviser for the Fund as contemplated by the Investment Advisory Agreement or the Sub-Advisory Agreement, as applicable, the Registration Statement, the Pricing Prospectus and the Prospectus. |
(c) | Such Adviser has full power and authority to enter into each of this Underwriting Agreement, the Investment Advisory Agreement and the Sub-Advisory Agreement, and in the case of the Investment Adviser, the Subscription Agreement and the Fee Agreements to which such Adviser is a party (collectively, the Adviser Agreements ), and carry out all the terms and provisions hereof and thereof to be carried out by it; and (i) each respective Adviser Agreement to which such Adviser is a party has been or will be duly and validly authorized, executed and delivered by such Adviser, (ii) the respective Adviser Agreements to which such Adviser is a party do not violate any of the applicable provisions of the Investment Company Act or the Advisers Act and (iii) assuming due authorization, execution and delivery by the other parties thereto, each of the Adviser Agreements to which such Adviser is a party constitutes a legal, valid and binding obligation of such Adviser enforceable in accordance with its terms, subject to the qualification that the enforceability of such Advisers obligations thereunder may be limited by U.S. bankruptcy, insolvency and similar laws affecting creditors rights generally, whether statutory or decisional, and to general equitable principles (regardless of whether enforcement is sought in a proceeding in equity or at law), except as enforcement of rights to indemnity thereunder may be limited by federal or state securities laws. |
(d) |
None of (i) the execution, delivery and performance by the Adviser of the Adviser Agreements to which such Adviser is a party, (ii) the issuance and sale by the Fund of the Shares as contemplated by this Underwriting Agreement, the Registration Statement, the Pricing Prospectus, the Prospectus or any of the Adviser Agreements and (iii) the performance by such Adviser of its obligations |
15
under any of the Adviser Agreements to which such Adviser is a party or performance and consummation by such Adviser of the other transactions contemplated by the Adviser Agreements to which such Adviser is a party (A) conflicts with or will conflict with, or results in or will result in a breach or violation of the [limited liability company operating agreement], bylaws or similar organizational documents of the Investment Adviser, or in the case of the Sub-Adviser, any agreement or instrument to which such Adviser is a party or by which such Adviser is bound, (B) conflicts with or will conflict with, results in or will result in a breach or violation of, or constitutes or will constitute a default or an event of default under, or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of such Adviser under the [limited liability company operating agreement], bylaws or similar organizational documents of such Adviser, or the terms and provisions of any agreement, indenture, mortgage, loan agreement, note, insurance or surety agreement, lease or other instrument to which such Adviser is a party or by which it may be bound or to which any of the property or assets of such Adviser is subject or (C) results in or will result in any violation of any order, law, rule or regulation of any court, governmental instrumentality, securities exchange or association or arbitrator, whether foreign or domestic, applicable to such Adviser or having jurisdiction over such Advisers properties. |
(e) | No consent, approval, authorization, notification or order of, or filing with, or the issuance of any license or permit by, any federal, state, local or foreign court or governmental or regulatory agency, commission, board, authority or body or with any self-regulatory organization, other non-governmental regulatory authority, securities exchange or association, whether foreign or domestic, is required by such Adviser for the consummation by the Investment Adviser of the transactions to be performed by such Adviser or the performance by such Adviser of all the terms and provisions to be performed by or on behalf of it in each case as contemplated in the Adviser Agreements, the Registration Statement, the Pricing Prospectus or the Prospectus, except such as have been obtained and such as may be required (and shall be obtained prior to commencement of the transaction contemplated by this Underwriting Agreement) under the Securities Act, the Exchange Act, the Investment Company Act or the Advisers Act, and (iii) may be required by the NYSE, FINRA or under state securities or blue sky laws, in connection with the purchase and distribution of the Shares by the Underwriters pursuant to this Underwriting Agreement. |
(f) | The description of such Adviser and its business and the statements attributed to such Adviser in the Registration Statement, the Pricing Prospectus and the Prospectus comply with the requirements of the Securities Act and the Investment Company Act and do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Pricing Prospectus and the Prospectus in light of the circumstances under which they were made) not misleading. |
16
(g) | Except as set forth in the Registration Statement, the Pricing Prospectus or the Prospectus, there is no action, threatened action, suit, claim, inquiry, investigation or proceeding affecting such Adviser or to which such Adviser is a party before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, whether foreign or domestic now pending or threatened against such Adviser which (i) if determined adversely would result in any adverse change in the condition (financial or otherwise), business, prospects, management, properties, net assets or results of operations of such Adviser or (ii) is of a character required to be described in the Registration Statement, the Pricing Prospectus or the Prospectus and is not described as required. |
(h) | Except for stabilization transactions conducted by the Underwriters, and except for the issuance or purchase of Shares pursuant to the Dividend Reinvestment Plan effected following the date on which the distribution of the Shares is completed in accordance with the policies of the Fund as set forth in the Pricing Prospectus or the Prospectus, such Adviser has not taken and will not take, directly or indirectly, any action designed or which might be expected to cause or result in, or which will constitute, stabilization or manipulation of the price of the Shares in violation of applicable federal securities laws. |
(i) | In the event that the Fund or such Adviser has made available any Road Show Materials or promotional materials (other than the Sales Materials) by means of an Internet web site or similar electronic means such as to constitute a bona fide electronic road show, such Adviser has installed and maintained pre-qualification and password-protection or similar procedures which are designed and expected to effectively prohibit access to such Road Show Materials or promotional materials by persons other than qualified broker-dealers and registered representatives thereof. |
(j) | Such Adviser has adopted and implemented written policies and procedures under Rule 206(4)-7 of the Advisers Act reasonably designed to prevent violation of the Advisers Act by the Adviser and its supervised persons. |
(k) | Such Adviser maintains a system of internal controls sufficient to ensure that (i) transactions effectuated by it under the Investment Advisory Agreement are executed in accordance with its managements general or specific authorization; and (ii) access to the Funds assets is permitted only in accordance with its managements general or specific authorization. |
(l) | Such Adviser or any other person associated with or acting on behalf of the Adviser including, without limitation, any trustee, officer, agent or employee of the Adviser, has not, directly or indirectly, while acting on behalf of the Adviser (i) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; (iii) violated any provision of the FCPA; or (iv) made any other unlawful payment. |
17
(m) | The operations of such Adviser and its subsidiaries are and have been conducted at all times in compliance with applicable Money Laundering Laws and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving such Adviser with respect to the Money Laundering Laws is pending or threatened. |
(n) | Neither such Adviser nor any member, director, trustee, officer, agent, employee or affiliate of such Adviser is currently subject to any U.S. sanctions administered by OFAC; and such Adviser will not directly or indirectly direct the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC. |
In addition, any certificate signed by any officer of the Investment Adviser or the Sub-Adviser and delivered to the Underwriters or counsel for the Underwriters in connection with the offering of the Shares shall be deemed to be a representation and warranty by the Investment Adviser or the Sub-Adviser, as applicable, as to matters covered thereby, to each Underwriter.
5. | Agreements of the Parties . |
(a) |
If the registration statement relating to the Shares has not yet become effective, the Fund will promptly file a Final Amendment, if not previously filed, with the Commission, and will cause such registration statement to become effective and, as soon as the Fund is advised, will advise the Managing Representatives when the Registration Statement or any amendment thereto has become effective. If it is necessary for a post-effective amendment to the Registration Statement, or a Registration Statement under Rule 462(b) under the Securities Act, to be filed with the Commission and become effective before the Shares may be sold, the Fund will cause such post-effective amendment or such Registration Statement to be filed and become effective as soon as possible, and the Fund will advise the Managing Representatives promptly and, if requested by the Managing Representatives, will confirm such advice in writing, when such post-effective amendment or such Registration Statement has become effective. If the Registration Statement has become effective and the Prospectus contained therein omits certain information at the time of effectiveness pursuant to Rule 430A under the Securities Act, the Fund will file a 430A Prospectus pursuant to Rule 497(h) under the Securities Act as promptly as practicable, but no later than the second business day following the earlier of the date of the determination of the offering price of the Shares or the date the Prospectus is first used after the Effective Time. If the Registration Statement has become effective and the Prospectus contained therein does not so omit such information, the Fund will file a Prospectus pursuant to Rule 497(b) or a certification pursuant to Rule 497(j) under the Securities Act as promptly as practicable, but no later than the fifth business day following the date of the later of the Effective Time or the commencement of the public offering of the Shares after the Effective Time. In |
18
either case, the Fund will provide the Managing Representatives satisfactory evidence of the filing. The Fund will not file with the Commission any Prospectus or any other amendment (except any post-effective amendment which is filed with the Commission after the later of (i) one year from the date of this Underwriting Agreement or (ii) the date on which distribution of the Shares is completed) or supplement to the Registration Statement or the Prospectus unless a copy has first been submitted to the Managing Representatives a reasonable time before its filing and the Managing Representatives has not objected to it in writing within a reasonable time after receiving the copy. |
(b) | For the period of three years from the date hereof, the Fund will advise the Managing Representatives promptly (i) of the issuance by the Commission of any order in respect of the Fund, or in respect of the Investment Adviser or the Sub-Adviser, which relates to the Fund and could materially affect the ability of the Investment Adviser or the Sub-Adviser, as applicable, to perform its respective obligations to the Fund, (ii) of the initiation or threatening in writing of any proceedings for, or receipt by the Fund of any written notice with respect to, any suspension of the qualification of the Shares for sale in any jurisdiction or the issuance of any order by the Commission suspending the effectiveness of the Registration Statement, (iii) of receipt by the Fund, or any representative or attorney of the Fund, of any other communication from the Commission relating in any material way to the Fund (other than communications with respect to an offering of preferred shares of beneficial interest), the Registration Statement, the Notification, any Preliminary Prospectus, the Sales Materials, the Prospectus or to the transactions contemplated by this Underwriting Agreement and (iv) the issuance by any federal, state, local, or foreign court, or governmental or regulatory agency, commission, board, authority or body or with any self-regulatory organization, administrative agency, other non-governmental regulatory authority, whether foreign or domestic, of any order, ruling or decree, or the threat in writing to initiate any proceedings with respect thereto, regarding the Fund, which relates in any way to the Fund or any material arrangements or proposed material arrangements involving the Fund. The Fund will make every effort to prevent the issuance of any order suspending the effectiveness of the Registration Statement and, if any such order is issued, to obtain its lifting as soon as practicable. |
(c) |
If not delivered prior to the date of this Underwriting Agreement, the Fund will deliver to the Managing Representatives, without charge, a signed copy of the Registration Statement, the Exchange Act Registration Statement and the Notification and of any amendments (except any post-effective amendment which is filed with the Commission after the later of (i) one year from the date of this Underwriting Agreement or (ii) the date on which the distribution of the Shares is completed) to either the Registration Statement, the Exchange Act Registration Statement or the Notification (including all exhibits filed with any such document) and as many conformed copies of the Registration Statement and any amendments thereto (except any post-effective amendment which is filed with the Commission after the later of (i) one year from the date of this Underwriting |
19
Agreement or (ii) the date on which the distribution of the Shares is completed) (excluding exhibits) as the Managing Representatives may request. |
(d) | During such period as a prospectus is required by law to be delivered by an underwriter or a dealer, the Fund will deliver, without charge, to the Managing Representatives, the Underwriters and any dealers, at such office or offices as the Managing Representatives may designate, as many copies of the Prospectus as the Managing Representatives may request, and, if any event occurs during such period as a result of which it is necessary to amend or supplement the Prospectus, in order to make any statements therein, in light of the circumstances under which they were made, not misleading, or if during such period it is necessary to amend or supplement the Prospectus to comply with the Securities Act or the Investment Company Act, the Fund promptly will prepare, submit to the Managing Representatives, file with the Commission and deliver, without charge, to the Underwriters and to dealers (whose names and addresses the Managing Representatives will furnish to the Fund) to whom Shares may have been sold by the Underwriters, and to other dealers on request, amendments or supplements to the Prospectus so that any statements in such Prospectus, as so amended or supplemented, will not, in light of the circumstances under which they were made, be misleading and will comply with the Securities Act and the Investment Company Act. Delivery by the Underwriters of any such amendments or supplements to the Prospectus will not constitute a waiver of any of the conditions in Section 6 hereof. |
(e) | The Fund will make generally available to holders of the Funds securities, as soon as practicable but in no event later than the last day of the 18th full calendar month following the calendar quarter in which the date of the Effective Time falls, an earnings statement, if applicable, satisfying the provisions of the last paragraph of Section 11(a) of the Securities Act and, at the option of the Fund, Rule 158 under the Securities Act. |
(f) |
If the transactions contemplated by this Underwriting Agreement are consummated, the Fund shall pay all costs and expenses incident to the performance of the obligations of the Fund under this Underwriting Agreement (to the extent such expenses do not, in the aggregate, exceed $[] per Share), including but not limited to costs and expenses of or relating to (i) the preparation, printing and filing of the Registration Statement and exhibits to it, each Preliminary Prospectus, the Prospectus and all amendments and supplements thereto, (ii) the issuance of the Shares and the preparation and delivery of certificates for the Shares, (iii) the registration or qualification of the Shares for offer and sale under the securities or blue sky laws of the jurisdictions referred to in the foregoing paragraph, including the fees and disbursements, if any, of counsel for the Underwriters in that connection, and the preparation and printing of any preliminary and supplemental blue sky memoranda, (iv) the furnishing (including costs of design, production, shipping and mailing) to the Underwriters and dealers of copies of each Preliminary Prospectus relating to the Shares, the Sales Materials, the Prospectus, and all amendments or supplements to the |
20
Prospectus, and of the other documents required by this Section to be so furnished, (v) the filing requirements of FINRA, in connection with its review of the underwriting arrangements and the Sales Materials, including filing fees paid by counsel for the Underwriters in that connection, in an amount not to exceed $20,000, (vi) all transfer taxes, if any, with respect to the sale and delivery of the Shares by the Fund to the Underwriters, (vii) the listing of the Shares on the NYSE and (viii) the transfer agent for the Shares; provided that (i) the Fund, the Investment Adviser, the Sub-Adviser and each Underwriter shall pay its own costs and expenses relating to the attendance at any road show or other informational meeting relating to the Fund, (ii) each Underwriter shall pay the costs and expenses of any internal promotional or informational materials relating to the Fund, other than the Sales Materials, prepared by such Underwriter in connection with the offering of the Shares, (iii) the Underwriters shall pay the costs and expenses of any tombstone announcements relating to the offering of the Shares and (iv) except as expressly provided in this Section 5(f), the Underwriters shall pay their own costs and expenses, including fees and disbursements of their counsel. To the extent the foregoing costs and expenses incident to the performance of the obligations of the Fund under this Underwriting Agreement exceed, in the aggregate, $[] per Share, the Investment Adviser or an affiliate will pay all such excess costs and expenses. The Fund, the Sub-Adviser and the Investment Adviser may otherwise agree among themselves as to the payment of the foregoing expenses, whether or not the transactions contemplated by this Underwriting Agreement are consummated, provided , however , that in no event shall the Underwriters be obligated to pay any expenses intended to be borne by the Fund or the Investment Adviser as provided above. |
(g) | If the transactions contemplated by this Underwriting Agreement are not consummated, except as otherwise provided herein, no party will be under any liability to any other party, except that (i) if this Underwriting Agreement is terminated by (A) the Fund, the Sub-Adviser or the Investment Adviser pursuant to any of the provisions hereof (otherwise than pursuant to Section 7 hereof) or (B) by the Representatives or the Underwriters because of any inability, failure or refusal on the part of the Fund, the Sub-Adviser or the Investment Adviser to comply with any terms of this Underwriting Agreement or because any of the conditions in Section 6 are not satisfied, the Investment Adviser, the Sub-Adviser or such Advisers affiliates and the Fund, jointly and severally, will reimburse the Underwriters for all out-of-pocket expenses (including the fees, disbursements and other charges of their counsel) incurred by them in connection with the proposed purchase and sale of the Shares ( provided , however , that the Fund, the Sub-Adviser and the Investment Adviser shall not be liable for any loss of anticipated profits or speculative or consequential or similar damages for such termination) and (ii) no Underwriter who has failed or refused to purchase the Shares agreed to be purchased by it under this Underwriting Agreement, in breach of its obligations pursuant to this Underwriting Agreement, will be relieved of liability to the Fund, the Investment Adviser, the Sub-Adviser and the other Underwriters for damages occasioned by its default. |
21
(h) | Without the prior written consent of the Managing Representatives, the Fund will not offer, sell or register with the Commission, or announce an offering of, any equity securities of the Fund, within 180 days after the date of the Effective Time, except for the Shares as described in the Prospectus and any issuance of Common Shares pursuant to the Dividend Reinvestment Plan. |
(i) | The Fund will cause the Shares to be listed on the NYSE prior to the date the Shares are issued, subject only to official notice of the issuance thereof, and comply with the rules and regulations of such exchange. |
(j) | The Fund will direct the investment of the net proceeds of the offering of the Shares in such a manner as to comply with the investment objective and policies of the Fund as described in the Prospectus. |
6. | Conditions of the Underwriters Obligations . The obligations of the Underwriters to purchase the Shares are subject to the accuracy on the date of this Underwriting Agreement, as of the Applicable Time and as of each of the Closing Times, of the representations of the Fund, the Sub-Adviser and the Investment Adviser in this Underwriting Agreement, to the accuracy and completeness of all statements made by the Fund, the Sub-Adviser or the Investment Adviser or any of their respective officers in any certificate delivered to the Managing Representatives or their counsel pursuant to this Underwriting Agreement, to performance by the Fund, the Sub-Adviser and the Investment Adviser of their respective obligations under this Underwriting Agreement and to the satisfaction (or waiver in writing by the Managing Representatives on behalf of the Underwriters) of each of the following additional conditions: |
(a) | The Registration Statement must have become effective by 5:30 p.m., New York City time, on the date of this Underwriting Agreement or such later date and time as the Managing Representatives consents to in writing. The Prospectus must have been filed in accordance with Rule 497(b) or (h) or a certificate must have been filed in accordance with Rule 497(j), as the case may be, under the Securities Act. |
(b) | No order suspending the effectiveness of the Registration Statement may be in effect and no proceedings for such purpose may be pending before or, to the knowledge of counsel to the Underwriters, threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) must be complied with or waived to the reasonable satisfaction of the Managing Representatives. |
(c) |
Since the dates as of which information is given in the Registration Statement, the Pricing Prospectus and the Prospectus, as of the date of this Underwriting Agreement, (i) there must not have been any change in the Common Shares or any adverse change in the liabilities of the Fund except as set forth in or contemplated by the Pricing Prospectus or the Prospectus; (ii) there must not have been any adverse change in the condition (financial or otherwise), earnings, |
22
business affairs, business prospects, management, properties, net assets or results of operations, whether or not arising from transactions in the ordinary course of business, of the Fund, the Sub-Adviser or the Investment Adviser as set forth in or contemplated by the Pricing Prospectus or the Prospectus; (iii) the Fund must not have sustained any loss or interference with its business from any court or from any legislative or other governmental action, order or decree, whether foreign or domestic, or from any other occurrence not described in the Registration Statement, the Pricing Prospectus and the Prospectus; and (iv) there must not have occurred any event that makes untrue or incorrect in any respect any statement or information contained in the Registration Statement, the Pricing Prospectus or the Prospectus or any statement or information omitted in the Registration Statement, the Pricing Prospectus or the Prospectus that should be reflected therein in order to make the statements or information therein (in the case of the Pricing Prospectus and the Prospectus, in light of the circumstances under which they were made), not misleading; if, in the judgment of the Managing Representatives, any such development referred to in clause (i), (ii), (iii), or (iv) of this paragraph (c) is material and adverse so as to make it impracticable or inadvisable to consummate the sale and delivery of the Shares to the public on the terms and in the manner contemplated by the Pricing Prospectus. |
(d) |
The Managing Representatives must have received as of each Closing Time a certificate, dated such date, of the Chief Executive Officer, President, Managing Director or a Vice-President and the Controller, Treasurer, Assistant Treasurer, Chief Financial Officer or Chief Accounting Officer of each of the Fund and the Investment Adviser and the Sub-Adviser certifying (in their capacity as such officers) that (i) the signers have carefully examined the Registration Statement, the Pricing Prospectus, the Prospectus and this Underwriting Agreement, (ii) the representations of the Fund (with respect to the certificates from such Fund officers), the representations of the Investment Adviser (with respect to the certificates from such officers of the Investment Adviser) and the representations of the Sub-Adviser (with respect to the certificates from such officers of the Sub-Adviser) in this Underwriting Agreement are accurate on and as of the date of the certificate, (iii) there has not been any material adverse change in the condition (financial or otherwise), earnings, business affairs, business prospects, management, property, net assets or results of operations of the Fund (with respect to the certificates from such Fund officers), the Investment Adviser (with respect to the certificates from such officers of the Investment Adviser) or the Sub-Adviser (with respect to the certificates from such officers of the Sub-Adviser), which change would adversely affect the ability of the Fund, the Investment Adviser or the Sub-Adviser, as the case may be, to fulfill its obligations under this Underwriting Agreement, the Investment Advisory Agreement (with respect to the certificates from such officers of the Investment Adviser) or the Sub-Advisory Agreement (with respect to the certificates from such officers of the Sub-Adviser), whether or not arising from transactions in the ordinary course of business, (iv) with respect to the certificates from such officers of the Fund only, no order suspending the effectiveness of the Registration Statement, prohibiting the sale of any of the Shares or otherwise having an |
23
adverse effect on the Fund has been issued and no proceedings for any such purpose are pending before or threatened by the Commission or any other regulatory body, whether foreign or domestic, (v) with respect to the certificates from such officers of the Investment Adviser only, no order having an adverse effect on the ability of the Investment Adviser to fulfill its obligations under this Underwriting Agreement, the Sub-Advisory Agreement, the Fee Agreements or the Investment Advisory Agreement, as the case may be, has been issued and no proceedings for any such purpose are pending before or threatened by the Commission or any other regulatory body, whether foreign or domestic, (vi) with respect to the certificate from such officers of the Sub-Adviser only, no order having an adverse effect on the ability of the Sub-Adviser to fulfill its obligations under this Underwriting Agreement or the Sub-Advisory Agreement, as the case may be, has been issued and no proceedings for any such purpose are pending before or, threatened by the Commission or any other regulatory body, whether foreign or domestic and (vii) each of the Fund (with respect to the certificates from such Fund officers), the Sub-Adviser (with respect to the certificates from such officers of the Sub-Adviser) and the Investment Adviser (with respect to the certificates from such officers of the Investment Adviser) has performed all of its respective agreements that this Underwriting Agreement requires it to perform by such Closing Time (to the extent not waived in writing by the Managing Representatives). |
(e) | The Managing Representatives must have received as of each Closing Time the opinions dated as of the date thereof substantially in the form of Schedules B and C to this Underwriting Agreement from the counsel identified in each such Schedules. With respect to the opinions identified in such Schedule B, to the extent that the matters addressed in such opinions relate to matters of Delaware law, such opinions may be rendered by [] addressed to the Managing Representatives. |
(f) | The Managing Representatives must have received as of each Closing Time from Clifford Chance US LLP an opinion dated as of the date thereof with respect to the Fund, the Shares, the Registration Statement and the Prospectus and this Underwriting Agreement in a form reasonably satisfactory in all respects to the Managing Representatives. The Fund and the Investment Adviser must have furnished to such counsel such documents as counsel may reasonably request for the purpose of enabling them to render such opinion. |
(g) | The Managing Representatives must have received on the date this Underwriting Agreement is signed and delivered by you a signed report from [], dated such date, and in form and substance satisfactory to the Managing Representatives containing statements and information of the type ordinarily included in accountants reports with respect to the financial information of the Fund contained in the Registration Statement, the Preliminary Prospectus or the Prospectus. The Managing Representatives also must have received from [] a report, as of each Closing Time, dated as of the date thereof, in form and substance satisfactory to the Managing Representatives, to the effect that they |
24
reaffirm the statements made in the earlier report, except that the specified date referred to shall be a date not more than three business days prior to such Closing Time. |
All opinions, letters, reports, evidence and certificates mentioned above or elsewhere in this Underwriting Agreement will comply only if they are in form and scope reasonably satisfactory to counsel for the Underwriters, provided that any such documents, forms of which are annexed hereto, shall be deemed satisfactory to such counsel if substantially in such form.
7. | Termination . This Underwriting Agreement may be terminated by the Managing Representatives by notifying the Fund at any time: |
(a) | before the later of the Effective Time and the time when any of the Shares are first generally offered pursuant to this Underwriting Agreement by the Managing Representatives to dealers by electronic delivery, letter or telegram; |
(b) | as of or before any Closing Time if, in the sole judgment of the Managing Representatives, payment for and delivery of any Shares is rendered impracticable or inadvisable because (i) trading in the equity securities of the Fund is suspended by the Commission or by the principal exchange that lists the Shares, (ii) trading in securities generally on the NYSE, NYSE Amex or the NASDAQ Stock Market shall have been suspended or limited or minimum or maximum prices shall have been generally established on such exchange or over-the-counter market, (iii) additional material governmental restrictions, not in force on the date of this Underwriting Agreement, have been imposed upon trading in securities or trading has been suspended on any U.S. securities exchange, (iv) a general banking moratorium has been established by U.S. federal or New York authorities or (v) if there has occurred (A) any material adverse change in the financial or securities markets in the United States or the international financial markets, (B) any material adverse change in the political, financial or economic conditions in the United States, (C) any outbreak of hostilities or escalation thereof or other calamity, terrorist activity, crises or any change or development involving a prospective change in national or international political, financial or economic conditions (D) or declaration by the United States of a national emergency or war or other calamity shall have occurred the effect of any of which is such as to make it, in the sole judgment of the Managing Representatives, impracticable or inadvisable to market the Shares on the terms and in the manner contemplated by the Prospectus; or |
(c) | as of or before any Closing Time, if any of the conditions specified in Section 6 with respect to such Closing Time have not been fulfilled when and as required by this Underwriting Agreement, and the Managing Representatives shall have given the Fund and the Advisers notice thereof and a reasonable opportunity to fulfill such condition. |
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8. | Substitution of Underwriters . If one or more of the Underwriters fails (other than for a reason sufficient to justify the termination of this Underwriting Agreement) to purchase as of any Closing Time the Shares agreed to be purchased as of such Closing Time by such Underwriter or Underwriters, the Managing Representatives may find one or more substitute underwriters to purchase such Shares or make such other arrangements as the Managing Representatives deems advisable, or one or more of the remaining Underwriters may agree to purchase such Shares in such proportions as may be approved by the Managing Representatives, in each case upon the terms set forth in this Underwriting Agreement. If no such arrangements have been made within 36 hours after the date of such Closing Time, and |
(a) | the number of Shares to be purchased by the defaulting Underwriters as of such Closing Time does not exceed 10% of the Shares that the Underwriters are obligated to purchase as of such Closing Time, each of the nondefaulting Underwriters will be obligated to purchase such Shares on the terms set forth in this Underwriting Agreement in proportion to their respective obligations under this Underwriting Agreement, or |
(b) | the number of Shares to be purchased by the defaulting Underwriters as of such Closing Time exceeds 10% of the Shares to be purchased by all the Underwriters as of such Closing Time, the Fund will be entitled to an additional period of 24 hours within which to find one or more substitute underwriters reasonably satisfactory to the Managing Representatives to purchase such Shares on the terms set forth in this Underwriting Agreement. |
Upon the occurrence of the circumstances described in the foregoing paragraph (b), either the Managing Representatives or the Fund will have the right to postpone the date of the applicable Closing Time for not more than five business days in order that necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement, the Pricing Prospectus or the Prospectus) may be effected by the Managing Representatives and the Fund. If the number of Shares to be purchased as of such Closing Time by such defaulting Underwriter or Underwriters exceeds 10% of the Shares that the Underwriters are obligated to purchase as of such Closing Time, and none of the nondefaulting Underwriters or the Fund makes arrangements pursuant to this Section 8 within the period stated for the purchase of the Shares that the defaulting Underwriters agreed to purchase, this Underwriting Agreement will terminate without liability on the part of any nondefaulting Underwriter, the Fund or the Investment Adviser or the Sub-Adviser except as provided in Sections 5(g) and 9 hereof. Any action taken under this Section will not affect the liability of any defaulting Underwriter to the Fund, the Sub-Adviser or the Investment Adviser or to any nondefaulting Underwriters arising out of such default. A substitute underwriter will become an Underwriter for all purposes of this Underwriting Agreement.
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9. | Indemnity and Contribution . |
(a) | Each of the Fund, the Sub-Adviser and the Investment Adviser, jointly and severally, agrees to indemnify, defend and hold harmless each Underwriter, its partners, the directors, members, managers, officers, employees, agents and affiliates and any person who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, any such Underwriter or any such person may incur under the Securities Act, the Exchange Act, the Investment Company Act, the Advisers Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim (i) arises out of or is based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Fund) or arises out of or is based upon an omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) arises out of or is based upon an untrue statement or alleged untrue statement of a material fact included in any Preliminary Prospectus, any Road Show Material, the Disclosure Package, any Sales Material or the Prospectus (as it may be amended or supplemented) or arises out of or is based upon an omission or alleged omission to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; except with respect to either of the foregoing clause (i) and (ii) insofar as any such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information concerning such Underwriters furnished in writing by or on behalf of any Underwriter through the Managing Representatives to the Fund expressly for use with reference to any Underwriter in such Registration Statement or in such Disclosure Package or Prospectus (as amended or supplemented) as set forth in Section 9(f) hereof or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or in the Disclosure Package or the Prospectus or necessary to make such information (with respect to such Disclosure Package and the Prospectus, in light of the circumstances under which they were made), not misleading. |
If any action, suit or proceeding (together, a Proceeding ) is brought against an Underwriter or any such person in respect of which indemnity may be sought against the Fund, the Sub-Adviser or the Investment Adviser pursuant to the foregoing paragraph, such Underwriter or such person shall promptly notify the Fund, the Sub-Adviser or the Investment Adviser, as the case may be, in writing of the institution of such Proceeding and the Fund, the Sub-Adviser or the Investment Adviser shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses; provided , however , that the omission to so
27
notify the Fund, the Sub-Adviser or the Investment Adviser shall not relieve the Fund, the Sub-Adviser or the Investment Adviser from any liability which the Fund, the Sub-Adviser or the Investment Adviser may have to any Underwriter or any such person or otherwise. Such Underwriter or such person shall have the right to employ additional counsel in any such case, but the reasonable fees and expenses of such counsel shall be at the expense of such Underwriter or of such person unless the employment of such counsel shall have been authorized in writing by the Fund, the Sub-Adviser or the Investment Adviser, as the case may be, in connection with the defense of such Proceeding or the Fund, the Sub-Adviser or the Investment Adviser shall not have, within a reasonable period of time in light of the circumstances, employed counsel to have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them, which are different from, additional to or in conflict with those available to the Fund, the Sub-Adviser or the Investment Adviser (in which case the Fund, the Sub-Adviser or the Investment Adviser shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties), in any of which events such reasonable fees and expenses shall be borne by the Fund, the Sub-Adviser or the Investment Adviser and paid as incurred in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding. Neither the Fund, the Sub-Adviser nor the Investment Adviser shall be liable for any settlement of any Proceeding effected without its written consent but if settled with the written consent of the Fund, the Sub-Adviser or the Investment Adviser, the Fund, the Sub-Adviser or the Investment Adviser, as the case may be, agrees to indemnify and hold harmless any Underwriter and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for reasonable fees and expenses of counsel as contemplated by the second sentence of this paragraph, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding and does not include an admission of fault, culpability or a failure to act, by or on behalf of such indemnified party.
(b) |
Each Underwriter severally agrees to indemnify, defend and hold harmless the Fund, the Sub-Adviser and the Investment Adviser, and each of their respective |
28
shareholders, partners, managers, members, trustees, directors and officers, and any person who controls the Fund, the Sub-Adviser or the Investment Adviser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation), which, jointly or severally, the Fund, the Sub-Adviser the Investment Adviser or any such person may incur under the Securities Act, the Exchange Act, the Investment Company Act, the Advisers Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon an untrue statement or alleged untrue statement of a material fact contained in and in conformity with information concerning such Underwriters furnished in writing by or on behalf of any Underwriter to the Fund or the Investment Adviser or the Sub-Adviser expressly for use in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Fund) or in the Disclosure Package or the Prospectus as set forth in Section 9(f) hereof, or arises out of or is based upon an omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or the Disclosure Package or the Prospectus or necessary to make such information (with respect to the Disclosure Package and the Prospectus, in light of the circumstances under which they were made), not misleading. |
If any Proceeding is brought against the Fund, the Investment Adviser, the Sub-Adviser or any such person in respect of which indemnity may be sought against any Underwriter pursuant to the foregoing paragraph, the Fund, the Investment Adviser, the Sub-Adviser or such person shall promptly notify such Underwriter in writing of the institution of such Proceeding and such Underwriter shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses; provided , however , that the omission to so notify such Underwriter shall not relieve such Underwriter from any liability which such Underwriter may have to the Fund, the Investment Adviser, the Sub-Adviser or any such person or otherwise. The Fund, the Investment Adviser, the Sub-Adviser or such person shall have the right to employ additional counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Fund, the Investment Adviser, the Sub-Adviser or such person, as the case may be, unless the employment of such counsel shall have been authorized in writing by such Underwriter in connection with the defense of such Proceeding or such Underwriter shall not have, within a reasonable period of time in light of the circumstances, employed counsel to have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them, which are different from or additional to or in conflict with those available to such Underwriter (in which case such Underwriter shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties, but such Underwriter may employ counsel in connection with the defense thereof but the fees and expenses of such counsel shall be at the expense of such Underwriter), in any of which events such
29
fees and expenses shall be borne by such Underwriter and paid as incurred. Neither the Fund nor the Investment Adviser nor the Sub-Investment Adviser shall be liable for any settlement of any Proceeding effected without its written consent but if settled with the written consent of the Fund or the Investment Adviser or the Sub-Adviser, the Fund or the Investment Adviser or the Sub-Adviser, as the case may be, agrees to indemnify and hold harmless any Underwriter and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for reasonable fees and expenses of counsel as contemplated by the second sentence of this paragraph, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding and does not include an admission of fault, culpability or a failure to act, by or on behalf of such indemnified party.
(c) |
If the indemnification provided for in this Section 9 is unavailable to an indemnified party under subsections (a) and (b) of this Section 9 in respect of any losses, damages, expenses, liabilities or claims referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, damages, expenses, liabilities or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Fund, the Sub-Adviser and the Investment Adviser on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Fund, the Sub-Adviser and the Investment Adviser on the one hand and of the Underwriters on the other in connection with the statements or omissions, which resulted in such losses, damages, expenses, liabilities or claims, as well as any other relevant equitable considerations. The relative benefits received by the Fund, the Sub-Adviser and the Investment Adviser on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Fund and the total underwriting discounts and commissions received by the Underwriters, bear to the aggregate public offering |
30
price of the Shares. The relative fault of the Fund, the Sub-Adviser and the Investment Adviser on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Fund or the Investment Adviser or by the Underwriters and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, damages, expenses, liabilities and claims referred to in this subsection shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating, preparing to defend or defending any Proceeding. |
(d) | The Fund, the Sub-Adviser, the Investment Adviser and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in subsection (c) above. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the fees and commissions received by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters obligations to contribute pursuant to this Section 9 are several in proportion to their respective underwriting commitments and not joint. |
(e) | The indemnity and contribution agreements contained in this Section 9 and the covenants, warranties and representations of the Fund contained in this Underwriting Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of any Underwriter, its partners, the directors, members, managers, officers, employees, agents and affiliates or any person (including each partner, officer or director of such person) who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, or by or on behalf of the Fund, the Investment Adviser, the Sub-Adviser, its shareholders, partners, advisers, members, trustees, directors or officers or any person who controls the Fund, the Sub-Adviser or the Investment Adviser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and shall survive any termination of this Underwriting Agreement or the issuance and delivery of the Shares. The Fund, the Sub-Adviser, the Investment Adviser and each Underwriter agree promptly to notify each other of the commencement of any Proceeding against it and, in the case of the Fund or the Investment Adviser, against any of the Funds trustees, directors or officers, or any of the Investment Advisers or the Sub-Advisers shareholders, partners, managers, members, trustees, directors or officers in connection with the issuance and sale of the Shares, or in connection with the Registration Statement or Prospectus. |
31
(f) | The Fund, the Sub-Adviser and the Investment Adviser each acknowledge that the statements in the Prospectus with respect to the names of the Underwriters and number of Common Shares allocated for purchase by such Underwriters, the selling concessions and reallowances of selling concessions, the statements regarding stabilization, penalty bids and syndicate short selling, and the statements regarding electronic delivery of prospectuses, all as described under the caption Underwriting in the Prospectus, constitute the only information furnished in writing by or on behalf of any Underwriter through the Managing Representatives to the Fund expressly for use with reference to such Underwriter in the Registration Statement or in the Disclosure Package or the Prospectus (as amended or supplemented). The Underwriters severally confirm that these statements are correct in all material respects and were so furnished by or on behalf of each of the Underwriters severally for use in the Prospectus. |
(g) | Notwithstanding any other provisions in this Section 9, no party shall be entitled to indemnification or contribution under this Underwriting Agreement against any loss, claim, liability, expense or damage arising by reason of such persons willful misfeasance, bad faith, gross negligence or reckless disregard of its duties in the performance of its duties hereunder. The parties hereto acknowledge that the foregoing provision shall be applicable solely as to matters arising under Section 17(i) of the Investment Company Act, and shall not be construed to impose any duties or obligations upon any such parties under this Underwriting Agreement other than as specifically set forth herein (it being understood that the Underwriters have no duty hereunder to the Fund to perform any due diligence investigation). |
10. |
No Fiduciary Relationship . The Fund and the Advisers hereby acknowledge and agree that the Underwriters are acting solely as underwriters in connection with the purchase and sale of the Funds securities contemplated hereby. The Fund and the Advisers further acknowledge and agree that the Underwriters are acting pursuant to a contractual relationship created solely by this Underwriting Agreement entered into on an arms length basis, and in no event do the parties intend that the Underwriters act or be responsible as a fiduciary to the Fund, its management, shareholders or creditors or any other person in connection with any activity that the Underwriters may undertake or have undertaken in furtherance of such purchase and sale of the Funds securities, either before or after the date hereof. The Underwriters hereby expressly disclaim any fiduciary or similar obligations to the Fund or the Advisers, either in connection with the transactions contemplated by this Underwriting Agreement or any matters leading up to such transactions, and the Fund and the Advisers hereby confirm their understanding and agreement to that effect. The Fund, the Advisers and the Underwriters agree that they are each responsible for making their own independent judgments with respect to any such transactions and that any opinions or views expressed by the Underwriters to the Fund or the Advisers regarding such transactions, including, but not limited to, any opinions or views with respect to the price or market for the Funds securities, do not constitute advice or recommendations to the Fund or the Advisers. The Fund, the Advisers and the Underwriters agree that each Underwriter is acting solely as principal and is not the agent or fiduciary of the Fund or the Advisers and no Underwriter has assumed, and no |
32
Underwriter will assume, any advisory or fiduciary responsibility in favor of the Fund or the Advisers with respect to the transactions contemplated hereby or the process leading thereto (irrespective of whether any Underwriter has advised or is currently advising the Fund or the Advisers on other matters); provided, that an Underwriter, in its capacity as an independent contractor, may provide advice to the Advisers as to the structure and organization of the Fund pursuant to a Fee Agreement. The Fund and Advisers acknowledge and agree that the Underwriters have not provided any legal, accounting, regulatory or tax advice with respect to the transactions contemplated hereby and each of the Fund and Advisers have consulted its own respective legal, accounting, regulatory, and tax advisors to the extent it deemed appropriate. The Fund and the Advisers hereby waive and release, to the fullest extent permitted by law, any claims that the Fund or the Advisers may have against the Underwriters with respect to any breach or alleged breach of any fiduciary, advisory or similar duty to the Fund or the Advisers in connection with the transactions contemplated by this Underwriting Agreement or any matters leading up to such transactions. |
11. | Notices . Except as otherwise herein provided, all statements, requests, notices and agreements shall be in writing or by telegram and, if to the Underwriters, shall be sufficient in all respects if delivered or sent to UBS Securities LLC, 1285 Avenue of the Americas, New York, New York 10019, Attention: Syndicate / Michael Ryan (fax: (212) 713-3371); and if to the Fund or the Investment Adviser, shall be sufficient in all respects if delivered or sent to the Fund or the Investment Adviser, as the case may be, at the offices of the Fund or the Investment Adviser at [321 North Clark Street, Suite 2430, Chicago, Illinois 60654], Attention: []. |
12. | Governing Law; Construction . This Underwriting Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Underwriting Agreement ( Claim ), directly or indirectly, shall be governed by, and construed in accordance with, the laws of the State of New York. The Section headings in this Underwriting Agreement have been inserted as a matter of convenience of reference and are not a part of this Underwriting Agreement. |
13. | Submission to Jurisdiction . Except as set forth below, no Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have jurisdiction over the adjudication of such matters, and the Fund and the Underwriters each consent to the jurisdiction of such courts and personal service with respect thereto. Each of the Underwriters, the Fund (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates), the Investment Adviser (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Sub-Adviser (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) waives all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Underwriting Agreement. Each of the Fund, the Investment Adviser and the Sub-Adviser agrees that a final judgment in any such action, proceeding or counterclaim brought in any such court shall be conclusive and binding upon the Fund, the Investment |
33
Adviser and the Sub-Adviser, as the case may be, and may be enforced in any other courts in the jurisdiction of which the Fund, the Investment Adviser or the Sub-Adviser, as the case may be, is or may be subject, by suit upon such judgment. |
14. | Parties at Interest . The Agreement herein set forth has been and is made solely for the benefit of the Underwriters, the Fund, the Sub-Adviser and the Investment Adviser and to the extent provided in Section 9 hereof the controlling persons, shareholders, partners, members, trustees, managers, directors, officers, employees, agents and affiliates referred to in such section, and their respective successors, assigns, heirs, personal representatives and executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from any of the Underwriters) shall acquire or have any right under or by virtue of this Underwriting Agreement. |
15. | Counterparts . This Underwriting Agreement may be signed by the parties in one or more counterparts which together shall constitute one and the same agreement among the parties. |
16. | Successors and Assigns . This Underwriting Agreement shall be binding upon the Underwriters, the Fund, the Sub-Adviser and the Investment Adviser and any successor or assign of any substantial portion of the Funds, the Sub-Advisers, the Investment Advisers or any of the Underwriters respective businesses and/or assets, as the case may be. |
17. | Disclaimer of Liability of Trustees and Beneficiaries . A copy of the declaration of trust (as amended and restated from time to time) of the Fund is on file with the Secretary of State of the State of Delaware, and notice hereby is given that this Underwriting Agreement is executed on behalf of the Fund by an officer or Trustee of the Fund in his or her capacity as an officer or Trustee of the Fund and not individually and that the obligations under or arising out of this Underwriting Agreement are not binding upon any of the Trustees, officers or shareholders individually but are binding only upon the assets and properties of the Fund. |
34
If the foregoing correctly sets forth the understanding among the Fund, the Investment Adviser, the Sub-Adviser and the Underwriters, please so indicate in the space provided below, whereupon this letter and your acceptance shall constitute a binding agreement among the Fund, the Investment Adviser, the Sub-Adviser and the Underwriters, severally.
Very truly yours, |
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST |
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By: |
Title: |
XA INVESTMENTS LLC |
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By: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
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By: |
Title: |
Schedule A-1
Accepted and agreed to as of the date first above written, on behalf of themselves and the other several Underwriters named in Schedule A |
UBS SECURITIES LLC |
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By: |
Title: |
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By: |
Title: |
[●] |
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By: |
Title: |
Schedule A-2
SCHEDULE A
Underwriters | Number of Shares | |||
UBS Securities LLC |
[● | ] | ||
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Total |
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Schedule A-3
Schedule C-1
UBS SECURITIES LLC
MASTER AGREEMENT AMONG UNDERWRITERS
REGISTERED SEC OFFERINGS
(INCLUDING MULTIPLE SYNDICATE OFFERINGS)
AND
EXEMPT OFFERINGS
(OTHER THAN OFFERINGS OF MUNICIPAL SECURITIES)
June 6, 2014
This Master Agreement Among Underwriters (this Master AAU ), dated as of June 6, 2014, is by and between UBS Securities LLC ( UBS , or we ) and the party named on the signature page hereto (an Underwriter , as defined in Section 1.1 hereof, or you ). From time to time we or one or more of our affiliates may invite you (and others) to participate on the terms set forth herein as an underwriter or an initial purchaser, or in a similar capacity, in connection with certain offerings of securities that are managed solely by us or with one or more other co-managers. If we invite you to participate in a specific offering and sale of securities (an Offering ) to which this Master AAU will apply, we will send the information set forth in Section 1.1 hereof to you by one or more wires, telexes, telecopy or electronic data transmissions, or other written communications (each, a Wire , and collectively, an AAU ), unless you are otherwise deemed to have accepted an AAU with respect to such Offering pursuant to Section 1.2 hereof. Each Wire will indicate that it is a Wire pursuant to this Master AAU. The Wire inviting you to participate in an Offering is referred to herein as an Invitation Wire . You and we hereby agree that by the terms hereof the provisions of this Master AAU automatically will be incorporated by reference in each AAU, except that any such AAU may also exclude or revise such provisions of this Master AAU in respect of the Offering to which such AAU relates, and may contain such additional provisions as may be specified in any Wire relating to such AAU. You and we further agree as follows :
I. GENERAL
1.1. Terms of AAU; Certain Definitions; Construction . Each AAU will relate to an Offering, and will identify: (i) the securities to be offered in the Offering (the Securities ), their principal terms, the issuer or issuers (each, an Issuer ) and any guarantor (each, a
2
Guarantor ) thereof, and, if different from the Issuer, the seller or sellers (each, a Seller ) of the Securities, (ii) the underwriting agreement, purchase agreement, standby underwriting agreement, distribution agreement, or similar agreement (as identified in such AAU and as amended or supplemented, including a terms agreement or pricing agreement pursuant to any of the foregoing, collectively, the Underwriting Agreement ) providing for the purchase, on a several and not joint basis, of the Securities by the several underwriters, initial purchasers, or others acting in a similar capacity (the Underwriters ) on whose behalf the Manager (as defined below) executes the Underwriting Agreement, and whether such agreement provides for: (x) an option to purchase Additional Securities (as defined below) to cover over-allotments, or (y) an offering in multiple jurisdictions or markets involving two or more syndicates (an International Offering ), each of which will offer and sell Securities subject to such restrictions as may be specified in any Intersyndicate Agreement (as defined below) referred to in such AAU, (iii) the price at which the Securities are to be purchased by the several Underwriters from any Issuer or Seller thereof (the Purchase Price ), (iv) the offering terms, including, if applicable, the price or prices at which the Securities initially will be offered by the Underwriters (the Offering Price ), any selling concession to dealers (the Selling Concession ), reallowance (the Reallowance ), management fee, global coordinators fee, praecipium, or other similar fees, discounts, or commissions (collectively, the Fees and Commissions ) with respect to the Securities, and (v) other principal terms of the Offering, which may include, without limitation: (A) the proposed or actual pricing date ( Pricing Date ) and settlement date (the Settlement Date ), (B) any contractual restrictions on the offer and sale of the Securities pursuant to the Underwriting Agreement, Intersyndicate Agreement, or otherwise, (C) any co-managers for such Offering (the Co-Managers ), (D) your proposed participation in the Offering, and (E) any trustee, fiscal agent, or similar agent (the Trustee ) for the indenture, trust agreement, fiscal agency agreement, or similar agreement (the Indenture ) under which such Securities will be issued.
Manager means UBS Securities LLC, except as set forth in Section 9.9 hereof. Representative means the Manager and any Co-Manager that signs the applicable Underwriting Agreement on behalf of the Underwriters or is identified as a Representative in the applicable Underwriting Agreement. Underwriters includes the Representative(s), the Manager, and the Co-Managers. Firm Securities means the number or amount of Securities that the several Underwriters are initially committed to purchase under the Underwriting Agreement (which may be expressed as a percentage of an aggregate number or amount of Securities to be purchased by the Underwriters, as in the case of a standby Underwriting Agreement). Additional Securities means the Securities, if any, that the several Underwriters have an option to purchase under the Underwriting Agreement to cover over-allotments. The number, amount, or percentage of Firm Securities set forth opposite each Underwriters name in the Underwriting Agreement plus any additional Firm Securities which such Underwriter has made a commitment to purchase, irrespective of whether such Underwriter actually purchases or sells such number, amount, or percentage of Securities under the Underwriting Agreement or Article XI hereof, is hereinafter referred to as the Original Underwriting Obligation of such Underwriter, and the ratio which such Original Underwriting Obligation bears to the total of all Firm Securities set forth in the Underwriting Agreement (or, in the case of a standby Underwriting Agreement, to 100%) is hereinafter referred to as the Underwriting Percentage of such Underwriter. For the avoidance of doubt, each Underwriter acknowledges and agrees that, for all purposes under this Agreement and otherwise (including, to the extent applicable, for
3
purposes of Section 11(e) under the U.S. Securities Act of 1933 (the 1933 Act )), each Underwriters Underwriting Percentage of the total number, amount, or percentage of Securities offered and sold in the Offering (including any Additional Securities), and only such number, amount, or percentage, constitutes the securities underwritten by such Underwriter and distributed to investors. 1
References herein to laws, statutory and regulatory sections, rules, regulations, forms, and interpretive materials will be deemed to include any successor provisions.
1.2. Acceptance of AAU . You will have accepted an AAU for an Offering if: (a) we receive your acceptance, prior to the time specified in the Invitation Wire for such Offering, by wire, telex, telecopy or electronic data transmission, or other written communication (any such communication being deemed In Writing ) or orally (if promptly confirmed In Writing), in the manner specified in the Invitation Wire, of our invitation to participate in the Offering, or (b) notwithstanding that we did not send you an Invitation Wire or you have not otherwise responded In Writing to any such Wire, you: (i) agree (orally or by a Wire) to be named as an Underwriter in the relevant Underwriting Agreement executed by us as Manager, or (ii) receive and retain an economic benefit for participating in the Offering as an Underwriter. Your acceptance of the invitation to participate will cause such AAU to constitute a valid and binding contract between us. Your acceptance of the AAU as provided above or an Invitation Wire will also constitute acceptance by you of the terms of subsequent Wires to you relating to the Offering unless we receive In Writing, within the time and in the manner specified in such subsequent Wire, a notice from you to the effect that you do not accept the terms of such subsequent Wire, in which case you will be deemed to have elected not to participate in the Offering.
1.3. Underwriters Questionnaire . Your acceptance of the Invitation Wire for an Offering or your participation in an Offering as an Underwriter will confirm that you have no exceptions to the Underwriters Questionnaire attached as Exhibit A hereto (or to any other questions addressed to you in any Wires relating to the Offering previously sent to you), other than exceptions noted by you In Writing in connection with the Offering and received from you by us before the time specified in the Invitation Wire or any subsequent Wire.
II. OFFERING MATERIALS; OFFERING AGREEMENTS
2.1. Registered Offerings . In the case of an Offering that will be registered in whole or in part (a Registered Offering ) under the 1933 Act, you acknowledge that the Issuer has filed with the Securities and Exchange Commission (the Commission ) a registration statement, including a prospectus relating to the Securities. Registration Statement means such registration statement as amended to the effective date of the Underwriting Agreement and, in the event that the Issuer files an abbreviated registration statement to register additional Securities pursuant to Rule 462(b) or 462(e) under the 1933 Act, such abbreviated registration
1 Meant to clarify mechanics of underwriting for purposes of Section 11(e), and rebut footnote 8 of the WorldCom decision (See In re: Worldcom, Inc. Securities Litigation , U.S. Dist. Ct. (SDNY), slip-op 02 Civ 3288, March 14, 2005 (unpublished)).
4
statement. Prospectus means the prospectus, together with the final prospectus supplement, if any, containing the final terms of the Securities and, in the case of a Registered Offering that is an International Offering, Prospectus means, collectively, each prospectus or offering circular, together with each final prospectus supplement or final offering circular supplement, if any, relating to the Offering, in the respective forms containing the final terms of the Securities. Preliminary Prospectus means any preliminary prospectus relating to the Offering or any preliminary prospectus supplement together with a prospectus relating to the Offering and, in the case of a Registered Offering that is an International Offering, Preliminary Prospectus means, collectively, each preliminary prospectus or preliminary offering circular relating to the Offering or each preliminary prospectus supplement or preliminary offering circular supplement, together with a prospectus or offering circular, respectively, relating to the Offering. Free Writing Prospectus means, in the case of a Registered Offering, a free writing prospectus as defined in Rule 405 under the 1933 Act. As used herein the terms Registration Statement , Prospectus , Preliminary Prospectus , and Free Writing Prospectus will include in each case the material, if any, incorporated by reference therein, and as used herein, the term Registration Statement includes information deemed to be part thereof pursuant to, and as of the date and time specified in, Rules 430A, 430B, or 430C under the 1933 Act, while the terms Prospectus and Preliminary Prospectus include information deemed to be a part thereof pursuant to the rules and regulations under the 1933 Act, but only as of the actual time that information is first used or filed with the Commission pursuant to Rule 424(b) under the 1933 Act. The Manager will furnish, make available to you, or make arrangements for you to obtain copies (which may, to the extent permitted by law, be in electronic form) of each Prospectus and Preliminary Prospectus (as amended or supplemented, if applicable, but excluding, for this purpose, unless otherwise required pursuant to rules or regulations under the 1933 Act, documents incorporated therein by reference) as soon as practicable after sufficient quantities thereof have been made available by the Issuer.
As used herein, in the case of an Offering that is an offering of asset-backed securities, the term ABS Underwriter Derived Information means any analytical or computational materials as described in clause (5) of footnote 271 of Commission Release No. 33-8591, issued July 19, 2005 (Securities Offering Reform) (the Securities Offering Reform Release ).
2.2. Non-Registered Offerings . In the case of an Offering other than a Registered Offering, you acknowledge that no registration statement has been filed with the Commission. Offering Circular means the final offering circular or memorandum, if any, or any other final written materials authorized by the Issuer to be used in connection with an Offering that is not a Registered Offering. Preliminary Offering Circular means any preliminary offering circular or memorandum, if any, or any other written preliminary materials authorized by the Issuer to be used in connection with such an Offering. As used herein, the terms Offering Circular and Preliminary Offering Circular include the material, if any, incorporated by reference therein. We will either, as soon as practicable after the later of the date of the Invitation Wire or the date made available to us by the Issuer, furnish to you (or make available for your review) a copy of any Preliminary Offering Circular or any proof or draft of the Offering Circular. In any event, in any Offering involving an Offering Circular, the Manager will furnish, make available to you, or make arrangements for you to obtain, as soon as practicable after sufficient quantities thereof are made available by the Issuer, copies (which may, to the extent permitted by law, be in electronic
5
form) of the Preliminary Offering Circular and Offering Circular, as amended or supplemented, if applicable (but excluding, for this purpose, documents incorporated therein by reference).
2.3. Authority to Execute Underwriting and Intersyndicate Agreements . You authorize the Manager, on your behalf: (a) to determine the form of the Underwriting Agreement and to execute and deliver to the Issuer, Guarantor, or Seller the Underwriting Agreement to purchase: (i) up to the number, amount, or percentage of Firm Securities set forth in the applicable AAU, and (ii) if the Manager elects on behalf of the several Underwriters to exercise any option to purchase Additional Securities, up to the number, amount, or percentage of Additional Securities set forth in the applicable AAU, subject, in each case, to reduction pursuant to Article IV; and (b) to determine the form of any agreement or agreements, including, but not limited to, underwriting agreements, between or among the syndicates participating in the Offering or International Offering, respectively (each, an Intersyndicate Agreement ), and to execute and deliver any such Intersyndicate Agreement.
III. MANAGERS AUTHORITY
3.1. Terms of Offering . You authorize the Manager to act as manager of the Offering of the Securities by the Underwriters (the Underwriters Securities ) or by the Issuer or Seller pursuant to delayed delivery contracts (the Contract Securities ), if any, contemplated by the Underwriting Agreement. You authorize the Manager: (i) to purchase any or all of the Additional Securities for the accounts of the several Underwriters pursuant to the Underwriting Agreement, (ii) to agree, on your behalf and on behalf of the Co-Managers, to any addition to, change in, or waiver of any provision of, or the termination of, the Underwriting Agreement or any Intersyndicate Agreement (other than an increase in the Purchase Price or in your Original Underwriting Obligation to purchase Securities, in either case from that contemplated by the applicable AAU), (iii) to add prospective or remove existing Underwriters from the syndicate, (iv) to exercise, in the Managers discretion, all of the authority vested in the Manager in the Underwriting Agreement, (v) except as described below in this Section 3.1, to take any other action as may seem advisable to the Manager in respect of the Offering (including, in the case of an Offering of asset-backed securities, the preparation and delivery of ABS Underwriter Derived Information), including actions and communications with the Commission, the Financial Industry Regulatory Authority ( FINRA ), state blue sky or securities commissions, stock exchanges, and other regulatory bodies or organizations. Furthermore, the Manager will have exclusive authority, on your behalf and on behalf of the Co-Managers, to exercise powers and pursue enforcement of the terms and conditions of the Underwriting Agreement and any Intersyndicate Agreement, whether or not actually exercised, except as otherwise specified herein or therein. If, in accordance with the terms of the applicable AAU, the Offering of the Securities is at varying prices based on prevailing market prices, or prices related to prevailing market prices, or at negotiated prices, you authorize the Manager to determine, on your behalf in the Managers discretion, any Offering Price and the Fees and Commissions applicable to the Offering from time to time. You authorize the Manager on your behalf to arrange for any currency transactions (including forward and hedging currency transactions) as the Manager may deem necessary to facilitate settlement of the purchase of the Securities, but you do not authorize the Manager on your behalf to engage in any other forward or hedging transactions (including interest rate hedging transactions) in connection with the Offering unless such transactions are specified in an applicable AAU or are otherwise consented to by you. You further authorize the
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Manager, subject to the provisions of Section 1.2 hereof: (i) to vary the offering terms of the Securities in effect at any time, including, if applicable, the Offering Price, Fees, and Commissions set forth in the applicable AAU, (ii) to determine, on your behalf, the Purchase Price, and (iii) to increase or decrease the number, amount, or percentage of Securities being offered. Notwithstanding the foregoing provisions of this Section 3.1, the Manager will notify the Underwriters, prior to the signing of the Underwriting Agreement, of any provision in the Underwriting Agreement that could result in an increase in the number, amount, or percentage of Firm Securities set forth opposite each Underwriters name in the Underwriting Agreement by more than 25% (or such other percentage as will have been specified in the applicable Invitation Wire or otherwise consented to by you) as a result of the failure or refusal of another Underwriter or Underwriters to perform its or their obligations thereunder. The Manager may, at its discretion, delegate to any Underwriter any and all authority vested in the applicable AAU, including, but not limited to, the powers set forth in Sections 5.1 and 5.2 hereof.
3.2. Offering Date . The Offering is to be made on or about the time the Underwriting Agreement is entered into by the Issuer, Guarantor, or Seller and the Manager as in the Managers judgment is advisable, on the terms and conditions set forth in the Prospectus or the Offering Circular, as the case may be, and the applicable AAU. You will not sell any Securities prior to the time the Manager releases such Securities for sale to purchasers. The date on which such Securities are released for sale is referred to herein as the Offering Date .
3.3. Communications . Any public announcement or advertisement of the Offering will be made by the Manager on behalf of the Underwriters on such date as the Manager may determine. You will not announce or advertise the Offering prior to the date of the Managers announcement or advertisement thereof without the Managers consent. You will abide by any restrictions in the Underwriting Agreement relating to any general solicitation, announcement, advertising or publicity in addition to the restrictions in this Section 3.3. Further, if the Offering is made in whole or in part in reliance on any applicable exemption from registration under the 1933 Act, you will not engage in any general solicitation, announcement, or advertising in connection with the Offering that would be inconsistent with such exemption. Any announcement or advertisement you may make of the Offering after such date will be your own responsibility, and at your own expense and risk. In addition to your compliance with restrictions on the Offering pursuant to Sections 10.10, 10.11 and 10.12 hereof, you represent that you have not, and you agree that you will not, in connection with the offering and sale of the Securities in the Offering, give, send, or otherwise convey to any prospective purchaser or any purchaser of the Securities or other person not in your employ any written communication (as defined in Rule 405 under the 1933 Act) other than:
(i) any Preliminary Prospectus, Prospectus, Preliminary Offering Circular, or Offering Circular,
(ii) (A) written confirmations and notices of allocation delivered to your customers in accordance with Rules 172 or 173 under the 1933 Act, and written communications based on the exemption provided by Rule 134 under the 1933 Act, and (B) in the case of Offerings not registered under the 1933 Act, such written communications (1) as would be permitted by Section 3.3(v)(D)(1) below were such Offering registered under the 1933 Act, or (2) that the Manager or Underwriting
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Agreement may permit; provided, however , that such written communication under this clause (B) would not have otherwise constituted Issuer Information as defined below, or would have qualified for the exemption provided by Rule 134 under the 1933 Act, in each case, if such communication had been furnished in the context of a Registered Offering ( Supplemental Materials ),
(iii) any issuer free writing prospectus (as defined in Rule 433(h) under the 1933 Act, an Issuer Free Writing Prospectus ), the issuance or use of which has been permitted or consented to by the Issuer and the Manager,
(iv) information contained in any computational materials, or in the case of an Offering of asset backed securities, the ABS Underwriter Derived Information, or any other offering materials not constituting a Free Writing Prospectus concerning the Offering, the Issuer, the Guarantor, or the Seller, in each case, prepared by or with the permission of the Manager for use by the Underwriters in connection with the Offering, and, in the case of a Registered Offering, filed (if required) with the Commission or FINRA, as applicable,
(v) a Free Writing Prospectus prepared by or on behalf of, or used or referred to by, an Underwriter in connection with the Offering, so long as: (A) such Free Writing Prospectus is not required to be filed with the Commission, (B) the proposed use of such Free Writing Prospectus is permitted by the Underwriting Agreement, (C) such Free Writing Prospectus complies with the legending condition of Rule 433 under the 1933 Act, and you comply with the record-keeping condition of Rule 433, and (D) (1) such Free Writing Prospectus contains only information describing the preliminary terms of the Securities and other pricing data 2 that is not Issuer Information (as defined in Rule 433(h) under the 1933 Act, including footnote 271 of the Securities Offering Reform Release), or (2) the Issuer has agreed in the Underwriting Agreement to file a final term sheet under Rule 433 within the time period necessary to avoid a requirement for any Underwriter to file the Free Writing Prospectus to be used by such Underwriter, and the Free Writing Prospectus used by such Underwriter contains only information describing the terms of the Securities or their offering that is included in such final term sheet of the Issuer and other pricing data that is not Issuer Information (a Free Writing Prospectus meeting the requirements of (A) through (D) above is referred to herein as an Underwriter Free Writing Prospectus ). Without limiting the foregoing, any Underwriter Free Writing Prospectus that you use or refer to will not be distributed by you or on your behalf in a manner reasonably designed to lead to its broad unrestricted dissemination. You will comply in all material respects with the applicable requirements of the 1933 Act and the rules and regulations thereunder in connection with your use of any Underwriter Free Writing Prospectus,
(vi) any written communication prepared by or on behalf of, or used or referred to by, the Issuer, the conveyance of which by you in reliance on Section 5(d) of
2 Meant to permit disclosure of non-Issuer related information, such as benchmark Treasury rate, in preliminary term sheets or price talk.
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the 1933 Act has been permitted or consented to by the Issuer and the Manager (a Written Testing-the-Waters Communication ), so long as (A) you convey any such Written Testing-the-Waters Communication solely to entities that are 3 qualified institutional buyers within the meaning of Rule 144A under the 1933 Act or institutions that are accredited investors within the meaning of Rule 501 under the 1933 Act, and (B) you otherwise comply with the requirements of Section 5(d) of the 1933 Act, and
(vii) any written communication not otherwise permitted under clauses (i) through (vi) above, the conveyance of which by you has been permitted or consented to by the Manager (a Manager-Approved Communication ).
3.4. Institutional and Retail Sales . You authorize the Manager to sell to institutions and retail purchasers such Securities purchased by you pursuant to the Underwriting Agreement as the Manager will determine. The Selling Concession on any such sales will be credited to the accounts of the Underwriters as the Manager will determine.
3.5. Sales to Dealers . You authorize the Manager to sell to Dealers (as defined below) such Securities purchased by you pursuant to the Underwriting Agreement as the Manager will determine. A Dealer will be a person who is: (a) a broker or dealer (as defined by FINRA) actually engaged in the investment banking or securities business, and (i) a member in good standing of FINRA, or (ii) a non-U.S. bank, broker, dealer, or other institution not eligible for membership in FINRA that, in the case of either clause (a)(i) or (a)(ii), makes the representations and agreements applicable to such institutions contained in Section 10.5 hereof, or (b) in the case of Offerings of Securities that are exempt securities under Section 3(a)(12) of the Securities Exchange Act of 1934 (the 1934 Act ), and such other Securities as from time to time may be sold by a bank (as defined in Section 3(a)(6) of the 1934 Act (a Bank )), a Bank that is not a member of FINRA and that makes the representations and agreements applicable to such institutions contained in Section 10.5 hereof. If the price for any such sales by the Manager to Dealers exceeds an amount equal to the Offering Price less the Selling Concession set forth in the applicable AAU, the amount of such excess, if any, will be credited to the accounts of the Underwriters as the Manager will determine.
3.6. Direct Sales . The Manager will advise you promptly, on the Offering Date, as to the Securities purchased by you pursuant to the Underwriting Agreement that you will retain for direct sale. At any time prior to the termination of the applicable AAU, any such Securities that are held by the Manager for sale but not sold may, on your request and at the Managers discretion, be released to you for direct sale, and Securities so released to you will no longer be deemed held for sale by the Manager. You may allow, and Dealers may reallow, a discount on sales to Dealers in an amount not in excess of the Reallowance set forth in the applicable AAU. You may not purchase Securities from, or sell Securities to, any other Underwriter or Dealer at any discount or concession other than the Reallowance, except with the prior consent of the Manager.
3 If, and after, the SEC clarifies that reasonable belief is the applicable standard in this context, this language should be revised to reflect that standard.
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3.7. Release of Unsold Securities . From time to time prior to the termination of the applicable AAU, at the request of the Manager, you will advise the Manager of the number or amount of Securities remaining unsold which were retained by or released to you for direct sale, and of the number or amount of Securities and Other Securities (as defined below) purchased for your account remaining unsold which were delivered to you pursuant to Article V hereof or pursuant to any Intersyndicate Agreement, and, on the request of the Manager, you will release to the Manager any such Securities and Other Securities remaining unsold: (a) for sale by the Manager to institutions, Dealers, or retail purchasers, (b) for sale by the Issuer or Seller pursuant to delayed delivery contracts, or (c) if, in the Managers opinion, such Securities or Other Securities are needed to make delivery against sales made pursuant to Article V hereof or any Intersyndicate Agreement.
3.8. International Offerings . In the case of an International Offering, you authorize the Manager: (i) to make representations on your behalf as set forth in any Intersyndicate Agreement, and (ii) to purchase or sell for your account pursuant to the Intersyndicate Agreement: (a) Securities, (b) any other securities of the same class and series, or any securities into which the Securities may be converted or for which the Securities may be exchanged or exercised, and (c) any other securities designated in the applicable AAU or applicable Intersyndicate Agreement (the securities referred to in clauses (b) and (c) above being referred to collectively as the Other Securities ).
IV. DELAYED DELIVERY CONTRACTS
4.1. Arrangements for Sales . Arrangements for sales of Contract Securities will be made only through the Manager acting either directly or through Dealers (including Underwriters acting as Dealers), and you authorize the Manager to act on your behalf in making such arrangements. The aggregate number or amount of Securities to be purchased by the several Underwriters will be reduced by the respective number or amounts of Contract Securities attributed to such Underwriters as hereinafter provided. Subject to the provisions of Section 4.2 hereof, the aggregate number or amount of Contract Securities will be attributed to the Underwriters as nearly as practicable in proportion to their respective Underwriting Percentages, except that, as determined by the Manager in its discretion: (a) Contract Securities directed and allocated by a purchaser to specific Underwriters will be attributed to such Underwriters, and (b) Contract Securities for which arrangements have been made for sale through Dealers will be attributed to each Underwriter approximately in the proportion that Securities of such Underwriter held by the Manager for sales to Dealers bear to all Securities so held. The fee with respect to Contract Securities payable to the Manager for the accounts of the Underwriters pursuant to the Underwriting Agreement will be credited to the accounts of the respective Underwriters in proportion to the Contract Securities attributed to such Underwriters pursuant to the provisions of this Section 4.1, less, in the case of each Underwriter, the concession to Dealers on Contract Securities sold through Dealers and attributed to such Underwriter.
4.2. Excess Sales . If the number or amount of Contract Securities attributable to an Underwriter pursuant to Section 4.1 hereof would exceed such Underwriters Original Underwriting Obligation reduced by the number or amount of Underwriters Securities sold by or on behalf of such Underwriter, such excess will not be attributed to such Underwriter, and
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such Underwriter will be regarded as having acted only as a Dealer with respect to, and will receive only the concession to Dealers on, such excess.
V. PURCHASE AND SALE OF SECURITIES
5.1. Facilitation of Distribution . In order to facilitate the distribution and sale of the Securities, you authorize the Manager to buy and sell Securities and any Other Securities, in addition to Securities sold pursuant to Article III hereof, in the open market or otherwise (including, without limitation, pursuant to any Intersyndicate Agreement), for long or short account, on such terms as it may deem advisable, and to over-allot in arranging sales. Such purchases and sales and over-allotments will be made for the accounts of the several Underwriters as nearly as practicable to their respective Underwriting Percentages or, in the case of an International Offering, such purchases and sales will be for such accounts as set forth in the applicable Intersyndicate Agreement. Any Securities or Other Securities which may have been purchased by the Manager for stabilizing purposes in connection with the Offering prior to the acceptance of the applicable AAU will be treated as having been purchased pursuant to this Section 5.1 for the accounts of the several Underwriters or, in the case of an International Offering, for such accounts as are set forth in the applicable Intersyndicate Agreement. Your net commitment pursuant to the foregoing authorization will not exceed at the close of business on any day an amount equal to 20% of your Underwriting Percentage of the aggregate initial Offering Price of the Firm Securities, it being understood that, in calculating such net commitment, the initial Offering Price will be used with respect to the Securities so purchased or sold and, in the case of all Other Securities, will be the purchase price thereof. For purposes of determining your net commitment for short account ( i.e. , naked short), any short position that can be covered with: (a) Securities that may be purchased upon exercise of any over-allotment option then exercisable, (b) in the case of an International Offering, any Securities or Other Securities that the Manager has agreed to purchase for your account pursuant to any applicable Intersyndicate Agreement, and (c) Securities that may be purchased pursuant to a forward sale contract or similar arrangement with the Issuer or any selling security holder in the Offering, will be disregarded. On demand you will take up and pay for any Securities or Other Securities so purchased for your account and any Securities released to you pursuant to Section 3.7 hereof, and will deliver to the Manager against payment any Securities or Other Securities so sold or over-allotted for your account or released to you. The Manager will notify you if it engages in any stabilization transaction in accordance with Rule 17a-2 under the 1934 Act, and will notify you of the date of termination of stabilization. You will not stabilize or engage in any syndicate covering transaction (as defined in Rule 100 of Regulation M under the 1934 Act ( Regulation M )) in connection with the Offering without the prior consent of the Manager. You will provide to the Manager any reports required of you pursuant to Rule 17a-2 under the 1934 Act not later than the date specified therein.
5.2. Penalty with Respect to Securities Repurchased by the Manager . If pursuant to the provisions of Section 5.1 hereof and prior to the termination of the Managers authority to cover any short position incurred under the applicable AAU or such other date as the Manager may specify in a Wire, either: (a) the Manager purchases or contracts to purchase for the account of any Underwriter in the open market or otherwise any Securities which were retained by, or released to, you for direct sale or any Securities sold pursuant to Section 3.4 hereof for which you received a portion of the Selling Concession set forth in the applicable AAU, or any
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Securities which may have been issued on transfer or in exchange for such Securities, and which Securities were therefore not effectively placed for investment, or (b) if the Manager has advised you by Wire that trading in the Securities will be reported to the Manager pursuant to the Initial Public Offering Tracking System of The Depository Trust Company ( DTC ) and the Manager determines, based on notices from DTC, that your customers sold a number or amount of Securities during any day that exceeds the number or amount previously notified to you by Wire, then you authorize the Manager either to charge your account with an amount equal to such portion of the Selling Concession set forth in the applicable AAU received by you with respect to such Securities or, in the case of clause (b), such Securities as exceed the number or amount specified in such Wire, or to require you to repurchase such Securities or, in the case of clause (b), such Securities as exceed the number or amount specified in such Wire, at a price equal to the total cost of such purchase, including transfer taxes, accrued interest, dividends, and commissions, if any.
5.3. Compliance with Regulation M . You represent that, at all times since you were invited to participate in the Offering, you have complied with the provisions of Regulation M applicable to the Offering, in each case as interpreted by the Commission and after giving effect to any applicable exemptions. If you have been notified in a Wire that the Underwriters may conduct passive market making in compliance with Rule 103 of Regulation M in connection with the Offering, you represent that, at all times since your receipt of such Wire, you have complied with the provisions of such Rule applicable to such Offering, as interpreted by the Commission and after giving effect to any applicable exemptions. You will comply with any additional provisions of Regulation M if and to the extent set forth in the Invitation Wire or other Wire.
5.4. Standby Underwritings . You authorize the Manager in its discretion, at any time on, or from time to time prior to, the expiration of the conversion right of convertible securities identified in the applicable AAU in the case of securities called for redemption, or the expiration of rights to acquire securities in the case of rights offerings, for which, in either case, standby underwriting arrangements have been made: (i) to purchase convertible securities or rights to acquire Securities for your account, in the open market or otherwise, on such terms as the Manager determines, and to convert convertible securities or exercise rights so purchased; and (ii) to offer and sell the underlying common stock or depositary shares for your account, in the open market or otherwise, for long or short account (for purposes of such commitment, such common stock or depositary shares being considered the equivalent of convertible securities or rights), on such terms consistent with the terms of the Offering set forth in the Prospectus or Offering Circular as the Manager determines. On demand, you will take up and pay for any securities so purchased for your account or you will deliver to the Manager against payment any securities so sold, as the case may be. During such period, you may offer and sell the underlying common stock or depositary shares, but only at prices set by the Manager from time to time, and any such sales will be subject to the Managers right to sell to you the underlying common stock or depositary shares as above provided and to the Managers right to reserve your securities purchased, received, or to be received upon conversion. You agree not to otherwise bid for, purchase, or attempt to induce others to purchase or sell, directly or indirectly, any convertible securities or rights or underlying common stock or depositary shares, provided, however , that no Underwriter will be prohibited from: (a) selling underlying common stock owned beneficially by such Underwriter on the day the convertible securities were first called for redemption, (b) converting convertible securities owned beneficially by such Underwriter on such date or selling
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12 underlying common stock issued upon conversion of convertible securities so owned, (c) exercising rights owned beneficially by such Underwriter on the record date for a rights offering, or selling the underlying common stock or depositary shares issued upon exercise of rights so owned, or (d) purchasing or selling convertible securities or rights or underlying common stock or depositary shares as a broker pursuant to unsolicited orders.
VI. PAYMENT AND SETTLEMENT
You will deliver to the Manager on the date and at the place and time specified in the applicable AAU (or on such later date and at such place and time as may be specified by the Manager in a subsequent Wire) the funds specified in the applicable AAU, payable to the order of UBS Securities LLC, for: (a) an amount equal to the Offering Price plus (if not included in the Offering Price) accrued interest, amortization of original issue discount or dividends, if any, specified in the Prospectus or Offering Circular, less the applicable Selling Concession in respect of the Firm Securities to be purchased by you, (b) an amount equal to the Offering Price plus (if not included in the Offering Price) accrued interest, amortization of original issue discount or dividends, if any, specified in the Prospectus or Offering Circular, less the applicable Selling Concession in respect of such of the Firm Securities to be purchased by you as will have been retained by or released to you for direct sale as contemplated by Section 3.6 hereof, or (c) the amount set forth or indicated in the applicable AAU, as the Manager will advise. You will make similar payment as the Manager may direct for Additional Securities, if any, to be purchased by you on the date specified by the Manager for such payment. The Manager will make payment to the Issuer or Seller against delivery to the Manager for your account of the Securities to be purchased by you, and the Manager will deliver to you the Securities paid for by you which will have been retained by or released to you for direct sale. If the Manager determines that transactions in the Securities are to be settled through DTC or another clearinghouse facility and payment in the settlement currency is supported by such facility, payment for and delivery of Securities purchased by you will be made through such facilities, if you are a participant, or, if you are not a participant, settlement will be made through your ordinary correspondent who is a participant.
VII. EXPENSES
7.1. Management Fee . You authorize the Manager to charge your account as compensation for the Managers and Co-Managers services in connection with the Offering, including the purchase from the Issuer or Seller of the Securities, as the case may be, and the management of the Offering, the amount, if any, set forth as the management fee, global coordinators fee, praecipium, or other similar fee in the applicable AAU. Such amount will be divided among the Manager and any Co-Managers named in the applicable AAU as they may determine. Each Underwriter acknowledges that such fees are being paid by the Underwriters, and are not a benefit received directly or indirectly from the Issuer of the type referred to in Section 11(e) of the 1933 Act.
7.2. Offering Expenses . You authorize the Manager to charge your account with your Underwriting Percentage of all expenses agreed to be paid by the Underwriters in the Underwriting Agreement and all expenses of a general nature incurred by the Manager and Co- Managers under the applicable AAU in connection with the Offering, including the negotiation
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and preparation thereof, or in connection with the purchase, carrying, marketing, sale and distribution of any securities under the applicable AAU and any Intersyndicate Agreement, including, without limitation, legal fees and expenses, transfer taxes, costs associated with approval of the Offering by FINRA, and the costs of currency transactions (including forward and hedging currency transactions) or, if permitted pursuant to Section 3.1 hereof, any other forward or hedging transactions (including interest rate swaps) entered into to facilitate settlement of the purchase of Securities permitted hereunder.
VIII. MANAGEMENT OF SECURITIES AND FUNDS
8.1. Advances; Loans; Pledges . You authorize the Manager to advance the Managers own funds for your account, charging current interest rates, and to arrange loans for your account for the purpose of carrying out the provisions of the applicable AAU and any Intersyndicate Agreement, and in connection therewith, to hold or pledge as security therefor all or any securities which the Manager may be holding for your account under the applicable AAU and any Intersyndicate Agreement, to execute and deliver any notes or other instruments evidencing such advances or loans, and to give all instructions to the lenders with respect to any such loans and the proceeds thereof. The obligations of the Underwriters under loans arranged on their behalf will be several in proportion to their respective Original Underwriting Obligations, and not joint. Any lender is authorized to accept the Managers instructions as to the disposition of the proceeds of any such loans. In the event of any such advance or loan, repayment thereof will, in the discretion of the Manager, be effected prior to making any remittance or delivery pursuant to Section 8.2, 8.3, or 9.2 hereof.
8.2. Return of Amount Paid for Securities . Out of payment received by the Manager for Securities sold for your account which have been paid for by you, the Manager will remit to you promptly an amount equal to the price paid by you for such Securities.
8.3. Delivery and Redelivery of Securities for Carrying Purposes . The Manager may deliver to you from time to time prior to the termination of the applicable AAU pursuant to Section 9.1 hereof against payment, for carrying purposes only, any Securities or Other Securities purchased by you under the applicable AAU or any Intersyndicate Agreement which the Manager is holding for sale for your account but which are not sold and paid for. You will redeliver to the Manager against payment any Securities or Other Securities delivered to you for carrying purposes at such times as the Manager may demand.
IX. TERMINATION; INDEMNIFICATION; CONTRIBUTION; SETTLEMENT
9.1. Termination . Each AAU will terminate at the close of business on the later of: (a) the date on which the Underwriters pay the Issuer or Seller for the Securities, and (b) 45 calendar days after the applicable Offering Date, unless sooner terminated by the Manager. The Manager may at its discretion by notice to you prior to the termination of such AAU alter any of the terms or conditions of the Offering to the extent permitted by Articles III and IV hereof, or terminate or suspend the effectiveness of Article V hereof, or any part thereof. No termination or suspension pursuant to this paragraph will affect the Managers authority under Section 3.1 hereof to take actions in respect of the Offering or under Article V hereof to cover any short position incurred under such AAU or in connection with covering any such short position to
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require you to repurchase Securities as specified in Section 5.2 hereof. For the avoidance of doubt, unless otherwise agreed in a Wire or an Intersyndicate Agreement, the Managers authority to purchase Securities or Other Securities, for long account, pursuant to Section 5.1 hereof, will terminate or be suspended upon the termination or suspension, as the case may be, of the applicable AAU (or any provision and or term thereof in respect of trading, price or offering restrictions as set forth in a Wire that is sent by the Manager following the time the Securities are released for sale to purchasers) or Article V or Section 5.1 hereof pursuant to this paragraph.
9.2. Delivery or Sale of Securities; Settlement of Accounts . Upon termination of each AAU, or prior thereto at the Managers discretion, the Manager will deliver to you any Securities paid for by you pursuant to Article VI hereof and held by the Manager for sale pursuant to Section 3.4 or 3.5 hereof but not sold and paid for and any Securities or Other Securities that are held by the Manager for your account pursuant to the provisions of Article V hereof or any Intersyndicate Agreement. Notwithstanding the foregoing, at the termination of such AAU, if the aggregate initial Offering Price of any such Securities and the aggregate purchase price of any Other Securities so held and not sold and paid for does not exceed an amount equal to 20% of the aggregate initial Offering Price of the Securities, the Manager may, in its discretion, sell such Securities and Other Securities for the accounts of the several Underwriters, at such prices, on such terms, at such times, and in such manner as it may determine. Within the period specified by applicable FINRA Rules or, if no period is so specified, as soon as practicable after termination of such AAU, your account will be settled and paid. The Manager may reserve from distribution such amount as the Manager deems advisable to cover possible additional expenses. The determination by the Manager of the amount so to be paid to or by you will be final and conclusive. Any of your funds under the Managers control may be held with the Managers general funds without accountability for interest.
Notwithstanding any provision of this Master AAU other than Section 10.12 hereof, upon termination of each AAU, or prior thereto at the Managers discretion, the Manager may: (i) allocate to the accounts of the Underwriters the expenses described in Section 7.2 hereof and any losses incurred upon the sale of Securities or Other Securities pursuant to the applicable AAU or any Intersyndicate Agreement (including any losses incurred upon the sale of securities referred to in Section 5.4(ii) hereof), (ii) deliver to the Underwriters any unsold Securities or Other Securities purchased pursuant to Section 5.1 hereof or any Intersyndicate Agreement, and (iii) deliver to the Underwriters any unsold Securities purchased pursuant to the applicable Underwriting Agreement, in each case in the Managers discretion. The only limitations on such discretion will be as follows: (a) no Underwriter that is not the Manager or a Co-Manager will bear more than its share of such expenses, losses, or Securities (such share will not exceed such Underwriters Underwriting Percentage and will be determined pro rata among all such Underwriters based on their Underwriting Percentages), (b) no such Underwriter will receive Securities that, together with any Securities purchased by such Underwriter pursuant to Article VI (but excluding any Securities that such Underwriter is required to repurchase pursuant to Section 5.2 hereof) exceed such Underwriters Original Underwriting Obligation, and (c) no Co-Manager will bear more than its share of such expenses, losses, or Securities (such share to be determined pro rata among the Manager and all Co-Managers based on their Underwriting Percentages). If any Securities or Other Securities returned to you pursuant to clause (ii) or (iii) above were not paid for by you pursuant to Article VI hereof, you will pay to the Manager an amount per security equal to the amount set forth in clause (i) of Article VI, in the case of
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Securities returned to you pursuant to clause (iii) above, or the purchase price of such securities, in the case of Securities or Other Securities returned to you pursuant to clause (ii) above.
9.3. Certain Other Expenses . You will pay your Underwriting Percentage of: (i) all expenses incurred by the Manager in investigating, preparing to defend, and defending against any action, claim, or proceeding which is asserted, threatened, or instituted by any party, including any governmental or regulatory body (each, an Action), relating to: (A) the Registration Statement, any Preliminary Prospectus or Prospectus (and any amendment or supplement thereto), any Preliminary Offering Circular or Offering Circular (and any amendment or supplement thereto), any Supplemental Materials, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication, and any ABS Underwriter Derived Information used by any Underwriter other than the Manager, (B) the violation of any applicable restrictions on the offer, sale, resale, or purchase of Securities or Other Securities imposed by U.S. Federal or state laws or non-U.S. laws and the rules and regulations of any regulatory body promulgated thereunder or pursuant to the terms of the applicable AAU, the Underwriting Agreement, or any Intersyndicate Agreement, and (C) any claim that the Underwriters constitute a partnership, an association, or an unincorporated business or other separate entity, and (ii) any Losses (as defined in Section 9.4 hereof) incurred by the Manager in respect of any such Action, whether such Loss will be the result of a judgment or arbitrators determination or as a result of any settlement agreed to by the Manager. Notwithstanding the foregoing, you will not be required to pay your Underwriting Percentage of any such expense or liability: (1) to the extent that such expense or liability was caused by the Managers gross negligence or willful misconduct as determined in a final judgment of a court of competent jurisdiction; (2) as to which, and to the extent, the Manager actually receives (a) indemnity pursuant to Section 9.4 hereof, (b) contribution pursuant to Section 9.5 hereof, (c) indemnity or contribution pursuant to the Underwriting Agreement, or (d) damages from an Underwriter for breach of its representations, warranties, agreements, or covenants contained in the applicable AAU; or (3) of the Manager (other than fees of Syndicate Counsel) that relates to a settlement entered into by the Manager on a basis that results in a settlement of such Action against it and fewer than all the Underwriters. None of the foregoing provisions of this Section 9.3 will relieve any defaulting or breaching Underwriter from liability for its defaults or breach. Failure of any party to give notice under Section 9.10 hereof will not relieve any Underwriter of an obligation to pay expenses pursuant to the provisions of this Section 9.3.
9.4. Indemnification . Notwithstanding any settlement or the termination of the applicable AAU, you agree to indemnify and hold harmless each other Underwriter and each person, if any, who controls any such Underwriter within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act (each, an Indemnified Party ), to the extent and upon the terms which you agree to indemnify and hold harmless any of the Issuer, the Guarantor, the Seller, any person controlling the Issuer, the Guarantor, the Seller, its directors, and, in the case of a Registered Offering, its officers who signed the Registration Statement and, in the case of an Offering other than a Registered Offering, its officers, in each case as set forth in the Underwriting Agreement. You further agree to indemnify and hold harmless each Indemnified Party from and against any and all losses, claims, damages, liabilities, and expenses not reimbursed pursuant to Section 9.3 hereof (collectively, Losses ) related to, arising out of, or in connection with the breach or violation by you of the terms of Section 3.3 hereof, including any and all Losses under Section 5 of the 1933 Act, and any litigation, investigation, and proceeding
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(collectively, Litigation ) relating to any of the foregoing. You will also reimburse each such Indemnified Party upon demand for all expenses, including fees and expenses of counsel, as they are incurred, in connection with investigating, preparing for, or defending any of the foregoing. You will indemnify and hold harmless each Indemnified Party from and against any and all Losses related to, arising out of, or in connection with, any untrue statement or alleged untrue statement of a material fact contained in any Underwriter Free Writing Prospectus, Manager- Approved Communication or Supplemental Material used by you, or any research report in the form of a written communication (as defined in Rule 405 under the 1933 Act) used by you in reliance upon the penultimate sentence of Section 2(a)(3) of the 1933 Act prior to completion of the distribution of an initial public offering (a Written Research Report ), or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and any Litigation relating to any of the foregoing, and to reimburse each such Indemnified Party upon demand for all expenses, including fees and expenses of counsel, as they are incurred, in connection with investigating, preparing for, or defending any of the foregoing. In addition, you will indemnify and hold harmless each Indemnified Party from and against any and all Losses related to, arising out of, or in connection with any untrue statement or alleged untrue statement of a material fact contained in any ABS Underwriter Derived Information used by you, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and any Litigation relating to any of the foregoing, and to reimburse each such Indemnified Party upon demand for all expenses, including fees and expenses of counsel, as they are incurred, in connection with investigating, preparing for, or defending any of the foregoing; provided, however, that any Losses, joint or several, paid or incurred by any Underwriter, arising out of or based upon any ABS Underwriter Derived Information which was used only by such Underwriter, or in connection with the preparation of which an Underwriter is found to have acted with gross negligence or willful misconduct in a final judgment of a court of competent jurisdiction, will be paid solely by such Underwriter.
Each Underwriter will further indemnify and hold harmless any investment banking firm identified in a Wire as the qualified independent underwriter as defined in FINRA Rule 5121 or any successor rule thereto (in such capacity, a QIU ) for an Offering and each person, if any, who controls such QIU within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any and all Losses related to, arising out of, or in connection with such investment banking firms activities as QIU for the Offering. Each Underwriter will reimburse such QIU for all expenses, including fees and expenses of counsel, as they are incurred, in connection with investigating, preparing for, and defending any Action related to, arising out of, or in connection with such QIUs activities as a QIU for the Offering. Each Underwriter will be responsible for its Underwriting Percentage of any amount due to such QIU on account of the foregoing indemnity and reimbursement. Such QIU will have no additional liability to any Underwriter or otherwise as a result of its serving as QIU in connection with the Offering. To the extent the indemnification provided to a QIU under this Section 9.4 is unavailable to such QIU or is insufficient in respect of any Losses related thereto, whether as a matter of law or public policy or as a result of the default of any Underwriter in performing its obligations under this Section 9.4, each other Underwriter will contribute to the amount paid or payable by such QIU as a result of such Losses related thereto in proportion to its Underwriting Percentage.
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For the avoidance of doubt, references to an Underwriter or you in this Section 9.4 shall include the Manager in its role as an Underwriter.
9.5. Contribution . Notwithstanding any settlement or the termination of the applicable AAU, you will pay upon request of the Manager, as contribution, your Underwriting Percentage of any Losses, joint or several, paid or incurred by any Indemnified Party to any person other than an Indemnified Party, arising out of or in connection with the breach or violation of the terms of Section 3.3 hereof, including any and all Losses under Section 5 of the 1933 Act, and any Litigation relating to the foregoing. Further, you will pay upon request of the Manager, as contribution, your Underwriting Percentage of any Losses, joint or several, paid or incurred by any Indemnified Party to any person other than an Indemnified Party, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus or Prospectus (and any amendment or supplement thereto), any Preliminary Offering Circular or Offering Circular (and any amendment or supplement thereto), any Supplemental Materials, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication, any other materials prepared or used by an Underwriter in accordance with Section 3.3 hereof, or any Underwriter Free Writing Prospectus, Manager-Approved Communication or Written Research Report, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (other than an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information furnished to the Company In Writing by the Underwriter on whose behalf the request for contribution is being made expressly for use therein), or any act or omission to act or any alleged act or omission to act by the Manager or, if applicable, a Representative, as the Manager or a Representative, in connection with any transaction contemplated by this Agreement or undertaken in preparing for the purchase, sale, and delivery of the Securities (provided, that you will not be required to pay in any such case to the extent that any such Loss resulted from the Managers or such Representatives gross negligence or willful misconduct as determined in a final judgment of a court of competent jurisdiction), and your Underwriting Percentage of any legal or other expenses, including fees and expenses of counsel, as they are incurred, reasonably incurred by the Indemnified Party (with the approval of the Manager) on whose behalf the request for contribution is being made in connection with investigating or defending any such Loss or any action in respect thereof; provided, however, that no request will be made on behalf of any Indemnified Party guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) from any Indemnified Party who was not guilty of such fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act); provided, further, that any Losses, joint or several, paid or incurred by any Indemnified Party, arising out of or based upon an Underwriters Underwriter Free Writing Prospectus, Manager-Approved Communication, Written Research Report or Supplemental Material, will be paid by only the Underwriters that used such Underwriter Free Writing Prospectus, Manager-Approved Communication, Written Research Report or Supplemental Material, as the case may be (the Contributing Underwriters), and the amount to be paid by each Contributing Underwriter will be determined pro rata among the Contributing Underwriters based on their Underwriting Percentages. None of the foregoing provisions of this Section 9.5 will relieve any defaulting or breaching Underwriter from liability for its defaults or breach.
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In addition, you will pay upon request of the Manager, as contribution, your Underwriting Percentage of any Losses, joint or several, paid or incurred by any Indemnified Party to any person other than an Indemnified Party, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in any ABS Underwriter Derived Information, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (other than an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information furnished to the Company In Writing by the Underwriter on whose behalf the request for contribution is being made expressly for use therein) and your Underwriting Percentage of any expenses, including fees and expenses of counsel, as they are incurred, reasonably incurred by the Indemnified Party (with the approval of the Manager) on whose behalf the request for contribution is being made in connection with investigating, preparing for, or defending any such Loss or any action in respect thereof; provided, however, that any Losses, joint or several, paid or incurred by any Underwriter, arising out of or based upon any ABS Underwriter Derived Information which was used only by such Underwriter, or in connection with the preparation of which the Underwriter is found to have acted with gross negligence or willful misconduct in a final judgment of a court of competent jurisdiction, will be paid solely by the Underwriter.
For the avoidance of doubt, references to an Underwriter or you in this Section 9.5 shall include the Manager in its role as an Underwriter.
9.6. Separate Counsel . If any Action is asserted or commenced pursuant to which the indemnity provided in Section 9.4 hereof or the right of contribution provided in Section 9.5 hereof may apply, the Manager may take such action in connection therewith as it deems necessary or desirable, including retention of counsel for the Underwriters ( Syndicate Counsel ), and in its discretion separate counsel for any particular Underwriter or group of Underwriters, and the fees and disbursements of any counsel so retained will be allocated among the several Underwriters as determined by the Manager. Any such Syndicate Counsel retained by the Manager will be counsel to the Underwriters as a group and, in the event that: (a) the Manager settles any Action on a basis that results in the settlement of such Action against it and fewer than all the Underwriters, or (b)(i) a conflict develops between the Manager and the other Underwriters, or (ii) differing defenses are available to the other Underwriters and not available to the Manager, and as a result of either (b)(i) or (b)(ii) such Syndicate Counsel concludes that it is unable to continue to represent the Manager and the other Underwriters, then in each such case, after notification to the Manager and the other Underwriters, Syndicate Counsel will remain counsel to the other Underwriters and will withdraw as counsel to the Manager. The Manager hereby consents to such arrangement and undertakes to take steps to: (i) ensure that any engagement letters with Syndicate Counsel are consistent with such arrangement; (ii) issue a notice to all other Underwriters promptly following receipt of any advice (whether oral or written) from Syndicate Counsel regarding its inability to represent the Manager and the other Underwriters jointly; and (iii) facilitate Syndicate Counsels continued representation of the other Underwriters. Any Underwriter may elect to retain at its own expense its own counsel and, on advice of such counsel, may settle or consent to the settlement of any such Action, but only in compliance with Section 9.7 hereof, and in each case, only after notification to every other Underwriter. The Manager may settle or consent to the settlement of any such Action, but only in compliance with Section 9.7 hereof.
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9.7. Settlement of Actions . Neither the Manager nor any other Underwriter party to this Master AAU may settle or agree to settle any Action related to or arising out of the Offering, nor may any other Underwriter settle or agree to settle any such Action without the consent of the Manager, nor may any other Underwriter seek the Managers consent to any such settlement agreement, nor may the Manager consent to any such settlement agreement, unless: (A) the Manager, together with such other Underwriters as constitute a majority in aggregate interest based on the Underwriting Percentage of the Underwriters as a whole (including the Managers interest), approve the settlement of such Action, in which case the Manager is authorized to settle for all Underwriters, provided, however, that the settlement agreement results in the settlement of the Action against all Underwriters raised by the plaintiffs party thereto; or (B) (i) such settlement agreement expressly provides that the non-settling Underwriters will be given a judgment credit (or credit in settlement) with respect to all such Actions for which the non- settling Underwriters may be found liable (or will pay in subsequent settlement), in an amount that is the greatest of: (x) the dollar amount paid in such initial settlement to settle such Actions, (y) the proportionate share of the settling Underwriters fault in respect of common damages arising in connection with such Actions as proven at trial, if applicable, or (z) the amount by which the settling Underwriter would have been required to make contribution had it not settled, under Sections 9.5 and 11.2 hereof in respect of the final non-appealable judgment (or settlement) subsequently entered into by the non-settling Underwriters (such greatest amount of either (x), (y), or (z), the Judgment Credit ); 4 (ii) such settlement agreement expressly provides that in the event that the applicable court does not approve the Judgment Credit as part of the settlement, the settlement agreement will automatically terminate; and (iii) the final judgment entered with respect to the settlement agreement contains the Judgment Credit.
9.8. Survival . Except as set forth in the last sentence of Section 9.1, your agreements contained in Article V and Sections 3.1, 9.3, 9.4, 9.5, 9.6, 9.7, 9.8, 9.9, 9.10, and 11.2 hereof will remain operative and in full force and effect regardless of any termination of an AAU and: (a) any termination of the Underwriting Agreement, (b) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Issuer, the Guarantor, the Seller, its directors or officers, or any person controlling the Issuer, the Guarantor or the Seller, and (c) acceptance of any payment for any Securities.
4 Seeks to ensure that there is no harm to non-settling Underwriter due to settlement. For example, assume that plaintiffs have suffered $1,000 in damage in a case in which the Underwriters are 50% at fault and other defendants, all of whom are insolvent, are 50% at fault. Further assume that there were two Underwriters, each which underwrote 50% of the offering, and they were equally at fault. If neither Underwriter settles, then each would be required to pay $500 to satisfy the $1,000 verdict for which they are jointly and severally liable (or, if one paid $1,000, Section 9.5 would obligate the other to contribute $500 towards such payment). If the first Underwriter settles for $100, then the second Underwriter will obtain a judgment credit of $500, being equal to the greater of: (a) settlement amount ($100), (b) the first Underwriters fault ($250), and (c) the amount which the settling Underwriters would have been required to contribute under the contribution provisions ($500). This formula ensures that the second Underwriter is not harmed by the settlement. By contrast, the judgment credit applied in WorldCom ignored clause (c), resulting in a credit of only $250 and leading the non-settling Underwriter to pay $750, or $250 more than had the first Underwriter not settled.
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9.9. Replacement of Manager . If at any time after any Action is brought the Manager settles the Action on a basis that results in the settlement of such Action against it and fewer than all the Underwriters (whether or not such settlement complies with Section 9.7 hereof), the Manager will, at such time, for purposes of Sections 9.3, 9.4, 9.5, 9.6, and 9.7 hereof, cease to be the Manager. The non-settling Underwriters will, by vote of holders of a majority of the Underwriting Percentage of such non-settling Underwriters, select a new Manager, which will become the new Manager for all purposes of Sections 9.3, 9.4., 9.5, 9.6, and 9.7 hereof as well as this section; provided that the non-settling Underwriter(s) with the largest Underwriting Percentage will act as Manager until such vote occurs and a new Manager is selected. 5
Notwithstanding such a settlement, the Manager and the other settling Underwriters will remain obligated to the non-settling Underwriters to assist and cooperate fully, in good faith, and at their own expense, in the defense of any Actions, including, without limitation, by providing, upon reasonable request of any non-settling Underwriter, and without the necessity of court process, access to or copies of all relevant records, and reasonable access to all witnesses under control of the Manager or the other settling Underwriters, for the purpose of interviews, depositions, and testimony at trial, subject in each case to the applicable legal and procedural obligations of such Manager and such other settling Underwriter.
In addition, if at any time, the Manager is unwilling or unable for any reason to assume or discharge its duties as Manager under the applicable AAU, whether resulting from its insolvency (voluntary or involuntary), resignation or otherwise, to the extent permitted by applicable law, the remaining Underwriters will, by vote of holders of a majority of the Underwriting Percentage of such Underwriters, be entitled to select a new Manager, which will become the new Manager for all purposes under this Agreement. 6 Notwithstanding the foregoing, a Manager replaced pursuant to this Section 9.9 shall continue to benefit from and be subject to all other terms and conditions of this Agreement applicable to an Underwriter.
9.10. Notice . When the Manager receives notice of the assertion of any Action to which the provisions of Sections 9.4, 9.5, 9.6, or 9.7 hereof would apply, it will give prompt notice thereof to each Underwriter, and whenever an Underwriter receives notice of the assertion of any claim or commencement of any Action to which the provisions of Sections 9.4, 9.5, 9.6, or 9.7 hereof would apply, such Underwriter will give prompt notice thereof to the Manager. The Manager also will furnish each Underwriter with periodic reports, at such times as it deems appropriate, as to the status of such Action, and the actions taken by it in connection therewith. If the Manager or any other Underwriter engages in any settlement discussion that involves or contemplates settlement on any basis other than settlement of all Actions against all Underwriters on a pro rata basis according to their Underwriting Percentages, the Manager (or other Underwriter engaging in such discussions) will notify all other Underwriters promptly and provide reasonable details about such discussions.
5 Permits new Manager to replace settling Manager and manage the litigationrelated provisions of this agreement.
6 Permits new Manager to replace insolvent Manager and manage all aspects of this MAAU.
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X. REPRESENTATIONS AND COVENANTS OF UNDERWRITERS
10.1. Knowledge of Offering . You acknowledge that it is your responsibility to examine the Registration Statement, the Prospectus, or the Offering Circular, as the case may be, any amendment or supplement thereto relating to the Offering, any Preliminary Prospectus or Preliminary Offering Circular, and the material, if any, incorporated by reference therein, any Issuer Free Writing Prospectus, any Supplemental Materials, and any ABS Underwriter Derived Information, and you will familiarize yourself with the terms of the Securities, any applicable Indenture, and the other terms of the Offering thereof which are to be reflected in the Prospectus or the Offering Circular, as the case may be, and the applicable AAU and Underwriting Agreement. The Manager is authorized, with the advice of counsel for the Underwriters, to approve on your behalf any amendments or supplements to the documents described in the preceding sentence.
10.2. Accuracy of Underwriters Information . You confirm that the information that you have given and are deemed to have given in response to the Underwriters Questionnaire attached as Exhibit A hereto (and to any other questions addressed to you in the Invitation Wire or other Wires), which information has been furnished to the Issuer for use in the Registration Statement, Prospectus, or Offering Circular, as the case may be, or has otherwise been relied upon in connection with the Offering, is complete and accurate. You will notify the Manager immediately of any development before the termination of the applicable AAU which makes untrue or incomplete any information that you have given or are deemed to have given in response to the Underwriters Questionnaire (or such other questions).
10.3. Name; Address . Unless you have promptly notified the Manager In Writing otherwise, your name as it should appear in the Registration Statement, Prospectus or Offering Circular and any advertisement, if different, and your address, are as set forth on the signature pages hereof.
10.4. Compliance with Capital Requirements . You represent that your commitment to purchase the Securities will not result in a violation of the financial responsibility requirements of Rule 15c3-1 under the 1934 Act or of any similar provision of any applicable rules of any securities exchange to which you are subject or, if you are a financial institution subject to regulation by the Board of Governors of the U.S. Federal Reserve System, the U.S. Comptroller of the Currency, or the U.S. Federal Deposit Insurance Corporation, will not place you in violation of any applicable capital requirements or restrictions of such regulator or any other regulator to which you are subject.
10.5. FINRA Requirements . (A) You represent that you are a member in good standing of FINRA, or a non-U.S. bank, broker, dealer, or institution not eligible for membership in FINRA or a Bank.
(i) If you are a member of FINRA, you will comply with all applicable rules of FINRA in respect of any Offering of Securities, including, without limitation, the requirements of FINRA Rules 5110, 5121, 5130, 5131 and 5141 (to the extent any or all such rules are applicable to the particular Offering).
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(ii) If you are a non-U.S. bank, broker, dealer, or other non-U.S. institution not eligible for membership in FINRA, you represent that you are not required to be registered as a broker or dealer under the 1934 Act and you will not make any offers or sales of the Securities in, or to nationals or residents of, the United States, its territories, or its possessions, except to the extent permitted by Rule 15a-6 under the 1934 Act (or any successor rule thereto adopted by the SEC). In making any offers or sales of the Securities you also agree to comply with the requirements of the following FINRA rules (including any successor rules thereto adopted by FINRA): (a) to the extent that you are acting, in respect of offers or sales of the Securities, as a conduit for, or are receiving in connection with such offers and sales any selling commissions, discounts, allowances or other compensation from, or are otherwise being directed with respect to allocations or disposition of the Securities by, a FINRA member, FINRA Rule 5130 and FINRA Rule 5141 as though you are a member of FINRA, and (b) NASD Conduct Rule 2420(c), as that Rule applies to a non-member broker/dealer in a non-U.S. country.
(iii) If you are a Bank, you agree that (a) to the extent you are acting, in respect of offers or sales of the Securities, as a conduit for, or are receiving in connection with such offers and sales any selling commissions, discounts, allowances or other compensation from, or are otherwise being directed with respect to allocations or disposition of the Securities by, a FINRA member, you will comply with FINRA Rules 5130 and 5141 as though you are a member of FINRA, and (b) you will not accept any portion of the management fee paid by the Underwriters with respect to any Offering or, in connection with any Offering of Securities that do not constitute exempted securities within the meaning of Section 3(a)(12) of the 1934 Act, or purchase any Securities at a discount from the offering price from any Underwriter or Dealer or otherwise accept any Fees and Commissions from any Underwriter or Dealer, which in any such case is not permitted under FINRA rules (including, without limitation, NASD Conduct Rule 2420 or any successor rule thereto adopted by FINRA) or would subject you to registration and regulation as a broker or dealer under Section 3(a)(4) or 3(a)(5) of the 1934 Act.
(B) With respect to any Offering of Securities that constitutes a new issue under FINRA Rule 5131, you agree that, with respect to any Securities trading at a premium to the public offering price that are returned by a purchaser (the Returned Securities ) to you after secondary market trading commences, you will promptly consult with the Manager or Co- Manager that has been appointed to manage the syndicate short position for that Offering (the Designated Syndicate Agent ) to determine the appropriate treatment of the Returned Securities under FINRA Rule 5131(d)(3), and agree to (i) return the Returned Securities to the Designated Syndicate Agent if directed to do so by that entity, or (ii) if no such direction has been provided by the Designated Syndicate Agent, to comply with the provisions of FINRA Rule 5131(d)(3)(B) with respect to the disposition of the Returned Securities.
10.6. FATCA Certification. If you are a Foreign Financial Institution ( FFI ) as that term is defined pursuant to FATCA (as defined below) (including a U.S. branch of a non-U.S. bank), you represent that you are not, and have not been identified by the U.S. Internal Revenue Service ( IRS ) as, a nonparticipating FFI as that term is defined pursuant to FATCA. Unless otherwise agreed, promptly following your acceptance of an AAU for an Offering, but not later than such Offerings Pricing Date, you will provide us such documents (including an IRS Form
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W-8BEN-E or an IRS Form W-8BEN if the instructions to the IRS Form W-8BEN-E have not been released) as may be necessary to confirm that no tax is required to be withheld under FATCA in respect of payments to you that we make or are deemed to make for U.S. federal income tax purposes. If we are required to make any deduction or withholding pursuant to or on account of FATCA in respect of payments to you that we make or are deemed to make for U.S. federal income tax purposes, and we do not so deduct or withhold and a liability resulting from such failure to withhold or deduct is assessed directly against us, then you will indemnify us therefor (without duplication of any applicable indemnification obligation, and without triggering any contribution obligation of any other Underwriter, with respect thereto under Article IX hereof) and promptly pay us the amount of such liability (including any related liability for interest and penalties). FATCA means sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986 (the Code ), any current or future regulations or official interpretations thereof, any agreement entered into thereunder, or any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered into in connection with the implementation thereof.
10.7. Further State Notice . The Manager will file a Further State Notice with the Department of State of New York, if required.
10.8. Compliance with Rule 15c2-8 . In the case of a Registered Offering and any other Offering to which the provisions of Rule 15c2-8 under the 1934 Act are made applicable pursuant to the AAU or otherwise, you will comply with such Rule in connection with the Offering. In the case of an Offering other than a Registered Offering, you will comply with applicable Federal and state laws and the applicable rules and regulations of any regulatory body promulgated thereunder governing the use and distribution of offering circulars by underwriters.
10.9. Discretionary Accounts . In the case of a Registered Offering of Securities issued by an Issuer that was not, immediately prior to the filing of the Registration Statement, subject to the requirements of Section 13(d) or 15(d) of the 1934 Act, you will not make sales to any account over which you exercise discretionary authority in connection with such sale, except as otherwise permitted by the applicable AAU for such Offering.
10.10. Offering Restrictions . You will not make any offers or sales of Securities or any Other Securities in jurisdictions outside the United States except under circumstances that will result in compliance with (i) applicable laws, including private placement requirements, in each such jurisdiction and (ii) the restrictions on offers or sales set forth in any AAU or the Prospectus, Preliminary Prospectus, Offering Circular, or Preliminary Offering Circular, as the case may be.
It is understood that, except as specified in the Prospectus or Offering Circular or applicable AAU, no action has been taken by the Manager, the Issuer, the Guarantor, or the Seller to permit you to offer Securities in any jurisdiction other than the United States, in the case of a Registered Offering, where action would be required for such purpose.
10.11. Representations, Warranties, and Agreements . You will make to each other Underwriter participating in an Offering the same representations, warranties, and agreements, if any, made by the Underwriters to the Issuer, the Guarantor, or the Seller in the applicable
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Underwriting Agreement or any Intersyndicate Agreement, and you authorize the Manager to make such representations, warranties, and agreements to the Issuer, the Guarantor, or the Seller on your behalf.
10.12. Limitation on the Authority of the Manager to Purchase and Sell Securities for the Account of Certain Underwriters . Notwithstanding any provision of this AAU authorizing the Manager to purchase or sell any Securities or Other Securities (including arranging for the sale of Contract Securities) or over-allot in arranging sales of Securities for the accounts of the several Underwriters, the Manager may not, in connection with the Offering of any Securities, make any such purchases, sales, and/or over-allotments for the account of any Underwriter that, not later than its acceptance of the Invitation Wire relating to such Offering, has advised the Manager that, due to its status as, or relationship to, a bank or bank holding company such purchases, sales, and/or over-allotments are prohibited by applicable law. If any Underwriter so advises the Manager, the Manager may allocate any such purchases, sales, and over-allotments (and the related expenses) which otherwise would have been allocated to your account based on your respective Underwriting Percentage to your account based on the ratio of your Original Underwriting Obligation to the Original Underwriting Obligations of all Underwriters other than the advising Underwriter or Underwriters, or in such other manner as the Manager will determine.
10.13. Agreement Regarding Oral Due Diligence . By participating in an Offering, each Underwriter agrees that it, each of its affiliates participating in an Offering as Underwriter or financial intermediary and each controlling person of it and each such participating affiliate are bound by the Agreement Regarding Oral Due Diligence currently in effect between UBS Securities LLC and the accounting firm or firms that participate in oral due diligence in such offering.
XI. DEFAULTING UNDERWRITERS
11.1. Effect of Termination . If the Underwriting Agreement is terminated as permitted by the terms thereof, your obligations hereunder with respect to the Offering of the Securities will immediately terminate except: (a) as set forth in Section 9.8 hereof, (b) that you will remain liable for your Underwriting Percentage (or such other percentage as may be specified pursuant to Section 9.2 hereof) of all expenses, and for any purchases or sales which may have been made for your account pursuant to the provisions of Article V hereof or any Intersyndicate Agreement, and (c) that such termination will not affect any obligations of any defaulting or breaching Underwriter.
11.2. Sharing of Liability . If any Underwriter defaults in its obligations: (a) pursuant to Section 5.1, 5.2 or 5.4 hereof, (b) to pay amounts charged to its account pursuant to Section 7.1, 7.2, or 8.1 hereof, or (c) pursuant to Section 9.2, 9.3, 9.4, 9.5, 9.6, or 11.1 hereof, you will assume your proportionate share (determined on the basis of the respective Underwriting Percentages of the non-defaulting Underwriters) of such obligations, but no such assumption will relieve any defaulting Underwriter from liability to the non-defaulting Underwriters, the Issuer, the Guarantor, or the Seller for its default.
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11.3. Arrangements for Purchases . The Manager is authorized to arrange for the purchase by others (including the Manager or any other Underwriter) of any Securities not purchased by any defaulting Underwriter in accordance with the terms of the applicable Underwriting Agreement or, if the applicable Underwriting Agreement does not provide arrangements for defaulting Underwriters, in the discretion of the Manager. If such arrangements are made, the respective amounts of Securities to be purchased by the remaining Underwriters and such other person or persons, if any, will be taken as the basis for all rights and obligations hereunder, but this will not relieve any defaulting Underwriter from liability for its default.
XII. MISCELLANEOUS
12.1. Obligations Several . Nothing contained in this Master AAU or any AAU constitutes you partners with the Manager or with the other Underwriters, and the obligations of you and each of the other Underwriters are several and not joint. Each Underwriter elects to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the Code. Each Underwriter authorizes the Manager, on behalf of such Underwriter, to execute such evidence of such election as may be required by the IRS.
12.2. Liability of Manager . The Manager will not be liable to you for any act or omission, except for obligations expressly assumed by the Manager in the applicable AAU.
12.3. Termination of Master AAU . This Master AAU may be terminated by either party hereto upon five business days written notice to the other party; provided, however, that with respect to any Offering for which an AAU was sent prior to such notice, this Master AAU as it applies to such Offering will remain in full force and effect and will terminate with respect to such Offering in accordance with Section 9.1 hereof.
12.4. Governing Law; Waiver of Jury Trial . This Master AAU and each AAU will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in the State, without giving effect to principles of conflicts of law. You hereby irrevocably: (a) submit to the jurisdiction of any court of the State of New York located in the City of New York or the U.S. District Court for the Southern District of the State of New York for the purpose of any suit, action, or other proceeding arising out of this Master AAU, or any of the agreements or transactions contemplated hereby (each, a Proceeding ), (b) agree that all claims in respect of any Proceeding may be heard and determined in any such court, (c) waive, to the fullest extent permitted by law, any immunity from jurisdiction of any such court or from any legal process therein, (d) agree not to commence any Proceeding other than in such courts, and (e) waive, to the fullest extent permitted by law, any claim that such Proceeding is brought in an inconvenient forum. Each party hereto irrevocably waives any right that it may have to trial by jury in any action, proceeding or counterclaim arising out of or relating to this Master AAU and each AAU or the transactions contemplated thereby.
12.5. Amendments . This Master AAU may be amended from time to time by consent of the parties hereto. Your consent will be deemed to have been given to an amendment to this Master AAU, and such amendment will be effective, five business days following written notice
26
to you of such amendment if you do not notify us In Writing prior to the close of business on such fifth business day that you do not consent to such amendment. Upon effectiveness, the provisions of this Master AAU as so amended will apply to each AAU thereafter entered into, except as otherwise specifically provided in any such AAU.
12.6. Notices . Any notice to any Underwriter will be deemed to have been duly given if mailed, sent by wire, telecopy or electronic transmission or other written communication, or delivered in person to such Underwriter at the address set forth in its Underwriters Questionnaire, or if no address is provided in an Underwriters Questionnaire, then at the address set forth in reports filed by such Underwriter with FINRA. Any such notice will take effect upon receipt thereof.
12.7. Severability . In case any provision in this Master AAU is deemed invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions will not in any way be affected or impaired thereby.
12.8. Counterparts . This Master AAU may be executed in any number of counterparts, each of which will be deemed to be an original, and all of which taken together constitute one and the same instrument. Transmission by telecopy of an executed counterpart of this Master AAU will constitute due and sufficient delivery of such counterpart.
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Please confirm your acceptance of this Master AAU by signing and returning to us the enclosed duplicate copy hereof.
UBS SECURITIES LLC |
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By: |
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Name: |
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Title: |
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(Authorized Officer) | ||
By: |
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Name: |
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Title: |
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(Authorized Officer) |
Confirmed and accepted
as of , 20
(Legal Name of Underwriter) |
(Address) |
By: |
Name: |
Title: |
(Authorized Officer) |
(If person signing is not an officer
or a partner, please attach instrument
of authorization)
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GUIDE TO DEFINED TERMS
Term | Section Reference | |||
1933 Act |
1.1 | |||
1934 Act |
3.5 | |||
AAU |
Foreword | |||
ABS Underwriter Derived Information |
2.1 | |||
Action |
9.3 | |||
Additional Securities |
1.1 | |||
Bank |
3.5 | |||
Code |
10.6 | |||
Co-Managers |
1.1 | |||
Commission |
2.1 | |||
Contract Securities |
3.1 | |||
Contributing Underwriters |
9.5 | |||
Dealer |
3.5 | |||
Designated Syndicate Agent |
10.5 | |||
DTC |
5.2 | |||
FATCA |
10.6 | |||
Fees and Commissions |
1.1 | |||
FFI |
10.6 | |||
FINRA |
3.1 | |||
Firm Securities |
1.1 | |||
Free Writing Prospectus |
2.1 | |||
Guarantor |
1.1 | |||
In Writing |
1.2 | |||
Indemnified Party |
9.4 | |||
Indenture |
1.1 | |||
International Offering |
1.1 | |||
Intersyndicate Agreement |
2.3 | |||
Invitation Wire |
Foreword | |||
IRS |
10.6 | |||
Issuer |
1.1 | |||
Issuer Free Writing Prospectus |
3.3 | |||
Issuer Information |
3.3 | |||
Judgment Credit |
9.7 | |||
Litigation |
9.4 | |||
Losses |
9.4 | |||
Manager |
1.1 | |||
Manager-Approved Communication |
3.3 | |||
Master AAU |
Foreword | |||
Offering |
Foreword | |||
Offering Circular |
2.2 | |||
Offering Date |
3.2 | |||
Offering Price |
1.1 |
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Original Underwriting Obligation |
1.1 | |||
Preliminary Offering Circular |
2.2 | |||
Preliminary Prospectus |
2.1 | |||
Pricing Date |
1.1 | |||
Proceeding |
12.4 | |||
Prospectus |
2.1 | |||
Purchase Price |
1.1 | |||
QIU |
9.4 | |||
Reallowance |
1.1 | |||
Registered Offering |
2.1 | |||
Registration Statement |
2.1 | |||
Regulation M |
5.1 | |||
Representative |
1.1 | |||
Returned Securities |
10.5 | |||
Securities |
1.1 | |||
Securities Offering Reform Release |
2.1 | |||
Seller |
1.1 | |||
Selling Concession |
1.1 | |||
Settlement Date |
1.1 | |||
Supplemental Materials |
3.3 | |||
Syndicate Counsel |
9.6 | |||
Trustee |
1.1 | |||
Underwriter Free Writing Prospectus |
3.3 | |||
Underwriters |
1.1 | |||
Underwriters Securities |
3.1 | |||
Underwriting Agreement |
1.1 | |||
Underwriting Percentage |
1.1 | |||
Wire |
Foreword | |||
Written Research Report |
9.4 | |||
Written Testing-the-Waters Communication |
3.3 |
EXHIBIT A
UNDERWRITERS QUESTIONNAIRE
In connection with each Offering governed by the UBS Securities LLC Master Agreement Among Underwriters dated June 6, 2014, except as otherwise indicated in a timely acceptance of the Invitation Wire pursuant to Section 1.2 of the Master Agreement Among Underwriters ( Master AAU ) or already expressly disclosed in the Preliminary Prospectus or Preliminary Offering Circular, as the case may be, each Underwriter participating in such Offering severally advises the Issuer and the other participating Underwriters (all capitalized terms used herein and not otherwise defined herein will have the meanings given to them in the Master AAU) as follows:
(a) neither such Underwriter nor any of its directors, officers, or partners have a material relationship, as material is defined in Regulation C under the 1933 Act, with the Issuer, the Guarantor, or the Seller;
(b) if the Registration Statement is on Form S-1, neither such Underwriter nor any group (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) of which such Underwriter is aware is the beneficial (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) owner of more than 5% of any class of voting securities of the Issuer or Guarantor, nor does such Underwriter have any knowledge that more than 5% of any class of voting securities of the Issuer or the Guarantor is held or to be held subject to any voting trust or other similar agreement, nor does such Underwriter have any knowledge that more than 5% of any class of voting securities of the Issuer or the Guarantor is held or to be held subject to any voting trust or other similar agreement;
(c) other than as may be stated in the UBS Securities LLC Master Agreement Among Underwriters dated June 6, 2014, the applicable AAU, the Intersyndicate Agreement or dealer agreement, if any, the Prospectus, the Registration Statement, or the Offering Circular, such Underwriter does not know and has no reason to believe that there is an intention to over-allot or that the price of any security may be stabilized to facilitate the offering of the Securities;
(d) other than as stated in the Invitation Wire, such Underwriter does not know of (i) any other discounts or commissions to be allowed or paid to the Underwriters or of any other items that would be deemed by the Financial Industry Regulatory Authority, Inc. ( FINRA ) to constitute underwriting compensation for purposes of FINRA Rule 5110, or (ii) any discounts or commissions to be allowed or paid to dealers, including all cash, securities, contracts, or other consideration to be received by any dealer in connection with the sale of the Securities;
(e) such Underwriter has not prepared any report or memorandum for external use in connection with the Offering;
(f) if the offer and sale of the Securities are to be registered under the 1933 Act pursuant to a Registration Statement on Form S-1 or Form F-1, such Underwriter has
2
not within the past 12 months prepared or had prepared for such Underwriter any engineering, management, or similar report or memorandum relating to broad aspects of the business, operations, or products of the Issuer or the Guarantor. The immediately preceding sentence does not apply to reports solely comprised of recommendations to buy, sell, or hold the Issuers or the Guarantors securities, unless such recommendations have changed within the past six months, or to information already contained in documents filed with the Commission;
(g) in the case of Registered Offerings and Offerings of Securities exempt under Section 3 of the 1933 Act, such Underwriter does not have a conflict of interest with the Issuer or the Guarantor under FINRA Rule 5121. In that regard, such Underwriter specifically confirms that, at the time of such Underwriters participation in the subject Offering, (A) such Underwriter is not issuing the Securities in such Offering; (B) neither the Issuer nor the Guarantor controls, is controlled by or is under common control (as the term control is defined in FINRA Rule 5121(f)(6)) with such Underwriter or such Underwriters associated persons (as such term is defined by FINRA); (C) less than five percent of the net proceeds of the Offering, not including Fees and Commissions, are intended to be: (i) used to reduce or retire the balance of a loan or credit facility extended by such Underwriter, its affiliates and its associated persons (as such terms are defined by FINRA), in the aggregate; or (ii) otherwise directed to such Underwriter, its affiliates and associated persons, in the aggregate, and (D) as a result of such Offering and any transactions contemplated at the time of such Offering: (i) such Underwriter will not become an affiliate of the Issuer or Guarantor; (ii) such Underwriter will not become publicly owned; and (iii) the Issuer or Guarantor will not become a FINRA member or form a broker-dealer subsidiary. Furthermore, such Underwriter specifically confirms that such Underwriter does not, (a) beneficially own 10% or more of the Issuers or Guarantors outstanding common equity, preferred equity or subordinated debt (as each such term is defined in FINRA Rule 5121), including the right to receive such securities or subordinated debt within 60 days of such Underwriters participation in the Offering; (b) in the case of an Issuer or Guarantor which is a partnership, beneficially own a general, limited or special partnership interest in 10% or more of the Issuers or Guarantors distributable profits or losses, or a right to receive an interest in such distributable profits or losses within 60 days of such Underwriters participation in the Offering; or (c) have the power to direct or cause the direction of the management or policies of the Issuer or the Guarantor;
(h) other than as stated in the Invitation Wire, in the case of Registered Offerings and Offerings of Securities exempt under Section 3 of the 1933 Act, neither such Underwriter nor any of its directors, officers, partners, or persons associated with such Underwriter (as defined by FINRA) nor, to such Underwriters knowledge, any related person (defined by FINRA to include counsel, financial consultants and advisors, finders, members of the selling or distribution group, any FINRA member participating in the offering, and any other persons associated with or related to and members of the immediate family of any of the foregoing) or any other broker-dealer: (A) within the last six months have purchased in private transactions, or intend before, at, or within six months after the commencement of the public offering of the Securities to purchase in private transactions, any securities of the Issuer, the Guarantor, or any Issuer
3
Related Party (as hereinafter defined), (B) within the last 6 months have had any dealings with the Issuer, the Guarantor, any Seller, or any subsidiary or controlling person thereof (other than relating to the proposed Underwriting Agreement) as to which documents or information are required to be filed with FINRA, or (C) during the 6 months immediately preceding the filing of the Registration Statement (or, if there is none, the Offering Circular), have entered into any arrangement which provided or provides for the receipt of any item of value (including, but not limited to, cash payments, expense reimbursements and rights of first refusal to participate in a future public offering, private placement or other financing transaction) and/or the transfer of any warrants, options, or other securities from the Issuer, the Guarantor, or any Issuer Related Party to you or any related person;
(i) in the case of Registered Offerings and Offerings of Securities exempt under Section 3 of the 1933 Act, there is no association or affiliation between such Underwriter and; (A) any officer or director of the Issuer, the Guarantor or, any Issuer Related Party, or (B) any securityholder of 5% or more (or, in the case of an initial public offering of equity securities, any securityholder) of any class of securities of the Issuer, the Guarantor, or an Issuer Related Party; it being understood that for purposes of paragraph (i) above and this paragraph (j), the term Issuer Related Party includes any Seller, any affiliate of the Issuer, the Guarantor, or a Seller, and the officers or general partners, directors, employees, and securityholders thereof;
(j) in the case of Registered Offerings and Offerings of Securities exempt under Section 3 of the 1933 Act, and if the Securities are not issued by a real estate investment trust, no portion of the net offering proceeds from the sale of the Securities will be paid to such Underwriter or any of its affiliates or persons associated with such Underwriter (as defined by FINRA) or members of the immediate family of any such person; and
(k) in the case of Securities which are debt securities whose offer and sale is to be registered under the 1933 Act, such Underwriter is not an affiliate (as defined in Rule 0-2 under the Trust Indenture Act of 1939) of the Trustee for the Securities or of its parent, if any. Neither the Trustee nor its parent, if any, nor any of their directors or executive officers is a director, officer, partner, employee, appointee, or representative of such Underwriter (as those terms are defined in the Trust Indenture Act of 1939 or in the relevant instructions to Form T-1). Such Underwriter and its directors, partners, and executive officers, taken as a group, did not on the date specified in the Invitation, and do not, own beneficially 1% or more of the shares of any class of voting securities of the Trustee or of its parent, if any. If such Underwriter is a corporation, it does not have outstanding and has not assumed or guaranteed any securities issued otherwise than in its present corporate name.
If an Underwriter notes an exception with respect to material of the type referred to in clauses (e) and (f), such underwriter will send three copies of each item of such material, together with a statement as to distribution, identifying classes of recipients and the number of copies distributed to each such class, and, if relevant, the number of equity securities or the face value of debt securities owned by such person, the date such securities were acquired, and the
4
price paid for such securities to UBS Securities LLC, 1285 Avenue of the Americas, New York, New York 10019, Attention: [Fixed Income Syndicate] [Equity Syndicate].
Final adopted version dated May 23, 2012
UBS Securities LLC
MASTER SELECTED DEALERS AGREEMENT
R EGISTERED SEC O FFERINGS
AND
EXEMPT OFFERINGS
(O THER THAN O FFERINGS OF M UNICIPAL S ECURITIES )
May 23, 2012
This Master Selected Dealers Agreement (this Master SDA ), dated as of May 23, 2012, is by and between UBS Securities LLC (including its successors and assigns) ( we , our , us or the Manager ) and the party named on the signature page hereof (a Dealer , you or your ). From time to time, in connection with an offering and sale (an Offering ) of securities (the Securities ), managed solely by us or with one or more other managers or co-managers, we or one or more of our affiliates may offer you (and others) the opportunity to purchase as principal a portion of such securities on the terms set forth herein as a Selected Dealer (as defined below).
References herein to laws, statutory and regulatory sections, rules, regulations, forms and interpretive materials are deemed to include successor provisions. The following provisions of this Master SDA shall apply separately to each individual Offering of Securities. You and we further agree as follows:
1. Applicability of this Master SDA . The terms and conditions of this Master SDA will be applicable to any Offering in which you accept an offer to participate as a Selected Dealer (including through the receipt by you of Securities), whether pursuant to a registration statement filed under the Securities Act of 1933, as amended (the 1933 Act ), or exempt from registration thereunder, in respect of which we (acting for our own account or for the account of any underwriting or similar group or syndicate) are responsible for managing or otherwise implementing the sale of Securities to Selected Dealers. A Dealer is a person who meets the requirements of Section 10 hereof. The parties who agree to participate (including by the receipt by such parties of Securities) or are designated a selling concession to Dealers (the Selling Concession ), and reallowance, if any (the Reallowance ), in such Offering as selected Dealers are hereinafter referred to as Selected Dealers . In the case of any Offering where we are acting for the account of the several underwriters, initial purchasers or others acting in a similar capacity (the Underwriters ), the terms and conditions of this Master SDA will be for the benefit of such Underwriters, including, in the case of any Offering where we are acting with others as representatives of Underwriters, such other representatives.
2. Terms of the Offering . We may advise you orally or by one or more wires, telexes, telecopy or electronic data transmissions, or other written communications (each, a Wire ) of the particular method and supplementary terms and conditions of any Offering (including the price or prices at which the Securities initially will be offered by the several Underwriters, or if the price is to be determined by a formula based on market price, the terms of the formula, (the Offering Price ) and any Selling Concession or, if applicable, Reallowance) in which you are invited to participate. Any such Wire may also amend or modify such provisions of this Master SDA in respect of the Offering to which such Wire relates, and may contain such supplementary provisions as may be specified in any Wire relating to an Offering. To the extent such supplementary terms and conditions are inconsistent with any provision herein, such supplementary terms and conditions shall supersede any provision of this Master SDA. Unless otherwise indicated in any such Wire, acceptances and other communications by you with respect to an Offering should be sent pursuant to the terms of Section 19 hereof. Notwithstanding that we may not have sent you a Wire or other form of invitation to participate in such Offering or that you may not otherwise have responded by wire or other written
2
communication (any such communication being deemed In Writing ) to any such Wire or other form of invitation, you will be deemed to have accepted the terms of our offer to participate as a Selected Dealer and of this Master SDA (as amended, modified or supplemented by any Wire) by your purchase of Securities or otherwise receiving and retaining an economic benefit for participating in the Offering as a Selected Dealer. We reserve the right to reject any acceptance in whole or in part.
Any Offering will be subject to delivery of the Securities and their acceptance by us and any other Underwriters may be subject to the approval of all legal matters by counsel and may be subject to the satisfaction of other conditions. Any application for additional Securities will be subject to rejection in whole or in part.
3. Offering Documents . Upon your request, we will furnish, make available to you or make arrangements for you to obtain copies (which may, to the extent permitted by law, be in electronic form) of each prospectus, prospectus supplement, offering memorandum, offering circular or similar offering document, and any preliminary version thereof, as soon as reasonably practicable after sufficient quantities thereof have been made available by the issuer of the Securities (each, an Issuer ) and any guarantor (each, a Guarantor ) thereof, and, if different from the Issuer, the seller or sellers (each, a Seller ) of the Securities. You agree that you will comply with the applicable United States federal and state laws, and the applicable rules and regulations of any regulatory body promulgated thereunder, and the applicable laws, rules and regulations of any non-United States jurisdiction, governing the use and distribution of offering materials by brokers and dealers. You represent and warrant that you are familiar with Rule l5c2-8 under the Securities Exchange Act of 1934, as amended (the 1934 Act ), relating to the distribution of preliminary and final prospectuses and agree that your purchase of Securities shall constitute your confirmation that you have delivered and will deliver all preliminary prospectuses and final prospectuses required for compliance therewith. You agree to make a record of your distribution of each preliminary prospectus and, when furnished with copies of any revised preliminary prospectus or final prospectus, you will, upon our request, promptly forward copies thereof to each person to whom you have theretofore distributed a preliminary prospectus. You agree that, in purchasing Securities, you will rely upon no statement whatsoever, written or oral, other than the statements in the final prospectus, offering memorandum, offering circular or similar offering document delivered to you by us. You are not authorized by the Issuer or other Seller of Securities offered pursuant to a final prospectus, offering memorandum, offering circular or similar offering document or by any Underwriters to give any information or to make any representation not contained therein in connection with the sale of such Securities.
4. Offering of Securities .
(a) In respect of any Offering, we will inform you of any Selling Concession and Reallowance, if any. The Offering of Securities is made subject to the conditions referred to in the prospectus, offering memorandum, or offering circular or similar offering document related to the Offering and to the terms and conditions set forth in any Wire. After the initial Offering has commenced, we may change the Offering Price, the Selling Concession and the Reallowance (if any) to Selected Dealers. If a Reallowance is in effect, a reallowance from the Offering Price
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not in excess of such Reallowance may be allowed (i) in the case of Offerings of Securities that are not exempted securities (as defined in Section 3(a)(12) of the 1934 Act), as consideration for services rendered in distribution to Dealers who are either members in good standing of the Financial Industry Regulatory Authority, Inc. ( FINRA ) who agree to abide by the applicable rules of FINRA or non-U.S. banks, brokers, dealers or other non-U.S. institutions not eligible for membership in FINRA who represent to you that they will promptly reoffer such Securities at the Offering Price and will abide by the conditions with respect to non-U.S. banks, dealers and other non-U.S. institutions set forth in Section 10 hereof, or (ii) in the case of Offerings of Securities that are exempted securities (as defined in Section 3(a)(12) of the 1934 Act), as consideration for services rendered in distribution not only to Dealers identified in the immediately preceding clause but also to Dealers that are Banks (as defined in Section 10 hereof) and represent to you that they will promptly reoffer such Securities at the Offering Price and will abide by the conditions with respect to Banks set forth in Section 10 hereof.
(b) No expenses will be charged to Selected Dealers. A single transfer tax upon the sale of the Securities by the respective Underwriters to you will be paid by such Underwriters when such Securities are delivered to you. However, you shall pay any transfer tax on sales of Securities by you and you shall pay your proportionate share of any transfer tax or other tax (other than the single transfer tax described above) in the event that any such tax shall from time to time be assessed against you and other Selected Dealers as a group or otherwise.
5. Payment and Delivery . You will deliver to us, on the date and at the place and time specified by us orally or In Writing, payment in the manner and type of currency specified by us orally or In Writing, payable to the order of UBS Securities LLC (or as we may subsequently inform you), for an amount equal to the Offering Price plus (if not included in the Offering Price) accrued interest, amortization of original issue discount or dividends, if any, specified in the prospectus or offering circular or other similar offering document furnished in connection with the Offering of the Securities. We may, in our sole discretion, retain the applicable Selling Concession in respect of the Securities to be purchased by you for release at a date specified by us. We will make payment to the Issuer or Seller against delivery to us for your account of the Securities to be purchased by you, and we will deliver to you the Securities paid for by you which will have been retained by or released to you for direct sale. If we determine that transactions in the Securities are to be settled through The Depository Trust Company ( DTC ) or another clearinghouse facility and payment in the settlement currency is supported by such facility, payment for and delivery of Securities purchased by you will be made through such facility, if you are a participant, or, if you are not a participant, settlement will be made through your ordinary correspondent who is a participant.
6. Over-allotment; Stabilization; Unsold Allotments; Penalty Bids . We may, with respect to any Offering, be authorized to over-allot in arranging sales to Selected Dealers, to purchase and sell Securities for long or short account and to stabilize or maintain the market price of the Securities. You agree that upon our request at any time and from time to time prior to the termination of the provisions of Section 4 hereof with respect to any Offering, you will report to us the amount of Securities purchased by you pursuant to such Offering which then remain unsold by you and will, upon our request at any such time, sell to us for our account or the account of one or more Underwriters such amount of such unsold Securities as we may
4
designate at the Offering Price less an amount to be determined by us not in excess of the Selling Concession. Prior to the termination of the Managers authority to cover any short position in connection with the Offering or such other date as the Manager may specify by Wire, if the Manager determines pursuant to the Initial Public Offering Tracking System of DTC that the Manager has purchased, or any of your customers have sold, a number or amount of Securities retained by, or released to, you for direct sale or any Securities sold pursuant to Section 4 hereof for which you received a portion of the Selling Concession, or any Securities which may have been issued on transfer or in exchange for such Securities, which Securities were therefore not effectively placed for investment, then you authorize the Manager to charge your account with an amount equal to such portion of the Selling Concession received by you with respect to such Securities at a price equal to the total cost of such purchase, including transfer taxes, accrued interest, dividends, and commissions, if any.
7. Termination .
(a) The terms and conditions set forth in (i) Section 4, (ii) the second sentence of Section 6, (iii) Section 15 and (iv) Section 16 of this Master SDA (collectively, the offering provisions ) will terminate with respect to each Offering pursuant to this Master SDA at the close of business on the later of (a) the date on which the Underwriters pay the Issuer or Seller for the Securities, and (b) 45 calendar days after the applicable Offering date, unless in either such case the effectiveness of such offering provisions is extended or sooner terminated as hereinafter provided. We may terminate such offering provisions other than Section 6 at any time by notice to you to the effect that the offering provisions are terminated and we may terminate the provisions of Section 6 at any time at or subsequent to the termination of the other offering provisions by notice to you to the effect that the penalty bid provisions are terminated. All other provisions of the Master SDA shall remain operative and in full force and effect with respect to such Offering.
(b) This Master SDA may be terminated by either party hereto upon five business days written notice to the other party; provided, however, that with respect to any particular Offering, if we receive any such notice from you after we have advised you of the amount of Securities allotted to you, this Master SDA shall remain in full force and effect as to such Offering and shall terminate with respect to such Offering and all previous Offerings only in accordance with and to the extent provided in subsection (a) of this Section 7.
8. Amendments . This Master SDA may be amended from time to time by consent of the parties hereto. Your consent will be deemed to have been given to an amendment to this Master SDA, and such amendment will be effective, five business days following written notice to you of such amendment if you do not notify us In Writing prior to the close of business on such fifth business day that you do not consent to such amendment. Notwithstanding the foregoing, you agree that any amendment, supplement or modification of the terms of this Master SDA by Wire or otherwise In Writing will be effective immediately and your consent will be deemed to have been given to any such amendment, supplement or modification by your purchase of Securities or otherwise receiving and retaining an economic benefit for participating in the Offering as a Selected Dealer; provided that such amendment, supplement or modification of the terms of this Master SDA shall only be effective with respect to the related Offering.
5
9. Relationship Among Underwriters and Selected Dealers . We shall have full authority to take such actions as we deem advisable in all matters pertaining to any Offering under this Master SDA. You are not authorized to act as an agent for us, any Underwriter or the Issuer or other Seller of any Securities in offering Securities to the public or otherwise. Neither we nor any Underwriter will be under any obligation to you except for obligations assumed hereby or in any Wire from us in connection with any Offering, and no obligations on our part as the Manager will be implied hereby or inferred herefrom. Nothing contained in this Master SDA or any Wire shall constitute the Selected Dealers an association or partners with us or any Underwriter or with one another, and the obligations of you and each of the other Selected Dealers or any of the Underwriters are several and not joint. If the Selected Dealers, among themselves, with us or with the Underwriters, should be deemed to constitute a partnership for federal income tax purposes, then you elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986 and agree not to take any position inconsistent with such election. You authorize the Manager, in its discretion, to execute on your behalf such evidence of such election as may be required by the U.S. Internal Revenue Service. In connection with any Offering, you will be liable for your proportionate share of the amount of any tax, claim, demand or liability that may be asserted against you alone or against one or more Selected Dealers participating in such Offering, or against us or the Underwriters, based upon the claim that the Selected Dealers, or any of them, constitute an association, an unincorporated business or other entity, including, in each case, your proportionate share of the amount of any expense (including attorneys fees and expenses) incurred in defending against any such tax, claim, demand or liability.
10. FINRA Compliance . You represent and warrant that you are (a) a broker or dealer (as defined in Section 3(a)(4) or 3(a)(5) of the 1934 Act) that is a member in good standing of FINRA, (b) a non-U.S. bank, broker, dealer or other non-U.S. institution that is not eligible for membership in FINRA and is not required to be registered as a broker or dealer under the 1934 Act (a non-member non-U.S. dealer ), or (c) only in the case of Offerings of Securities that are exempted securities (as defined in Section 3(a)(12) of the 1934 Act), and such other Securities as from time to time may be sold by a bank (as defined in Section 3(a)(6) of the 1934 Act (a Bank )), that you are a Bank that is acting in connection with the Offering in accordance with an applicable exception or exemption from the definition of broker and dealer under Sections 3(a)(4) and 3(a)(5) of the 1934 Act.
You further represent, warrant and agree that, in connection with any purchase or sale of the Securities wherein a selling concession, discount or other allowance is received or granted by or to you:
(i) if you are a member of FINRA, you will comply with all applicable rules of FINRA, including, without limitation, the requirements of FINRA Rules 5110, 5121, 5130, 5131 and 5141 (to the extent any or all such rules are applicable to the particular Offering);
(ii) if you are a non-member non-U.S. dealer, (x) you will not make any offers or sales of the Securities in, or to nationals or residents of, the United States, its territories, or its possessions, except to the extent permitted by Rule 15a-6 under the 1934 Act (or any successor rule thereto adopted by the U.S. Securities and Exchange Commission (the SEC)), (y) in
6
making any offers or sales of the Securities, you will comply with the requirements of the following FINRA rules (including any successor rules thereto adopted by FINRA): (A) to the extent that you are acting, in respect of offers or sales of the Securities, as a conduit for, or are receiving in connection with such offers and sales any selling commissions, discounts, allowances or other compensation from, or are otherwise being directed with respect to allocations or disposition of the Securities by, a FINRA member, FINRA Rule 5130 and FINRA Rule 5141 as though you are a member of FINRA, and (B) NASD Conduct Rule 2420(c), as that Rule applies to a non-member broker or dealer in a non-U.S. country, and (z) you are, and will remain at all relevant times, an appropriately registered or licensed broker or dealer (to the extent required) in your home jurisdiction and in any non-U.S. jurisdiction in which you engage in activities in connection with an Offering;
(iii) if you are a Bank, (x) to the extent you are acting, in respect of offers or sales of the Securities, as a conduit for, or are receiving in connection with such offers and sales any selling commissions, discounts, allowances or other compensation from, or are otherwise being directed with respect to allocations or disposition of the Securities by, a FINRA member, you will comply with FINRA Rules 5130 and 5141 as though you are a member of FINRA, and (y) you will not accept any fee or other compensation, or purchase any Securities at a discount from the offering price from any Underwriter or Dealer, which would not be permitted under applicable FINRA rules (including, without limitation, NASD Conduct Rule 2420 or any successor rule thereto adopted by FINRA) or would subject you to registration and regulation as a broker or dealer under Section 3(a)(4) or 3(a)(5) of the 1934 Act;
(iv) in respect of each Offering in which you participate (as indicated by your participation therein), you have provided to us all documents and other information required to be filed with respect to you, any related person or any person associated with you or any such related person pursuant to FINRAs requirements and interpretations with respect to review of corporate financing transactions as such requirements and interpretations relate to such Offering; and
(v) you are fully familiar with the 1933 Act, 1934 Act and FINRA provisions referenced in this Section 10 and elsewhere in this Master SDA.
11. Blue Sky Matters . Upon application to us, we shall inform you as to any advice we have received from counsel concerning the jurisdictions in which Securities have been qualified for sale or are exempt under the securities or Blue Sky laws of such jurisdictions, but we do not assume any obligation or responsibility as to your right to sell Securities in any such jurisdiction, notwithstanding any information we may furnish to you in that connection.
12. Governing Law; Submission to Jurisdiction . This Master SDA (as it may be modified or supplemented by any Wire) will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in the State. You hereby irrevocably: (a) submit to the jurisdiction of any court of the State of New York located in the City of New York or the U.S. District Court for the Southern District of the State of New York for the purpose of any suit, action, or other proceeding arising out of this Master SDA, or any of the agreements or transactions contemplated hereby (each, a Proceeding ), (b)
7
agree that all claims in respect of any Proceeding may be heard and determined in any such court, (c) waive, to the fullest extent permitted by law, any immunity from jurisdiction of any such court or from any legal process therein, (d) agree not to commence any Proceeding other than in such courts, and (e) waive, to the fullest extent permitted by law, any claim that such Proceeding is brought in an inconvenient forum.
13. Successors and Assigns . This Master SDA will be binding on, and inure to the benefit of, the parties hereto and other persons specified in Section 1 hereof, and the respective successors and assigns of each of them; provided, however, that you may not assign your rights or delegate any of your duties under this Master SDA without our prior written consent.
14. Compliance with Law . You agree that in selling Securities pursuant to any Offering (which agreement shall also be for the benefit of the Issuer or other Seller of such Securities) you will comply with all applicable rules and regulations, including the applicable provisions of the 1933 Act and the 1934 Act, the applicable rules and regulations of the SEC thereunder, the applicable rules and regulations of FINRA, the applicable rules and regulations of any securities exchange or other regulatory or self-regulatory organization having jurisdiction over the Offering and the applicable laws, rules and regulations specified in Section 16(a) and 16(b) hereof.
15. Discretionary Accounts . In the case of an Offering of Securities registered under the 1933 Act by an Issuer that was not, immediately prior to the filing of the related registration statement, subject to the requirements of Section 13(d) or 15(d) of the 1934 Act, you will not make sales to any account over which you exercise discretionary authority in connection with such sale, except as otherwise permitted by us for such Offering In Writing.
16. Offering Restrictions . You will not make any offers or sales of Securities or any other securities in jurisdictions outside the United States except under circumstances that will result in compliance with (a) applicable laws, including private placement requirements, in each such jurisdiction and (b) the restrictions on offers or sales set forth in this Master SDA, any Wire or the prospectus, preliminary prospectus, offering memorandum, offering circular, or preliminary offering memorandum or preliminary offering circular or other similar offering document, as the case may be. It is understood that, except as specified in this Master SDA, the prospectus, offering memorandum or offering circular or other similar offering document, or applicable Wire, no action has been taken by us, the Issuer, the Guarantor, the Seller or any other party to permit you to offer Securities in any jurisdiction other than the United States, in the case of a Registered Offering, where action would be required for such purpose.
17. Prohibition on Money Laundering . The operations of your business and your subsidiaries are and, to your knowledge, have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the Money Laundering Laws ) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving you or any of your
8
subsidiaries with respect to the Money Laundering Laws is pending or, to your knowledge, threatened.
18. Liability of Manager . The Manager will not be liable to you for any act or omission, except for obligations expressly assumed by the Manager In Writing.
19. Notices . Any notice to you will be deemed to have been duly given if mailed, sent by Wire, or delivered in person to you at the address set forth on the signature page hereto (or to such other address, telephone, telecopy or telex as you will be notified by us), or if such address is no longer valid, then at the address set forth in reports filed by you with FINRA. Any such notice will take effect upon receipt thereof. Communications by Wire will be deemed to be written communications and made In Writing.
20. Severability . In case any provision in this Master SDA or any Wire is deemed invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions will not in any way be affected or impaired thereby.
21. Counterparts . This Master SDA may be executed in any number of counterparts, each of which will be deemed to be an original, and all of which taken together constitute one and the same instrument. Transmission by telecopy of an executed counterpart of this Master SDA will constitute due and sufficient delivery of such counterpart.
Please confirm by signing and returning to us the enclosed copy of this Master SDA that your subscription to, or your acceptance of any reservation of, any Securities pursuant to an Offering shall constitute (a) acceptance of and agreement to the terms and conditions of this Master SDA (as supplemented and amended pursuant to Section 8 hereof) together with and subject to any supplementary terms and conditions contained in any Wire from us in connection with such Offering, all of which shall constitute a binding agreement between you and us individually or as representative of any Underwriters, (b) confirmation that your representations and warranties set forth herein are true and correct at that time, (c) confirmation that your agreements herein have been and will be fully performed by you to the extent and at the times required thereby and (d) in the case of any Offering described in Section 3 hereof, acknowledgment that you have requested and received from us sufficient copies of the final prospectus, offering memorandum or offering circular, as the case may be, with respect to such Offering in order to comply with your undertakings in Section 16(a) or 16(b) hereof.
(Remainder of page intentionally left blank)
(Signature page follows)
This Master SDA is dated as of May 23, 2012, and executed by and between UBS Securities LLC and [ insert name of selected dealer ].
Very truly yours, |
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UBS Securities LLC | ||
By: |
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Name: |
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Title: |
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By: |
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Name: |
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Title: |
Confirmed as of (date):
CONFIRMED: , 2012 [ INSERT
NAME OF SELECTED DEALER ]
By: |
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Name: |
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Address:
Telephone:
Facsimile:
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10
Master Selected Dealers Agreement
GUIDE TO DEFINED TERMS
Term |
Section Reference |
|
1933 Act |
1 | |
1934 Act |
3 | |
Bank |
10 | |
Dealer |
Foreward | |
DTC |
5 | |
FINRA |
4(a) | |
Guarantor |
3 | |
In Writing |
2 | |
Issuer |
3 | |
Manager |
Foreword | |
Master SDA |
Foreword | |
Money Laundering Laws |
17 | |
non-member non-U.S. dealer |
10 | |
Offering |
Foreword | |
Offering Price |
2 | |
offering provisions |
7(a) | |
Proceeding |
12 | |
Reallowance |
1 | |
SEC |
10 | |
Securities |
1 | |
Selected Dealers |
1 | |
Seller |
3 | |
Selling Concession |
1 | |
Underwriters |
1 | |
Wire |
2 |
CLOSED-END FUND DISTRIBUTION SERVICES AGREEMENT
THIS CLOSED-END FUND DISTRIBUTION SERVICES AGREEMENT (this Agreement ) is made, as of September 1, 2017 (the Effective Date ), by and among First Dominion Capital Corp. ( FDCC ), Vision 4 Fund Distributors, LLC ( Vision ) and XA Investments LLC (the Adviser ), relating to certain services to be provided by FDCC and Vision to the Adviser with respect to a proposed closed-end investment company, currently referred to as XAI Octagon Floating Rate & Alternative Income Term Trust (the Fund ).
WHEREAS, the Adviser is the investment adviser to the Fund;
WHEREAS, the Fund will be operated as a closed-end management investment company registered under the Investment Company Act of 1940 (the 1940 Act );
WHEREAS, the Fund will offer for sale common shares of beneficial interest (the Shares and the holders of the Shares being referred to herein as the Shareholders );
WHEREAS, in connection with serving as investment adviser to the Fund, the Adviser wishes to retain FDCC to provide the distribution and marketing services set forth herein to the Adviser under the terms and conditions stated below, and FDCC is willing to provide such services for the compensation set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties hereby agree as follows:
1. |
APPOINTMENT. The Adviser hereby retains FDCC to furnish, and FDCC hereby agrees to furnish, the services set forth in paragraph 2 below. |
2. |
SERVICES AND DUTIES OF FDCC. At such times and to the extent that the Adviser may reasonably request, FDCC registered representatives who are also employees of Vision will assist the Adviser with the distribution of the Shares in an initial public offering (the Offering ) by: |
(a) |
making all of its registered representatives who are also employees of Vision available to the Adviser and the Fund to aid in the distribution of the Shares and to generally provide sales services with respect to the Shares; |
(b) |
developing and coordinating a targeted road show with respect to the Offering; |
(c) |
assisting in the customization of marketing materials for use by, and presentations to the sales networks at, broker-dealers that distribute the Shares; |
(d) |
assisting in the review of materials made available to prospective investors and broker-dealers; |
(e) |
assisting in scheduling and marketing national, informational conference calls in targeted broker-dealer channels for the Offering; |
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(f) |
organizing and hosting meetings with key financial advisers, closed-end fund wholesalers, analysts, service providers and ratings and information organizations that cover closed-end funds; |
(g) |
making such reports and recommendations to the board of trustees of the Fund (the Board) as the Board and/or the Adviser may reasonably request or deem appropriate; |
(h) |
replying to requests for information from broker-dealers or prospective investors concerning the Shares, the Offering or the Fund; |
(i) |
assisting in the drafting of press releases in connection with the Offering; providing the sales support and marketing services typical for an offering of the Shares; and |
(j) |
providing such other services as the parties may mutually agree from time to time. |
For the avoidance of doubt, such distribution and marketing services shall not involve acting as underwriter of any offering of the Fund on a firm commitment or best efforts basis.
For the avoidance of doubt, FDCC acknowledges and agrees that it is not authorized to provide any information or make any representation regarding the Fund, the Offering or the Shares other than as contained in the Funds prospectus and statement of additional information or any sales literature and advertising or marketing materials specifically approved by the Adviser for use by FDCC in connection with the performance of the services provided by FDCC hereunder.
FDCC further acknowledges and agrees that it will not use or cause to be used any sales literature or advertising or marketing materials in connection with the Offering unless such sales literature or advertising or marketing materials have, if required by applicable law or the rules and regulations of the Financial Industry Regulatory Authority (FINRA), been filed with FINRA in a timely manner and, if required by applicable law or the rules and regulations, FINRA has indicated that such sales literature or advertising or marketing materials appear consistent with applicable standards.
3. |
COMPLIANCE WITH LAW. In all matters pertaining to the performance of this Agreement, FDCC will act in conformity with the reasonable directions of the Adviser and the Board, officers and employees of the Fund and will conform to and comply with the requirements of the 1940 Act and the rules and regulations thereunder and all other applicable federal and state laws and regulations, including, without limitation rules and regulations promulgated by the Securities and Exchange Commission (SEC) and FINRA. |
4. |
SERVICES NOT EXCLUSIVE. The services to be provided hereunder by FDCC and Vision are not deemed to be exclusive, and FDCC and each of its respective members, officers, employees and affiliates are free to render such services to other funds or clients as long as Visions services under this Agreement are not impaired thereby, except that |
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during the period from the Offering Launch Date (as defined below) through the closing of the Offering: (i) FDCC will not launch, or aid in launching, in the public markets any other registered closed-end fund offering during the period from the Offering Launch Date (as defined below) through the closing of the Offering, without the prior written consent of the Adviser; provided that members of FDCCs management team that are not involved in sales may begin work on potential future launches (that do not conflict with the Offering) during the period of the Offering and (ii) FDCC will make the Fund the sole focus of FDCCs distribution services for closed-end funds for the period from the Offering Launch Date through the closing of the Offering. The Offering Launch Date is the date that the Funds preliminary prospectus that is approved for use in the Offering (also known as the red herring prospectus) is printed and first made available by the Fund for use in connection with the Offering and the related marketing efforts. The parties understand and agree that, subject to the termination provisions in Section 11, the launch of the Offering may take place at any time during the continuance of this Agreement in the discretion of the Adviser and the Fund, and that FDCC shall notify the Adviser in writing of any agreement or arrangements it has entered into to provide services for another closed-end fund whose offering period may overlap with the period from the eventual Offering Launch Date through the closing of the Offering; provided that FDCC will not enter into such an agreement or arrangement for an offering period that conflicts with the timing that FDCC is aware that Adviser is planning for the Offering, unless the Adviser notifies FDCC that it no longer intends to conduct an offering during such offering period. |
5. |
REPRESENTATIONS, WARRANTIES AND COVENANTS OF FDCC. |
Vision and FDCC jointly and severally represent, warrant and agree as follows:
(a) |
FDCC has obtained all necessary registrations, licenses and approvals in order to perform the services provided in this Agreement. FDCC is registered as a broker-dealer with the SEC, is a member of FINRA and is registered in each state where such registration is required. FDCC covenants to maintain all necessary registrations, licenses and approvals in effect during the term of this Agreement. |
(b) |
FDCC and Vision shall promptly notify the Adviser (i) in the event that the SEC, FINRA or any other United States or state regulatory authority, governmental agency or body or securities exchange or association has censured FDCCs or Visions activities, functions or operations, suspended or revoked any registration, license or approval, or has commenced proceedings or an investigation that may result in any of these actions, (ii) in the event that there is a change of control of FDCC or Vision or a change in its senior management or (iii) of any change to FDCC or Vision that materially and adversely affects its ability to perform services under this Agreement. |
(c) |
(i) FDCC and Vision are validly existing entities and have full corporate power and authority to perform its obligations under this Agreement, (ii) this Agreement has been duly and validly authorized, executed and delivered on behalf of FDCC and Vision and constitutes the binding and enforceable obligation |
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of FDCC and Vision in accordance with its terms, and (iii) the execution and delivery of this Agreement, the incurrence of its obligations herein set forth and the consummation of the transactions contemplated herein will not constitute a breach of, or default under, its constituent documents, other instruments to which FDCC or Vision is a party or by which FDCC or Vision is bound or affected, or under any order, rule or regulation applicable to FDCC or Vision of any court or any governmental body or administrative agency having jurisdiction over FDCC or Vision, except for those breaches or defaults that would not materially and adversely affect FDCCs ability to perform its obligations under this Agreement. |
(d) |
FDCC has reviewed and understands Rule 206(4)-5 (the Rule ) promulgated by the SEC under the Investment Advisers Act of 1940, and FDCC shall not, and shall cause each of its members, managers, employees and affiliates, including each registered representatives who is also an employee of Vision, (each of the foregoing, together with FDCC, FDCC Representatives ) not to engage in conduct that would reasonably be expected to (i) cause paragraphs (a)(1) or (a)(2) of the Rule to apply to the Adviser or any of its affiliates (taking into account the exceptions provided by paragraph (b) of the Rule, to the extent applicable) or (ii) constitute a violation of paragraph (a)(2) of the Rule with respect to the Adviser or its affiliates, in either case, as though each FDCC Representative was a covered associate of the Adviser or its affiliates. FDCC hereby further represents and warrants that (except to the extent disclosed in writing to the Adviser as of the date hereof) no FDCC Representative has, in the two year period prior to the date of this Agreement, engaged in conduct that would reasonably be expected to cause paragraph (a)(1) of the Rule to apply to the Adviser or its affiliates (taking into account the exceptions provided by paragraph (b) of the Rule, to the extent applicable) as though each FDCC Representative was a covered associate of the Adviser or its affiliates. Each of the representations, warranties and agreements in this Section 5(d) shall be subject to and interpreted in accordance with the other paragraphs of the Rule, including, without limitation, paragraphs (c) and (d) thereof. Terms used in this subsection shall have the same meanings ascribed to them as set forth in paragraph (f) of the Rule. |
(e) |
Any information furnished by FDCC or Vision expressly for use in the Funds registration statement, prospectus, statement of additional information, sales literature or advertising or marketing materials does not or will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. |
(f) |
FDCC and Vision shall act as independent contractors in providing services pursuant to this Agreement. Neither the Adviser or the Fund, nor the legal or accounting advisors to the Adviser or the Fund, is an advisor to FDCC or Vision as to legal, tax, accounting or regulatory matters in any jurisdiction and FDCC and Vision shall consult with their own advisors concerning such matters and shall be responsible for making its own independent investigation and appraisal or such matters arising from the services contemplated hereby. |
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(g) |
Neither FDCC nor Vision (i) has compensated, or agreed to compensate, directly or indirectly, any third party in connection with securing the Adviser or the Fund as a client and (ii) will not share its fee with any third party without the prior written consent of the Adviser. |
6. |
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE ADVISER. |
(a) |
The Adviser agrees that it shall promptly notify FDCC (i) in the event that the SEC or any other United States or state regulatory authority, governmental agency or body or securities exchange or association has censured in writing the Advisers or the Funds activities, functions or operations, suspended or revoked any registration, license or approval, or has commenced proceedings that may result in any of these actions, (ii) in the event that there is a change of control of the Adviser or (iii) of any change to the Adviser that materially and adversely affects the Advisers ability to perform its obligations under this Agreement. |
(b) |
The Adviser represents and warrants that (i) it is a validly existing entity and has full power and authority to perform its obligations under this Agreement, (ii) this Agreement has been duly and validly authorized, executed and delivered on its behalf and constitutes the binding and enforceable obligation of the Adviser in accordance with its terms, (iii) the execution and delivery of this Agreement, the incurrence of its obligations herein set forth and the consummation of the transactions contemplated herein will not constitute a breach of, or default under, its constituent documents, other instruments to which the Adviser is a party or by which the Adviser is bound or affected, or under any order, rule or regulation applicable to it of any court or any governmental body or administrative agency having jurisdiction over it, and (iv) the Adviser is, or will be prior to the commencement of investment operations of the Fund, registered as an investment adviser under the Investment Advisers Act of 1940 and in any state where registration is required. |
7. |
COMPENSATION. |
(a) |
As compensation for the services to be provided by FDCC to the Adviser under this Agreement, the Adviser shall pay FDCC as follows: |
(i) |
By January 2, 2018, if the closing date of the Offering has occurred by such date, the Adviser shall pay FDCC a fee in an amount equal to 1.00% (one percent) of the total price to the public of the Shares sold in the Offering (including any Shares offered pursuant to an underwriters overallotment option), but excluding Shares sold to institutional investors who are not sourced through FDCC or Vision or though members of the underwriting syndicate for the Offering (it being understood that institutional investors who are not sourced through FDCC or Vision or through the underwriting syndicate may need to execute their purchase of Shares through syndicate members). |
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(ii) |
FDCC agrees that the fees described in Section 7(a)(i) above shall be reduced by 10% to rates of 0.90% (90 basis points). |
(b) |
As compensation for the services under this Agreement, FDCC may pay compensation to those persons who are registered representatives of FDCC and employees of Vision pursuant to the terms of the contract between FDCC and the registered representative. |
8. |
REIMBURSEMENT OF EXPENSES. Within 10 business days of the earlier of the closing date of the Offering or the termination this Agreement pursuant to Paragraphs 11(a)(ii)-(v), the Adviser will promptly reimburse Vision for all reasonable and documented out-of-pocket expenses incurred by it and its registered representatives providing services in connection with this Agreement, including expenses associated with hosting events and meetings as contemplated under this Agreement and expenses associated with travel, lodging, meals, printing, shipping, mailing expenses and other similar expenses. Such out-of-pocket expenses shall not exceed $300,000, without the prior written approval of the Adviser. In addition, the Adviser will also contribute up to $20,000 for an in-person training session prior to the launch date of the Fund. Vision shall invoice the Adviser and provide reasonable evidence of such expenses. |
9. |
LIMITATION OF LIABILITY OF FDCC. FDCC will not be liable for any act or omission or for any error of judgment or for any loss suffered by the Adviser in connection with the performance of its duties under this Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties, from the reckless disregard by it of its duties under this Agreement or from a material breach by FDCC or Vision of any representation, warranty or covenant hereunder ( FDCC Disabling Conduct ). |
The Adviser agrees to indemnify, defend and hold FDCC, its members and officers, and any person who controls FDCC within the meaning of Section 15 of the 1933 Act (collectively, FDCC Indemnified Persons ), free and harmless from and against any and all claims, demands, liabilities and expenses (including the reasonable and documented costs of investigating or defending such claims, demands or liabilities and the reasonable and documented fees of one counsel incurred in connection therewith) that any FDCC Indemnified Persons may incur arising out of or relating to (i) the Advisers breach of any of its representations, warranties or covenants contained in this Agreement, (ii) the Advisers failure to comply with any applicable laws or regulations, or (iii) the Advisers willful misfeasance, bad faith or gross negligence in the performance of its duties or the Advisers reckless disregard by it of its duties under this Agreement, but only to the extent that such liability or expense incurred by the FDCC Indemnified Persons or resulting from such claims or demands shall not arise out of or be based upon FDCC Disabling Conduct.
10. |
LIMITATION OF LIABILITY OF THE ADVISER. The Adviser will not be liable for any act or omission or for any error of judgment or for any loss suffered by FDCC or Vision in connection with the performance of its duties under this Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the |
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performance of its duties, from the reckless disregard by it of its duties under this Agreement or from a material breach by the Adviser of any representation, warrant or covenant hereunder ( Adviser Disabling Conduct ). |
FDCC agrees to indemnify, defend and hold the Fund, the Adviser, their several officers and directors, and any person who controls the Adviser within the meaning of Section 15 of the Securities Act of 1933 (collectively, Adviser Indemnified Persons ), free and harmless from and against any and all claims, demands, liabilities and expenses (including the reasonable and documented costs of investigating or defending such claims, demands or liabilities and reasonable and documented fees of one counsel incurred in connection therewith) that any Adviser Indemnified Persons may incur arising out of or relating to (i) FDCCs breach of any of its representations, warranties or covenants contained in this Agreement, (ii) FDCCs failure to comply with any applicable laws or regulations, or (iii) FDCCs willful misfeasance, bad faith or gross negligence in the performance of its duties or FDCCs reckless disregard by it of its duties under this Agreement, but only to the extent that such liability or expense incurred by the Adviser Indemnified Persons or resulting from such claims or demands shall not arise out of or be based upon Adviser Disabling Conduct.
11. |
TERMINATION. |
(a) |
This Agreement may be terminated solely as follows: |
(i) |
The Adviser may terminate this Agreement upon 10 days prior written notice to FDCC in the event of a material breach by FDCC of any of its obligations, representations, warranties or covenants contained in this Agreement. |
(ii) |
FDCC may terminate this Agreement upon 10 days prior written notice to the Adviser in the event of a material breach by the Adviser of any of its obligations, representations, warranties or covenants contained in this Agreement. |
(iii) |
This Agreement may also be terminated upon the express written mutual agreement of FDCC and the Adviser upon 30 days prior written notice. |
(iv) |
This Agreement shall terminate upon written notice from the Adviser that, based on discussions with prospective lead underwriters, the Offering will not be completed. |
(v) |
Either party may terminate this Agreement if the Offering has not commenced by December 31, 2017. |
(b) |
In the event that the Adviser terminates this Agreement pursuant to paragraph 11(a)(i), the Adviser shall not be responsible for paying any fee to FDCC or for reimbursing any expense of FDCC pursuant to paragraph 8 above. |
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Upon termination of this Agreement pursuant to paragraphs 11(a)(ii) (v), the Adviser shall reimburse any amounts due to FDCC pursuant to paragraph 8 above.
(c) |
Notwithstanding anything to the contrary in this Agreement, Sections 9, 10, 13, 14, 15, 20 and 21 shall survive termination of this Agreement and in the event an Offering has closed, the provisions of the last paragraph of Section 2 will survive any termination of this Agreement until the fourth anniversary of the date the Offering closes. |
12. |
AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be changed, waived, discharged, amended or terminated orally, but only by an instrument in writing signed by FDCC, Vision and the Adviser. |
13. |
CONFIDENTIALITY. FDCC and the Adviser each acknowledge that it may obtain certain confidential information of the other party to this Agreement or, in the case of FDCC, of the Fund or its Shareholders, during the performance of its duties under this Agreement and each party hereto agrees to treat all such confidential information as proprietary information of the applicable party and to keep such information confidential by using the same care and discretion it uses with respect to its own confidential information, property and trade secrets, provided that a party may disclose confidential information if (i) such disclosure is approved in writing by the applicable party to which the confidential information relates or originates or (ii) such disclosure is required by applicable laws, rules, and regulations, or such disclosure is made to a regulatory authority in the normal course of an examination, audit or investigation involving the receipt or otherwise in response to a valid request by a regulatory authority. If a party is required or requested to disclose confidential information of another party pursuant to (ii) above, such party shall, to the extent not prohibited by applicable law, immediately notify the other parties to this Agreement in order to provide such parties the opportunity to pursue such legal or other action as such parties may desire to prevent the release of such confidential information, and such party agrees to provide reasonable assistance to any party seeking to prevent the release of such confidential information, at the expense of the requesting party. Notwithstanding the foregoing, FDCC and the Adviser acknowledge and agree that the terms of this Agreement may be disclosed to the Fund and the underwriters for the Offering, the terms of this Agreement may be described in the prospectus and statement of additional information related to the Offering a copy of this Agreement may be filed as an exhibit to the Funds registration statement. |
For purposes of this Agreement, confidential information does not include information which, without any breach of FDCC or the Adviser of the foregoing, (1) is or becomes publicly available (other than in breach of this Agreement or a violation of a confidentiality obligation owed to a party hereto), (2) is in the possession of FDCC or the Adviser (as the case may be) prior to disclosure by the other party, (3) is independently developed by FDCC or the Adviser (as the case may be) outside the scope of this Agreement and without use of confidential information or (4) is rightfully obtained by FDCC or the Adviser (as the case may be) from third parties who have no duty of confidentiality to the Adviser or FDCC, respectively.
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In the performance of its obligations under this Agreement and in respect of any information provided to FDCC in connection with this Agreement, FDCC agrees to comply with all applicable laws and regulations related to the collection, storage, handling, processing and transfer of non-public personal information ( Applicable Data Security Laws ), and to implement and maintain appropriate security measures to protect the confidentiality, security and integrity of non-public personal information in the manner provided for under and to the extent required by all such Applicable Data Security Laws.
FDCC confirms that it is aware that securities laws of various jurisdictions restrict persons from trading in securities of an issuer while in possession of material non-public information regarding such issuer, and from communicating such information to a person under circumstances in which it is reasonably foreseeable that such person may trade in such security.
14. |
GOVERNING LAW. This Agreement and all questions relating to its validity, interpretation, performance and enforcement shall be construed in accordance with the laws of the State of New York, notwithstanding any conflict of laws doctrines of any jurisdiction to the contrary. |
EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
15. |
BOOKS AND RECORDS. |
(a) | In compliance with the requirements of the 1940 Act, FDCC hereby agrees that all records which it may maintain for the Fund or the Adviser, as the case may be, are the property of the Adviser and the Fund, as the case may be, and further agrees to surrender promptly to the Adviser or the Fund, as the case may be any of such records upon request. FDCC may retain such copies of records delivered to the Advisor or Fund as may be required to satisfy its record keeping requirements; provided that it holds such copies in strict confidence for as long as it retains them. |
(b) |
FDCC hereby agrees to furnish to regulatory authorities having the requisite authority any information or reports in connection with services that FDCC renders pursuant to this Agreement which may be requested in order to ascertain whether the operations of the Adviser and/or the Fund are being conducted in a manner consistent with applicable laws and regulations. If FDCC is required or requested to provide any information or reports to regulatory authorities, FDCC shall, to the extent not prohibited by applicable law, immediately notify the Adviser in order to provide the Adviser the opportunity to pursue such legal or other action as it may desire to prevent the release of the information or reports, and FDCC agrees to provide reasonable assistance to the Adviser in seeking to prevent the release of the information. |
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16. |
BENEFIT TO OTHERS. The understandings contained in this Agreement are for the sole benefit of the parties hereto and their respective successors and assigns and, except as otherwise provided herein, they shall not be construed as conferring, and are not intended to confer, any rights on any other persons except as specifically provided herein. |
17. |
BINDING NATURE OF AGREEMENT; NO ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that no party may assign or transfer its rights nor delegate its obligations under this Agreement without the prior written consent of FDCC and the Adviser. |
18. |
EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against the any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as signatories. |
19. |
ENTIRE AGREEMENT. This Agreement and the Preferred Distribution Provider Agreement contain the entire understanding among the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. |
20. |
WAIVERS. Neither the failure nor any delay on the part of any party to this Agreement to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and signed by the party asserted to have granted such waiver. |
21. |
MISCELLANEOUS. The captions of 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. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. |
22. |
NOTICES. |
All notices required or permitted to be sent under this Agreement shall be sent, if to the Adviser, to:
XA Investments LLC
c/o John McGarrity
- 10 -
321 North Clark Street
Suite 2430
Chicago, IL 60654
Email: jmcgarrity@xainvestments.com
- 11 -
Or if to Vision, to:
Vision 4 Fund Distributors, LLC
c/o Henry Johnson
Vision 4 Fund Distributors
9260 East Raintree Drive, Suite 100
Scottsdale, AZ 85260
e-mail: henry.johnson@v4fd.com
Or if to FDCC to:
First Dominion Capital Corp.
8730 Stony Point Parkway
Building III, Suite 205
Richmond, VA 23235
Attn: Compliance
e-mail: svermillera@ccofva.com
[ Remainder of Page Intentionally Left Blank ]
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IN WITNESS WHEREOF, the parties hereto have caused the instrument to be executed by their officers designated below as of the day and year first above written.
First Dominion Capital Corp. | ||
By: |
/s/ John Pasco, III |
|
Name: John Pasco, III |
||
Title: President |
Vision 4 Fund Distributors, LLC | ||
By: |
/s/ Paul Kusalowicz |
|
Name: Paul Kusalowicz |
||
Title: Managing Partner |
XA Investments LLC | ||
By: |
/s/ John F. Spence |
|
Name: John F. Spence |
||
Title: Co-CEO |
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STRUCTURING FEE AGREEMENT
September [ ], 2017
UBS Securities LLC
299 Park Avenue
New York, New York 10171
Ladies and Gentlemen:
This agreement (the Agreement) is between XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser), Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) and UBS Securities LLC (UBS) with respect to the XAI Octagon Floating Rate Income & Alternative Income Term Trust (the Fund). Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Underwriting Agreement among the Fund, the Adviser, the Sub-Adviser and the underwriters named therein (the Underwriting Agreement).
1. Fee. In consideration of certain financial advisory services that UBS has provided to the Companies in assisting the Companies in structuring, designing and organizing the Fund as well as services related to the sale and distribution (the Offering) of the common shares of the Fund, it being understood that the ultimate decision with respect to the structure, design and organization of the Fund shall rest with the Companies, the Companies shall pay a fee to UBS in the aggregate amount of $[] (the Fee), of which $[] shall be paid by the Adviser and $[] shall be paid by the Sub-Adviser. The Fee shall be paid on or before [], 2017, or as otherwise agreed to by the parties. In the event the Offering does not proceed, UBS will not receive any fees under this Agreement; however, for the avoidance of doubt, accountable expenses actually incurred may be payable to UBS pursuant to the terms of the Underwriting Agreement.
2. Term. This Agreement shall terminate upon the payment of the entire amount of the Fee, as specified in Section 1 hereof. Notwithstanding the foregoing, Sections 4, 5, 8, 9 and 10 of this Agreement and the Indemnification Agreement attached hereto shall survive the termination of this Agreement.
3. Indemnification. The Companies agree to the indemnification and other agreements set forth in the Indemnification Agreement attached hereto, the provisions of which are incorporated herein by reference and shall survive the termination, expiration or supersession of this Agreement.
4. Confidential Advice. Except to the extent legally required or requested by a court, commission, regulatory body, administrative agency or other self-regulatory agency (after consultation with, and approval (not to be unreasonably withheld or delayed) as to form and substance by, UBS and its counsel), none of (i) the name of UBS, (ii) any advice rendered by UBS to the Companies, or (iii) the terms of this Agreement or any communication from UBS, each in connection with the services performed by UBS pursuant to this Agreement, will be quoted or referred to orally or in writing, or in the case of (ii) and (iii), reproduced or disseminated,
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by the Companies or any of their respective affiliates or agents, without UBS prior written consent; it being understood that UBS has agreed to disclosure of the terms of this Agreement in the prospectus and registration statement related to the Offering.
5. Information. The Companies recognize and confirm that UBS (a) has used and relied primarily on the information provided by the Companies and on information available from generally recognized public sources in performing the services contemplated by this Agreement without having assumed responsibility for independently verifying the same, (b) has not assumed responsibility for the accuracy, completeness or reasonableness of such information and (c) has not made an appraisal of any assets or liabilities (contingent or otherwise) of the Fund. The information provided by each Company to UBS in performing the services contemplated in this Agreement, was true and correct in all material respects and did not contain any material misstatement of fact or omit to state any material fact necessary to make the statements contained therein not misleading. Each Company will promptly notify UBS if it learns of any material inaccuracy or misstatement in, or material omission from, any information provided by such Company to UBS pursuant to this Section 5.
6. Not an Investment Adviser. The Companies acknowledge that UBS has not provided any advice hereunder as to the value of securities or regarding the advisability of purchasing or selling any securities for the Funds portfolio. The Companies acknowledge and agrees that UBS has been retained to act solely as an adviser to the Companies, and the Companies engagement of UBS is not intended to confer rights upon any person (including the Fund or any shareholders, employees or creditors of the Companies or the Fund) not a party hereto as against UBS or its affiliates, or their respective directors, officers, employees or agents, successors, or assigns. UBS has acted as an independent contractor under this Agreement, and not in any other capacity including as a fiduciary, and any duties arising out of its engagement shall be owed solely to the Companies.
7. Not Exclusive. Nothing herein shall be construed as prohibiting you or your affiliates from acting as an underwriter or financial adviser or in any other capacity for any other persons (including other registered investment companies or other investment managers).
8. Amendment; Waiver. No provision of this Agreement may be amended or waived except by an instrument in writing signed by the parties hereto.
9. Governing Law. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement (Claim), directly or indirectly, shall be governed by and construed in accordance with the laws of the State of New York. No Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have exclusive jurisdiction over the adjudication of such matters, each Company and UBS consent to the jurisdiction of such courts and personal service with respect thereto. EACH OF UBS AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT.
10. Successors and Assigns. This Agreement shall be binding upon each Company and UBS and their respective successors and assigns and any successor or assign of any substantial portion of each Companys or UBS respective businesses and/or assets.
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11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this Agreement by facsimile or electronic transmission shall be effective as delivery of a manually executed counterpart hereof.
[ Signature Page Follows ]
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This Agreement shall be effective as of the date first written above.
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
UBS SECURITIES LLC |
By: |
Name: |
Title: |
By: |
Name: |
Title: |
[Signature Page - UBS Structuring Fee Agreement]
Indemnification Agreement
September [], 2017
UBS Securities LLC
299 Park Avenue
New York, New York 10171
Ladies and Gentlemen:
In connection with the engagement of UBS Securities LLC (UBS) to advise and assist the undersigned XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser) and Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) with the matters set forth in the Structuring Fee Agreement, dated September [], 2017, among the Companies and UBS (the Agreement), in the event that UBS becomes involved in any capacity in any claim, suit, action, proceeding, investigation or inquiry (including, without limitation, any shareholder or derivative action or arbitration proceeding) arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement (collectively, a Proceeding), the Companies agree to indemnify, defend and hold UBS harmless to the fullest extent permitted by law, from and against any losses, claims, damages, liabilities and expenses arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that such losses, claims, damages, liabilities and expenses resulted solely from the gross negligence, willful misconduct or bad faith of UBS. In addition, in the event that UBS becomes involved in any capacity in any Proceeding, the Companies will reimburse UBS for its reasonable legal and other expenses (including the reasonable cost of any investigation and preparation) as such expenses are incurred by UBS in connection therewith, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review, that such expenses results solely from the gross negligence, willful misconduct of bad faith of UBS. If such indemnification were not to be available for any reason, the Companies agree to contribute to the losses, claims, damages, liabilities and expenses involved (i) in the proportion appropriate to reflect the relative benefits received or sought to be received by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and UBS, on the other hand, in connection with the matters contemplated by the Agreement or (ii) if (but only if and to the extent) the allocation provided for in clause (i) is for any reason held unenforceable, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, as well as any other relevant equitable considerations. The Companies agree that for the purposes of this paragraph the relative benefits received, or sought to be received, by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, in connection with the matters contemplated by the Agreement shall be deemed to be in the same proportion that the total value received or paid or contemplated to be received or paid by the Companies or their stockholders or affiliates and other
- 1 -
constituencies, as the case may be, as a result of or in connection with the matters (whether or not consummated) for which UBS has been retained to perform financial services bears to the fees paid to UBS under the Agreement; provided that, in no event shall the Companies contribute less than the amount necessary to assure that UBS is not liable for losses, claims, damages, liabilities and expenses in excess of the amount of fees actually received by UBS pursuant to the Agreement. Relative fault shall be determined by reference to, among other things, whether any alleged untrue statement or omission or any other alleged conduct relates to information provided by the Companies or other conduct by the Companies (or their employees or other agents), on the one hand, or by UBS, on the other hand. The Companies will not settle any Proceeding in respect of which indemnity may be sought hereunder, whether or not UBS is an actual or potential party to such Proceeding, without UBS prior written consent, which consent shall not be unreasonably withheld or delayed. For purposes of this Indemnification Agreement, UBS shall include UBS Securities LLC, any of its affiliates, each other person, if any, controlling UBS or any of its affiliates, their respective officers, current and former directors, employees and agents, and the successors and assigns of all of the foregoing persons. The foregoing indemnity and contribution agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise.
The Companies agree that neither UBS nor any of its affiliates, directors, agents, employees or controlling persons shall have any liability to the Companies or any person asserting claims on behalf of or in right of the Companies in connection with or as a result of either UBS engagement under the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that any losses, claims, damages, liabilities or expenses incurred by the Companies resulted solely from the gross negligence, willful misconduct or bad faith of UBS in performing the services that are the subject of the Agreement.
THIS INDEMNIFICATION AGREEMENT AND ANY CLAIM, COUNTERCLAIM OR DISPUTE OF ANY KIND OR NATURE WHATSOEVER ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT (CLAIM), DIRECTLY OR INDIRECTLY, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS SET FORTH BELOW, NO CLAIM MAY BE COMMENCED, PROSECUTED OR CONTINUED IN ANY COURT OTHER THAN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION OVER THE ADJUDICATION OF SUCH MATTERS, AND EACH COMPANY AND UBS CONSENT TO THE JURISDICTION OF SUCH COURTS AND PERSONAL SERVICE WITH RESPECT THERETO. EACH COMPANY AND UBS HEREBY CONSENT TO PERSONAL JURISDICTION, SERVICE AND VENUE IN ANY COURT IN WHICH ANY CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT IS BROUGHT BY ANY THIRD PARTY AGAINST UBS OR ANY INDEMNIFIED PARTY. EACH OF UBS AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT. EACH COMPANY AND UBS AGREES THAT A FINAL JUDGMENT IN ANY PROCEEDING OR CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT BROUGHT IN ANY SUCH COURT SHALL BE CONCLUSIVE AND BINDING THEREON MAY BE ENFORCED IN
- 2 -
ANY OTHER COURTS TO THE JURISDICTION OF WHICH SUCH PARTY IS OR MAY BE SUBJECT, BY SUIT UPON SUCH JUDGMENT.
The foregoing Indemnification Agreement shall remain in full force and effect notwithstanding any termination of UBS engagement. This Indemnification Agreement shall be binding upon each Company and UBS and their respective successors and assigns and any successor or assign of any substantial portion of such Companys or UBS respective businesses and/or assets. This Indemnification Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
[ Signature Page Follows ]
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Very truly yours, |
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
UBS SECURITIES LLC |
By: |
Name: |
Title: |
By: |
Name: |
Title: |
[Signature Page - UBS Indemnification Agreement]
STRUCTURING FEE AGREEMENT
September 29, 2017
BB&T Capital Markets, a division of BB&T Securities, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
This agreement (the Agreement) is between XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser), Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) and BB&T Capital Markets, a division of BB&T Securities, LLC (BB&T) with respect to the XAI Octagon Floating Rate Income & Alternative Income Term Trust (the Fund). Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Underwriting Agreement among the Fund, the Adviser, the Sub-Adviser and the underwriters named therein (the Underwriting Agreement).
1. Fee. In consideration of certain financial advisory services that BB&T has provided to the Companies in assisting the Companies in structuring, designing and organizing the Fund as well as services related to the sale and distribution (the Offering) of the common shares of the Fund, it being understood that the ultimate decision with respect to the structure, design and organization of the Fund shall rest with the Companies, the Companies shall pay a fee to BB&T in the aggregate amount of $[] (the Fee), of which $[] shall be paid by the Adviser and $[] shall be paid by the Sub-Adviser. The Fee shall be paid on or before [], 2017, or as otherwise agreed to by the parties. In the event the Offering does not proceed, BB&T will not receive any fees under this Agreement; however, for the avoidance of doubt, accountable expenses actually incurred may be payable to BB&T pursuant to the terms of the Underwriting Agreement.
2. Term. This Agreement shall terminate upon the payment of the entire amount of the Fee, as specified in Section 1 hereof. Notwithstanding the foregoing, Sections 4, 5, 8, 9 and 10 of this Agreement and the Indemnification Agreement attached hereto shall survive the termination of this Agreement.
3. Indemnification. The Companies agree to the indemnification and other agreements set forth in the Indemnification Agreement attached hereto, the provisions of which are incorporated herein by reference and shall survive the termination, expiration or supersession of this Agreement.
4. Confidential Advice. Except to the extent legally required or requested by a court, commission, regulatory body, administrative agency or other self-regulatory agency (after consultation with, and approval (not to be unreasonably withheld or delayed) as to form and substance by, BB&T and its counsel), none of (i) the name of BB&T, (ii) any advice rendered by BB&T to the Companies, or (iii) the terms of this Agreement or any communication from BB&T, each in connection with the services performed by BB&T pursuant to this Agreement, will be quoted or referred to orally or in writing, or in the case of (ii) and (iii), reproduced or disseminated, by the Companies or any of their respective affiliates or agents, without BB&Ts prior written
- 1 -
consent; it being understood that BB&T has agreed to disclosure of the terms of this Agreement in the prospectus and registration statement related to the Offering.
5. Information. The Companies recognize and confirm that BB&T (a) has used and relied primarily on the information provided by the Companies and on information available from generally recognized public sources in performing the services contemplated by this Agreement without having assumed responsibility for independently verifying the same, (b) has not assumed responsibility for the accuracy, completeness or reasonableness of such information and (c) has not made an appraisal of any assets or liabilities (contingent or otherwise) of the Fund. The information provided by each Company to BB&T in performing the services contemplated in this Agreement, was true and correct in all material respects and did not contain any material misstatement of fact or omit to state any material fact necessary to make the statements contained therein not misleading. Each Company will promptly notify BB&T if it learns of any material inaccuracy or misstatement in, or material omission from, any information provided by such Company to BB&T pursuant to this Section 5.
6. Not an Investment Adviser. The Companies acknowledge that BB&T has not provided any advice hereunder as to the value of securities or regarding the advisability of purchasing or selling any securities for the Funds portfolio. The Companies acknowledge and agrees that BB&T has been retained to act solely as an adviser to the Companies, and the Companies engagement of BB&T is not intended to confer rights upon any person (including the Fund or any shareholders, employees or creditors of the Companies or the Fund) not a party hereto as against BB&T or its affiliates, or their respective directors, officers, employees or agents, successors, or assigns. BB&T has acted as an independent contractor under this Agreement, and not in any other capacity including as a fiduciary, and any duties arising out of its engagement shall be owed solely to the Companies.
7. Not Exclusive. Nothing herein shall be construed as prohibiting you or your affiliates from acting as an underwriter or financial adviser or in any other capacity for any other persons (including other registered investment companies or other investment managers).
8. Amendment; Waiver. No provision of this Agreement may be amended or waived except by an instrument in writing signed by the parties hereto.
9. Governing Law. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement (Claim), directly or indirectly, shall be governed by and construed in accordance with the laws of the State of New York. No Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have exclusive jurisdiction over the adjudication of such matters, each Company and BB&T consent to the jurisdiction of such courts and personal service with respect thereto. EACH OF BB&T AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT.
10. Successors and Assigns. This Agreement shall be binding upon each Company and BB&T and their respective successors and assigns and any successor or assign of any substantial portion of each Companys or BB&Ts respective businesses and/or assets.
11. Counterparts. This Agreement may be executed in any number of counterparts,
- 2 -
each of which shall be an original, and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this Agreement by facsimile or electronic transmission shall be effective as delivery of a manually executed counterpart hereof.
[ Signature Page Follows ]
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This Agreement shall be effective as of the date first written above.
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
BB&T Capital Markets, a division of BB&T Securities, LLC
By: |
Name: |
Title: |
[Signature Page - BB&T Structuring Fee Agreement]
Indemnification Agreement
September 29, 2017
BB&T Capital Markets, a division of BB&T Securities, LLC
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
In connection with the engagement of BB&T Capital Markets, a division of BB&T Securities, LLC (BB&T) to advise and assist the undersigned XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser) and Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) with the matters set forth in the Structuring Fee Agreement, dated September 29, 2017, among the Companies and BB&T (the Agreement), in the event that BB&T becomes involved in any capacity in any claim, suit, action, proceeding, investigation or inquiry (including, without limitation, any shareholder or derivative action or arbitration proceeding) arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement (collectively, a Proceeding), the Companies agree to indemnify, defend and hold BB&T harmless to the fullest extent permitted by law, from and against any losses, claims, damages, liabilities and expenses arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that such losses, claims, damages, liabilities and expenses resulted solely from the gross negligence, willful misconduct or bad faith of BB&T. In addition, in the event that BB&T becomes involved in any capacity in any Proceeding, the Companies will reimburse BB&T for its reasonable legal and other expenses (including the reasonable cost of any investigation and preparation) as such expenses are incurred by BB&T in connection therewith, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review, that such expenses results solely from the gross negligence, willful misconduct of bad faith of BB&T. If such indemnification were not to be available for any reason, the Companies agree to contribute to the losses, claims, damages, liabilities and expenses involved (i) in the proportion appropriate to reflect the relative benefits received or sought to be received by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and BB&T, on the other hand, in connection with the matters contemplated by the Agreement or (ii) if (but only if and to the extent) the allocation provided for in clause (i) is for any reason held unenforceable, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, as well as any other relevant equitable considerations. The Companies agree that for the purposes of this paragraph the relative benefits received, or sought to be received, by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, in connection with the matters contemplated by the Agreement shall be deemed to be in the same proportion that the total value received or paid or contemplated to be received or paid by the Companies or their stockholders or affiliates and other constituencies, as the case may be, as a result of or in connection with the matters (whether or not consummated) for which BB&T has been retained to perform financial services bears to the fees paid
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to BB&T under the Agreement; provided that, in no event shall the Companies contribute less than the amount necessary to assure that BB&T is not liable for losses, claims, damages, liabilities and expenses in excess of the amount of fees actually received by BB&T pursuant to the Agreement. Relative fault shall be determined by reference to, among other things, whether any alleged untrue statement or omission or any other alleged conduct relates to information provided by the Companies or other conduct by the Companies (or their employees or other agents), on the one hand, or by BB&T, on the other hand. The Companies will not settle any Proceeding in respect of which indemnity may be sought hereunder, whether or not BB&T is an actual or potential party to such Proceeding, without BB&Ts prior written consent, which consent shall not be unreasonably withheld or delayed. For purposes of this Indemnification Agreement, BB&T shall include BB&T Capital Markets, a division of BB&T Securities, LLC, any of its affiliates, each other person, if any, controlling BB&T or any of its affiliates, their respective officers, current and former directors, employees and agents, and the successors and assigns of all of the foregoing persons. The foregoing indemnity and contribution agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise.
The Companies agree that neither BB&T nor any of its affiliates, directors, agents, employees or controlling persons shall have any liability to the Companies or any person asserting claims on behalf of or in right of the Companies in connection with or as a result of either BB&Ts engagement under the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that any losses, claims, damages, liabilities or expenses incurred by the Companies resulted solely from the gross negligence, willful misconduct or bad faith of BB&T in performing the services that are the subject of the Agreement.
THIS INDEMNIFICATION AGREEMENT AND ANY CLAIM, COUNTERCLAIM OR DISPUTE OF ANY KIND OR NATURE WHATSOEVER ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT (CLAIM), DIRECTLY OR INDIRECTLY, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS SET FORTH BELOW, NO CLAIM MAY BE COMMENCED, PROSECUTED OR CONTINUED IN ANY COURT OTHER THAN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION OVER THE ADJUDICATION OF SUCH MATTERS, AND EACH COMPANY AND BB&T CONSENT TO THE JURISDICTION OF SUCH COURTS AND PERSONAL SERVICE WITH RESPECT THERETO. EACH COMPANY AND BB&T HEREBY CONSENT TO PERSONAL JURISDICTION, SERVICE AND VENUE IN ANY COURT IN WHICH ANY CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT IS BROUGHT BY ANY THIRD PARTY AGAINST BB&T OR ANY INDEMNIFIED PARTY. EACH OF BB&T AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT. EACH COMPANY AND BB&T AGREES THAT A FINAL JUDGMENT IN ANY PROCEEDING OR CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT BROUGHT IN ANY SUCH COURT SHALL BE CONCLUSIVE AND BINDING THEREON MAY BE ENFORCED IN ANY OTHER COURTS TO THE
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JURISDICTION OF WHICH SUCH PARTY IS OR MAY BE SUBJECT, BY SUIT UPON SUCH JUDGMENT.
The foregoing Indemnification Agreement shall remain in full force and effect notwithstanding any termination of BB&Ts engagement. This Indemnification Agreement shall be binding upon each Company and BB&T and their respective successors and assigns and any successor or assign of any substantial portion of such Companys or BB&Ts respective businesses and/or assets. This Indemnification Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
[ Signature Page Follows ]
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Very truly yours, |
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
BB&T Capital Markets, a division of BB&T Securities, LLC
By: |
Name: |
Title: |
[Signature Page - BB&T Indemnification Agreement]
STRUCTURING FEE AGREEMENT
September 29, 2017
Ladenburg Thalmann & Co. Inc.
58 South Service Road, Suite 160
Melville, NY 11747
Ladies and Gentlemen:
This agreement (the Agreement) is between XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser), Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) and Ladenburg Thalmann & Co. Inc. (Ladenburg) with respect to the XAI Octagon Floating Rate Income & Alternative Income Term Trust (the Fund). Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Underwriting Agreement among the Fund, the Adviser, the Sub-Adviser and the underwriters named therein (the Underwriting Agreement).
1. Fee. In consideration of certain financial advisory services that Ladenburg has provided to the Companies in assisting the Companies in structuring, designing and organizing the Fund as well as services related to the sale and distribution (the Offering) of the common shares of the Fund, it being understood that the ultimate decision with respect to the structure, design and organization of the Fund shall rest with the Companies, the Companies shall pay a fee to Ladenburg in the aggregate amount of $[] (the Fee), of which $[] shall be paid by the Adviser and $[] shall be paid by the Sub-Adviser. The Fee shall be paid on or before [], 2017, or as otherwise agreed to by the parties. In the event the Offering does not proceed, Ladenburg will not receive any fees under this Agreement; however, for the avoidance of doubt, accountable expenses actually incurred may be payable to Ladenburg pursuant to the terms of the Underwriting Agreement.
2. Term. This Agreement shall terminate upon the payment of the entire amount of the Fee, as specified in Section 1 hereof. Notwithstanding the foregoing, Sections 4, 5, 8, 9 and 10 of this Agreement and the Indemnification Agreement attached hereto shall survive the termination of this Agreement.
3. Indemnification. The Companies agree to the indemnification and other agreements set forth in the Indemnification Agreement attached hereto, the provisions of which are incorporated herein by reference and shall survive the termination, expiration or supersession of this Agreement.
4. Confidential Advice. Except to the extent legally required or requested by a court, commission, regulatory body, administrative agency or other self-regulatory agency (after consultation with, and approval (not to be unreasonably withheld or delayed) as to form and substance by, Ladenburg and its counsel), none of (i) the name of Ladenburg, (ii) any advice rendered by Ladenburg to the Companies, or (iii) the terms of this Agreement or any communication from Ladenburg, each in connection with the services performed by Ladenburg pursuant to this Agreement, will be quoted or referred to orally or in writing, or in the case of (ii) and (iii), reproduced or disseminated, by the Companies or any of their respective affiliates or agents, without Ladenburgs prior written consent; it being understood that Ladenburg has agreed
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to disclosure of the terms of this Agreement in the prospectus and registration statement related to the Offering.
5. Information. The Companies recognize and confirm that Ladenburg (a) has used and relied primarily on the information provided by the Companies and on information available from generally recognized public sources in performing the services contemplated by this Agreement without having assumed responsibility for independently verifying the same, (b) has not assumed responsibility for the accuracy, completeness or reasonableness of such information and (c) has not made an appraisal of any assets or liabilities (contingent or otherwise) of the Fund. The information provided by each Company to Ladenburg in performing the services contemplated in this Agreement, was true and correct in all material respects and did not contain any material misstatement of fact or omit to state any material fact necessary to make the statements contained therein not misleading. Each Company will promptly notify Ladenburg if it learns of any material inaccuracy or misstatement in, or material omission from, any information provided by such Company to Ladenburg pursuant to this Section 5.
6. Not an Investment Adviser. The Companies acknowledge that Ladenburg has not provided any advice hereunder as to the value of securities or regarding the advisability of purchasing or selling any securities for the Funds portfolio. The Companies acknowledge and agrees that Ladenburg has been retained to act solely as an adviser to the Companies, and the Companies engagement of Ladenburg is not intended to confer rights upon any person (including the Fund or any shareholders, employees or creditors of the Companies or the Fund) not a party hereto as against Ladenburg or its affiliates, or their respective directors, officers, employees or agents, successors, or assigns. Ladenburg has acted as an independent contractor under this Agreement, and not in any other capacity including as a fiduciary, and any duties arising out of its engagement shall be owed solely to the Companies.
7. Not Exclusive. Nothing herein shall be construed as prohibiting you or your affiliates from acting as an underwriter or financial adviser or in any other capacity for any other persons (including other registered investment companies or other investment managers).
8. Amendment; Waiver. No provision of this Agreement may be amended or waived except by an instrument in writing signed by the parties hereto.
9. Governing Law. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement (Claim), directly or indirectly, shall be governed by and construed in accordance with the laws of the State of New York. No Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have exclusive jurisdiction over the adjudication of such matters, each Company and Ladenburg consent to the jurisdiction of such courts and personal service with respect thereto. EACH OF LADENBURG AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT.
10. Successors and Assigns. This Agreement shall be binding upon each Company and Ladenburg and their respective successors and assigns and any successor or assign of any substantial portion of each Companys or Ladenburgs respective businesses and/or assets.
11. Counterparts. This Agreement may be executed in any number of counterparts,
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each of which shall be an original, and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this Agreement by facsimile or electronic transmission shall be effective as delivery of a manually executed counterpart hereof.
[ Signature Page Follows ]
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This Agreement shall be effective as of the date first written above.
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
LADENBURG THALMANN & CO. INC. |
By: |
Name: |
Title: |
[Signature Page - Ladenburg Structuring Fee Agreement]
Indemnification Agreement
September 29, 2017
Ladenburg Thalmann & Co. Inc.
58 South Service Road, Suite 160
Melville, NY 11747
Ladies and Gentlemen:
In connection with the engagement of Ladenburg Thalmann & Co. Inc. (Ladenburg) to advise and assist the undersigned XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser) and Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) with the matters set forth in the Structuring Fee Agreement, dated September 29, 2017, among the Companies and Ladenburg (the Agreement), in the event that Ladenburg becomes involved in any capacity in any claim, suit, action, proceeding, investigation or inquiry (including, without limitation, any shareholder or derivative action or arbitration proceeding) arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement (collectively, a Proceeding), the Companies agree to indemnify, defend and hold Ladenburg harmless to the fullest extent permitted by law, from and against any losses, claims, damages, liabilities and expenses arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that such losses, claims, damages, liabilities and expenses resulted solely from the gross negligence, willful misconduct or bad faith of Ladenburg. In addition, in the event that Ladenburg becomes involved in any capacity in any Proceeding, the Companies will reimburse Ladenburg for its reasonable legal and other expenses (including the reasonable cost of any investigation and preparation) as such expenses are incurred by Ladenburg in connection therewith, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review, that such expenses results solely from the gross negligence, willful misconduct of bad faith of Ladenburg. If such indemnification were not to be available for any reason, the Companies agree to contribute to the losses, claims, damages, liabilities and expenses involved (i) in the proportion appropriate to reflect the relative benefits received or sought to be received by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and Ladenburg, on the other hand, in connection with the matters contemplated by the Agreement or (ii) if (but only if and to the extent) the allocation provided for in clause (i) is for any reason held unenforceable, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, as well as any other relevant equitable considerations. The Companies agree that for the purposes of this paragraph the relative benefits received, or sought to be received, by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, in connection with the matters contemplated by the Agreement shall be deemed to be in the same proportion that the total value received or paid or contemplated to be received or paid by the Companies or their stockholders or affiliates and other constituencies, as the case may be, as a result of or in connection with the matters (whether or not consummated) for which Ladenburg has been retained to perform financial services bears to the fees paid to Ladenburg under
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the Agreement; provided that, in no event shall the Companies contribute less than the amount necessary to assure that Ladenburg is not liable for losses, claims, damages, liabilities and expenses in excess of the amount of fees actually received by Ladenburg pursuant to the Agreement. Relative fault shall be determined by reference to, among other things, whether any alleged untrue statement or omission or any other alleged conduct relates to information provided by the Companies or other conduct by the Companies (or their employees or other agents), on the one hand, or by Ladenburg, on the other hand. The Companies will not settle any Proceeding in respect of which indemnity may be sought hereunder, whether or not Ladenburg is an actual or potential party to such Proceeding, without Ladenburgs prior written consent, which consent shall not be unreasonably withheld or delayed. For purposes of this Indemnification Agreement, Ladenburg shall include Ladenburg Thalmann & Co. Inc., any of its affiliates, each other person, if any, controlling Ladenburg or any of its affiliates, their respective officers, current and former directors, employees and agents, and the successors and assigns of all of the foregoing persons. The foregoing indemnity and contribution agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise.
The Companies agree that neither Ladenburg nor any of its affiliates, directors, agents, employees or controlling persons shall have any liability to the Companies or any person asserting claims on behalf of or in right of the Companies in connection with or as a result of either Ladenburgs engagement under the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that any losses, claims, damages, liabilities or expenses incurred by the Companies resulted solely from the gross negligence, willful misconduct or bad faith of Ladenburg in performing the services that are the subject of the Agreement.
THIS INDEMNIFICATION AGREEMENT AND ANY CLAIM, COUNTERCLAIM OR DISPUTE OF ANY KIND OR NATURE WHATSOEVER ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT (CLAIM), DIRECTLY OR INDIRECTLY, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS SET FORTH BELOW, NO CLAIM MAY BE COMMENCED, PROSECUTED OR CONTINUED IN ANY COURT OTHER THAN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION OVER THE ADJUDICATION OF SUCH MATTERS, AND EACH COMPANY AND LADENBURG CONSENT TO THE JURISDICTION OF SUCH COURTS AND PERSONAL SERVICE WITH RESPECT THERETO. EACH COMPANY AND LADENBURG HEREBY CONSENT TO PERSONAL JURISDICTION, SERVICE AND VENUE IN ANY COURT IN WHICH ANY CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT IS BROUGHT BY ANY THIRD PARTY AGAINST LADENBURG OR ANY INDEMNIFIED PARTY. EACH OF LADENBURG AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT. EACH COMPANY AND LADENBURG AGREES THAT A FINAL JUDGMENT IN ANY PROCEEDING OR CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT BROUGHT IN ANY SUCH COURT SHALL BE CONCLUSIVE AND BINDING THEREON MAY BE ENFORCED IN ANY OTHER COURTS TO THE JURISDICTION OF WHICH SUCH PARTY IS OR MAY BE SUBJECT,
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BY SUIT UPON SUCH JUDGMENT.
The foregoing Indemnification Agreement shall remain in full force and effect notwithstanding any termination of Ladenburgs engagement. This Indemnification Agreement shall be binding upon each Company and Ladenburg and their respective successors and assigns and any successor or assign of any substantial portion of such Companys or Ladenburgs respective businesses and/or assets. This Indemnification Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
[ Signature Page Follows ]
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Very truly yours, |
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
LADENBURG THALMANN & CO. INC. |
By: |
Name: |
Title: |
[Signature Page - Ladenburg Indemnification Agreement]
STRUCTURING FEE AGREEMENT
September 29, 2017
Maxim Group LLC
405 Lexington Avenue
New York, NY 10174
Ladies and Gentlemen:
This agreement (the Agreement) is between XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser), Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) and Maxim Group LLC (Maxim) with respect to the XAI Octagon Floating Rate Income & Alternative Income Term Trust (the Fund). Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Underwriting Agreement among the Fund, the Adviser, the Sub-Adviser and the underwriters named therein (the Underwriting Agreement).
1. Fee. In consideration of certain financial advisory services that Maxim has provided to the Companies in assisting the Companies in structuring, designing and organizing the Fund as well as services related to the sale and distribution (the Offering) of the common shares of the Fund, it being understood that the ultimate decision with respect to the structure, design and organization of the Fund shall rest with the Companies, the Companies shall pay a fee to Maxim in the aggregate amount of $[] (the Fee), of which $[] shall be paid by the Adviser and $[] shall be paid by the Sub-Adviser. The Fee shall be paid on or before [], 2017, or as otherwise agreed to by the parties. In the event the Offering does not proceed, Maxim will not receive any fees under this Agreement; however, for the avoidance of doubt, accountable expenses actually incurred may be payable to Maxim pursuant to the terms of the Underwriting Agreement.
2. Term. This Agreement shall terminate upon the payment of the entire amount of the Fee, as specified in Section 1 hereof. Notwithstanding the foregoing, Sections 4, 5, 8, 9 and 10 of this Agreement and the Indemnification Agreement attached hereto shall survive the termination of this Agreement.
3. Indemnification. The Companies agree to the indemnification and other agreements set forth in the Indemnification Agreement attached hereto, the provisions of which are incorporated herein by reference and shall survive the termination, expiration or supersession of this Agreement.
4. Confidential Advice. Except to the extent legally required or requested by a court, commission, regulatory body, administrative agency or other self-regulatory agency (after consultation with, and approval (not to be unreasonably withheld or delayed) as to form and substance by, Maxim and its counsel), none of (i) the name of Maxim, (ii) any advice rendered by Maxim to the Companies, or (iii) the terms of this Agreement or any communication from Maxim, each in connection with the services performed by Maxim pursuant to this Agreement, will be quoted or referred to orally or in writing, or in the case of (ii) and (iii), reproduced or disseminated, by the Companies or any of their respective affiliates or agents, without Maxims prior written consent; it being understood that Maxim has agreed to disclosure of the terms of this Agreement
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in the prospectus and registration statement related to the Offering.
5. Information. The Companies recognize and confirm that Maxim (a) has used and relied primarily on the information provided by the Companies and on information available from generally recognized public sources in performing the services contemplated by this Agreement without having assumed responsibility for independently verifying the same, (b) has not assumed responsibility for the accuracy, completeness or reasonableness of such information and (c) has not made an appraisal of any assets or liabilities (contingent or otherwise) of the Fund. The information provided by each Company to Maxim in performing the services contemplated in this Agreement, was true and correct in all material respects and did not contain any material misstatement of fact or omit to state any material fact necessary to make the statements contained therein not misleading. Each Company will promptly notify Maxim if it learns of any material inaccuracy or misstatement in, or material omission from, any information provided by such Company to Maxim pursuant to this Section 5.
6. Not an Investment Adviser. The Companies acknowledge that Maxim has not provided any advice hereunder as to the value of securities or regarding the advisability of purchasing or selling any securities for the Funds portfolio. The Companies acknowledge and agrees that Maxim has been retained to act solely as an adviser to the Companies, and the Companies engagement of Maxim is not intended to confer rights upon any person (including the Fund or any shareholders, employees or creditors of the Companies or the Fund) not a party hereto as against Maxim or its affiliates, or their respective directors, officers, employees or agents, successors, or assigns. Maxim has acted as an independent contractor under this Agreement, and not in any other capacity including as a fiduciary, and any duties arising out of its engagement shall be owed solely to the Companies.
7. Not Exclusive. Nothing herein shall be construed as prohibiting you or your affiliates from acting as an underwriter or financial adviser or in any other capacity for any other persons (including other registered investment companies or other investment managers).
8. Amendment; Waiver. No provision of this Agreement may be amended or waived except by an instrument in writing signed by the parties hereto.
9. Governing Law. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement (Claim), directly or indirectly, shall be governed by and construed in accordance with the laws of the State of New York. No Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have exclusive jurisdiction over the adjudication of such matters, each Company and Maxim consent to the jurisdiction of such courts and personal service with respect thereto. EACH OF MAXIM AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT.
10. Successors and Assigns. This Agreement shall be binding upon each Company and Maxim and their respective successors and assigns and any successor or assign of any substantial portion of each Companys or Maxims respective businesses and/or assets.
11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which, when taken together, shall constitute one
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agreement. Delivery of an executed signature page of this Agreement by facsimile or electronic transmission shall be effective as delivery of a manually executed counterpart hereof.
[ Signature Page Follows ]
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This Agreement shall be effective as of the date first written above.
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
MAXIM GROUP LLC |
By: |
Name: |
Title: |
[Signature Page - Maxim Structuring Fee Agreement]
Indemnification Agreement
September 29, 2017
Maxim Group LLC
405 Lexington Avenue
New York, NY 10174
Ladies and Gentlemen:
In connection with the engagement of Maxim Group LLC (Maxim) to advise and assist the undersigned XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser) and Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) with the matters set forth in the Structuring Fee Agreement, dated September 29, 2017, among the Companies and Maxim (the Agreement), in the event that Maxim becomes involved in any capacity in any claim, suit, action, proceeding, investigation or inquiry (including, without limitation, any shareholder or derivative action or arbitration proceeding) arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement (collectively, a Proceeding), the Companies agree to indemnify, defend and hold Maxim harmless to the fullest extent permitted by law, from and against any losses, claims, damages, liabilities and expenses arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that such losses, claims, damages, liabilities and expenses resulted solely from the gross negligence, willful misconduct or bad faith of Maxim. In addition, in the event that Maxim becomes involved in any capacity in any Proceeding, the Companies will reimburse Maxim for its reasonable legal and other expenses (including the reasonable cost of any investigation and preparation) as such expenses are incurred by Maxim in connection therewith, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review, that such expenses results solely from the gross negligence, willful misconduct of bad faith of Maxim. If such indemnification were not to be available for any reason, the Companies agree to contribute to the losses, claims, damages, liabilities and expenses involved (i) in the proportion appropriate to reflect the relative benefits received or sought to be received by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and Maxim, on the other hand, in connection with the matters contemplated by the Agreement or (ii) if (but only if and to the extent) the allocation provided for in clause (i) is for any reason held unenforceable, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, as well as any other relevant equitable considerations. The Companies agree that for the purposes of this paragraph the relative benefits received, or sought to be received, by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, in connection with the matters contemplated by the Agreement shall be deemed to be in the same proportion that the total value received or paid or contemplated to be received or paid by the Companies or their stockholders or affiliates and other constituencies, as the case may be, as a result of or in connection with the matters (whether or not consummated) for which Maxim has been retained to perform financial services bears to the fees paid to Maxim under the Agreement; provided that, in no event shall the Companies contribute less than the
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amount necessary to assure that Maxim is not liable for losses, claims, damages, liabilities and expenses in excess of the amount of fees actually received by Maxim pursuant to the Agreement. Relative fault shall be determined by reference to, among other things, whether any alleged untrue statement or omission or any other alleged conduct relates to information provided by the Companies or other conduct by the Companies (or their employees or other agents), on the one hand, or by Maxim, on the other hand. The Companies will not settle any Proceeding in respect of which indemnity may be sought hereunder, whether or not Maxim is an actual or potential party to such Proceeding, without Maxims prior written consent, which consent shall not be unreasonably withheld or delayed. For purposes of this Indemnification Agreement, Maxim shall include Maxim Group LLC, any of its affiliates, each other person, if any, controlling Maxim or any of its affiliates, their respective officers, current and former directors, employees and agents, and the successors and assigns of all of the foregoing persons. The foregoing indemnity and contribution agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise.
The Companies agree that neither Maxim nor any of its affiliates, directors, agents, employees or controlling persons shall have any liability to the Companies or any person asserting claims on behalf of or in right of the Companies in connection with or as a result of either Maxims engagement under the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that any losses, claims, damages, liabilities or expenses incurred by the Companies resulted solely from the gross negligence, willful misconduct or bad faith of Maxim in performing the services that are the subject of the Agreement.
THIS INDEMNIFICATION AGREEMENT AND ANY CLAIM, COUNTERCLAIM OR DISPUTE OF ANY KIND OR NATURE WHATSOEVER ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT (CLAIM), DIRECTLY OR INDIRECTLY, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS SET FORTH BELOW, NO CLAIM MAY BE COMMENCED, PROSECUTED OR CONTINUED IN ANY COURT OTHER THAN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION OVER THE ADJUDICATION OF SUCH MATTERS, AND EACH COMPANY AND MAXIM CONSENT TO THE JURISDICTION OF SUCH COURTS AND PERSONAL SERVICE WITH RESPECT THERETO. EACH COMPANY AND MAXIM HEREBY CONSENT TO PERSONAL JURISDICTION, SERVICE AND VENUE IN ANY COURT IN WHICH ANY CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT IS BROUGHT BY ANY THIRD PARTY AGAINST MAXIM OR ANY INDEMNIFIED PARTY. EACH OF MAXIM AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT. EACH COMPANY AND MAXIM AGREES THAT A FINAL JUDGMENT IN ANY PROCEEDING OR CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT BROUGHT IN ANY SUCH COURT SHALL BE CONCLUSIVE AND BINDING THEREON MAY BE ENFORCED IN ANY OTHER COURTS TO THE JURISDICTION OF WHICH SUCH PARTY IS OR MAY BE SUBJECT, BY SUIT UPON SUCH JUDGMENT.
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The foregoing Indemnification Agreement shall remain in full force and effect notwithstanding any termination of Maxims engagement. This Indemnification Agreement shall be binding upon each Company and Maxim and their respective successors and assigns and any successor or assign of any substantial portion of such Companys or Maxims respective businesses and/or assets. This Indemnification Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
[ Signature Page Follows ]
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Very truly yours, |
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
MAXIM GROUP LLC |
By: |
Name: |
Title: |
[Signature Page - Maxim Indemnification Agreement]
STRUCTURING FEE AGREEMENT
September 29, 2017
National Securities Corporation
[Address]
Ladies and Gentlemen:
This agreement (the Agreement) is between XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser), Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) and National Securities Corporation (NSC) with respect to the XAI Octagon Floating Rate Income & Alternative Income Term Trust (the Fund). Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Underwriting Agreement among the Fund, the Adviser, the Sub-Adviser and the underwriters named therein (the Underwriting Agreement).
1. Fee. In consideration of certain financial advisory services that NSC has provided to the Companies in assisting the Companies in structuring, designing and organizing the Fund as well as services related to the sale and distribution (the Offering) of the common shares of the Fund, it being understood that the ultimate decision with respect to the structure, design and organization of the Fund shall rest with the Companies, the Companies shall pay a fee to NSC in the aggregate amount of $[] (the Fee), of which $[] shall be paid by the Adviser and $[] shall be paid by the Sub-Adviser. The Fee shall be paid on or before [], 2017, or as otherwise agreed to by the parties. In the event the Offering does not proceed, NSC will not receive any fees under this Agreement; however, for the avoidance of doubt, accountable expenses actually incurred may be payable to NSC pursuant to the terms of the Underwriting Agreement.
2. Term. This Agreement shall terminate upon the payment of the entire amount of the Fee, as specified in Section 1 hereof. Notwithstanding the foregoing, Sections 4, 5, 8, 9 and 10 of this Agreement and the Indemnification Agreement attached hereto shall survive the termination of this Agreement.
3. Indemnification. The Companies agree to the indemnification and other agreements set forth in the Indemnification Agreement attached hereto, the provisions of which are incorporated herein by reference and shall survive the termination, expiration or supersession of this Agreement.
4. Confidential Advice. Except to the extent legally required or requested by a court, commission, regulatory body, administrative agency or other self-regulatory agency (after consultation with, and approval (not to be unreasonably withheld or delayed) as to form and substance by, NSC and its counsel), none of (i) the name of NSC, (ii) any advice rendered by NSC to the Companies, or (iii) the terms of this Agreement or any communication from NSC, each in connection with the services performed by NSC pursuant to this Agreement, will be quoted or referred to orally or in writing, or in the case of (ii) and (iii), reproduced or disseminated, by the Companies or any of their respective affiliates or agents, without NSCs prior written consent; it being understood that NSC has agreed to disclosure of the terms of this Agreement in the prospectus and registration statement related to the Offering.
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5. Information. The Companies recognize and confirm that NSC (a) has used and relied primarily on the information provided by the Companies and on information available from generally recognized public sources in performing the services contemplated by this Agreement without having assumed responsibility for independently verifying the same, (b) has not assumed responsibility for the accuracy, completeness or reasonableness of such information and (c) has not made an appraisal of any assets or liabilities (contingent or otherwise) of the Fund. The information provided by each Company to NSC in performing the services contemplated in this Agreement, was true and correct in all material respects and did not contain any material misstatement of fact or omit to state any material fact necessary to make the statements contained therein not misleading. Each Company will promptly notify NSC if it learns of any material inaccuracy or misstatement in, or material omission from, any information provided by such Company to NSC pursuant to this Section 5.
6. Not an Investment Adviser. The Companies acknowledge that NSC has not provided any advice hereunder as to the value of securities or regarding the advisability of purchasing or selling any securities for the Funds portfolio. The Companies acknowledge and agrees that NSC has been retained to act solely as an adviser to the Companies, and the Companies engagement of NSC is not intended to confer rights upon any person (including the Fund or any shareholders, employees or creditors of the Companies or the Fund) not a party hereto as against NSC or its affiliates, or their respective directors, officers, employees or agents, successors, or assigns. NSC has acted as an independent contractor under this Agreement, and not in any other capacity including as a fiduciary, and any duties arising out of its engagement shall be owed solely to the Companies.
7. Not Exclusive. Nothing herein shall be construed as prohibiting you or your affiliates from acting as an underwriter or financial adviser or in any other capacity for any other persons (including other registered investment companies or other investment managers).
8. Amendment; Waiver. No provision of this Agreement may be amended or waived except by an instrument in writing signed by the parties hereto.
9. Governing Law. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement (Claim), directly or indirectly, shall be governed by and construed in accordance with the laws of the State of New York. No Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have exclusive jurisdiction over the adjudication of such matters, each Company and NSC consent to the jurisdiction of such courts and personal service with respect thereto. EACH OF NSC AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT.
10. Successors and Assigns. This Agreement shall be binding upon each Company and NSC and their respective successors and assigns and any successor or assign of any substantial portion of each Companys or NSCs respective businesses and/or assets.
11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this Agreement by facsimile or electronic transmission shall be effective as delivery of a manually executed counterpart hereof.
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[ Signature Page Follows ]
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This Agreement shall be effective as of the date first written above.
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
NATIONAL SECURITIES CORPORATION |
By: |
Name: |
Title: |
[Signature Page - NSC Structuring Fee Agreement]
Indemnification Agreement
September 29, 2017
National Securities Corporation
[Address]
Ladies and Gentlemen:
In connection with the engagement of National Securities Corporation (NSC) to advise and assist the undersigned XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser) and Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) with the matters set forth in the Structuring Fee Agreement, dated September 29, 2017, among the Companies and NSC (the Agreement), in the event that NSC becomes involved in any capacity in any claim, suit, action, proceeding, investigation or inquiry (including, without limitation, any shareholder or derivative action or arbitration proceeding) arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement (collectively, a Proceeding), the Companies agree to indemnify, defend and hold NSC harmless to the fullest extent permitted by law, from and against any losses, claims, damages, liabilities and expenses arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that such losses, claims, damages, liabilities and expenses resulted solely from the gross negligence, willful misconduct or bad faith of NSC. In addition, in the event that NSC becomes involved in any capacity in any Proceeding, the Companies will reimburse NSC for its reasonable legal and other expenses (including the reasonable cost of any investigation and preparation) as such expenses are incurred by NSC in connection therewith, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review, that such expenses results solely from the gross negligence, willful misconduct of bad faith of NSC. If such indemnification were not to be available for any reason, the Companies agree to contribute to the losses, claims, damages, liabilities and expenses involved (i) in the proportion appropriate to reflect the relative benefits received or sought to be received by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and NSC, on the other hand, in connection with the matters contemplated by the Agreement or (ii) if (but only if and to the extent) the allocation provided for in clause (i) is for any reason held unenforceable, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, as well as any other relevant equitable considerations. The Companies agree that for the purposes of this paragraph the relative benefits received, or sought to be received, by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, in connection with the matters contemplated by the Agreement shall be deemed to be in the same proportion that the total value received or paid or contemplated to be received or paid by the Companies or their stockholders or affiliates and other constituencies, as the case may be, as a result of or in connection with the matters (whether or not consummated) for which NSC has been retained to perform financial services bears to the fees paid to NSC under the Agreement; provided that, in no event shall the Companies contribute less than the amount necessary to assure that NSC is not liable for losses, claims, damages, liabilities and expenses
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in excess of the amount of fees actually received by NSC pursuant to the Agreement. Relative fault shall be determined by reference to, among other things, whether any alleged untrue statement or omission or any other alleged conduct relates to information provided by the Companies or other conduct by the Companies (or their employees or other agents), on the one hand, or by NSC, on the other hand. The Companies will not settle any Proceeding in respect of which indemnity may be sought hereunder, whether or not NSC is an actual or potential party to such Proceeding, without NSCs prior written consent, which consent shall not be unreasonably withheld or delayed. For purposes of this Indemnification Agreement, NSC shall include National Securities Corporation, any of its affiliates, each other person, if any, controlling NSC or any of its affiliates, their respective officers, current and former directors, employees and agents, and the successors and assigns of all of the foregoing persons. The foregoing indemnity and contribution agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise.
The Companies agree that neither NSC nor any of its affiliates, directors, agents, employees or controlling persons shall have any liability to the Companies or any person asserting claims on behalf of or in right of the Companies in connection with or as a result of either NSCs engagement under the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that any losses, claims, damages, liabilities or expenses incurred by the Companies resulted solely from the gross negligence, willful misconduct or bad faith of NSC in performing the services that are the subject of the Agreement.
THIS INDEMNIFICATION AGREEMENT AND ANY CLAIM, COUNTERCLAIM OR DISPUTE OF ANY KIND OR NATURE WHATSOEVER ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT (CLAIM), DIRECTLY OR INDIRECTLY, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS SET FORTH BELOW, NO CLAIM MAY BE COMMENCED, PROSECUTED OR CONTINUED IN ANY COURT OTHER THAN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION OVER THE ADJUDICATION OF SUCH MATTERS, AND EACH COMPANY AND NSC CONSENT TO THE JURISDICTION OF SUCH COURTS AND PERSONAL SERVICE WITH RESPECT THERETO. EACH COMPANY AND NSC HEREBY CONSENT TO PERSONAL JURISDICTION, SERVICE AND VENUE IN ANY COURT IN WHICH ANY CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT IS BROUGHT BY ANY THIRD PARTY AGAINST NSC OR ANY INDEMNIFIED PARTY. EACH OF NSC AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT. EACH COMPANY AND NSC AGREES THAT A FINAL JUDGMENT IN ANY PROCEEDING OR CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT BROUGHT IN ANY SUCH COURT SHALL BE CONCLUSIVE AND BINDING THEREON MAY BE ENFORCED IN ANY OTHER COURTS TO THE JURISDICTION OF WHICH SUCH PARTY IS OR MAY BE SUBJECT, BY SUIT UPON SUCH JUDGMENT.
The foregoing Indemnification Agreement shall remain in full force and effect
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notwithstanding any termination of NSCs engagement. This Indemnification Agreement shall be binding upon each Company and NSC and their respective successors and assigns and any successor or assign of any substantial portion of such Companys or NSCs respective businesses and/or assets. This Indemnification Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
[ Signature Page Follows ]
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Very truly yours, |
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
NATIONAL SECURITIES CORPORATION |
By: |
Name: |
Title: |
[Signature Page - NSC Indemnification Agreement]
STRUCTURING FEE AGREEMENT
September 29, 2017
Newbridge Securities Corporation
1451 W. Cypress Creek Road #204
Fort Lauderdale, FL 33309
Ladies and Gentlemen:
This agreement (the Agreement) is between XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser), Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) and Newbridge Securities Corporation (Newbridge) with respect to the XAI Octagon Floating Rate Income & Alternative Income Term Trust (the Fund). Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Underwriting Agreement among the Fund, the Adviser, the Sub-Adviser and the underwriters named therein (the Underwriting Agreement).
1. Fee. In consideration of certain financial advisory services that Newbridge has provided to the Companies in assisting the Companies in structuring, designing and organizing the Fund as well as services related to the sale and distribution (the Offering) of the common shares of the Fund, it being understood that the ultimate decision with respect to the structure, design and organization of the Fund shall rest with the Companies, the Companies shall pay a fee to Newbridge in the aggregate amount of $[] (the Fee), of which $[] shall be paid by the Adviser and $[] shall be paid by the Sub-Adviser. The Fee shall be paid on or before [], 2017, or as otherwise agreed to by the parties. In the event the Offering does not proceed, Newbridge will not receive any fees under this Agreement; however, for the avoidance of doubt, accountable expenses actually incurred may be payable to Newbridge pursuant to the terms of the Underwriting Agreement.
2. Term. This Agreement shall terminate upon the payment of the entire amount of the Fee, as specified in Section 1 hereof. Notwithstanding the foregoing, Sections 4, 5, 8, 9 and 10 of this Agreement and the Indemnification Agreement attached hereto shall survive the termination of this Agreement.
3. Indemnification. The Companies agree to the indemnification and other agreements set forth in the Indemnification Agreement attached hereto, the provisions of which are incorporated herein by reference and shall survive the termination, expiration or supersession of this Agreement.
4. Confidential Advice. Except to the extent legally required or requested by a court, commission, regulatory body, administrative agency or other self-regulatory agency (after consultation with, and approval (not to be unreasonably withheld or delayed) as to form and substance by, Newbridge and its counsel), none of (i) the name of Newbridge, (ii) any advice rendered by Newbridge to the Companies, or (iii) the terms of this Agreement or any communication from Newbridge, each in connection with the services performed by Newbridge pursuant to this Agreement, will be quoted or referred to orally or in writing, or in the case of (ii) and (iii), reproduced or disseminated, by the Companies or any of their respective affiliates or agents, without Newbridges prior written consent; it being understood that Newbridge has agreed
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to disclosure of the terms of this Agreement in the prospectus and registration statement related to the Offering.
5. Information. The Companies recognize and confirm that Newbridge (a) has used and relied primarily on the information provided by the Companies and on information available from generally recognized public sources in performing the services contemplated by this Agreement without having assumed responsibility for independently verifying the same, (b) has not assumed responsibility for the accuracy, completeness or reasonableness of such information and (c) has not made an appraisal of any assets or liabilities (contingent or otherwise) of the Fund. The information provided by each Company to Newbridge in performing the services contemplated in this Agreement, was true and correct in all material respects and did not contain any material misstatement of fact or omit to state any material fact necessary to make the statements contained therein not misleading. Each Company will promptly notify Newbridge if it learns of any material inaccuracy or misstatement in, or material omission from, any information provided by such Company to Newbridge pursuant to this Section 5.
6. Not an Investment Adviser. The Companies acknowledge that Newbridge has not provided any advice hereunder as to the value of securities or regarding the advisability of purchasing or selling any securities for the Funds portfolio. The Companies acknowledge and agrees that Newbridge has been retained to act solely as an adviser to the Companies, and the Companies engagement of Newbridge is not intended to confer rights upon any person (including the Fund or any shareholders, employees or creditors of the Companies or the Fund) not a party hereto as against Newbridge or its affiliates, or their respective directors, officers, employees or agents, successors, or assigns. Newbridge has acted as an independent contractor under this Agreement, and not in any other capacity including as a fiduciary, and any duties arising out of its engagement shall be owed solely to the Companies.
7. Not Exclusive. Nothing herein shall be construed as prohibiting you or your affiliates from acting as an underwriter or financial adviser or in any other capacity for any other persons (including other registered investment companies or other investment managers).
8. Amendment; Waiver. No provision of this Agreement may be amended or waived except by an instrument in writing signed by the parties hereto.
9. Governing Law. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement (Claim), directly or indirectly, shall be governed by and construed in accordance with the laws of the State of New York. No Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have exclusive jurisdiction over the adjudication of such matters, each Company and NEWBRIDGE consent to the jurisdiction of such courts and personal service with respect thereto. EACH OF NEWBRIDGE AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT.
10. Successors and Assigns. This Agreement shall be binding upon each Company and Newbridge and their respective successors and assigns and any successor or assign of any substantial portion of each Companys or Newbridges respective businesses and/or assets.
11. Counterparts. This Agreement may be executed in any number of counterparts,
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each of which shall be an original, and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this Agreement by facsimile or electronic transmission shall be effective as delivery of a manually executed counterpart hereof.
[ Signature Page Follows ]
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This Agreement shall be effective as of the date first written above.
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
NEWBRIDGE SECURITIES CORPORATION |
By: |
Name: |
Title: |
[Signature Page - Newbridge Structuring Fee Agreement]
Indemnification Agreement
September 29, 2017
Newbridge Securities Corporation
1451 W. Cypress Creek Road #204
Fort Lauderdale, FL 33309
Ladies and Gentlemen:
In connection with the engagement of Newbridge Securities Corporation (Newbridge) to advise and assist the undersigned XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser) and Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) with the matters set forth in the Structuring Fee Agreement, dated September 29, 2017, among the Companies and Newbridge (the Agreement), in the event that Newbridge becomes involved in any capacity in any claim, suit, action, proceeding, investigation or inquiry (including, without limitation, any shareholder or derivative action or arbitration proceeding) arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement (collectively, a Proceeding), the Companies agree to indemnify, defend and hold Newbridge harmless to the fullest extent permitted by law, from and against any losses, claims, damages, liabilities and expenses arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that such losses, claims, damages, liabilities and expenses resulted solely from the gross negligence, willful misconduct or bad faith of Newbridge. In addition, in the event that Newbridge becomes involved in any capacity in any Proceeding, the Companies will reimburse Newbridge for its reasonable legal and other expenses (including the reasonable cost of any investigation and preparation) as such expenses are incurred by Newbridge in connection therewith, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review, that such expenses results solely from the gross negligence, willful misconduct of bad faith of Newbridge. If such indemnification were not to be available for any reason, the Companies agree to contribute to the losses, claims, damages, liabilities and expenses involved (i) in the proportion appropriate to reflect the relative benefits received or sought to be received by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and Newbridge, on the other hand, in connection with the matters contemplated by the Agreement or (ii) if (but only if and to the extent) the allocation provided for in clause (i) is for any reason held unenforceable, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, as well as any other relevant equitable considerations. The Companies agree that for the purposes of this paragraph the relative benefits received, or sought to be received, by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, in connection with the matters contemplated by the Agreement shall be deemed to be in the same proportion that the total value received or paid or contemplated to be received or paid by the Companies or their stockholders or affiliates and other constituencies, as the case may be, as a result of or in connection with the matters (whether or not consummated) for which Newbridge has been retained to perform financial services bears to the fees
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paid to Newbridge under the Agreement; provided that, in no event shall the Companies contribute less than the amount necessary to assure that Newbridge is not liable for losses, claims, damages, liabilities and expenses in excess of the amount of fees actually received by Newbridge pursuant to the Agreement. Relative fault shall be determined by reference to, among other things, whether any alleged untrue statement or omission or any other alleged conduct relates to information provided by the Companies or other conduct by the Companies (or their employees or other agents), on the one hand, or by Newbridge, on the other hand. The Companies will not settle any Proceeding in respect of which indemnity may be sought hereunder, whether or not Newbridge is an actual or potential party to such Proceeding, without Newbridges prior written consent, which consent shall not be unreasonably withheld or delayed. For purposes of this Indemnification Agreement, Newbridge shall include Newbridge Securities Corporation, any of its affiliates, each other person, if any, controlling Newbridge or any of its affiliates, their respective officers, current and former directors, employees and agents, and the successors and assigns of all of the foregoing persons. The foregoing indemnity and contribution agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise.
The Companies agree that neither Newbridge nor any of its affiliates, directors, agents, employees or controlling persons shall have any liability to the Companies or any person asserting claims on behalf of or in right of the Companies in connection with or as a result of either Newbridges engagement under the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that any losses, claims, damages, liabilities or expenses incurred by the Companies resulted solely from the gross negligence, willful misconduct or bad faith of Newbridge in performing the services that are the subject of the Agreement.
THIS INDEMNIFICATION AGREEMENT AND ANY CLAIM, COUNTERCLAIM OR DISPUTE OF ANY KIND OR NATURE WHATSOEVER ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT (CLAIM), DIRECTLY OR INDIRECTLY, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS SET FORTH BELOW, NO CLAIM MAY BE COMMENCED, PROSECUTED OR CONTINUED IN ANY COURT OTHER THAN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION OVER THE ADJUDICATION OF SUCH MATTERS, AND EACH COMPANY AND NEWBRIDGE CONSENT TO THE JURISDICTION OF SUCH COURTS AND PERSONAL SERVICE WITH RESPECT THERETO. EACH COMPANY AND NEWBRIDGE HEREBY CONSENT TO PERSONAL JURISDICTION, SERVICE AND VENUE IN ANY COURT IN WHICH ANY CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT IS BROUGHT BY ANY THIRD PARTY AGAINST NEWBRIDGE OR ANY INDEMNIFIED PARTY. EACH OF NEWBRIDGE AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT. EACH COMPANY AND NEWBRIDGE AGREES THAT A FINAL JUDGMENT IN ANY PROCEEDING OR CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT BROUGHT IN ANY SUCH COURT SHALL BE CONCLUSIVE AND BINDING THEREON MAY BE ENFORCED IN ANY OTHER
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COURTS TO THE JURISDICTION OF WHICH SUCH PARTY IS OR MAY BE SUBJECT, BY SUIT UPON SUCH JUDGMENT.
The foregoing Indemnification Agreement shall remain in full force and effect notwithstanding any termination of Newbridges engagement. This Indemnification Agreement shall be binding upon each Company and Newbridge and their respective successors and assigns and any successor or assign of any substantial portion of such Companys or Newbridges respective businesses and/or assets. This Indemnification Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
[ Signature Page Follows ]
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Very truly yours, |
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
NEWBRIDGE SECURITIES CORPORATION |
By: |
Name: |
Title: |
[Signature Page - Newbridge Indemnification Agreement]
STRUCTURING FEE AGREEMENT
September 29, 2017
Wedbush Securities Inc.
1000 Wilshire Boulevard
Los Angeles, CA 90017
Ladies and Gentlemen:
This agreement (the Agreement) is between XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser), Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) and Wedbush Securities Inc. (Wedbush) with respect to the XAI Octagon Floating Rate Income & Alternative Income Term Trust (the Fund). Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Underwriting Agreement among the Fund, the Adviser, the Sub-Adviser and the underwriters named therein (the Underwriting Agreement).
1. Fee. In consideration of certain financial advisory services that Wedbush has provided to the Companies in assisting the Companies in structuring, designing and organizing the Fund as well as services related to the sale and distribution (the Offering) of the common shares of the Fund, it being understood that the ultimate decision with respect to the structure, design and organization of the Fund shall rest with the Companies, the Companies shall pay a fee to Wedbush in the aggregate amount of $[] (the Fee), of which $[] shall be paid by the Adviser and $[] shall be paid by the Sub-Adviser. The Fee shall be paid on or before [], 2017, or as otherwise agreed to by the parties. In the event the Offering does not proceed, Wedbush will not receive any fees under this Agreement; however, for the avoidance of doubt, accountable expenses actually incurred may be payable to Wedbush pursuant to the terms of the Underwriting Agreement.
2. Term. This Agreement shall terminate upon the payment of the entire amount of the Fee, as specified in Section 1 hereof. Notwithstanding the foregoing, Sections 4, 5, 8, 9 and 10 of this Agreement and the Indemnification Agreement attached hereto shall survive the termination of this Agreement.
3. Indemnification. The Companies agree to the indemnification and other agreements set forth in the Indemnification Agreement attached hereto, the provisions of which are incorporated herein by reference and shall survive the termination, expiration or supersession of this Agreement.
4. Confidential Advice. Except to the extent legally required or requested by a court, commission, regulatory body, administrative agency or other self-regulatory agency (after consultation with, and approval (not to be unreasonably withheld or delayed) as to form and substance by, Wedbush and its counsel), none of (i) the name of Wedbush, (ii) any advice rendered by Wedbush to the Companies, or (iii) the terms of this Agreement or any communication from Wedbush, each in connection with the services performed by Wedbush pursuant to this Agreement, will be quoted or referred to orally or in writing, or in the case of (ii) and (iii), reproduced or disseminated, by the Companies or any of their respective affiliates or
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agents, without Wedbushs prior written consent; it being understood that Wedbush has agreed to disclosure of the terms of this Agreement in the prospectus and registration statement related to the Offering.
5. Information. The Companies recognize and confirm that Wedbush (a) has used and relied primarily on the information provided by the Companies and on information available from generally recognized public sources in performing the services contemplated by this Agreement without having assumed responsibility for independently verifying the same, (b) has not assumed responsibility for the accuracy, completeness or reasonableness of such information and (c) has not made an appraisal of any assets or liabilities (contingent or otherwise) of the Fund. The information provided by each Company to Wedbush in performing the services contemplated in this Agreement, was true and correct in all material respects and did not contain any material misstatement of fact or omit to state any material fact necessary to make the statements contained therein not misleading. Each Company will promptly notify Wedbush if it learns of any material inaccuracy or misstatement in, or material omission from, any information provided by such Company to Wedbush pursuant to this Section 5.
6. Not an Investment Adviser. The Companies acknowledge that Wedbush has not provided any advice hereunder as to the value of securities or regarding the advisability of purchasing or selling any securities for the Funds portfolio. The Companies acknowledge and agrees that Wedbush has been retained to act solely as an adviser to the Companies, and the Companies engagement of Wedbush is not intended to confer rights upon any person (including the Fund or any shareholders, employees or creditors of the Companies or the Fund) not a party hereto as against Wedbush or its affiliates, or their respective directors, officers, employees or agents, successors, or assigns. Wedbush has acted as an independent contractor under this Agreement, and not in any other capacity including as a fiduciary, and any duties arising out of its engagement shall be owed solely to the Companies.
7. Not Exclusive. Nothing herein shall be construed as prohibiting you or your affiliates from acting as an underwriter or financial adviser or in any other capacity for any other persons (including other registered investment companies or other investment managers).
8. Amendment; Waiver. No provision of this Agreement may be amended or waived except by an instrument in writing signed by the parties hereto.
9. Governing Law. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement (Claim), directly or indirectly, shall be governed by and construed in accordance with the laws of the State of New York. No Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have exclusive jurisdiction over the adjudication of such matters, each Company and Wedbush consent to the jurisdiction of such courts and personal service with respect thereto. EACH OF WEDBUSH AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT.
10. Successors and Assigns. This Agreement shall be binding upon each Company and Wedbush and their respective successors and assigns and any successor or assign of any substantial portion of each Companys or Wedbushs respective businesses and/or assets.
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11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this Agreement by facsimile or electronic transmission shall be effective as delivery of a manually executed counterpart hereof.
[ Signature Page Follows ]
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This Agreement shall be effective as of the date first written above.
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
WEDBUSH SECURITIES INC. |
By: |
Name: |
Title: |
[Signature Page - Wedbush Structuring Fee Agreement]
Indemnification Agreement
September 29, 2017
Wedbush Securities Inc.
1000 Wilshire Boulevard
Los Angeles, CA 90017
Ladies and Gentlemen:
In connection with the engagement of Wedbush Securities Inc. (Wedbush) to advise and assist the undersigned XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser) and Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) with the matters set forth in the Structuring Fee Agreement, dated September 29, 2017, among the Companies and Wedbush (the Agreement), in the event that Wedbush becomes involved in any capacity in any claim, suit, action, proceeding, investigation or inquiry (including, without limitation, any shareholder or derivative action or arbitration proceeding) arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement (collectively, a Proceeding), the Companies agree to indemnify, defend and hold Wedbush harmless to the fullest extent permitted by law, from and against any losses, claims, damages, liabilities and expenses arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that such losses, claims, damages, liabilities and expenses resulted solely from the gross negligence, willful misconduct or bad faith of Wedbush. In addition, in the event that Wedbush becomes involved in any capacity in any Proceeding, the Companies will reimburse Wedbush for its reasonable legal and other expenses (including the reasonable cost of any investigation and preparation) as such expenses are incurred by Wedbush in connection therewith, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review, that such expenses results solely from the gross negligence, willful misconduct of bad faith of Wedbush. If such indemnification were not to be available for any reason, the Companies agree to contribute to the losses, claims, damages, liabilities and expenses involved (i) in the proportion appropriate to reflect the relative benefits received or sought to be received by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and Wedbush, on the other hand, in connection with the matters contemplated by the Agreement or (ii) if (but only if and to the extent) the allocation provided for in clause (i) is for any reason held unenforceable, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, as well as any other relevant equitable considerations. The Companies agree that for the purposes of this paragraph the relative benefits received, or sought to be received, by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, in connection with the matters contemplated by the Agreement shall be deemed to be in the same proportion that the total value received or paid or contemplated to be received or paid by the Companies or their stockholders or affiliates and other constituencies, as the case may be, as a result of or in connection with the matters (whether or not consummated) for which Wedbush has been retained to perform financial services bears to the fees paid to Wedbush under the
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Agreement; provided that, in no event shall the Companies contribute less than the amount necessary to assure that Wedbush is not liable for losses, claims, damages, liabilities and expenses in excess of the amount of fees actually received by Wedbush pursuant to the Agreement. Relative fault shall be determined by reference to, among other things, whether any alleged untrue statement or omission or any other alleged conduct relates to information provided by the Companies or other conduct by the Companies (or their employees or other agents), on the one hand, or by Wedbush, on the other hand. The Companies will not settle any Proceeding in respect of which indemnity may be sought hereunder, whether or not Wedbush is an actual or potential party to such Proceeding, without Wedbushs prior written consent, which consent shall not be unreasonably withheld or delayed. For purposes of this Indemnification Agreement, Wedbush shall include Wedbush Securities Inc., any of its affiliates, each other person, if any, controlling Wedbush or any of its affiliates, their respective officers, current and former directors, employees and agents, and the successors and assigns of all of the foregoing persons. The foregoing indemnity and contribution agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise.
The Companies agree that neither Wedbush nor any of its affiliates, directors, agents, employees or controlling persons shall have any liability to the Companies or any person asserting claims on behalf of or in right of the Companies in connection with or as a result of either Wedbushs engagement under the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that any losses, claims, damages, liabilities or expenses incurred by the Companies resulted solely from the gross negligence, willful misconduct or bad faith of Wedbush in performing the services that are the subject of the Agreement.
THIS INDEMNIFICATION AGREEMENT AND ANY CLAIM, COUNTERCLAIM OR DISPUTE OF ANY KIND OR NATURE WHATSOEVER ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT (CLAIM), DIRECTLY OR INDIRECTLY, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS SET FORTH BELOW, NO CLAIM MAY BE COMMENCED, PROSECUTED OR CONTINUED IN ANY COURT OTHER THAN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION OVER THE ADJUDICATION OF SUCH MATTERS, AND EACH COMPANY AND WEDBUSH CONSENT TO THE JURISDICTION OF SUCH COURTS AND PERSONAL SERVICE WITH RESPECT THERETO. EACH COMPANY AND WEDBUSH HEREBY CONSENT TO PERSONAL JURISDICTION, SERVICE AND VENUE IN ANY COURT IN WHICH ANY CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT IS BROUGHT BY ANY THIRD PARTY AGAINST WEDBUSH OR ANY INDEMNIFIED PARTY. EACH OF WEDBUSH AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT. EACH COMPANY AND WEDBUSH AGREES THAT A FINAL JUDGMENT IN ANY PROCEEDING OR CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT BROUGHT IN ANY SUCH COURT SHALL BE CONCLUSIVE AND BINDING THEREON MAY BE ENFORCED IN ANY OTHER COURTS TO THE JURISDICTION OF WHICH SUCH PARTY IS OR MAY BE SUBJECT, BY SUIT
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UPON SUCH JUDGMENT.
The foregoing Indemnification Agreement shall remain in full force and effect notwithstanding any termination of Wedbushs engagement. This Indemnification Agreement shall be binding upon each Company and Wedbush and their respective successors and assigns and any successor or assign of any substantial portion of such Companys or Wedbushs respective businesses and/or assets. This Indemnification Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
[ Signature Page Follows ]
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Very truly yours,
|
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
WEDBUSH SECURITIES INC. |
By: |
Name: |
Title: |
[Signature Page - Wedbush Indemnification Agreement]
STRUCTURING FEE AGREEMENT
September 29, 2017
Wunderlich Securities, Inc.
6000 Poplar Avenue, Suite 150
Memphis, TN 38119
Ladies and Gentlemen:
This agreement (the Agreement) is between XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser), Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) and Wunderlich Securities, Inc. (Wunderlich) with respect to the XAI Octagon Floating Rate Income & Alternative Income Term Trust (the Fund). Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Underwriting Agreement among the Fund, the Adviser, the Sub-Adviser and the underwriters named therein (the Underwriting Agreement).
1. Fee. In consideration of certain financial advisory services that Wunderlich has provided to the Companies in assisting the Companies in structuring, designing and organizing the Fund as well as services related to the sale and distribution (the Offering) of the common shares of the Fund, it being understood that the ultimate decision with respect to the structure, design and organization of the Fund shall rest with the Companies, the Companies shall pay a fee to Wunderlich in the aggregate amount of $[] (the Fee), of which $[] shall be paid by the Adviser and $[] shall be paid by the Sub-Adviser. The Fee shall be paid on or before [], 2017, or as otherwise agreed to by the parties. In the event the Offering does not proceed, Wunderlich will not receive any fees under this Agreement; however, for the avoidance of doubt, accountable expenses actually incurred may be payable to Wunderlich pursuant to the terms of the Underwriting Agreement.
2. Term. This Agreement shall terminate upon the payment of the entire amount of the Fee, as specified in Section 1 hereof. Notwithstanding the foregoing, Sections 4, 5, 8, 9 and 10 of this Agreement and the Indemnification Agreement attached hereto shall survive the termination of this Agreement.
3. Indemnification. The Companies agree to the indemnification and other agreements set forth in the Indemnification Agreement attached hereto, the provisions of which are incorporated herein by reference and shall survive the termination, expiration or supersession of this Agreement.
4. Confidential Advice. Except to the extent legally required or requested by a court, commission, regulatory body, administrative agency or other self-regulatory agency (after consultation with, and approval (not to be unreasonably withheld or delayed) as to form and substance by, Wunderlich and its counsel), none of (i) the name of Wunderlich, (ii) any advice rendered by Wunderlich to the Companies, or (iii) the terms of this Agreement or any communication from Wunderlich, each in connection with the services performed by Wunderlich pursuant to this Agreement, will be quoted or referred to orally or in writing, or in the case of (ii)
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and (iii), reproduced or disseminated, by the Companies or any of their respective affiliates or agents, without Wunderlichs prior written consent; it being understood that Wunderlich has agreed to disclosure of the terms of this Agreement in the prospectus and registration statement related to the Offering.
5. Information. The Companies recognize and confirm that Wunderlich (a) has used and relied primarily on the information provided by the Companies and on information available from generally recognized public sources in performing the services contemplated by this Agreement without having assumed responsibility for independently verifying the same, (b) has not assumed responsibility for the accuracy, completeness or reasonableness of such information and (c) has not made an appraisal of any assets or liabilities (contingent or otherwise) of the Fund. The information provided by each Company to Wunderlich in performing the services contemplated in this Agreement, was true and correct in all material respects and did not contain any material misstatement of fact or omit to state any material fact necessary to make the statements contained therein not misleading. Each Company will promptly notify Wunderlich if it learns of any material inaccuracy or misstatement in, or material omission from, any information provided by such Company to Wunderlich pursuant to this Section 5.
6. Not an Investment Adviser. The Companies acknowledge that Wunderlich has not provided any advice hereunder as to the value of securities or regarding the advisability of purchasing or selling any securities for the Funds portfolio. The Companies acknowledge and agrees that Wunderlich has been retained to act solely as an adviser to the Companies, and the Companies engagement of Wunderlich is not intended to confer rights upon any person (including the Fund or any shareholders, employees or creditors of the Companies or the Fund) not a party hereto as against Wunderlich or its affiliates, or their respective directors, officers, employees or agents, successors, or assigns. Wunderlich has acted as an independent contractor under this Agreement, and not in any other capacity including as a fiduciary, and any duties arising out of its engagement shall be owed solely to the Companies.
7. Not Exclusive. Nothing herein shall be construed as prohibiting you or your affiliates from acting as an underwriter or financial adviser or in any other capacity for any other persons (including other registered investment companies or other investment managers).
8. Amendment; Waiver. No provision of this Agreement may be amended or waived except by an instrument in writing signed by the parties hereto.
9. Governing Law. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement (Claim), directly or indirectly, shall be governed by and construed in accordance with the laws of the State of New York. No Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have exclusive jurisdiction over the adjudication of such matters, each Company and Wunderlich consent to the jurisdiction of such courts and personal service with respect thereto. EACH OF WUNDERLICH AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT.
10. Successors and Assigns. This Agreement shall be binding upon each Company and Wunderlich and their respective successors and assigns and any successor or assign of any substantial portion of each Companys or Wunderlichs respective businesses and/or assets.
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11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this Agreement by facsimile or electronic transmission shall be effective as delivery of a manually executed counterpart hereof.
[ Signature Page Follows ]
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This Agreement shall be effective as of the date first written above.
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
WUNDERLICH SECURITIES, INC. |
By: |
Name: |
Title: |
[Signature Page - Wunderlich Structuring Fee Agreement]
Indemnification Agreement
September 29, 2017
Wunderlich Securities, Inc.
6000 Poplar Avenue, Suite 150
Memphis, TN 38119
Ladies and Gentlemen:
In connection with the engagement of Wunderlich Securities, Inc. (Wunderlich) to advise and assist the undersigned XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser) and Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) with the matters set forth in the Structuring Fee Agreement, dated September 29, 2017, among the Companies and Wunderlich (the Agreement), in the event that Wunderlich becomes involved in any capacity in any claim, suit, action, proceeding, investigation or inquiry (including, without limitation, any shareholder or derivative action or arbitration proceeding) arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement (collectively, a Proceeding), the Companies agree to indemnify, defend and hold Wunderlich harmless to the fullest extent permitted by law, from and against any losses, claims, damages, liabilities and expenses arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that such losses, claims, damages, liabilities and expenses resulted solely from the gross negligence, willful misconduct or bad faith of Wunderlich. In addition, in the event that Wunderlich becomes involved in any capacity in any Proceeding, the Companies will reimburse Wunderlich for its reasonable legal and other expenses (including the reasonable cost of any investigation and preparation) as such expenses are incurred by Wunderlich in connection therewith, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review, that such expenses results solely from the gross negligence, willful misconduct of bad faith of Wunderlich. If such indemnification were not to be available for any reason, the Companies agree to contribute to the losses, claims, damages, liabilities and expenses involved (i) in the proportion appropriate to reflect the relative benefits received or sought to be received by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and Wunderlich, on the other hand, in connection with the matters contemplated by the Agreement or (ii) if (but only if and to the extent) the allocation provided for in clause (i) is for any reason held unenforceable, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, as well as any other relevant equitable considerations. The Companies agree that for the purposes of this paragraph the relative benefits received, or sought to be received, by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, in connection with the matters contemplated by the Agreement shall be deemed to be in the same proportion that the total value received or paid or contemplated to be received or paid by the Companies or their stockholders or affiliates and other constituencies, as the case may be, as a result of or in connection with the matters (whether or not
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consummated) for which Wunderlich has been retained to perform financial services bears to the fees paid to Wunderlich under the Agreement; provided that, in no event shall the Companies contribute less than the amount necessary to assure that Wunderlich is not liable for losses, claims, damages, liabilities and expenses in excess of the amount of fees actually received by Wunderlich pursuant to the Agreement. Relative fault shall be determined by reference to, among other things, whether any alleged untrue statement or omission or any other alleged conduct relates to information provided by the Companies or other conduct by the Companies (or their employees or other agents), on the one hand, or by Wunderlich, on the other hand. The Companies will not settle any Proceeding in respect of which indemnity may be sought hereunder, whether or not Wunderlich is an actual or potential party to such Proceeding, without Wunderlichs prior written consent, which consent shall not be unreasonably withheld or delayed. For purposes of this Indemnification Agreement, Wunderlich shall include Wunderlich Securities, Inc., any of its affiliates, each other person, if any, controlling Wunderlich or any of its affiliates, their respective officers, current and former directors, employees and agents, and the successors and assigns of all of the foregoing persons. The foregoing indemnity and contribution agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise.
The Companies agree that neither Wunderlich nor any of its affiliates, directors, agents, employees or controlling persons shall have any liability to the Companies or any person asserting claims on behalf of or in right of the Companies in connection with or as a result of either Wunderlichs engagement under the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that any losses, claims, damages, liabilities or expenses incurred by the Companies resulted solely from the gross negligence, willful misconduct or bad faith of Wunderlich in performing the services that are the subject of the Agreement.
THIS INDEMNIFICATION AGREEMENT AND ANY CLAIM, COUNTERCLAIM OR DISPUTE OF ANY KIND OR NATURE WHATSOEVER ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT (CLAIM), DIRECTLY OR INDIRECTLY, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS SET FORTH BELOW, NO CLAIM MAY BE COMMENCED, PROSECUTED OR CONTINUED IN ANY COURT OTHER THAN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION OVER THE ADJUDICATION OF SUCH MATTERS, AND EACH COMPANY AND WUNDERLICH CONSENT TO THE JURISDICTION OF SUCH COURTS AND PERSONAL SERVICE WITH RESPECT THERETO. EACH COMPANY AND WUNDERLICH HEREBY CONSENT TO PERSONAL JURISDICTION, SERVICE AND VENUE IN ANY COURT IN WHICH ANY CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT IS BROUGHT BY ANY THIRD PARTY AGAINST WUNDERLICH OR ANY INDEMNIFIED PARTY. EACH OF WUNDERLICH AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT. EACH COMPANY AND WUNDERLICH AGREES THAT A FINAL JUDGMENT IN ANY PROCEEDING OR CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT BROUGHT IN ANY SUCH COURT SHALL
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BE CONCLUSIVE AND BINDING THEREON MAY BE ENFORCED IN ANY OTHER COURTS TO THE JURISDICTION OF WHICH SUCH PARTY IS OR MAY BE SUBJECT, BY SUIT UPON SUCH JUDGMENT.
The foregoing Indemnification Agreement shall remain in full force and effect notwithstanding any termination of Wunderlichs engagement. This Indemnification Agreement shall be binding upon each Company and Wunderlich and their respective successors and assigns and any successor or assign of any substantial portion of such Companys or Wunderlichs respective businesses and/or assets. This Indemnification Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
[ Signature Page Follows ]
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Very truly yours,
|
XA INVESTMENTS LLC |
By: |
Name: |
Title: |
OCTAGON CREDIT INVESTORS, LLC |
By: |
Name: |
Title: |
Agreed and Accepted:
WUNDERLICH SECURITIES, INC. |
By: |
Name: |
Title: |
[Signature Page - Wunderlich Indemnification Agreement]
AGREEMENT
September 29, 2017
[Qualifying Underwriter]
[ ]
[ ]
Ladies and Gentlemen:
This agreement (the Agreement) is between XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser), Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) and [ ] (the Underwriter) with respect to the XAI Octagon Floating Rate Income & Alternative Income Term Trust (the Fund). Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Underwriting Agreement among the Fund, the Adviser, the Sub-Adviser and the underwriters named therein (the Underwriting Agreement).
1. Fee. In consideration of certain financial advisory services that the Underwriter has provided to the Companies related to the sale and distribution (the Offering) of the common shares of the Fund, it being understood that the ultimate decision with respect to the structure, design and organization of the Fund shall rest with the Companies, the Companies shall pay a fee to the Underwriter in the aggregate amount of $[] (the Fee), of which $[] shall be paid by the Adviser and $[] shall be paid by the Sub-Adviser. The Fee shall be paid on or before [], 2017, or as otherwise agreed to by the parties. In the event the Offering does not proceed, the Underwriter will not receive any fees under this Agreement; however, for the avoidance of doubt, accountable expenses actually incurred may be payable to the Underwriter pursuant to the terms of the Underwriting Agreement.
2. Term. This Agreement shall terminate upon the payment of the entire amount of the Fee, as specified in Section 1 hereof. Notwithstanding the foregoing, Sections 4, 5, 8, 9 and 10 of this Agreement and the Indemnification Agreement attached hereto shall survive the termination of this Agreement.
3. Indemnification. The Companies agree to the indemnification and other agreements set forth in the Indemnification Agreement attached hereto, the provisions of which are incorporated herein by reference and shall survive the termination, expiration or supersession of this Agreement.
4. Confidential Advice. Except to the extent legally required or requested by a court, commission, regulatory body, administrative agency or other self-regulatory agency (after consultation with, and approval (not to be unreasonably withheld or delayed) as to form and substance by, the Underwriter and its counsel), none of (i) the name of the Underwriter, (ii) any advice rendered by the Underwriter to the Companies, or (iii) the terms of this Agreement or any communication from the Underwriter, each in connection with the services performed by the Underwriter pursuant to this Agreement, will be quoted or referred to orally or in writing, or in the case of (ii) and (iii), reproduced or disseminated, by the Companies or any of their respective
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affiliates or agents, without the Underwriters prior written consent; it being understood that the Underwriter has agreed to disclosure of the terms of this Agreement in the prospectus and registration statement related to the Offering.
5. Information. The Companies recognize and confirm that the Underwriter (a) has used and relied primarily on the information provided by the Companies and on information available from generally recognized public sources in performing the services contemplated by this Agreement without having assumed responsibility for independently verifying the same, (b) has not assumed responsibility for the accuracy, completeness or reasonableness of such information and (c) has not made an appraisal of any assets or liabilities (contingent or otherwise) of the Fund. The information provided by each Company to the Underwriter in performing the services contemplated in this Agreement, was true and correct in all material respects and did not contain any material misstatement of fact or omit to state any material fact necessary to make the statements contained therein not misleading. Each Company will promptly notify the Underwriter if it learns of any material inaccuracy or misstatement in, or material omission from, any information provided by such Company to the Underwriter pursuant to this Section 5.
6. Not an Investment Adviser. The Companies acknowledge that the Underwriter has not provided any advice hereunder as to the value of securities or regarding the advisability of purchasing or selling any securities for the Funds portfolio. The Companies acknowledge and agrees that the Underwriter has been retained to act solely as an adviser to the Companies, and the Companies engagement of the Underwriter is not intended to confer rights upon any person (including the Fund or any shareholders, employees or creditors of the Companies or the Fund) not a party hereto as against the Underwriter or its affiliates, or their respective directors, officers, employees or agents, successors, or assigns. The Underwriter has acted as an independent contractor under this Agreement, and not in any other capacity including as a fiduciary, and any duties arising out of its engagement shall be owed solely to the Companies.
7. Not Exclusive. Nothing herein shall be construed as prohibiting you or your affiliates from acting as an underwriter or financial adviser or in any other capacity for any other persons (including other registered investment companies or other investment managers).
8. Amendment; Waiver. No provision of this Agreement may be amended or waived except by an instrument in writing signed by the parties hereto.
9. Governing Law. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement (Claim), directly or indirectly, shall be governed by and construed in accordance with the laws of the State of New York. No Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have exclusive jurisdiction over the adjudication of such matters, each Company and the Underwriter consent to the jurisdiction of such courts and personal service with respect thereto. EACH OF THE UNDERWRITER AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT.
10. Successors and Assigns. This Agreement shall be binding upon each Company and the Underwriter and their respective successors and assigns and any successor or assign of any substantial portion of each Companys or the Underwriters respective businesses and/or
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assets.
11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this Agreement by facsimile or electronic transmission shall be effective as delivery of a manually executed counterpart hereof.
[ Signature Page Follows ]
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This Agreement shall be effective as of the date first written above.
XA INVESTMENTS LLC |
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By: |
______________________________ | |
Name: |
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Title: |
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OCTAGON CREDIT INVESTORS, LLC | ||
By: | ______________________________ | |
Name: |
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Title: |
Agreed and Accepted: |
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[ ] |
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By: | ______________________________ | |
Name: |
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Title: |
[Signature Page - Agreement]
Indemnification Agreement
September 29, 2017
[Qualifying Underwriter]
[ ]
[ ]
Ladies and Gentlemen:
In connection with the engagement of [ ] (the Underwriter) to advise and assist the undersigned XA Investments LLC (including any successor or assign by merger or otherwise, the Adviser) and Octagon Credit Investors, LLC (including any successor or assign by merger or otherwise, the Sub-Adviser, and together with the Adviser, each a Company, and collectively, the Companies) with the matters set forth in the Structuring Fee Agreement, dated September 29, 2017, among the Companies and the Underwriter (the Agreement), in the event that the Underwriter becomes involved in any capacity in any claim, suit, action, proceeding, investigation or inquiry (including, without limitation, any shareholder or derivative action or arbitration proceeding) arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement (collectively, a Proceeding), the Companies agree to indemnify, defend and hold the Underwriter harmless to the fullest extent permitted by law, from and against any losses, claims, damages, liabilities and expenses arising out of the matters contemplated by the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that such losses, claims, damages, liabilities and expenses resulted solely from the gross negligence, willful misconduct or bad faith of the Underwriter. In addition, in the event that the Underwriter becomes involved in any capacity in any Proceeding, the Companies will reimburse the Underwriter for its reasonable legal and other expenses (including the reasonable cost of any investigation and preparation) as such expenses are incurred by the Underwriter in connection therewith, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review, that such expenses results solely from the gross negligence, willful misconduct of bad faith of the Underwriter. If such indemnification were not to be available for any reason, the Companies agree to contribute to the losses, claims, damages, liabilities and expenses involved (i) in the proportion appropriate to reflect the relative benefits received or sought to be received by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the Underwriter, on the other hand, in connection with the matters contemplated by the Agreement or (ii) if (but only if and to the extent) the allocation provided for in clause (i) is for any reason held unenforceable, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, as well as any other relevant equitable considerations. The Companies agree that for the purposes of this paragraph the relative benefits received, or sought to be received, by the Companies and their stockholders and affiliates and other constituencies, on the one hand, and the party entitled to contribution, on the other hand, in connection with the matters contemplated by the Agreement shall be deemed to be in the same proportion that the total value received or paid or contemplated to be received or paid by the Companies or their stockholders or affiliates and other constituencies, as the case may be, as a result of
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or in connection with the matters (whether or not consummated) for which the Underwriter has been retained to perform financial services bears to the fees paid to the Underwriter under the Agreement; provided that, in no event shall the Companies contribute less than the amount necessary to assure that the Underwriter is not liable for losses, claims, damages, liabilities and expenses in excess of the amount of fees actually received by the Underwriter pursuant to the Agreement. Relative fault shall be determined by reference to, among other things, whether any alleged untrue statement or omission or any other alleged conduct relates to information provided by the Companies or other conduct by the Companies (or their employees or other agents), on the one hand, or by the Underwriter, on the other hand. The Companies will not settle any Proceeding in respect of which indemnity may be sought hereunder, whether or not the Underwriter is an actual or potential party to such Proceeding, without the Underwriters prior written consent, which consent shall not be unreasonably withheld or delayed. For purposes of this Indemnification Agreement, the Underwriter shall include the Underwriter Securities, Inc., any of its affiliates, each other person, if any, controlling the Underwriter or any of its affiliates, their respective officers, current and former directors, employees and agents, and the successors and assigns of all of the foregoing persons. The foregoing indemnity and contribution agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise.
The Companies agree that neither the Underwriter nor any of its affiliates, directors, agents, employees or controlling persons shall have any liability to the Companies or any person asserting claims on behalf of or in right of the Companies in connection with or as a result of either the Underwriters engagement under the Agreement, including, without limitation, related services and activities provided prior to the date of the Agreement, except to the extent that it shall be determined by a court of competent jurisdiction in a judgment that has become final in that it is no longer subject to appeal or other review that any losses, claims, damages, liabilities or expenses incurred by the Companies resulted solely from the gross negligence, willful misconduct or bad faith of the Underwriter in performing the services that are the subject of the Agreement.
THIS INDEMNIFICATION AGREEMENT AND ANY CLAIM, COUNTERCLAIM OR DISPUTE OF ANY KIND OR NATURE WHATSOEVER ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT (CLAIM), DIRECTLY OR INDIRECTLY, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS SET FORTH BELOW, NO CLAIM MAY BE COMMENCED, PROSECUTED OR CONTINUED IN ANY COURT OTHER THAN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION OVER THE ADJUDICATION OF SUCH MATTERS, AND EACH COMPANY AND THE UNDERWRITER CONSENT TO THE JURISDICTION OF SUCH COURTS AND PERSONAL SERVICE WITH RESPECT THERETO. EACH COMPANY AND THE UNDERWRITER HEREBY CONSENT TO PERSONAL JURISDICTION, SERVICE AND VENUE IN ANY COURT IN WHICH ANY CLAIM ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT IS BROUGHT BY ANY THIRD PARTY AGAINST THE UNDERWRITER OR ANY INDEMNIFIED PARTY. EACH OF THE UNDERWRITER AND EACH COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT. EACH COMPANY AND THE UNDERWRITER AGREES THAT A FINAL JUDGMENT IN ANY PROCEEDING OR CLAIM
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ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT BROUGHT IN ANY SUCH COURT SHALL BE CONCLUSIVE AND BINDING THEREON MAY BE ENFORCED IN ANY OTHER COURTS TO THE JURISDICTION OF WHICH SUCH PARTY IS OR MAY BE SUBJECT, BY SUIT UPON SUCH JUDGMENT.
The foregoing Indemnification Agreement shall remain in full force and effect notwithstanding any termination of the Underwriters engagement. This Indemnification Agreement shall be binding upon each Company and the Underwriter and their respective successors and assigns and any successor or assign of any substantial portion of such Companys or the Underwriters respective businesses and/or assets. This Indemnification Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.
[ Signature Page Follows ]
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Very truly yours,
XA INVESTMENTS LLC |
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By: | ______________________________ | |
Name: | ||
Title: | ||
OCTAGON CREDIT INVESTORS, LLC |
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By: | ______________________________ | |
Name: | ||
Title: |
Agreed and Accepted:
[ ] |
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By: | _____________________________ | |
Name: | ||
Title: |
[Signature Page - Indemnification Agreement]
CUSTODY AGREEMENT
THIS AGREEMENT is made and entered into as of the day of September 2017, by and between XAI Octagon Floating Rate & Alternative Income Term Trust, a Delaware statutory trust (the Fund), and U.S. BANK NATIONAL ASSOCIATION , a national banking association organized and existing under the laws of the United States of America with its principal place of business at Minneapolis, Minnesota (the Custodian).
WHEREAS, the Fund is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a closed-end non-diversified management investment company; and
WHEREAS, the Custodian is a bank having the qualifications prescribed in Section 17 (f) and section 26(a)(1) of the 1940 Act; and
WHEREAS, the Board of Trustees (as defined below) has delegated to the Custodian the responsibilities set forth in Rule 17f-5(c) under the 1940 Act and the Custodian is willing to undertake the responsibilities and serve as the foreign custody manager for the Fund; and
WHEREAS, the Fund desires to retain the Custodian to act as custodian of its cash and securities; and
NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the meanings set forth below unless the context otherwise requires:
1.01 Authorized Person means any Officer or person (including an investment advisor, investment sub-advisor or other agent of the Fund) who has been designated by written notice as such from the Fund or the Funds investment advisor, investment sub-advisor or other agent of the Fund and is named in Exhibit A attached hereto. Such officer or person shall continue to be an Authorized Person until such time as the Custodian receives Written Instructions from the Fund or the Funds investment advisor or other agent that any such person is no longer an Authorized Person.
1.02 Board of Trustees shall mean the trustees from time to time serving under the Funds declaration of trust, as amended from time to time.
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1.03 Book-Entry System shall mean a federal book-entry system as provided in Subpart O of Treasury Circular No. 300, 31 CFR 306, in Subpart B of 31 CFR Part 350, or in such book-entry regulations of federal agencies as are substantially in the form of such Subpart O.
1.04 Business Day shall mean any day recognized as a settlement day by The New York Stock Exchange, Inc., and any other day for which the Fund computes the net asset value of Shares of the Fund.
1.05 Eligible Foreign Custodian has the meaning set forth in Rule 17f-5(a)(1), including a majority-owned or indirect subsidiary of a U.S. Bank (as defined in Rule 17f-5), a bank holding company meeting the requirements of an Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate action of the SEC), or a foreign branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the requirements of a custodian under Section 17(f) of the 1940 Act; the term does not include any Eligible Securities Depository.
1.06 Eligible Securities Depository has the meaning set forth in Rule17f-4 and 17f-7 under the 1940 Act.
1.07 Foreign Securities means any of the Funds investments (including foreign currencies) for which the primary market is outside the United States and such cash and cash equivalents as are reasonably necessary to effect the Funds transactions in such investments.
1.08 Fund Custody Account shall mean any of the accounts in the name of the Fund, which is provided for in Section 3.02 below.
1.09 IRS shall mean the Internal Revenue Service.
1.10 FINRA shall mean the Financial Industry Regulatory Authority, Inc. .
1.11 Loan means any commercial loan, or participation therein, made by a bank or other financial institution that by its terms provides for payments of principal and/or interest, including discount obligations and payment- in-kind obligations, acquired by any Fund from time to time.
1.12 Loan Trade Confirmation means a confirmation to the Custodian from the Fund of the Funds acquisition of a Loan, and setting forth applicable information with respect to such Loan, which confirmation may be in the form of Schedule A attached hereto and made a part hereof, subject to such changes or additions as may be agreed to by, or in such other form as may be agreed to by, the Custodian and the Fund from time to time
1.13 Noteless Loan means a Loan with respect to which (i) the related loan agreement does not require the obligor to execute and deliver an Underlying Note to evidence the indebtedness created under such Loan and (ii) no Underlying Notes are outstanding with respect to the portion of the Loan transferred to a Fund.
1.14 Officer shall mean the Chief Executive Officer, Chief Financial Officer, President, any Vice President, any Assistant Vice President, the Secretary, any Assistant Secretary, the Treasurer, or any Assistant Treasurer of the Fund.
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1.15 Participation means an interest in a Loan that is acquired indirectly by way of a participation from a selling institution
1.16 SEC shall mean the U.S. Securities and Exchange Commission.
1.17 Securities shall include, without limitation, common and preferred stocks, bonds, call options, put options, debentures, notes, bank certificates of deposit, bankers acceptances, mortgage-backed securities, loans or other obligations, and any certificates, receipts, warrants or other instruments or documents representing rights to receive, purchase or subscribe for the same, or evidencing or representing any other rights or interests therein, or any similar property or assets that the Custodian or its agents have the facilities to clear and service.
1.18 Securities Depository shall mean The Depository Trust Company and any other clearing agency registered with the SEC under Section 17A of the Securities Exchange Act of 1934, as amended (the 1934 Act), which acts as a system for the central handling of Securities where all Securities of any particular class or series of an issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of the Securities.
1.19 Shares shall mean, with respect to the Fund, the common shares of beneficial interest issued by the Fund on account of the Fund.
1.20 Sub-Custodian shall mean and include (i) any branch of a U.S. bank, as that term is defined in Rule 17f-5 under the 1940 Act, and (ii) any Eligible Foreign Custodian, as that term is defined in Rule 17f-5 under the 1940 Act, having a contract with the Custodian which the Custodian has determined will provide reasonable care of assets of the Fund based on the standards specified in Section 3.3 below. Such contract shall be in writing and shall include provisions that provide: (i) for indemnification or insurance arrangements (or any combination of the foregoing) such that the Fund will be adequately protected against the risk of loss of assets held in accordance with such contract; (ii) that the Foreign Securities will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the Sub-Custodian or its creditors except a claim of payment for their safe custody or administration, in the case of cash deposits, liens or rights in favor of creditors of the Sub-Custodian arising under bankruptcy, insolvency, or similar laws; (iii) that beneficial ownership for the Foreign Securities will be freely transferable without the payment of money or value other than for safe custody or administration; (iv) that adequate records will be maintained identifying the assets as belonging to the Fund or as being held by a third party for the benefit of the Fund; (v) that the Funds independent public accountants will be given access to those records or confirmation of the contents of those records; and (vi) that the Fund will receive periodic reports with respect to the safekeeping of the Funds assets, including, but not limited to, notification of any transfer to or from a Funds account or a third party account containing assets held for the benefit of the Fund. Such contract may contain, in lieu of any or all of the provisions specified in (i)-(vi) above, such other provisions that the Custodian reasonably determines will provide, in their entirety, the same or a greater level of care and protection for Fund assets as the specified provisions.
1.21 Underlying Note means the one or more promissory notes executed by an obligor evidencing a Loan
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1.22 Written Instructions shall mean (i) written communications received by the Custodian and signed by an Authorized Person (ii) communications by facsimile or e-mail or any other such system from one or more persons reasonably believed by the Custodian to be an Authorized Person, or (iii) communications between electronic devices.
ARTICLE II.
APPOINTMENT OF CUSTODIAN
2.01 Appointment . The Fund hereby appoints the Custodian as custodian of all Securities and cash owned by or in the possession of the Fund at any time during the period of this Agreement, on the terms and conditions set forth in this Agreement, and the Custodian hereby accepts such appointment and agrees to perform the services and duties set forth in this Agreement. The Fund hereby delegates to the Custodian, subject to Rule 17f-5(b), the responsibilities with respect to the Funds Foreign Securities, and the Custodian hereby accepts such delegation as foreign custody manager with respect to the Fund. The services and duties of the Custodian shall be confined to those matters expressly set forth herein, and no implied duties are assumed by or may be asserted against the Custodian hereunder.
2.02 Documents to be Furnished . The following documents, including any amendments thereto, will be provided contemporaneously with the execution of the Agreement to the Custodian by the Fund:
(a) | A copy of the Funds declaration of trust, certified by the Secretary; |
(b) | A copy of the Funds bylaws, certified by the Secretary; |
(c) | A copy of the resolutions of the Board of Trustees of the Fund appointing the Custodian, certified by the Secretary; |
(d) | A copy of the current prospectus of the Fund (the Prospectus); |
(e) | A certification of the President or Chief Financial Officer and the Secretary of the Fund setting forth the names and signatures of the current Officers of the Fund and other Authorized Persons; and |
(f) | An executed authorization required by the Shareholder Communications Act of 1985, attached hereto as Exhibit E . |
2.03 Notice of Appointment of Transfer Agent . The Fund agrees to notify the Custodian in writing of the appointment, termination or change in appointment of any transfer agent of the Fund, except if the Fund appoints an affiliate of the Custodian to serve as transfer agent of the Fund, the Custodian hereby waives the Funds obligation to provide such written notice.
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ARTICLE III.
CUSTODY OF CASH AND SECURITIES
3.01 Segregation . All Securities and non-cash property held by the Custodian for the account of the Fund (other than Securities maintained in a Securities Depository, Eligible Securities Depository or Book-Entry System) shall be physically segregated from other Securities and non-cash property in the possession of the Custodian (including the Securities and non-cash property of the other series of the Fund, if applicable) and shall be identified as subject to this Agreement.
3.02 Fund Custody Accounts . The Custodian shall open and maintain in its trust department a custody account in the name of the Fund coupled with the name of the Fund, subject only to draft or order of the Custodian, in which the Custodian shall enter and carry all Securities (other than Loans), cash and other assets of the Fund which are delivered to it. For avoidance of doubt, the Custodian shall not be required to credit or deposit Loans in the custody account but shall instead maintain a register (in book-entry form or in such other form as it shall deem necessary or desirable) of such Loans, containing such information as the Fund and the Custodian may reasonably agree. The Custodian shall be authorized to open such additional accounts as may be necessary or convenient for administration of its duties hereunder.
3.03 Appointment of Agents .
(a) | In its discretion, the Custodian may appoint one or more Sub-Custodians to establish and maintain arrangements with (i) Eligible Securities Depositories or (ii) Eligible Foreign Custodians that are members of the Sub-Custodians network to hold Securities and cash of the Fund and to carry out such other provisions of this Agreement as it may determine; provided, however, that the appointment of any such agents and maintenance of any Securities and cash of the Fund shall be at the Custodians expense and shall not relieve the Custodian of any of its obligations or liabilities under this Agreement. The Custodian shall be liable for the actions of any Sub-Custodians (regardless of whether assets are maintained in the custody of a Sub-Custodian, a member of its network or an Eligible Securities Depository) appointed by it as if such actions had been done by the Custodian. |
(b) | If, after the initial appointment of Sub-Custodians by the Board of Trustees in connection with this Agreement, the Custodian wishes to appoint other Sub-Custodians to hold property of the Fund, it will so notify the Fund and make the necessary determinations as to any such new Sub-Custodians eligibility under Rule 17f-5 under the 1940 Act. |
(c) | In performing its delegated responsibilities as foreign custody manager to place or maintain the Funds assets with a Sub-Custodian, the Custodian will determine that the Funds assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Funds assets will be held by that Sub-Custodian, after considering all factors relevant to safekeeping of such assets, including, without limitation the factors specified in Rule 17f-5(c)(1). |
(d) | The agreement between the Custodian and each Sub-Custodian acting hereunder shall contain the required provisions set forth in Rule 17f-5(c)(2) under the 1940 Act. |
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(e) | At the end of each calendar quarter, the Custodian shall provide written reports notifying the Board of Trustees of the withdrawal or placement of the Securities and cash of the Fund with a Sub-Custodian and of any material changes in the Funds arrangements. Such reports shall include an analysis of the custody risks associated with maintaining assets with any Eligible Securities Depositories. The Custodian shall promptly take such steps as may be required to withdraw assets of the Fund from any Sub-Custodian arrangement that has ceased to meet the requirements of Rule 17f-5 or Rule 17f-7 under the 1940 Act, as applicable. |
(f) | With respect to its responsibilities under this Section 3.03, the Custodian hereby warrants to the Fund that it agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of property of the Fund, provided, however, with respect to custody of any Loans, the Custodians responsibility shall be limited to the exercise of reasonable care by the Custodian in the physical custody of any loan documents delivered to it, including any related instrument, security, credit agreement, assignment agreement and/or other agreements or documents, if any, that may be delivered to it. The Custodian further warrants that the Funds assets will be subject to reasonable care if maintained with a Sub-Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation: (i) the Sub-Custodians practices, procedures, and internal controls for certificated securities (if applicable), its method of keeping custodial records, and its security and data protection practices; (ii) whether the Sub-Custodian has the requisite financial strength to provide reasonable care for Fund assets; (iii) the Sub-Custodians general reputation and standing and, in the case of a Securities Depository, the Securities Depositorys operating history and number of participants; and (iv) whether the Fund will have jurisdiction over and be able to enforce judgments against the Sub-Custodian, such as by virtue of the existence of any offices of the Sub-Custodian in the United States or the Sub-Custodians consent to service of process in the United States. |
(g) | The Custodian shall establish a system or ensure that its Sub-Custodian has established a system to monitor on a continuing basis (i) the appropriateness of maintaining the Funds assets with a Sub-Custodian or Eligible Foreign Custodians who are members of a Sub-Custodians network; (ii) the performance of the contract governing the Funds arrangements with such Sub-Custodian or Eligible Foreign Custodians members of a Sub-Custodians network; and (iii) the custody risks of maintaining assets with an Eligible Securities Depository. The Custodian must promptly notify the Fund or its investment adviser of any material change in these risks. |
(h) | The Custodian shall use commercially reasonable efforts to collect all income and other payments with respect to Foreign Securities to which the Fund shall be entitled and shall credit such income, as collected, to the Fund. In the event that extraordinary measures are required to collect such income, the Fund and Custodian shall consult as to the measurers and as to the compensation and expenses of the Custodian relating to such measures. |
3.04 Delivery of Assets to Custodian . The Fund shall deliver, or cause to be delivered, to the Custodian or a Sub-Custodian all of the Funds Securities, cash and other investment assets, including (i) all payments of income, payments of principal and capital distributions received by
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the Fund with respect to such Securities, cash or other assets owned by the Fund at any time during the period of this Agreement, and (ii) all cash received by the Fund for the issuance of Shares. With respect to assets other than Loans, such assets shall be delivered to the Custodian, and at the address identified below in Section 15.08. Except to the extent otherwise expressly provided herein, delivery of Securities to the Custodian shall be in street name or other good delivery form. The Custodian shall not be responsible for such Securities, cash or other assets until actually delivered to, and received by it or a Sub-Custodian.
3.05 Securities Depositories and Book-Entry Systems . The Custodian may deposit and/or maintain Securities (excluding Loans) of the Fund in a Securities Depository or in a Book-Entry System, subject to the following provisions:
(a) | The Custodian, on an on-going basis, shall deposit in a Securities Depository or Book-Entry System all Securities eligible for deposit therein and shall make use of such Securities Depository or Book-Entry System to the extent possible and practical in connection with its performance hereunder, including, without limitation, in connection with settlements of purchases and sales of Securities, loans of Securities, and deliveries and returns of collateral consisting of Securities. |
(b) | Securities (excluding Loans) of the Fund kept in a Book-Entry System or Securities Depository shall be kept in an account (Depository Account) of the Custodian in such Book-Entry System or Securities Depository which includes only assets held by the Custodian as a fiduciary, custodian or otherwise for customers. |
(c) | The records of the Custodian with respect to Securities of the Fund maintained in a Book-Entry System or Securities Depository shall, by book-entry, identify such Securities (other than Loans) as belonging to the Fund. |
(d) | If Securities purchased by the Fund are to be held in a Book-Entry System or Securities Depository, the Custodian shall pay for such Securities upon: (i) receipt of advice from the Book-Entry System or Securities Depository that such Securities have been transferred to the Depository Account; and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Fund. If Securities sold by the Fund are held in a Book-Entry System or Securities Depository, the Custodian shall transfer such Securities upon (i) receipt of advice from the Book-Entry System or Securities Depository that payment for such Securities has been transferred to the Depository Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. |
(e) | The Custodian shall provide the Fund with copies of any report (obtained by the Custodian from a Book-Entry System or Securities Depository in which Securities of the Fund are kept) on the internal accounting controls and procedures for safeguarding Securities deposited in such Book-Entry System or Securities Depository. |
(f) |
Notwithstanding anything to the contrary in this Agreement, the Custodian shall be liable to the Fund for any loss or damage to the Fund resulting from: (i) the use of a Book-Entry System or Securities Depository by reason of any negligence or willful misconduct on the |
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part of the Custodian or any Sub-Custodian; or (ii) failure of the Custodian or any Sub-Custodian to enforce effectively such rights as it may have against a Book-Entry System or Securities Depository. At its election, the Fund shall be subrogated to the rights of the Custodian with respect to any claim against a Book-Entry System or Securities Depository or any other person from any loss or damage to the Fund arising from the use of such Book-Entry System or Securities Depository, if and to the extent that the Fund has not been made whole for any such loss or damage. |
(g) | With respect to its responsibilities under this Section 3.05 and pursuant to Rule 17f-4 under the 1940 Act, the Custodian hereby warrants to the Fund that it agrees to (i) exercise due care in accordance with reasonable commercial standards in discharging its duty as a securities intermediary to obtain and thereafter maintain such assets, (ii) provide, promptly upon request by the Fund, such reports as are available concerning the Custodians internal accounting controls and financial strength, and (iii) require any Sub-Custodian to exercise due care in accordance with reasonable commercial standards in discharging its duty as a securities intermediary to obtain and thereafter maintain assets corresponding to the security entitlements of its entitlement holders. |
3.06 Disbursement of Moneys from Fund Custody Account . Upon receipt of Written Instructions, the Custodian shall disburse moneys from the Fund Custody Account but only in the following cases:
(a) | For the purchase of Securities for the Fund but only in accordance with Section 4.01 of this Agreement and only (i) in the case of Securities (other than options on Securities, futures contracts and options on futures contracts), against the delivery to the Custodian (or any Sub-Custodian) of such Securities registered as provided in Section 3.09 below or in proper form for transfer, or if the purchase of such Securities is effected through a Book-Entry System or Securities Depository, in accordance with the conditions set forth in Section 3.05 above; (ii) in the case of options on Securities, against delivery to the Custodian (or any Sub-Custodian) of such receipts as are required by the customs prevailing among dealers in such options; (iii) in the case of futures contracts and options on futures contracts, against delivery to the Custodian (or any Sub-Custodian) of evidence of title thereto in favor of the Fund or any nominee referred to in Section 3.09 below; and (iv) in the case of repurchase or reverse repurchase agreements entered into between the Fund and a bank that is a member of the Federal Reserve System or between the Fund and a primary dealer in U.S. Government securities, against delivery of the purchased Securities either in certificate form or through an entry crediting the Custodians account at a Book-Entry System or Securities Depository with such Securities; |
(b) | In connection with the conversion, exchange or surrender, as set forth in Section 3.07(f) below, of Securities owned by the Fund; |
(c) | For the payment of any dividends or capital gain distributions declared by the Fund; |
(d) | In payment of the repurchase price of Shares as provided in Section 5.01 below; |
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(e) | For the payment of any expense or liability incurred by the Fund, including, but not limited to, the following payments for the account of the Fund: interest; taxes; administration, investment advisory, accounting, auditing, transfer agent, custodian, trustee and legal fees; and other operating expenses of the Fund; in all cases, whether or not such expenses are to be in whole or in part capitalized or treated as deferred expenses; |
(f) | For transfer in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the 1934 Act and a member of FINRA, relating to compliance with rules of the Options Clearing Corporation and of any registered national securities exchange (or of any similar organization or organizations) regarding escrow or other arrangements in connection with transactions by the Fund; |
(g) | For transfer in accordance with the provisions of any agreement among the Fund, the Custodian and a futures commission merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market (or any similar organization or organizations) regarding account deposits in connection with transactions by the Fund; |
(h) | For the funding of any uncertificated time deposit or other interest-bearing account with any banking institution (including the Custodian), which deposit or account has a term of one year or less; and |
(i) | For any other proper purpose, but only upon receipt, in addition to Written Instructions, declaring such purpose to be a proper trust purpose, and naming the person or persons to whom such payment is to be made. |
3.07 Delivery of Securities from Fund Custody Account . Upon receipt of Written Instructions, the Custodian shall release and deliver, or cause the Sub-Custodian to release and deliver, Securities from the Fund Custody Account but only in the following cases:
(a) | Upon the sale of Securities for the account of the Fund but only against receipt of payment therefor in cash, by certified or cashiers check or bank credit; |
(b) | In the case of a sale effected through a Book-Entry System or Securities Depository, in accordance with the provisions of Section 3.05 above; |
(c) | To an offerors depository agent in connection with tender or other similar offers for Securities of the Fund; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian; |
(d) | To the issuer thereof or its agent (i) for transfer into the name of the Fund, the Custodian or any Sub-Custodian, or any nominee or nominees of any of the foregoing, or (ii) for exchange for a different number of certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new Securities are to be delivered to the Custodian; |
(e) | To the broker selling the Securities, for examination in accordance with the street delivery custom; |
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(f) | For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the issuer of such Securities, or pursuant to provisions for conversion contained in such Securities, or pursuant to any deposit agreement, including surrender or receipt of underlying Securities in connection with the issuance or cancellation of depository receipts; provided that, in any such case, the new Securities and cash, if any, are to be delivered to the Custodian; |
(g) | Upon receipt of payment therefor pursuant to any repurchase or reverse repurchase agreement entered into by the Fund; |
(h) | In the case of warrants, rights or similar Securities, upon the exercise thereof, provided that, in any such case, the new Securities and cash, if any, are to be delivered to the Custodian; |
(i) | For delivery in connection with any loans of Securities of the Fund, but only against receipt of such collateral as the Fund shall have specified to the Custodian in Written Instructions; |
(j) | For delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, but only against receipt by the Custodian of the amounts borrowed; |
(k) | Pursuant to any authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the Fund; |
(l) | For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the 1934 Act and a member of FINRA, relating to compliance with the rules of the Options Clearing Corporation and of any registered national securities exchange (or of any similar organization or organizations) regarding escrow or other arrangements in connection with transactions by the Fund; |
(m) | For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a futures commission merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market (or any similar organization or organizations) regarding account deposits in connection with transactions by the Fund; |
(n) | For any other proper trust purpose, but only upon receipt, in addition to Written Instructions, specifying the Securities to be delivered, declaring such purpose to be a proper trust purpose, and naming the person or persons to whom delivery of such Securities shall be made; or |
(o) | To brokers, clearing banks or other clearing agents for examination or trade execution in accordance with market custom; provided that in any such case the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodians own negligence or willful misconduct. |
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3.08 Actions Not Requiring Written Instructions . Unless otherwise instructed by the Fund, the Custodian shall with respect to all Securities held for the Fund:
(a) | Subject to Section 9.04 below, collect on a timely basis all income and other payments to which the Fund is entitled either by law or pursuant to custom in the securities business; |
(b) | Present for payment and, subject to Section 9.04 below, collect on a timely basis the amount payable upon all Securities that may mature or be called, redeemed, or retired, or otherwise become payable; |
(c) | Endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; |
(d) | Surrender interim receipts or Securities in temporary form for Securities in definitive form; |
(e) | Execute, as custodian, any necessary declarations or certificates of ownership under the federal income tax laws or the laws or regulations of any other taxing authority now or hereafter in effect, and prepare and submit reports to the IRS and the Fund at such time, in such manner and containing such information as is prescribed by the IRS; |
(f) | Hold for the Fund, either directly or, with respect to Securities held therein, through a Book-Entry System or Securities Depository, all rights and similar Securities issued with respect to Securities of the Fund; and |
(g) | In general, and except as otherwise directed in Written Instructions, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with Securities and other assets of the Fund. |
3.09 Registration and Transfer of Securities . All Securities (other than Loans) held for the Fund that are issued or issuable only in bearer form shall be held by the Custodian in that form, provided that any such Securities (other than Loans) shall be held in a Book-Entry System if eligible therefor. All other Securities held for the Fund may be registered in the name of the Fund, the Custodian, a Sub-Custodian or any nominee thereof, or in the name of a Book-Entry System, Securities Depository or any nominee of either thereof. The records of the Custodian with respect to the Funds Foreign Securities that are maintained with a Sub-Custodian in an account that is identified as belonging to the Custodian for the benefit of its customers shall identify those securities as belonging to the Fund. The Fund shall furnish to the Custodian appropriate instruments to enable the Custodian to hold or deliver in proper form for transfer, or to register in the name of any of the nominees referred to above or in the name of a Book-Entry System or Securities Depository, any Securities (other than Loans) registered in the name of the Fund.
3.10 Records .
(a) |
The Custodian shall maintain complete and accurate records with respect to Securities, cash or other property held for the Fund, including (i) journals or other records of original entry containing an itemized daily record in detail of all receipts and deliveries of |
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Securities and all receipts and disbursements of cash; (ii) ledgers (or other records) reflecting (A) Securities in transfer, (B) Securities in physical possession, (C) monies and Securities borrowed and monies and Securities loaned (together with a record of the collateral therefor and substitutions of such collateral), (D) dividends and interest received, and (E) dividends receivable and interest receivable; (iii) canceled checks and bank records related thereto; and (iv) all records relating to its activities and obligations under this Agreement. The Custodian shall keep such other books and records of the Fund as the Fund shall reasonably request, or as may be required by the 1940 Act, including, but not limited to, Section 31 of the 1940 Act and Rule 31a-2 promulgated thereunder. |
(b) | All such books and records maintained by the Custodian shall (i) be maintained in a form acceptable to the Fund and in compliance with the rules and regulations of the SEC, (ii) be the property of the Fund and at all times during the regular business hours of the Custodian be made available upon request for inspection by duly authorized officers, employees or agents of the Fund and employees or agents of the SEC, and (iii) if required to be maintained by Rule 31a-1 under the 1940 Act, be preserved for the periods prescribed in Rules 31a-1 and 31a-2 under the 1940 Act. |
3.11 Fund Reports by Custodian . The Custodian shall furnish the Fund with a daily activity statement and a summary of all transfers to or from each Fund Custody Account on the day following such transfers. At least monthly, the Custodian shall furnish the Fund with a detailed statement of the Securities and moneys held by the Custodian and the Sub-Custodians for the Fund under this Agreement.
3.12 Other Reports by Custodian . As the Fund may reasonably request from time to time, the Custodian shall provide the Fund with reports on the internal accounting controls and procedures for safeguarding Securities which are employed by the Custodian or any Sub-Custodian.
3.13 Proxies and Other Materials . The Custodian shall cause all proxies relating to Securities (excluding Loans) that are not registered in the name of the Fund to be promptly executed by the registered holder of such Securities (excluding Loans), without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to such Securities. With respect to the foreign Securities, the Custodian will use reasonable commercial efforts to facilitate the exercise of voting and other shareholder rights, subject to the laws, regulations and practical constraints that may exist in the country where such securities are issued. The Fund acknowledges that local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of the Fund to exercise shareholder rights.
3.14 Information on Corporate Actions . The Custodian shall promptly deliver to the Fund all information received by the Custodian and pertaining to Securities (excluding Loans) being held by the Fund with respect to optional tender or exchange offers, calls for redemption or purchase or expiration of rights. If the Fund desires to take action with respect to any tender offer, exchange offer or other similar transaction, the Fund shall notify the Custodian at least
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three Business Days prior to the date on which the Custodian is to take such action. The Fund will provide or cause to be provided to the Custodian all relevant information for any Security which has unique put/option provisions at least three Business Days prior to the beginning date of the tender period. The Custodian shall have no duty or obligation hereunder to take any action on behalf of the Fund, to communicate on behalf of the Fund, to collect amounts or proceeds in respect of, or otherwise to interact or exercise rights or remedies on behalf of the Fund, with respect to any Loans. All such actions and communications are the responsibility of the Fund.
3.15 Insurance . The Custodian need not maintain any special insurance for the benefit of the Fund, although the Custodian shall at all times maintain insurance coverage adequate for the nature of its operations, including directors and officers, errors and omissions and fidelity bond insurance coverage. The Custodian shall notify the Fund if there are any material adverse changes to its insurance policies or coverage. The Custodian shall notify the Fund of any material errors or omissions, interruptions in, or delay or unavailability of the Custodians abilities to safeguard and hold the securities and cash of the Fund in accordance with this Agreement as promptly as practicable, and proceed to correct the same as soon as is reasonably possible.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
4.01 | (a) Purchase of Securities . Promptly upon each purchase of Securities (other than Loans) for the Fund, Written Instructions shall be delivered to the Custodian, specifying (i) the name of the issuer or writer of such Securities, and the title or other description thereof, (ii) the number of shares, principal amount (and accrued interest, if any) or other units purchased, (iii) the date of purchase and settlement, (iv) the purchase price per unit, (v) the total amount payable upon such purchase, and (vi) the name of the person to whom such amount is payable. The Custodian shall upon receipt of such Securities purchased by the Fund pay out of the moneys held for the account of the Fund the total amount specified in such Written Instructions to the person named therein. The Custodian shall not be under any obligation to pay out moneys to cover the cost of a purchase of Securities for the Fund, if in the Fund Custody Account there is insufficient cash available to the Fund for which such purchase was made. |
(b) (i) In connection with its acquisition of a Loan or other delivery of a Security constituting a Loan, the Fund (or its agent) shall deliver or cause to be delivered to the Custodian a properly completed Loan Trade Confirmation containing such information in respect of such Loan as the Custodian may reasonably require in order to enable the Custodian to perform its duties hereunder in respect of such Loan on which the Custodian may conclusively rely without further inquiry or investigation, in such form and format as the Custodian reasonably may require.
(ii) Notwithstanding anything herein to the contrary, delivery of Loans acquired by the Fund which constitute Noteless Loans or Participations or which are otherwise not evidenced by a security or instrument as defined in Section 8-102 and Section 9-
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102(a)(47) of the UCC, respectively, shall be made by delivery to the Custodian of (i) in the case of a Noteless Loan, a copy of the loan register with respect to such Noteless Loan evidencing registration of such Loan on the books and records of the applicable obligor or bank agent to the name of the Fund (or its nominee) or a copy (which may be a facsimile copy) of an assignment agreement in favor of the Fund as assignee, and (ii) in the case of a Participation, a copy of the related participation agreement. Any duty on the part of the Custodian with respect to the custody of such Loans shall be limited to the exercise of reasonable care by the Custodian in the physical custody of any loan documents including any related instrument, security, credit agreement, assignment agreement and/or other agreements or documents, if any (collectively, Financing Documents ), that may be delivered to it. Nothing herein shall require the Custodian to credit to the Securities Account or to treat as a financial asset (within the meaning of Section 8-102(a)(9) of the UCC) any such Loan or other asset in the nature of a general intangible (as defined in Section 9-102(a)(42) of the UCC) or to maintain a sufficient quantity thereof.
(iii)The Custodian may assume the genuineness of any such Financing Document it may receive and the genuineness and due authority of any signatures appearing thereon, and shall be entitled to assume that each such Financing Document it may receive is what it purports to be. If an original security or instrument as defined in Section 8-102 and Section 9-102(a)(47) of the UCC, respectively, is or shall be or become available with respect to any Loan to be held by the Custodian under this Agreement, it shall be the sole responsibility of the Fund to make or cause delivery thereof to the Custodian, and the Custodian shall not be under any obligation at any time to determine whether any such original security or instrument has been or is required to be issued or made available in respect of any Loan or to compel or cause delivery thereof to the Custodian.
(iv)Contemporaneously with the acquisition of any Loan, the Fund may (i) cause the copies of the loan documents evidencing such Loan to be delivered to the Custodian; (ii) if requested by the Custodian, provide to the Custodian an amortization schedule of principal payments and a schedule of the interest payable date(s) identifying the amount and due dates of all scheduled principal and interest payments for such Loan and (iii) a properly completed Loan Trade Confirmation containing such information in respect of such Loan as the Custodian may reasonably require in order to enable the Custodian to perform its duties hereunder in respect of such Loan on which the Custodian may conclusively rely without further inquiry or investigation, in such form and format as the Custodian reasonably may require; (iv) take all actions reasonably necessary for the Fund to acquire good title to such Loan; and (v) take all actions as may be reasonably necessary (including appropriate payment notices and instructions to bank agents or other applicable paying agents) to cause (A) all payments in respect of the Loan to be made to the Custodian and (B) all notices, solicitations and other communications in respect of such Loan to be directed to the Fund. The Custodian shall have no liability for any delay or failure on the part of the Fund to provide necessary information to the Custodian, or for any inaccuracy therein or incompleteness thereof, or for any delay or failure on the part of the Fund to give such effective payment instruction to bank agents and other paying agents, in respect of the Loans. With respect to each such Loan, the Custodian shall be entitled to rely on any information and notices it may receive from time to time from the related bank agent, obligor or similar party with respect to the related Loan Asset, and
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shall be entitled to update its records (as it may deem necessary or appropriate), or from the Fund, on the basis of such information or notices received, without any obligation on its part independently to verify, investigate or recalculate such information.
4.02 Liability for Payment in Advance of Receipt of Securities Purchased . In any and every case where payment for the purchase of Securities for the Fund is made by the Custodian in advance of receipt of the Securities purchased and in the absence of specified Written Instructions to so pay in advance, the Custodian shall be liable to the Fund for such payment.
4.03 Sale of Securities . Promptly upon each sale of Securities by the Fund, Written Instructions shall be delivered to the Custodian, specifying: (i) the name of the issuer or writer of such Securities, and the title or other description thereof; (ii) the number of shares, principal amount (and accrued interest, if any), or other units sold; (iii) the date of sale and settlement, (iv) the sale price per unit; (v) the total amount payable upon such sale; and (vi) the person to whom such Securities are to be delivered. Upon receipt of the total amount payable to the Fund as specified in such Written Instructions, the Custodian shall deliver such Securities to the person specified in such Written Instructions. Subject to the foregoing, the Custodian may accept payment in such form as shall be satisfactory to it, and may deliver Securities and arrange for payment in accordance with the customs prevailing among dealers in Securities.
4.04 Delivery of Securities Sold . Notwithstanding Section 4.03 above or any other provision of this Agreement, the Custodian, when instructed to deliver Securities (excluding Loans) against payment, shall be entitled, if in accordance with generally accepted market practice, to deliver such Securities (excluding Loans) prior to actual receipt of final payment therefor. In any such case, the Fund shall bear the risk that final payment for such Securities may not be made or that such Securities may be returned or otherwise held or disposed of by or through the person to whom they were delivered, and the Custodian shall have no liability for any for the foregoing.
4.05 Payment for Securities Sold . In its sole discretion and from time to time, the Custodian may credit the Fund Custody Account, prior to actual receipt of final payment thereof, with: (i) proceeds from the sale of Securities which it has been instructed to deliver against payment; (ii) proceeds from the redemption of Securities or other assets of the Fund; and (iii) income from cash, Securities or other assets of the Fund. Any such credit shall be conditional upon actual receipt by Custodian of final payment and may be reversed if final payment is not actually received in full. The Custodian may, in its sole discretion and from time to time, permit the Fund to use funds so credited to the Fund Custody Account in anticipation of actual receipt of final payment. Any such funds shall be repayable immediately upon demand made by the Custodian at any time prior to the actual receipt of all final payments in anticipation of which funds were credited to the Fund Custody Account.
4.06 Advances by Custodian for Settlement . The Custodian may, in its sole discretion and from time to time, advance funds to the Fund to facilitate the settlement of a Funds transactions in the Fund Custody Account. Any such advance shall be repayable immediately upon demand made by Custodian.
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ARTICLE V.
REPURCHASE OF FUND SHARES
5.01 Transfer of Funds . From such funds as may be available for the purpose in the relevant Fund Custody Account, and upon receipt of Written Instructions specifying that the funds are required to repurchase Shares of the Fund, the Custodian shall wire each amount specified in such Proper Instructions to or through such bank or broker-dealer as the Fund may designate.
5.02 No Duty Regarding Paying Banks . Once the Custodian has wired amounts to a bank or broker-dealer pursuant to Section 5.01 above, the Custodian shall not be under any obligation to effect any further payment or distribution by such bank or broker-dealer.
ARTICLE VI.
SEGREGATED ACCOUNTS
Upon receipt of Written Instructions, the Custodian shall establish and maintain a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or Securities, including Securities maintained in a Depository Account:
(a) | in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the 1934 Act and a member of FINRA (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of the Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund; |
(b) | for purposes of segregating cash or Securities in connection with securities options purchased or written by the Fund or in connection with financial futures contracts (or options thereon) purchased or sold by the Fund; |
(c) | which constitute collateral for loans of Securities made by the Fund; |
(d) | for purposes of compliance by the Fund with requirements under the 1940 Act for the maintenance of segregated accounts by registered investment companies in connection with reverse repurchase agreements and when-issued, delayed delivery and firm commitment transactions; and |
(e) | for other proper trust purposes, but only upon receipt of Written Instructions, setting forth the purpose or purposes of such segregated account and declaring such purposes to be Written trust purposes. |
Each segregated account established under this Article VI shall be established and maintained for the Fund only. All Written Instructions relating to a segregated account shall specify the Fund.
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ARTICLE VII.
COMPENSATION OF CUSTODIAN
7.01 Compensation . The Custodian shall be compensated for providing the services set forth in this Agreement in accordance with the fee schedule set forth on Exhibit B hereto (as amended by mutual agreement from time to time). The Custodian shall also be reimbursed for such miscellaneous expenses (e.g., telecommunication charges, postage and delivery charges, and reproduction charges) as are reasonably incurred by the Custodian in performing its duties hereunder. The Fund shall pay all such fees and reimbursable expenses within 30 calendar days following receipt of the billing notice, except for any fee or expense subject to a good faith dispute. The Fund shall notify the Custodian in writing within 30 calendar days following receipt of each invoice if the Fund is disputing any amounts in good faith. The Fund shall pay such disputed amounts within 10 calendar days of the day on which the parties agree to the amount to be paid. Notwithstanding anything to the contrary, amounts owed by the Fund to the Custodian shall only be paid out of the assets and property of the Fund.
7.02 Overdrafts . The Fund is responsible for maintaining an appropriate level of short term cash investments to accommodate cash outflows. The Fund may obtain a formal line of credit for potential overdrafts of its custody account. In the event of an overdraft or in the event the line of credit is insufficient to cover an overdraft, the overdraft amount or the overdraft amount that exceeds the line of credit will be charged in accordance with the fee schedule set forth on Exhibit B hereto (as amended from time to time)
ARTICLE VIII.
REPRESENTATIONS AND WARRANTIES
8.01 Representations and Warranties of the Fund . The Fund hereby represents and warrants to the Custodian, which representations and warranties shall be deemed to be continuing throughout the term of this Agreement, that:
(a) | It is duly formed and has legal existence under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder; |
(b) | This Agreement has been duly authorized, executed and delivered by the Fund in accordance with all requisite action and constitutes a valid and legally binding obligation of the Fund, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties; and |
(c) | It is conducting its business in compliance in all material respects with all applicable laws and regulations, both state and federal, and has obtained all regulatory approvals necessary to carry on its business as now conducted; there is no statute, rule, regulation, order or judgment binding on it and no provision of its charter, bylaws or any contract binding it or affecting its property which would prohibit its execution or performance of this Agreement. |
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8.02 Representations and Warranties of the Custodian . The Custodian hereby represents and warrants to the Fund, which representations and warranties shall be deemed to be continuing throughout the term of this Agreement, that:
(a) | It is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder; |
(b) | It is a U.S. Bank as defined in section (a)(7) of Rule 17f-5. |
(c) | This Agreement has been duly authorized, executed and delivered by the Custodian in accordance with all requisite action and constitutes a valid and legally binding obligation of the Custodian, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties; |
(d) | It is qualified to act as a custodian under Section 17 (f) and Section 26 (a) of the 1940 Act and is conducting its business in compliance in all material respects with all applicable laws and regulations, both state and federal, and has obtained all regulatory approvals necessary to carry on its business as now conducted; there is no statute, rule, regulation, order or judgment binding on it and no provision of its charter, bylaws or any contract binding it or affecting its property which would prohibit its execution or performance of this Agreement; and |
(e) | It maintains business continuity policies and standards and recovery procedures with respect to the provision of the Services which conform to contemporary industry practice and all applicable law. |
ARTICLE IX.
CONCERNING THE CUSTODIAN
9.01 Standard of Care . The Custodian shall exercise reasonable care in the performance of its duties under this Agreement. The Custodian shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with its duties under this Agreement, except a loss arising out of or relating to the Custodians (or a Sub-Custodians) refusal or failure to comply with the terms of this Agreement (or any sub-custody agreement) or from its (or a Sub-Custodians) bad faith, negligence or willful misconduct in the performance of its duties under this Agreement (or any sub-custody agreement). The Custodian shall be entitled to rely on and may act upon advice of counsel on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. The Custodian shall promptly notify the Fund of any action taken or omitted by the Custodian pursuant to advice of counsel.
9.02 Actual Collection Required . The Custodian shall not be liable for, or considered to be the custodian of, any cash belonging to the Fund or any money represented by a check, draft or other instrument for the payment of money, until the Custodian or its agents actually receive such cash or collect on such instrument.
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9.03 No Responsibility for Title, etc. So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received or delivered by it pursuant to this Agreement.
9.04 Limitation on Duty to Collect . Custodian shall not be required to enforce collection, by legal means or otherwise, of any money or property due and payable with respect to Securities held for the Fund if such Securities are in default or payment is not made after due demand or presentation.
9.05 Reliance Upon Documents and Instructions . The Custodian shall be entitled to rely upon any certificate, notice or other instrument in writing received by it and reasonably believed by it to be genuine. The Custodian shall be entitled to rely upon any Written Instructions actually received by it pursuant to this Agreement.
9.06 Cooperation . The Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the Fund to keep the books of account of the Fund and/or compute the value of the assets of the Fund. The Custodian shall take all such reasonable actions as the Fund may from time to time request to enable the Fund to obtain, from year to year, favorable opinions from the Funds independent accountants with respect to the Custodians activities hereunder in connection with (i) the preparation of the Funds reports on Form N-SAR, Form N-CSR and any other reports required by the SEC or any future registration statement on Form N-2, and (ii) the fulfillment by the Fund of any other requirements of the SEC.
ARTICLE X.
INDEMNIFICATION
10.01 Indemnification by Fund . The Fund shall indemnify and hold harmless the Custodian, any Sub-Custodian and any nominee thereof (each, an Indemnified Party and collectively, the Indemnified Parties) from and against any and all claims, demands, losses, reasonable expenses and liabilities of any and every nature (including reasonable attorneys fees) that an Indemnified Party may sustain or incur or that may be asserted against an Indemnified Party by any person arising directly or indirectly (i) from the fact that Securities are registered in the name of any such nominee, (ii) from any action taken or omitted to be taken by the Custodian or such Sub-Custodian (a) at the request or direction of or in reliance on the advice of the Fund, or (b) upon Written Instructions, or (iii) from the performance of its obligations under this Agreement or any sub-custody agreement, provided that neither the Custodian nor any such Sub-Custodian shall be indemnified and held harmless from and against any such claim, demand, loss, expense or liability arising out of or relating to its refusal or failure to comply with the terms of this Agreement (or any sub-custody agreement), or from its bad faith, negligence or willful misconduct in the performance of its duties under this Agreement (or any sub-custody agreement). This indemnity shall be a continuing obligation of the Fund, its successors and assigns, notwithstanding the termination of this Agreement. As used in this paragraph, the terms Custodian and Sub-Custodian shall include their respective directors, officers and employees.
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10.02 Indemnification by Custodian . The Custodian shall indemnify and hold harmless the Fund from and against any and all claims, demands, losses, expenses, and liabilities of any and every nature (including reasonable attorneys fees) that the Fund may sustain or incur or that may be asserted against the Fund by any person arising directly or indirectly out of any action taken or omitted to be taken by an Indemnified Party as a result of the Indemnified Partys refusal or failure to comply with the terms of this Agreement (or any sub-custody agreement), or from its bad faith, negligence or willful misconduct in the performance of its duties under this Agreement (or any sub-custody agreement). This indemnity shall be a continuing obligation of the Custodian, its successors and assigns, notwithstanding the termination of this Agreement. As used in this paragraph, the term Fund shall include the Funds trustees, officers and employees.
10.03 Security . If the Custodian advances cash or Securities to the Fund for any purpose, either at the Funds request or as otherwise contemplated in this Agreement, or in the event that the Custodian or its nominee incurs, in connection with its performance under this Agreement, any claim, demand, loss, expense or liability (including reasonable attorneys fees) (except such as may arise from its or its nominees bad faith, negligence or willful misconduct), then, in any such event, any property at any time held for the account of the Fund shall be security therefor, and should the Fund fail to promptly repay or indemnify the Custodian, the Custodian shall be entitled to utilize available cash of such Fund and to dispose of other assets of such Fund to the extent necessary to obtain reimbursement or indemnification.
10.04 Miscellaneous.
(a) | Neither party to this Agreement shall be liable to the other party for consequential, special or punitive damages under any provision of this Agreement. |
(b) | The indemnity provisions of this Article shall indefinitely survive the termination and/or assignment of this Agreement. |
(c) | In order that the indemnification provisions contained in this Article shall apply, it is understood that if in any case the indemnitor may be asked to indemnify or hold the indemnitee harmless, the indemnitor shall be fully and promptly advised of all pertinent facts concerning the situation in question, and it is further understood that the indemnitee will use all reasonable care to notify the indemnitor promptly concerning any situation that presents or appears likely to present the probability of a claim for indemnification. The indemnitor shall have the option to defend the indemnitee against any claim that may be the subject of this indemnification. In the event that the indemnitor so elects, it will so notify the indemnitee and thereupon the indemnitor shall take over complete defense of the claim, and the indemnitee shall in such situation initiate no further legal or other expenses for which it shall seek indemnification under this Article X. The indemnitee shall in no case confess any claim or make any compromise in any case in which the indemnitor will be asked to indemnify the indemnitee except with the indemnitors prior written consent. |
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ARTICLE XI.
FORCE MAJEURE
Neither the Custodian nor the Fund shall be liable for any failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; acts of terrorism; sabotage; strikes; epidemics; riots; power failures; and any such circumstances beyond its reasonable control as may cause interruption, loss or malfunction of utility, transportation, computer (hardware, assuming such hardware was reasonably maintained or third party software) or telephone communication service; accidents; labor disputes; acts of civil or military authority; governmental actions; or inability to obtain labor, material, equipment or transportation; provided, however, that in the event of a failure or delay, the Custodian: (i) shall not discriminate against the Fund in favor of any other customer of the Custodian in making computer time and personnel available to input or process the transactions contemplated by this Agreement; and (ii) shall use its best efforts to ameliorate the effects of any such failure or delay.
ARTICLE XII.
PROPRIETARY AND CONFIDENTIAL INFORMATION
12.01 The Custodian agrees on behalf of itself and its directors, officers, and employees to treat confidentially and as proprietary information of the Fund, all records and other information relative to the Fund and prior, present, or potential shareholders of the Fund (and clients of said shareholders), and not to use such records and information for any purpose other than the performance of its responsibilities and duties hereunder, except: (i) after prior notification to and approval in writing by the Fund, which approval shall not be unreasonably withheld and may not be withheld where the Custodian may be exposed to civil or criminal contempt proceedings for failure to comply; (ii) when requested to divulge such information by duly constituted authorities, although the Custodian will promptly report such disclosure to the Fund if disclosure is permitted by applicable law and regulation; or (iii) when so requested by the Fund. Records and other information which have become known to the public through no wrongful act of the Custodian or any of its employees, agents or representatives, and information that was already in the possession of the Custodian prior to receipt thereof from the Fund or its agent, shall not be subject to this paragraph.
12.02 Further, the Custodian will adhere to the privacy policies adopted by the Fund pursuant to Title V of the Gramm-Leach-Bliley Act, as may be modified from time to time. In this regard, the Custodian shall have in place and maintain physical, electronic and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of, and to prevent unauthorized access to or use of, records and information relating to the Fund and its shareholders.
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ARTICLE XIII.
EFFECTIVE PERIOD; TERMINATION
13.01 Effective Period . This Agreement shall become effective as of the date first written above and will continue in effect for a period of three (3) years.
13.02 Termination . This Agreement may be terminated by either party upon giving 90 days prior written notice to the other party or such shorter period as is mutually agreed upon by the parties. Subsequent to the end of the three (3) year period, this Agreement continues until one party gives 90 days prior written notice to the other party or such shorter notice period as is mutually agreed upon by the parties. Notwithstanding the foregoing, this Agreement may be terminated by either party upon the breach of the other party of any material term of this Agreement if such breach is not cured within 15 days of notice of such breach to the breaching party. In addition, the Fund may, at any time, immediately terminate this Agreement in the event of (i) the Custodian ceases to be qualified to be a custodian under Section 17(f) of the 1940 Act, (ii) the Custodian being adjusted bankrupt or insolvent by a court of competent jurisdiction, (iii) the Custodian instituting proceedings for bankruptcy or filing a petition seeking reorganization under the Federal bankruptcy laws or for relief under any law for the relief of debtors, (iv) the dissolution of the Custodian or (v) the appointment of a conservator or receiver for the Custodian by regulatory authorities or court of competent jurisdiction or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction (collectively a Cause Event).
13.03 Early Termination . In the absence of any material breach of this agreement or a Cause Event, should the Fund elect to terminate this agreement prior to the end of the three (3) year term, the Fund agrees to pay the following fees:
a) All monthly fees through the life of the Agreement including the repayment of any negotiated discounts from the fee rates set forth herein;
b) All miscellaneous fees associated with converting services to successor service provider;
c) All fees associated with any record retention and/or tax reporting obligations that may not be eliminated due to the conversion to a successor service provider, as agreed upon by both parties; and
d) All miscellaneous costs associated with a) thru c) above.
13.04 Appointment of Successor Custodian . If a successor custodian shall have been appointed by the Board of Trustees, the Custodian shall, upon receipt of a notice from the Fund, on such specified date of termination (i) deliver directly to the successor custodian all Securities (other than Securities held in a Book-Entry System or Securities Depository) and cash then owned by the Fund and held by the Custodian as custodian, and (ii) transfer any Securities held in a Book-Entry System or Securities Depository to an account of or for the benefit of the Fund at the successor custodian, provided that the Fund shall have paid to the Custodian all fees, expenses and other amounts to the payment or reimbursement of which it shall then be entitled. In addition, the Custodian shall, at the expense of the Fund, transfer to such successor all relevant books, records, correspondence, and other data established or maintained by the
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Custodian under this Agreement in a form reasonably acceptable to the Fund (if such form differs from the form in which the Custodian has maintained the same, the Fund shall pay any expenses associated with transferring the data to such form), and will cooperate in the transfer of such duties and responsibilities, including provision for assistance from the Custodians personnel in the establishment of books, records, and other data by such successor. Upon such delivery and transfer, the Custodian shall be relieved of all obligations under this Agreement.
13.05 Failure to Appoint Successor Custodian . If a successor custodian is not designated by the Fund on or before the date of termination of this Agreement, then the Custodian shall have the right to deliver to a bank or trust company of its own selection, which bank or trust company is qualified to serve as a custodian under Section 17 (f) and Section 26(a)(1) of the 1940 Act, all Securities, cash and other property held by the Custodian under this Agreement and to transfer to an account of or for the Fund at such bank or trust company all Securities of the Fund held in a Book-Entry System or Securities Depository. Upon such delivery and transfer, such bank or trust company shall be the successor custodian under this Agreement and the Custodian shall be relieved of all obligations under this Agreement. In addition, under these circumstances, all books, records and other data of the Fund shall be returned to the Fund.
ARTICLE XIV.
CLASS ACTIONS
The Custodian shall use its best efforts to identify and file claims for the Fund involving any class action litigation that impacts any security the Fund may have held during the class period. The Fund agrees that the Custodian may file such claims on its behalf and understands that it may be waiving and/or releasing certain rights to make claims or otherwise pursue class action defendants who settle their claims. Further, the Fund acknowledges that there is no guarantee these claims will result in any payment or partial payment of potential class action proceeds and that the timing of such payment, if any, is uncertain.
However, the Fund may instruct the Custodian to distribute class action notices and other relevant documentation to the Fund or its designee and, if it so elects, will relieve the Custodian from any and all liability and responsibility for filing class action claims on behalf of the Fund.
ARTICLE XV.
MISCELLANEOUS
15.01 Compliance with Laws . The Fund has and retains primary responsibility for all compliance matters relating to the Fund, including but not limited to compliance with the 1940 Act, the Internal Revenue Code of 1986, the Sarbanes-Oxley Act of 2002, the USA Patriot Act of 2001 and the policies and limitations of the Fund relating to its portfolio investments as set forth in its Registration Statement on Form N-2,shareholder reports and other filings with the SEC and /or pronouncements to shareholders. The Custodians services hereunder shall not relieve the Fund of its responsibilities for assuring such compliance or the Board of Trustees oversight responsibility with respect thereto.
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15.02 Amendment . This Agreement may not be amended or modified in any manner except by written agreement executed by the Custodian and the Fund, and authorized or approved by the Board of Trustees.
15.03 Assignment . This Agreement shall extend to and be binding upon the parties hereto and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Fund without the written consent of the Custodian, or by the Custodian without the written consent of the Fund accompanied by the authorization or approval of the Board of Trustees.
15.04 Governing Law; Waiver of Jury Trial . This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to conflicts of law principles. To the extent that the applicable laws of the State of Delaware, or any of the provisions herein, conflict with the applicable provisions of the 1940 Act, the latter shall control, and nothing herein shall be construed in a manner inconsistent with the 1940 Act or any rule or order of the SEC thereunder. THE PARTIES HEREBY EXPRESSELY WAIVE, TO THE FULL EXTENT PERMITTED BY LAW, ANY RIGHTS TO TRIAL BY JURY WITH RESPECT TO ANY JUDICIAL PROCESS AND ARISINF FROM OR RELATED TO THIS AGREEMENT.
15.05 No Agency Relationship . Nothing herein contained shall be deemed to authorize or empower either party to act as agent for the other party to this Agreement, or to conduct business in the name, or for the account, of the other party to this Agreement.
15.06 Services Not Exclusive . Nothing in this Agreement shall limit or restrict the Custodian from providing services to other parties that are similar or identical to some or all of the services provided hereunder.
15.07 Invalidity. Any provision of this Agreement which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. In such case, the parties shall in good faith modify or substitute such provision consistent with the original intent of the parties.
15.08 Notices . Any notice required or permitted to be given by either party to the other shall be in writing and shall be deemed to have been given on the date delivered personally or by courier service, or three days after sent by registered or certified mail, postage prepaid, return receipt requested, or on the date sent and confirmed received by facsimile transmission to the other partys address set forth below:
Notice to the Custodian shall be sent to:
U.S Bank, N.A.
1555 N. Rivercenter Dr., MK-WI-S302
Milwaukee, WI 53212
Attn: Tom Fuller
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Phone: 414-905-6118
Fax: 866-350-5066
and notice to the Fund shall be sent to:
XAI Octagon Floating Rate & Alternative Income Term Trust
321 N. Clark St., Suite 2430
Chicago, IL 60654
Attn: John McGarrity
Phone: 312-374-6932
15.09 Multiple Originals . This Agreement may be executed on two or more counterparts, each of which when so executed shall be deemed an original, but such counterparts shall together constitute but one and the same instrument.
15.10 No Waiver . No failure by either party hereto to exercise, and no delay by such party in exercising, any right hereunder shall operate as a waiver thereof. The exercise by either party hereto of any right hereunder shall not preclude the exercise of any other right, and the remedies provided herein are cumulative and not exclusive of any remedies provided at law or in equity.
15.11 References to Custodian . The Fund shall not circulate any written material that contains any reference to the Custodian without the prior written approval of the Custodian, excepting written material contained in the Prospectus or statement of additional information for the Fund and such other written material as merely identifies the Custodian as custodian for the Fund. The Fund shall submit written material requiring approval to the Custodian in draft form, allowing sufficient time for review by the Custodian and its counsel prior to any deadline for publication.
15.12 Trust Disclaimer . It is expressly agreed that the obligations of the Fund hereunder shall not be binding upon any of its Trustees, shareholders, nominees, officers, agents or employees personally, but shall bind only the property or assets of the Trust, as the case may be. The execution and delivery of this Agreement has been authorized by the Trustees, and this Agreement has been signed and delivered by an authorized officer of the Fund, acting as such, and neither such authorization by the Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the property or assets of the Fund as provided in the Funds organizational documents.
15.13 Entire Agreement . This Agreement, together with its Exhibits, constitutes the sole and entire agreement between the parties relating to the subject matter herein and does not operate as an acceptance of any conflicting terms or provisions of any other instrument and terminates and supersedes any and all prior agreements and undertakings between the parties relating to the subject matter herein.
( signatures on the following page)
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by a duly authorized officer on one or more counterparts as of the date first above written.
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST
By: |
Name: |
Title: |
U.S. BANK NATIONAL ASSOCIATION
By: |
Name: |
Title: |
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EXHIBIT A
AUTHORIZED PERSONS
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST
Set forth below are the names and specimen signatures of the persons authorized by the Fund to administer the Fund Custody Accounts.
Name |
Telephone/Fax Number |
Signature |
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Exhibit B to the Custody Agreement Custody Fee Schedule
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Exhibit C to the Custody Agreement
SHAREHOLDER COMMUNICATIONS ACT AUTHORIZATION
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST
The Shareholder Communications Act of 1985 requires banks and trust companies to make an effort to permit direct communication between a company which issues securities and the shareholder who votes those securities.
Unless you specifically require us to NOT release your name and address to requesting companies, we are required by law to disclose your name and address.
Your yes or no to disclosure will apply to all securities U.S. Bank holds for you now and in the future, unless you change your mind and notify us in writing.
YES |
U.S. Bank is authorized to provide the Funds name, address and security position to requesting companies whose stock is owned by the Fund. | |
NO |
U.S. Bank is NOT authorized to provide the Funds name, address and security position to requesting companies whose stock is owned by the Fund. |
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST
By: |
Title: |
Date: |
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TRANSFER AGENCY AGREEMENT
THIS AGREEMENT made the day of , 2017, by and between, XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST , a statutory trust organized under the laws of the State of Delaware, having its principal place of business at 321 N. Clark Street, Suite 2430, Chicago, Illinois 60654 (the Fund), and DST SYSTEMS, INC., a corporation organized and existing under the laws of the State of Delaware, having its principal place of business at 333 West 11th Street, 5th Floor, Kansas City, Missouri 64105 (DST):
WITNESSETH:
WHEREAS , the Fund desires to appoint DST as Transfer Agent, Dividend Disbursing Agent and Dividend Reinvestment Plan Agent, and DST desires to accept such appointment upon the terms and conditions set forth herein;
NOW, THEREFORE , in consideration of the mutual covenants herein contained, the parties hereto agree as follows:
1. |
Documents to be Provided with Appointment . |
In connection with the appointment of DST as Transfer Agent, Dividend Disbursing Agent and Dividend Reinvestment Plan Agent for the common shares of beneficial interest (Shares) of the Fund, the Fund will provide DST with the following documents:
A. |
A certified copy of the resolutions of the Board of Trustees of the Fund appointing DST as Transfer Agent and Dividend Disbursing Agent, approving the form of this Agreement, and designating certain persons to sign or give written or oral instructions and requests on behalf of the Fund; |
B. |
A certified copy of the Agreement and Declaration of Trust of the Fund and all amendments thereto (the Declaration of Trust); |
C. |
A certified copy of the Bylaws of the Fund and all amendments thereto; |
D. |
Copies of Registration Statements and amendments thereto, filed with the Securities and Exchange Commission. |
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E. |
A certificate of the Fund as to the Shares authorized, issued and outstanding, as well as a description of all reserves of unissued Shares relating to the exercise of options, if any; |
F. |
Specimens of the signatures of the officers of the Fund authorized to sign on behalf of the Fund generally and individuals authorized to sign written instructions and requests; |
G. |
A certificate by the Secretary or similarly situated officer of the Fund with respect to: |
(1) |
The Funds organization and existence and status in good standing under the laws of its state of organization, |
(2) |
The Fund is duly qualified to carry on its business in the State of its organization, |
(3) |
The status of all Shares covered by the appointment under the Securities Act of 1933, as amended (the 1933 Act), and any other applicable federal or state statute, |
(4) |
That all issued Shares are, and all unissued Shares will be, when issued, validly issued, fully paid and non-assessable, and |
H. |
Statements as to (i) the existence or termination of any restrictions on the transfer of Shares and in the application to or removal of any legend restricting the transfer of such Shares, (ii) any authorized but unissued Shares reserved for specific purposes, (iii) if any reserved Shares are subject to option and, if so, the details of such reservation, and (iv) special instructions regarding dividends and information of any foreign securityholders. For this Section H, a certificate from the Funds Secretary or Chief Financial Officer or similarly situated officer of the Fund is acceptable. |
2. |
Certain Representations and Warranties of DST . |
DST represents and warrants to the Fund that:
A. |
It is a corporation duly organized and existing and in good standing under the laws of Delaware. |
B. |
It is duly qualified to carry on its business in the State of Missouri. |
C. |
It is empowered under applicable laws and by its Articles of Incorporation and Bylaws to enter into and perform the services contemplated in this Agreement. |
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D. |
It is registered as a transfer agent to the extent required under the Securities Exchange Act of 1934, as amended (the 1934 Act) and it is in compliance with all federal and state laws applicable to DSTs acting as a transfer agent. |
E. |
All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. |
F. |
It has and will continue to have and maintain the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. |
G. |
It is accepted by The Depository Trust Company (DTC) as a limited participant in the DTC Direct Registration System (DRS). In this regard, DST will participate in DTCs Fast Automated Securities Transfer (FAST) program, provide a direct mail by agent (or DMA) function as mandated by DTC in connection with DRS participation; will undergo sufficient training regarding DRS and DTCs Profile Modification System (Profile); and will participate in DTCs Profile Surety Program as a prerequisite to initiating Profile transactions. |
H. |
For so long as this Agreement remains in full force and effect DST will maintain an electronic interface with DTC. |
I. |
DST will add the Fund to the FAST program and Profile through DTC and will make the Funds shares DRS eligible as soon as reasonably practicably, and, except for the Funds responsibility to ensure that (i) the Funds governing documents permit the issuance of uncertificated shares, (ii) the Funds Board of Trustees has authorized the issuance of uncertificated shares, and (iii) all associated tax reporting requirements are complied with, will maintain the Funds eligibility to participate therein, in accordance with all applicable DTC requirements and SEC rules and regulations, including, without limitation, by mailing or otherwise making available to a securityholder (i) a securityholder transaction advice or statement within two (2) business days of each DRS account transaction that affects the securityholders position or more often as required by SEC regulations; and (ii) DRS book entry statements to registered owners at least annually or more often as required by SEC regulations. |
3. |
Certain Representations and Warranties of the Fund . |
The Fund represents and warrants to DST that:
A. |
It is a statutory trust duly organized and existing and in good standing under the laws of the State of Delaware appearing after its name at the beginning of this Agreement and it is duly qualified, as |
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required, to carry on its business in the jurisdictions in which it is required to so qualify or in which DST provides the Services. |
B. |
All Shares of the Fund when issued will be duly authorized, validly issued, fully paid and non-assessable. |
C. |
A registration statement under the 1933 Act has been filed and will be effective with respect to all Shares of the Fund being offered for sale other than Shares that were issued in a transaction or transactions exempt from the registration requirements of the 1933 Act. |
D. |
To the extent applicable, all requisite steps have been and will at all times material hereto continue to be taken to register the Funds Shares for the sale in all applicable states and such registration will be effective at all times Shares are offered for sale in such state. All Shares issued and outstanding as of the date of this Agreement were issued pursuant to an effective registration statement under the 1933 Act or were exempt or were issued in a transaction or transactions exempt from the registration requirements of the 1933 Act. Any Shares issued after the date hereof will be issued pursuant to an effective registration statement under the 1933 Act, unless in each case such Shares or transaction is exempt from the registration requirements of the 1933 Act. |
E. |
To the extent required to offer shares of the Fund as contemplated herein, the Fund is registered with the Securities and Exchange Commission (the SEC), any securities self-regulatory organization, and/or any state or non-US securities regulatory body that asserts the authority to regulate such matter, by regulation, order or otherwise (collectively, the Applicable Regulatory Authorities), has made all required notice or other filings with and paid all required fees to all Applicable Regulatory Authorities and is currently, and will remain throughout the term of this Agreement, in substantial compliance with applicable law. To the extent any applicable law requires registration, licensing or other qualifications of the Fund or any of its officers, directors, employees, agent or Affiliates, or payment of fees or filing of documents, they are in compliance with same. The foregoing representations will remain accurate during the term of this Agreement |
F. |
Each offer to sell or sale of Shares of the Fund by the Fund or its agents, representatives and dealers will be made in material compliance with all applicable Federal, State or local laws, rules and regulations |
G. |
The Fund is empowered under applicable laws and by its Declaration of Trust and Bylaws, as appropriate, to enter into and perform this Agreement. |
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4. |
Scope of Appointment . |
A. |
Subject to the terms and conditions set forth in this Agreement, the Fund hereby appoints DST as Transfer Agent and Dividend Disbursing Agent. |
B. |
DST hereby accepts such appointment and agrees that it will act as the Funds Transfer Agent and Dividend Disbursing Agent. |
C. |
The Fund agrees to use its reasonable efforts to deliver to DST in Kansas City, Missouri, as soon as they are available, all of its securityholder account records. |
D. |
DST, utilizing TA2000 tm , DSTs computerized data processing system for securityholder accounting (the TA2000 System) and in accordance with the terms and conditions of this Agreement, will perform the following services as transfer and dividend disbursing agent for the Fund, and as agent of the Fund for securityholder accounts thereof, in a timely manner: (i) issuing (including countersigning), transferring and redeeming book entry shares; (ii) maintaining securityholder accounts on the records of the Fund on the TA2000 System; (iii) providing transaction journals; (iv) to the extent applicable, mailing securityholder reports and prospectuses; (v) once annually preparing securityholder meeting lists for use in connection with the annual meeting of shareholders of the Fund and certifying a copy of such list; (vi) withholding, as required by federal law, taxes on securityholder accounts, preparing, filing and providing, in electronic format, the U.S. Treasury Department Forms 1099, 1042, 1042S, and K-1 to Funds print vendor of choice and performing and paying backup withholding as required for all securityholders; (vii) to the extent applicable, calculating the appropriate sales charge with respect to each purchase of the Fund shares as instructed by an Authorized Person, as hereinafter defined, determining the portion of each sales charge payable to the dealer participating in a sale in accordance with schedules an instructions delivered to DST by the Funds managing dealer or distributor (hereinafter managing dealer) or any other Authorized Person from time to time, disbursing dealer commissions collected to such dealers, determining the portion of each sales charge payable to such managing dealer and disbursing such commissions to the managing dealer; (viii) disbursing income dividends and distributions and capital gains distributions to securityholders and recording reinvestment of dividends and distributions in shares of the Fund; (ix) preparing and providing, in electronic format, confirmation forms for securityholders to Funds print vendor of choice as instructed, for all purchases and liquidations of shares of the Fund and other confirmable transactions in securityholders accounts; (x) providing or making available on-line daily and monthly reports as provided by the TA2000 System and as requested by the Fund or its management company; (xi) |
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maintaining those records necessary to carry out DSTs duties hereunder, including all information reasonably required by the Fund to account for all transactions on TA2000 in the Fund shares; (x) receiving correspondence pertaining to any former, existing or new securityholder account, processing such correspondence, for proper recordkeeping, and responding promptly to securityholder correspondence mailing to dealers confirmations of wire order trades; providing copies of securityholder statements, in electronic format, to Funds print vendor of choice in accordance with the instructions of an Authorized Person; (xi) processing, generally on the date of receipt, purchases or instructions to settle any mail or wire order purchases received in proper order (as defined by an Authorized Person or the Procedures as hereinafter defined); (xii) to the extent applicable, providing to the person designated by an Authorized Person the daily Blue Sky reports generated by the Blue Sky module of TA2000 with respect to purchases of the shares of the Funds on TA2000; (xiii) providing to the Fund escheatment reports as requested by an Authorized Person with respect to the status of accounts and outstanding checks on TA2000; and (xiv) providing a Cash Utilization Arrangement consistent with the provisions set forth in Exhibit A. For clarification, with respect to obligations, the Fund is responsible any registration or filing with a federal or state government body or obtaining approval from such body required for the sale of shares of the Fund in each jurisdiction in which it is sold. DSTs sole obligation is to provide the Fund access to the Blue Sky module of TA2000 with respect to purchases of shares of the Fund on TA2000. It is the Funds responsibility to validate that the blue sky module settings are accurate and complete and to validate the output produced thereby and other applicable reports provided by DST, to ensure accuracy. DST is not responsible in any way for claims that the sale of shares of the Fund violated any such requirement (unless such violation results from a failure of the DST Blue Sky module to notify the Fund that such sales do not comply with the parameters set by the Fund for sales to residents of a given state). |
E. |
At the request of an Authorized Person, DST shall use reasonable efforts to provide the services set forth in Section 4.D in connection with transactions (i) the processing of which transactions require DST to use methods and procedures other than those usually employed by DST to perform securityholder servicing agent services, (ii) involving the provision of information to DST after the commencement of the nightly processing cycle of the TA2000 System or (iii) which require more manual intervention by DST, either in the entry of data or in the modification or amendment of reports generated by the TA2000 System than is usually required by normal transactions, (the Exception Services). |
6
F. |
DST shall use reasonable efforts to provide, reasonably promptly under the circumstances, the same services with respect to any new, additional functions or features or any changes or improvements to existing functions or features as provided for in the Funds instructions, prospectus or application as amended from time to time, for the Fund provided (i) DST is advised in advance by the Fund of any changes therein and (ii) the TA2000 System and the mode of operations utilized by DST as then constituted supports such additional functions and features. If any addition to, improvement of or change in the features and functions currently provided by the TA2000 System or the operations as requested by the Fund requires an enhancement or modification to the TA2000 System or to operations as presently conducted by DST, DST shall not be liable therefore until such modification or enhancement is installed on the TA2000 System or new mode of operation is instituted. If any new, additional function or feature or change or improvement to existing functions or features or new service or mode of operation measurably increases DSTs cost of performing the services required hereunder at the current level of service, DST shall advise the Fund of the amount of such increase and if the Fund elects to utilize such function, feature or service, DST shall be entitled to increase its fees by the amount of the increase in costs. In no event shall DST be responsible for or liable to provide any additional function, feature, improvement or change in method of operation until it has consented thereto in writing. |
G. |
In addition to those services outlined in this Agreement, DST will perform the following transfer agency services: |
(1) |
issue and record the appropriate number of Shares as authorized and hold such Shares in the appropriate Shareholder account; and |
(2) |
effect transfers of Shares by the registered owners thereof upon receipt of appropriate documentation. |
H. |
DST will perform the following dividend disbursing services: |
(1) |
upon receipt of a written notice from an officer of the Fund declaring the payment of a dividend or distribution, DST shall prepare and disburse such dividend and distribution payments; provided that in advance of such payment the Fund furnishes DST with sufficient funds. The payment of such funds to DST for the purpose of being available for the payment of dividends or distributions from time to time is not intended by the Fund to confer any rights in such funds on the Funds shareholders whether in trust or in contract or otherwise; |
7
(2) |
the Fund hereby authorizes DST to stop payment of checks issued in payment of dividends, but not presented for payment, when the payees thereof allege either that they have not received the checks or that such checks have been mislaid, lost, stolen, destroyed or, through no fault of theirs, are otherwise beyond their control and cannot be produced by them for presentation and collection, and DST shall issue and deliver duplicate checks in replacement thereof, and the Fund shall indemnify DST against any loss or damage resulting from reissuance of the checks; and |
(3) |
DST is hereby authorized to deduct from all dividends or distributions declared by the Fund and disbursed by DST, as dividend disbursing agent, the tax required to be withheld pursuant to the Internal Revenue Code of 1986, as amended, or by any Federal or State statutes subsequently enacted, and to make the necessary return and payment of such tax in connection therewith. |
I. |
DST will perform the following dividend reinvestment plan agent services: |
(1) |
act as agent for shareholders pursuant to dividend reinvestment plans, and other investment programs as amended from time to time in accordance with the terms of the agreements relating thereto to which DST is or will be a party; and |
(2) |
receive all payments made to the Fund or DST under any dividend reinvestment plan and make all payments required to be made under such plan, including all payments required to be made to the Fund. |
J. |
The provisions of this Section 4.J that follow this sentence shall take precedence over and shall govern in the event of any inconsistency between such provisions and any other provisions of this Agreement or any provisions of any exhibit or other attachment to this Agreement (or any provisions of any attachment to any such exhibit or attachment). The parties agree that to the extent that DST provides any services under this Agency Agreement that relate to compliance by the Fund with the Internal Revenue Code of 1986 or any other tax law, it is the parties mutual intent that DST will provide only printing, reproducing, and other mechanical assistance to the Fund and that DST will not make any judgments or exercise any discretion of any kind, and particularly that DST will not make any judgments or exercise any discretion in: (1) determining generally the actions that are required in connection with such compliance or determining generally when such compliance has been achieved; (2) determining the amounts of taxes that should be withheld on securityholder accounts (except to the extent of making mathematical |
8
calculations of such amounts based on express instructions provided by the Fund); (3) determining the amounts that should be reported in or on any specific box or line of any tax form (except to the extent of making mathematical calculations of such amounts based on express instructions provided by the Fund which among other things identify the specific boxes and lines into which amounts calculated by DST are to be placed); (4) classifying the status of securityholders and securityholder accounts under applicable tax law (except to the extent of following express instructions regarding such classification provided by the Fund); and (5) paying withholding and other taxes, except pursuant to the express instructions of the Fund. The Fund agrees that it will provide express and comprehensive instructions to DST in connection with all of the services that are to be provided by DST under this Agency Agreement that relate to compliance by the Fund with the Internal Revenue Code of 1986 or any other tax law, including promptly providing responses to requests for direction that may be made from time to time by DST of the Fund in this regard. |
K. |
Additionally, upon receipt of a Funds written request, DST shall provide transmissions of shareholder activity to the print vendor selected by the Fund. |
5. |
Limit of Authority . |
The appointment of DST as Transfer Agent for the Fund will be construed to cover the full amount of authorized Shares for which DST is appointed as the same will, from time to time, be constituted, and as reduced or increased from time to time.
In case of such reduction or increase the Fund will file with DST:
A. |
If the appointment of DST was theretofore expressly limited, a certified copy of a resolution of the Board of Directors of the Fund increasing the authority of DST; |
B. |
A certified copy of the amendment to the Declaration of Trust, if any, authorizing the increase of Shares; |
C. |
A certified copy of the order or consent of each governmental or regulatory authority, if any, required by law to consent to the issuance of the increased Shares; |
D. |
A certificate of the Secretary or similarly situated officer of the Fund with respect to for the Fund stating: |
(1) The status of the additional Shares under the 1933 Act, and any other applicable federal or state statute; and
9
(2) That the additional Shares are, or when issued will be, validly issued, fully paid and non-assessable.
6. |
Compensation and Expenses . |
A. |
In consideration for DSTs services hereunder as Transfer Agent and Dividend Disbursing Agent, the Fund will pay to DST compensation for all services rendered as Agent as set forth in Exhibit A attached hereto (Compensation) The monthly fee for an open account shall be charged in the month during which an account is opened through the month in which such account is closed. The monthly fee for a closed account shall be charged in the month following the month during which such account is closed and shall cease to be charged in the month following the Purge Date, as hereinafter defined in Section 17. |
B. |
The Fund also agrees promptly to reimburse DST for all reasonable out of pocket and other expenses or fees or disbursements incurred by DST in connection with the performance of services under this Agreement including, but not limited to those expenses as set forth in Exhibit A attached hereto (Expenses). In addition, any other expenses incurred by DST at the written request or with the written consent of the Fund will be promptly reimbursed by the Fund. |
C. |
Amounts due hereunder shall be due and paid on or before the thirtieth (30 th ) business day after receipt of the statement therefor by the Fund (the Due Date). The Fund is aware that its failure to pay all amounts in a timely fashion so that they will be received by DST on or before the Due Date will give rise to costs to DST not contemplated by this Agreement, including but not limited to carrying, processing and accounting charges. Accordingly, subject to Section 6.D. hereof, in the event that any amounts due hereunder are not received by DST by the Due Date, the Fund shall pay a late charge equal to the lesser of the maximum amount permitted by applicable law or the product of one and one-half percent (1.5%) per month times the amount overdue times the number of months from the Due Date up to and including the day on which payment is received by DST The parties hereby agree that such late charge represents a fair and reasonable computation of the costs incurred by reason of late payment or payment of amounts not properly due. Acceptance of such late charge shall in no event constitute a waiver of the Funds or DSTs default or prevent the non-defaulting party from exercising any other rights and remedies available to it. |
D. |
In the event that any charges are disputed, the Fund shall, on or before the Due Date, pay all undisputed amounts due hereunder and notify DST in writing of any disputed charges for billable |
10
expenses which it is disputing in good faith. Payment for such disputed charges shall be due on or before the close of the fifth (5 th ) business day after the day on which DST provides to the Fund documentation which an objective observer would agree reasonably supports the disputed charges (the Revised Due Date). Late charges shall not begin to accrue as to charges disputed in good faith until the first business day after the Revised Due Date. |
E. |
The fees and charges set forth on Exhibit A shall increase or may be increased as follows: |
(1) |
As set forth within Exhibit A; |
(2) |
DST may increase the fees and charges set forth on Exhibit A upon at least ninety (90) days prior written notice if substantially all DST clients are charged separately for substantial system modifications that result in a material increase in cost of performance hereunder (i) necessitated by changes in existing laws, rules or regulations, or (ii) required at DSTs discretion in order to maintain the TA2000 System; |
(3) |
DST may charge for additional functions or features of the DST System used by the Fund which features are not consistent with the Funds current processing requirements provided that use of such functions or features is optional to the Fund; |
(4) |
In the event DST, at the Funds request or direction, performs Exception Services, DST shall be entitled to increase the fees and charges for such Exception Services from those set forth on Exhibit A to the extent such Exception Services increase DSTs cost of performance; and |
(5) |
Charges attendant to the development of reasonable changes to the TA2000 System requested by the Fund (Client Requested Software) shall be at DSTs standard rates and fees in effect at the time. If the cost to DST of operating the TA2000 System is increased by the addition of Client Requested Software, DST shall be entitled to increase its fees by an amount to be mutually agreed upon. |
If DST notifies the Fund of an increase in fees or charges pursuant to subparagraph (2) of this Section 6.E., the Fund agrees to reimburse DST for the Funds pro-rata portion of the cost associated with such substantial system modifications.
If DST notifies the Fund of an increase in fees or charges under subparagraphs (3) or (4) of this Section 6.E., the parties shall negotiate, diligently and in good faith, to agree upon a new fee to cover such new fund feature.
11
7. |
Operation of DST System . |
In connection with the performance of its services under this Agreement, DST is responsible for such items as:
A. |
That entries in DSTs records reflect the orders, instructions, and other information received by DST from the Fund, the Funds investment adviser or the Funds administrator and any other person whom the Fund names on Exhibit B (each an Authorized Person), broker-dealers or securityholders; |
B. |
The accurate and timely issuance of dividend and distribution payments in accordance with instructions received from the Fund and the data in the Funds records on the TA2000 System; |
C. |
That, once approval of the Fund therefor has been received by DST, payments be effected accurately and timely in accordance with the instructions of the Fund and the data in the Funds records on the TA2000 System; |
D. |
If applicable, the requiring of proper forms of instructions, signatures and signature guarantees and any necessary documents supporting the opening of securityholder accounts, transfers and other securityholder account transactions, all in conformance with DSTs present procedures as set forth in its Legal Manual, Third Party Check Procedures, Checkwriting Draft Procedures, Compliance + and Identity Theft Programs and Signature Guarantee Procedures (collectively the Procedures) with such changes or deviations therefrom as may be from time to time required or approved by the Fund, its investment adviser or managing dealer, or its or DSTs counsel and the rejection of orders or instructions not in good order in accordance with the applicable prospectus or the Procedures; |
G. |
The maintenance of customary records in connection with its agency in accordance with the transfer agent recordkeeping requirements under the 1934 Act; |
H. |
The maintenance of a current, duplicate set of the Funds essential records at a secure separate location, in a form available and usable forthwith in the event of any breakdown or disaster disrupting its main operation; and |
I. |
Notwithstanding anything herein to the contrary, with respect to as of adjustments, DST will not assume one hundred percent (100%) responsibility for losses resulting from as ofs due to clerical errors or misinterpretations of securityholder instructions, but DST will discuss with the Fund DSTs accepting liability for an as of on a case-by-case basis and may accept financial responsibility for a particular situation resulting in a financial loss to the Fund where such loss is |
12
material, as hereinafter defined, and, under the particular facts at issue, DST in its discretion believes DSTs conduct was culpable and DSTs conduct is the sole cause of the loss. A loss is material for purposes of this Section 7.I. when it results in a pricing error on a given day which is (i) greater than a negligible amount per securityholder, (ii) equals or exceeds one ($.01) full cent per share times the number of shares outstanding or (iii) equals or exceeds the product of one-half of one percent (1%) times Funds Net Asset Value per share times the number of shares outstanding (or, in case of (ii) or (iii), such other amounts as may be adopted by applicable accounting or regulatory authorities from time to time). When DST concludes that it should contribute to the settlement of a loss, DSTs responsibility will commence with that portion of the loss over $0.01 per share calculated on the basis of the total value of all shares owned by the affected portfolio (i.e., on the basis of the value of the shares of the total portfolio, including all classes of that portfolio, not just those of the affected class). |
8. |
Indemnification . |
A. |
DST shall provide the services set forth in, and fulfill its obligations under, this Agreement in accordance with the terms and conditions set forth in this Agreement, Section 17A of the 1934 Act, and the rules and regulations thereunder, any other federal or state laws applicable to DSTs acting as a transfer agent or any local laws which are the subject of a Memorandum issued by the Investment Company Institute or brought to DSTs attention by an Authorized Person. For those activities or actions delineated in the Procedures, DST shall be presumed to have acted in accordance with the terms and conditions of this Agreement if DST has acted in accordance with the Procedures in effect when DST acted or omitted to act. |
B. |
DST shall not be responsible for, and the Fund shall indemnify and hold DST harmless from and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability which may be asserted against DST or for which DST may be held to be liable (including without limitation any attorneys fees or court costs incurred by DST in enforcing this right to the Funds indemnification) (the Adverse Consequences), arising out of or attributable to: |
(1) |
All actions or omissions of DST required to be taken or omitted by DST pursuant to this Agreement, provided that DST has fulfilled all obligations under this Agreement with respect to the matter for which DST is seeking indemnification, and DSTs action or omission does not constitute willful misconduct or bad faith, or the material breach of any representation or warranty of DST hereunder; |
13
(2) |
The Funds refusal or failure to comply with the terms of this Agreement or the material breach of any representation or warranty of the Fund hereunder; |
(3) |
The good faith reliance on, or the carrying out of, any written or oral instructions or requests of persons designated by the Fund in writing (see Exhibit B) from time to time as authorized to give instructions on its behalf or representatives of an Authorized Person or DSTs good faith reliance on, or use of, information, data, records, transmissions and documents received from, or which have been prepared and/or maintained by the Fund, its investment advisor, its sponsor, its managing dealer or any other person or entity from whom the Fund instructs DST to accept and utilize information, data, records, transmissions and documents; |
(4) |
Defaults by dealers or shareowners with respect to payment for share orders previously entered; |
(5) |
The negotiation and processing of all checks, including checks that are tendered to DST for the purchase of shares of the Fund; |
(6) |
The offer or sale of the Funds shares in violation of any requirement under federal securities laws or regulations or the securities laws or regulations of any state or in violation of any stop order or other determination or ruling by any federal agency or state with respect to the offer or sale of such shares in such state or in excess of the authorized number of outstanding shares (unless such violation results from DSTs failure to comply with written instructions of the Fund or of any officer of the Fund that no offers or sales be permitted to remain in the Funds securityholder records in or to residents of such state); |
(7) |
The Funds errors and mistakes in the use of the TA2000 System, the data center, computer and related equipment used to access the TA2000 System (the DST Facilities), and control procedures relating thereto in the verification of output and in the remote input of data; |
(8) |
Errors, inaccuracies, and omissions in, or errors, inaccuracies or omissions of DST arising out of or resulting from such errors, inaccuracies and omissions in, the Funds records, securityholder and other records, delivered to DST hereunder by the Fund or its prior agent(s); |
14
(9) |
Actions or omissions to act by the Fund or agents designated by the Fund with respect to duties assumed thereby as provided for in Section 21 hereof; and |
(10) |
DSTs performance of Exception Services except where DST acted or omitted to act in bad faith, with willful misconduct, with reckless disregard of its obligations or with gross negligence. |
C. |
Except where DST is entitled to indemnification under Section 8.B. hereof, DST shall indemnify and hold the Fund harmless from and against any and all Adverse Consequences arising out of DSTs failure to comply with the terms of, or to fulfill its obligations under, this Agreement or arising out of or attributable to willful misconduct, bad faith, or the material breach of any representation or warranty of DST hereunder; provided, however, that DSTs cumulative and aggregate liability during any term of this Agreement with respect to, arising from or arising in connection with this Agreement, or from all services provided or omitted to be provided under this Agreement, whether in contract, or in tort, or otherwise, is limited to, and shall not exceed, the amounts paid hereunder by the Fund to DST as fees and charges, but not including reimbursable expenses, during the twelve (12) months immediately preceding the event giving rise to DSTs liability. |
D. |
IN NO EVENT AND UNDER NO CIRCUMSTANCES SHALL EITHER PARTY UNDER THIS AGREEMENT BE LIABLE TO ANY PERSON, INCLUDING, WITHOUT LIMITATION THE OTHER PARTY, FOR PUNITIVE, CONSEQUENTIAL, INCIDENTAL, INDIRECT, OR OTHER SPECIAL DAMAGES UNDER ANY PROVISION OF THIS AGREEMENT OR FOR ANY ACT OR FAILURE TO ACT HEREUNDER, EVEN IF ADVISED OF THE POSSIBILITY THEREOF. |
E. |
Promptly after receipt by an indemnified person of notice of the commencement of any action, such indemnified person will, if a claim in respect thereto is to be made against an indemnifying party hereunder, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party will not relieve an indemnifying party from any liability that it may have to any indemnified person for contribution or otherwise under the indemnity agreement contained herein except to the extent it is prejudiced as a proximate result of such failure to timely notify. In case any such action is brought against any indemnified person and such indemnified person seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, assume the defense thereof (in its own name or in the name and on behalf of any indemnified party or both with counsel reasonably |
15
satisfactory to such indemnified person); provided, however, if the defendants in any such action include both the indemnified person and an indemnifying party and the indemnified person shall have reasonably concluded that there may be a conflict between the positions of the indemnified person and an indemnifying party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified persons which are inconsistent with those available to an indemnifying party, the indemnified person or indemnified persons shall have the right to select one separate counsel (in addition to local counsel) to assume such legal defense and to otherwise participate in the defense of such action on behalf of such indemnified person or indemnified persons at such indemnified partys sole expense. Upon receipt of notice from an indemnifying party to such indemnified person of its election so to assume the defense of such action and approval by the indemnified person of counsel, which approval shall not be unreasonably withheld (and any disapproval shall be accompanied by a written statement of the reasons therefor), the indemnifying party will not be liable to such indemnified person hereunder for any legal or other expenses subsequently incurred by such indemnified person in connection with the defense thereof. An indemnifying party will not settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified persons are actual or potential parties to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified person from all liability arising out of such claim, action, suit or proceeding. An indemnified party will not, without the prior written consent of the indemnifying party settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder. If it does so, it waives its right to indemnification therefor. |
9. |
Certain Covenants of DST and the Fund . |
A. |
To the extent applicable, all requisite steps will be taken by the Fund from time to time when and as necessary to register, or qualify, as applicable, the Funds Shares for sale in all states in which the Funds Shares shall at the time be offered for sale and require registration or qualification. If at any time the Fund receives notice or becomes aware of any stop order or other proceeding in any such state affecting such registration or the sale of the Funds shares, or of any stop order or other proceeding under the federal securities laws affecting the sale of the Funds shares, the Fund will give prompt notice thereof to DST. |
16
B. |
DST hereby agrees to perform such transfer agency functions as are set forth in Section 4.D. above and establish and maintain facilities and procedures reasonably acceptable to the Fund for safekeeping of check forms, and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such forms and devices, and to carry such insurance as it considers adequate and reasonably available. |
C. |
DST agrees that all records maintained by DST relating to services to be performed by DST under this Agreement are the property of the Fund and will be preserved and will be surrendered promptly to the Fund on request. |
D. |
DST agrees to furnish the Fund annual reports of DSTs financial condition, consisting of a balance sheet, earnings statement and any other public financial information reasonably requested by the Fund. The annual financial statements will be certified by DSTs certified public accountants. |
E. |
DST represents and agrees that it will use its reasonable efforts to keep current on the trends of the transfer agent industry relating to securityholder services and will use its reasonable efforts to continue to modernize and improve its systems. |
F. |
DST will permit the Fund and its authorized representatives (subject to execution of DSTs standard confidentiality and non-use agreement) to make periodic inspections of its operations as such involves or is utilized by DST to provide services to the Fund at reasonable times during business hours. DST will permit duly authorized federal examiners to make periodic inspections of its operations as such would involve the Fund to obtain, inter alia , information and records relating to DSTs performance of its Compliance + Program or Identity Theft Program obligations and to inspect DSTs operations for purposes of the Program. Any costs imposed by such examiners in connection with such examination (other than fines or other penalties) shall be paid by the Fund. Notwithstanding anything herein to the contrary, DST is authorized to and will permit the Internal Revenue Service and any other tax authority to inspect its operations in connection with examinations by any such authority of DSTs or other taxpayers compliance with the tax laws, and the costs of each such inspection and examination shall be paid by the Fund to the extent that the examination relates to DSTs performance of services under this Agreement. |
G. |
DST shall comply with Exhibit C (Information Protection Program), which are made a part of this Agreement and apply to the Services. The policies and procedures specified in Exhibit C (Information Protection Program) are subject to change at any time in accordance with DSTs internal change control procedures, provided that the protections afforded thereby will not be |
17
diminished in comparison with those currently provided by DST to the Fund under this Agreement. Throughout the Term of this Agreement, as part of the Services, DST shall maintain reasonable backup and physical and electronic security procedures in accordance with its then current internal policies and procedures. DST will be reasonably available to meet with and provide assurances to the Fund concerning its backup procedures as well as its security procedures. |
H. |
DST shall maintain at all times a program reasonably designed to prevent violations of the federal securities laws (as defined in Rule 38a-1 under the 1940 Act) with respect to the services provided hereunder, and shall provide to the Fund a third party audit report summary no less frequently than annually regarding compliance with Rule 38a-1 involving DST that affects or could affect the Fund. DST shall make available to the Funds Chief Compliance Officer its compliance personnel and shall provide to the Funds Chief Compliance Officer at its own expense summaries and other relevant materials relating to such program as reasonably requested by the Fund. |
I. |
DST currently maintains and shall at all times maintain insurance coverage adequate for the nature of its operations and shall provide the Fund at least annually a certificate of insurance and shall notify the Fund if there are any material adverse changes to its insurance policies or coverage. |
10. |
Recapitalization or Readjustment . |
In case of any recapitalization, readjustment or other change in the capital structure of the Fund requiring a change in the shares contained in book entry form on the share record of the Fund as maintained by DST, DST will effectuate or transfer ownership of, the outstanding shares in book entry, upon receiving:
A. |
Written instructions from an officer of the Fund; |
B. |
Certified copy of the amendment to the Declaration of Trust or other document, if any, effecting the change; |
C. |
Certified copy of any order or consent of each governmental or regulatory authority, if any, required by law to the issuance of new book entry shares. |
D. |
Specimens of the new certificates, if any, in the form approved by the Board of Trustees of the Fund, with a certificate of the Secretary of the Fund as to such approval; |
E. |
A certificate by the Secretary or similarly situated officer of the Fund stating: |
18
(1) |
The status of the Shares in the new form under the 1933 Act and any other applicable federal or state statute; and |
(2) |
That the issued Shares in the new form are, and all unissued Shares will be, when issued, validly issued, fully paid and nonassessable. |
11. |
Share Certificates . If the Fund issues certificates for Shares: |
A. |
The Fund will furnish DST with a sufficient supply of blank share certificates and from time to time will renew such supply upon the request of DST. Such certificates will be signed manually or by facsimile signatures of the officers of the Fund authorized by law and by bylaws to sign share certificates, and if required, will bear the corporate seal or facsimile thereof. |
B. |
In the event that certificates for shares of the Fund shall be represented to have been lost, stolen or destroyed, DST, upon being furnished with an indemnity bond in such form and amount and with such surety as shall be reasonably satisfactory to it, is authorized to countersign a new certificate or certificates for the number of shares of the Fund represented by the lost or stolen certificate. |
C. |
In the event that certificates of the Fund shall be represented to have been lost, stolen, missing, counterfeited or recovered, DST shall file Form X-17F-1A with the Securities and Exchange Commission (the SEC), or its designee, as required by Rule 17f-1(c) under the 1934 Act. |
12. |
Death, Resignation or Removal of Signing Officer . |
The Fund will promptly provide DST written notice of any change in the officers authorized to sign share certificates, written instructions or requests, together with two signature cards bearing the specimen signature of each newly authorized officer, if any.
13. |
Future Amendments of Agreement and Declaration of Trust and Bylaws . |
The Fund will promptly provide to DST copies of all material amendments to its Declaration of Trust or Bylaws made after the date of this Agreement.
14. |
Instructions, Opinion of Counsel and Signatures . |
At any time DST may apply to any person authorized by the Fund to give instructions to DST, and may with the approval of a Fund officer consult with (i) legal counsel for the Fund or (ii) DSTs own legal counsel at the expense of the Fund, with respect to any matter arising in connection with the agency and it will not be liable for any action taken or omitted by it in good faith in reliance upon such instructions or upon the opinion of such counsel. In connection with services provided by DST under this Agreement
19
that relate to compliance by the Fund with the Internal Revenue Code of 1986 or any other tax law, DST shall have no obligation to continue to provide such services after it has asked the Fund to give it instructions which it believes are needed by it to so continue to provide such services and before it receives the needed instructions from the Fund, and DST shall have no liability for any damages (including without limitation penalties imposed by any tax authority) caused by or that result from its failure to provide services as contemplated by this sentence. DST will be protected in acting upon any paper or document reasonably believed by it to be genuine and to have been signed by the proper person or persons and will not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Fund.
15. |
Force Majeure and Disaster Recovery Plans. |
A. |
DST shall not be responsible or liable for its failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation: any interruption, loss or malfunction of any utility, transportation, computer (hardware, provided such hardware has been reasonably maintained, or third party software) or communication service; inability to obtain labor, material, equipment or transportation, or a delay in mails; governmental or exchange action, statute, ordinance, rulings, regulations or direction; war, strike, riot, emergency, civil disturbance, terrorism, vandalism, explosions, labor disputes, freezes, floods, fires, tornados, acts of God or public enemy, revolutions, or insurrection; or any other similar cause, contingency, circumstance or delay not subject to DSTs reasonable control which prevents or hinders DSTs performance hereunder. |
B. |
DST shall provide back-up facilities to the data center or centers used by DST to provide the transfer agency services hereunder (collectively, the Back-Up Facilities) capable of supplying the transfer agency services specified herein to the Fund in case of damage to the primary facility providing those services. The back-up to the data center operations facility will have no other function that could not be suspended immediately for an indefinite period of time to the extent necessary to allow, or continue to be supported while allowing, the facility to function as a back-up facility and support all functionality scheduled to be supported in DSTs Business Contingency Plan. Transfer to the Back-Up Facility shall commence promptly after the DSTs declaration of a disaster and shall be conducted in accordance with DSTs Business Contingency Plan, which Plan calls for the transfer to the Back-Up Facilities to be completed within 4 hours after DSTs declaration of a disaster. The Fund shall not bear any costs (in addition to the Fees and charges |
20
set forth in Exhibit A attached hereto) related to such transfer. At least once annually, DST shall complete a successful test of the Business Contingency Plan. Upon the Funds reasonable request, DST shall provide supplemental information concerning aspects of its Business Contingency Plan that are relevant to the services provided hereunder. |
C. |
DST also currently maintains, separate from the area in which the operations which provides the services to the Fund hereunder are located, a Crisis Management Center consisting of phones, computers and the other equipment necessary to operate a full service transfer agency business in the event one of its operations areas is rendered inoperable. The transfer of operations to other operating areas or to the Crisis Management Center is also covered in DSTs Business Contingency Plan. |
D. |
DST is not responsible for a failure, unavailability, disruption, or any circumstance arising out of, related to, or resulting from DSTs efforts (including DST intentionally making the System(s) unavailable) to block or otherwise prevent a security breach, provided that DST has fulfilled its information security obligations under the Agreement otherwise and Client is notified promptly as reasonably practicable. |
16. |
Certification of Documents . |
The required copy of the Certificate of Trust of the Fund and copies of all amendments thereto will be certified by the Secretary of State (or other appropriate official) of Delaware, and if such Certificate of Trust and amendments are required by law to be also filed with a county, city or other officer of official body, a certificate of such filing will appear on the certified copy submitted to DST. A copy of the order or consent of each governmental or regulatory authority required by law to the issuance of the shares will be certified by the Secretary or Clerk of such governmental or regulatory authority, under proper seal of such authority. The copy of the Bylaws and copies of all amendments thereto, and copies of resolutions of the Board of Trustees of the Fund, will be certified by the Secretary or an Assistant Secretary of the Fund.
17. |
Records . |
DST will maintain customary transfer agent records in connection with its agency, and particularly will maintain those records required to be maintained pursuant to subparagraph (2) (iv) of paragraph (b) of Rule 31a-1 under the 1940 Act, if any. Notwithstanding anything in this Agreement to the contrary, the records to be maintained and preserved by DST under this Agreement shall be maintained and preserved in accordance with the following:
21
A. |
Annual Purges by August 31: DST and the Fund shall mutually agree upon a date for the annual purge of the appropriate history transactions from the Transaction History (A88) file for accounts that were open as of January 1 of the current year, such purge to be complete no later than August 31. Purges completed after this date will subject the Fund to the Aged History Retention fees set forth in the Fee Schedule attached hereto as Exhibit A. |
B. |
Purge Criteria: In order to avoid the Aged History Retention fees, history data for regular or ordinary accounts (that is, non-tax advantaged accounts) must be purged if the confirmation date of the history transaction is prior to January 1 of the current year. All purged history information shall be retained on magnetic tape for seven (7) years. |
C. |
Purged History Retention Options (entail an additional fee): For the additional fees set forth on the Fee Schedule attached hereto as Exhibit A, then Fund may choose (i) to place purged history information on the Purged Transaction History (A19) table or (ii) to retain history information on the Transaction History (A88) file beyond the timeframes defined above. Retaining information on the A19 table allows for viewing of this data through online facilities and E-Commerce applications. This database does not support those histories being printed on statements and reports and is not available for on request job executions. |
18. |
Disposition of Books, Records and Canceled Certificates . |
DST may send periodically to the Fund, or to where designated by the Secretary or an Assistant Secretary of the Fund, all books, documents, and all records no longer deemed needed for current purposes, upon the understanding that such books, documents, and records will be maintained by the Fund under and in accordance with the requirements of Section 17Ad-7 adopted under the 1934 Act, including by way of example and not limitation Section 17Ad-7(g) thereof. Such materials will not be destroyed by the Fund without the consent of DST (which consent will not be unreasonably withheld), but will be safely stored for possible future reference.
19. |
Provisions Relating to DST as Transfer Agent . |
A. |
Before making any original issue of shares, the Fund will furnish DST with sufficient funds to pay all required taxes on the original issue of the shares, if any. The Fund will furnish DST such evidence as may be required by DST to show the actual value of the shares. |
B. |
Shares will be transferred by book entry in accordance with the instructions of the securityholders of record thereof. DST reserves the right to refuse to transfer shares until it is satisfied that the endorsement or signature on the certificate or any other document is valid and genuine, and for that |
22
purpose it may require a guaranty of signature in accordance with the Signature Guarantee Procedures. DST also reserves the right to refuse to transfer shares until it is satisfied that the requested transfer or redemption is legally authorized, and it will incur no liability for the refusal in good faith to make transfers which, in its judgment, are improper or unauthorized. DST may, in effecting transfers or redemptions, rely upon the Procedures, Simplification Acts, Uniform Commercial Code or other statutes that protect DST and the Fund or both in not requiring complete fiduciary documentation. In cases in which DST is not directed or otherwise required to maintain the consolidated records of securityholders accounts, DST will not be liable for any loss which may arise by reason of not having such records, except to the extent such loss arose from DSTs failure to meet its obligations under the terms of this Agreement, willful misconduct, or bad faith. |
C. |
DST will supply a securityholders list to the Fund for its annual meeting upon receiving a request from an officer of the Fund. It will also, at the expense of the Fund, supply lists at such other times as may be requested by an officer of the Fund. |
D. |
In case of any request or demand for the inspection of the stock books of the Fund or any other books in the possession of DST, DST will endeavor to notify the Fund and to secure instructions as to permitting or refusing such inspection. DST reserves the right, however, to exhibit the stock books or other books to any person in case it is advised by its counsel that it may be held responsible for the failure to exhibit the stock books or other books to such person. |
E. |
DST agrees to furnish the Fund with (1) annual reports of its financial condition, consisting of a balance sheet, earnings statement and any other financial information as is made public by DST in connection with the foregoing and (2) semi-annually with a copy of a SSAE 16 or successor Report issued by DSTs certified public accountants pursuant to Rule 17Ad-13 under the 1934 Act as filed with SEC. The annual financial statements will be certified by DSTs certified public accountants and the posting of a current copy thereof on DSTs website shall be deemed to be delivery to the Fund. |
F. (1) |
DST shall assist the Fund to fulfill certain of the Funds responsibilities under certain provisions of USA PATRIOT Act, Sarbanes-Oxley Act, Title V of Gramm Leach Bliley Act, the Red Flags Regulations promulgated jointly by the Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS); National Credit Union Administration (NCUA); and Federal Trade Commission (FTC or Commission) implementing section 114 of the Fair and Accurate |
23
Credit Transactions Act of 2003 (FACT Act) and final rules implementing section 315 of the FACT Act , and the applicable federal securities laws (collectively the Reform Regulations), to the extent applicable to the Fund, by complying with Compliance +, a compliance program that focuses on certain business processes that represent key activities of the transfer agent/service provider function (the Compliance + Program), a copy of which has hitherto been made available to Fund. These business processes are anti-money laundering, identity theft, red flag reporting, certificate processing, correspondence processing, fingerprinting, lost securityholder processing, reconciliation and control, transaction processing, transfer agent administration and safeguarding fund assets and securities. DST reserves the right to make changes thereto as experience suggests alternative and better ways to perform the affected function. DST shall provide the Fund with written notice of any such changes. |
(2) |
DST shall perform the procedures set forth in the Compliance + Program, as amended by DST from time to time, which pertain to DSTs performance of those transfer agency services in accordance with the terms and conditions set forth in this Agreement, (ii) implement and maintain internal controls and procedures reasonably necessary to insure that DSTs employees act in accordance with the Compliance + Program, and (iii) provide the Fund with written notice of any material changes made to the Program as attached hereto. |
(3) |
Notwithstanding the foregoing, DSTs obligations shall be solely as are set forth in this Section and in the Compliance + Program, as amended, and any of obligations under the enumerated Acts and Regulations that DST has not agreed to perform on the Funds behalf under the Compliance + Program or under this Agreement shall remain the Funds sole obligation. |
G. |
With respect to DSTs activities under the Compliance + Program, DST will permit duly authorized governmental and self-regulatory examiners to make periodic inspections of its operations as such would involve the Fund and the Fund to obtain, inter alia , information and records relating to DSTs performance of its obligations under the Compliance + Program and to inspect DSTs operations for purposes of determining DSTs compliance with the Identity Theft Program. Any costs imposed by such examiners in connection with such examination (other than fines or other penalties arising solely out of DSTs failure to fulfill its obligations under the Compliance + Program) shall be paid by the Fund. |
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H. |
DST shall establish on behalf of the Fund banking relationships for the conduct of the business of the Fund in accordance with the terms set forth in this Agreement. |
I. |
The Fund acknowledges that DST is currently using, and will continue to use, DST Worldwide Services India Private Limited (DST India) and DST Worldwide Services (Thailand) Limited (DST Thailand), indirect, wholly-owned subsidiaries of DST, to assist with software development and support projects for DST and/or for the Fund. As part of such support, the Fund acknowledges that DST India and DST Thailand associates access the Fund Confidential Information including, but not limited to, personally identifiable shareholder information (shareholder name, address, social security number, account number, etc.). |
20. |
Provisions Relating to Dividend Disbursing and Paying Agency (as well as the receipt, deposit and payment of funds by the Transfer Agent in connection with the purchase and redemption of Funds shares). |
A. |
DST, acting as agent for the Fund, is hereby authorized (1) to establish in the name of, and to maintain on behalf of, the Fund, on the usual terms and conditions prevalent in the industry, including limits or caps (based on fees paid over some period of time or a flat amount, as required by the affected Bank) on the maximum liability of such Banks, as hereinafter defined, one or more deposit accounts at a nationally or regionally known banking institution (the Bank) into which DST shall deposit the funds DST receives for payment of dividends, distributions, purchases of Fund shares, commissions, corporate re-organizations (including recapitalizations or liquidations) or any other disbursements made by DST on behalf of the Fund provided for in this Agreement, (2) to draw checks upon such accounts, to issue orders or instructions to the Bank for the payment out of such accounts as necessary or appropriate to accomplish the purposes for which such funds were provided to DST, and (3) to establish, to implement and to transact Fund business through Automated Clearinghouse (ACH), Draft Processing, Wire Transfer and any other banking relationships, arrangements and agreements with such Bank as are necessary or appropriate to fulfill DSTs obligations under this Agreement. DST, acting as agent for the Fund, is also hereby authorized to execute on behalf and in the name of the Fund, on the usual terms and conditions prevalent in the industry, including limits or caps (based on fees paid over some period of time or a flat amount, as required by the affected Bank) on the maximum liability of such Banks, agreements with banks for ACH, wire transfer, draft processing services, as well as any other services which are necessary or appropriate for DST to utilize to accomplish the purposes of this Agreement. In each of the foregoing situations the Fund shall be liable on such agreements with the Bank as if it itself had executed the agreement and DSTs liability shall be judged under the standards set forth in this Agreement. DST shall not be liable for any Adverse Consequences arising out of or resulting from |
25
errors or omissions of the Bank provided, however, that DST shall have acted in good faith and with due diligence. |
B. |
DST is authorized and directed to stop payment of checks theretofore issued hereunder, but not presented for payment, when the payees thereof allege either that they have not received the checks or that such checks have been mislaid, lost, stolen, destroyed or through no fault of theirs, are otherwise beyond their control, and cannot be produced by them for presentation and collection, and, to issue and deliver duplicate checks in replacement thereof. |
21. |
Assumption of Duties By the Fund or Agents Designated By the Fund . |
A. |
The Fund or its designated agents other than DST may assume certain duties and responsibilities of DST or those services of Transfer Agent and Dividend Disbursing Agent as those terms are referred to in Section 4.D. of this Agreement including but not limited to answering and responding to telephone inquiries from securityholders and brokers, accepting securityholder and broker instructions (either or both oral and written) and transmitting orders based on such instructions to DST, preparing and providing in electronic format, to Funds print vendor of choice, confirmations, obtaining certified TIN numbers, and disbursing monies of the Fund, said assumption to be embodied in writing to be signed by both parties. |
B. |
To the extent the Fund or its agent or affiliate assumes such duties and responsibilities, DST shall be relieved from all responsibility and liability therefor and is hereby indemnified and held harmless against any liability therefrom and in the same manner and degree as provided for in Section 8 hereof. |
C. |
Initially the Fund or its designees shall be responsible for the following: (i) answer and respond to phone calls from securityholders and broker-dealers; and (ii) generate certain, but not all, correspondence to securityholders as decided by the parties in written procedures. |
22. |
Termination of Agreement . |
A. |
This Agreement shall be in effect upon execution by both the Fund and DST and shall continue in full force and effect for an initial period of three (3) years (the Initial Term) commencing upon the first use of DSTs Services in production after the conversion of the Funds securityholder records onto TA2000. Effective upon the last day of such initial five (3) year term, this Agreement may be terminated by either the Fund or DST as of the last day of the then current term by the giving to the other party of at least 120 days prior written notice. If such notice is not given by either party to the other at least 120 days prior to the end of the then current term, this Agreement |
26
shall automatically extend for a new term of one year unless a different period is agreed upon by the parties. |
B. |
Each party, in addition to any other rights and remedies, shall have the right to terminate this Agreement forthwith upon the occurrence at any time of any of the following events with respect to the other party: |
(1) |
The bankruptcy of the other party or its assigns or the appointment of a receiver for the other party or its assigns; |
(2) |
A material breach of this Agreement by the other party, which breach continues for thirty (30) days after receipt of written notice from the first party setting forth in reasonable detail the circumstances of such alleged breach; or |
(3) |
Failure by the Fund to pay Compensation and Expenses as they become due, which failure continues for thirty (30) days after receipt of written notice from DST; |
C. |
In the event of termination, the Fund will promptly pay DST all amounts due to DST hereunder and DST will use its reasonable efforts to transfer the records of the Fund to the designated successor transfer agent, to provide reasonable assistance to the Fund and its designated successor transfer agent, and to provide other information relating to its services provided hereunder (subject to the recompense of DST for such assistance at its standard rates and fees for personnel then in effect at that time); provided, however, as used herein reasonable assistance and other information shall not include assisting any new service or system provider to modify, alter, enhance, or improve its system or to improve, enhance, or alter its current system, or to provide any new, functionality or to require DST to disclose any DST Confidential Information, as hereinafter defined, or any information which is otherwise confidential to DST. |
23. |
Confidentiality . |
A. |
DST Confidential Information . The Fund acknowledges and agrees that the terms and conditions of this Agreement and any information obtained by the Fund concerning or through receipt of the services (including by way of example and without limitation the TA2000 System and all related output, all security procedures, financial or operational records, processes, algorithms, designs, techniques, code, screen and data formats, interface formats and protocols, and structures contained or included therein) and other information obtained by them concerning the other software, software applications, equipment configurations, and business of DST (the DST Confidential Information) |
27
is confidential and proprietary to DST. The Fund further agrees to use the DST Confidential Information only as permitted by this Agreement, to maintain the confidentiality of the DST Confidential Information and not to disclose the DST Confidential Information, or any part thereof, to any other person, firm or corporation. DST Confidential Information shall not include (i) information that is or becomes generally known by the public, absent breach by the Fund of its obligations hereunder, (ii) information that is or becomes otherwise known or developed by the Fund without reference to information provided (absent breach by the Fund of its obligations hereunder) by or on behalf of DST, or (iii) information that is approved in writing by DST to be disclosed. The Fund acknowledges that disclosure of the DST Confidential Information may give rise to an irreparable injury to DST inadequately compensable in damages. Accordingly, DST may seek (without the posting of any bond or other security) injunctive relief against the breach of the foregoing undertaking of confidentiality and nondisclosure, in addition to any other legal remedies that may be available. The Fund consents to the obtaining of such injunctive relief and in any proceeding upon a motion for such injunctive relief, the Funds ability to answer in damages shall not be interposed as a defense to the granting of such injunctive relief. |
B. |
Fund Confidential Information . DST acknowledges and agrees that the terms and conditions of this Agreement, and any information or records in its possession relating to the Fund, its securityholders, or the securityholders accounts (the Fund Confidential Information) is confidential and proprietary to the Fund. DST agrees that, except as provided in the last sentence of Section 19.E. hereof, or as otherwise required by law, DST hereby agrees to use the Fund Confidential Information only as permitted by this Agreement, to maintain the confidentiality of the Fund Confidential Information and not to disclose the Fund Confidential Information, or any part thereof, to any other person, firm or corporation except as necessary to fulfill DSTs obligations under this Agreement. Fund Confidential Information shall not include (i) information that is or becomes generally known by the public, absent breach by DST of its obligations hereunder, (ii) information that is or becomes otherwise known or developed by DST without reference to information provided (absent breach by DST of its obligations hereunder) by or on behalf of Fund, or (iii) information that is approved in writing by Fund to be disclosed. DST acknowledges that disclosure of the Fund Confidential Information may give rise to an irreparable injury to Fund inadequately compensable in damages. Accordingly, Fund may seek (without the posting of any bond or other security) injunctive relief against the breach of the foregoing undertaking of confidentiality and nondisclosure, in addition to any other legal remedies that may be available. DST consents to the obtaining of such injunctive relief and in any proceeding upon a motion for such injunctive relief, DSTs ability to answer in damages shall not be interposed as a defense to the granting of such injunctive relief. |
28
DST further acknowledges that in negotiating and performing the terms of this Agreement, it may have access to non-public personal information as defined in Title V of the Gramm-Leach-Bliley Act of 1999 or any successor federal statute, and the rules and regulations thereunder, all as may be amended or supplemented from time to time belonging to Funds workforce, customers, business partners, agents and representatives, suppliers, service providers, contractors (the Personal Data). DST further agrees that it will comply with the terms of the applicable federal and state laws and regulations, and, unless it otherwise advises Fund in writing, local laws which are the subject of an ICI Memorandum or as to which Fund has notified DST in writing, in all cases in the United States regarding the privacy of information pertaining to individuals and shall keep any such data confidential, secure from loss or destruction or damage. |
C. |
Governmental Disclosures . If a party is required to file this Agreement or any portion thereof with, or to provide any information pertaining to this Agreement to, any state or federal agency or regulatory body, to the extent legally permissible, it shall notify the other party sufficiently in advance for the parties to work together to redact such provisions and to keep confidential such information as the other party deems sensitive. Fund acknowledges that at a minimum DST considers all monetary provisions, service levels and damage limitation and formulas in this Agreement as confidential. Each party shall use its best commercially reasonable efforts to advance the position of the other party with the governmental agency or regulatory body that such provisions or information should not be provided or should not be made publicly available, and each party shall keep the other party apprised of any decision by the agency or regulatory body in this regard. Each party shall provide the other party with copies of all written communications with the agency or regulatory body pertaining to the services to be provided hereunder or to this Agreement. |
D. |
Limitations; Survival . The provisions of this Section 23 shall not apply to any information if and to the extent such information was (i) independently developed by the receiving party as evidenced by documentation in such partys possession, (ii) lawfully received by it free of restrictions from another source having the right to furnish the same, (iii) generally known or available to the public without breach of this Agreement by the receiving party or (iv) known to the receiving party free of restriction at the time of such disclosure; provided, however, that the person or party asserting the existence of any of the foregoing exceptions shall bear the burden of proof with respect thereto. The parties agree that immediately upon termination of this Agreement, without regard to the reason for such termination, the parties shall forthwith return to one another all written materials and computer software which are the property of the other party, |
29
subject to each partys internal document retention policies and procedures. All of the undertakings and obligations relating to confidentiality and nondisclosure in this Agreement shall survive the termination or expiration of this Agreement for a period of ten (10) years provided that, to the extent Confidential Information includes information that is also a Trade Secret as defined by the Uniform Trade Secrets Act, the obligation to protect such Trade Secrets shall survive the termination of this Agreement and shall remain for so long as such Confidential Information constitutes a Trade Secret, as defined by the Uniform Trade Secrets Act. |
(1) |
The Fund acknowledges that DST has proprietary rights in and to its systems used to perform services hereunder including, but not limited to the maintenance of securityholder accounts and records, processing of related information and generation of output, including, without limitation any changes or modifications of such systems and any other DST programs, data bases, supporting documentation, or procedures. |
(2) |
The Fund acknowledges that DST intends to develop and offer analytics-based products and services for its customers. In providing such products and services, DST will be using consolidated data across all clients, including data of the Fund, and make such consolidated data available to clients of the analytics products and services. The Fund hereby consents to the use by DST of Fund Confidential Information (including shareholder information) for in the offering of such products and services, and to disclose the results of such analytics services to its customers and other third parties, provided the Fund information will be aggregated, anonymized and sometimes enriched with external data sources. DST will not disclose client investor names or other personal identifying information, or information specific to or identifying the Fund. |
(3) |
Each party acknowledges that any unauthorized use, misuse, disclosure or taking of confidential information of the other party which is confidential as provided by law, or which is a trade secret, residing or existing internal or external to a computer, computer system, or computer network, or the knowing and unauthorized accessing or causing to be accessed of any computer, computer system, or computer network, may be subject to civil liabilities and criminal penalties under applicable state law. Each party will advise all of its employees and agents who have access to any confidential information of the other party or to any computer equipment capable of accessing hardware or software of the other party of the foregoing. |
30
(4) |
In the event the Fund becomes aware that the Fund has obtained information from DST which is not intended for the Fund, the Fund agrees to (i) immediately, and in no case more than twenty-four (24) hours later, notify DST that unauthorized information has been made available to the Fund; (ii) after identifying that such information is not intended for the Fund, not review, disclose, release, or in any way, use such unauthorized information; (iii) provide DST reasonable assistance in retrieving such unauthorized information and/or destroy such unauthorized information; and (iv) deliver to DST a certificate executed by an authorized officer of the Fund certifying that all such unauthorized information in the Funds possession or control has been delivered to DST or destroyed as required by this provision. |
24. |
Changes and Modifications . |
A. |
DST shall have the right, at any time and from time to time, to alter and modify any systems, programs, procedures or facilities used or employed in performing its duties and obligations hereunder; provided that the Fund will be notified as promptly as possible prior to implementation of such alterations and modifications and that no such alteration or modification or deletion shall materially adversely change or affect the operations and procedures of the Fund in using or employing the DST Facilities hereunder or the reports to be generated by such system and facilities hereunder, unless the Fund is given thirty (30) days prior notice to allow the Fund to change its procedures and DST provides the Fund with revised operating procedures and controls. |
B. |
All enhancements, improvements, changes, modifications or new features added to the DST Facilities, however developed or paid for, including, without limitation, Client Requested Software (collectively, Deliverables), shall be, and shall remain, the confidential and exclusive property of, and proprietary to, DST. The parties recognize that during the Term of this Agreement the Fund will disclose to DST, Fund Confidential Information and, from time to time, DST may partly rely on such Fund Confidential Information to design, structure or develop a Deliverable. Provided that, as developed, such Deliverable contains no Fund Confidential Information that identifies the Fund or its shareholders, (i) the Fund hereby consents to DSTs use of such Fund Confidential Information to design, to structure or to determine the scope of such Deliverable and that any such Deliverable, regardless of who paid for it, shall be, and shall remain, the sole and exclusive property of DST and (ii) the Fund hereby grants DST a perpetual, |
31
nonexclusive license to incorporate and retain in such Deliverables Fund Confidential Information. All Confidential Information of the Fund shall be and shall remain the property of the Fund and shall remain protected under Section 23(A). |
C. |
During the term of this Agreement DST will use on behalf of the Fund without additional cost all modifications, enhancements, or changes which DST may make to the DST Facilities in the normal course of its business and which are applicable to functions and features offered by the Fund, unless substantially all DST clients are charged separately for such modifications, enhancements or changes, including, without limitation, substantial system revisions or modifications necessitated by changes in existing laws, rules or regulations. The Fund agrees to pay DST promptly for modifications and improvements that are charged for separately at the rate provided for in DSTs standard pricing schedule which shall be identical for substantially all clients, if a standard pricing schedule shall exist. If there is no standard pricing schedule, the parties shall mutually agree upon the rates to be charged. |
25. |
Third Party Vendors. |
Nothing herein shall impose any duty upon DST in connection with or make DST liable for the actions or omissions to act of the following types of unaffiliated third parties: (a) courier and mail services including but not limited to Airborne Services, Federal Express, UPS and the U.S. Mails, (b) telecommunications companies including but not limited to AT&T, Sprint, MCI and other delivery, telecommunications and other such companies not under the partys reasonable control, and (c) third parties not under the partys reasonable control or subcontract relationship providing services to the financial industry generally, such as, by way of example and not limitation, the The Depository Trust & Clearing Corporation (DTCC), and its subsidiary, the Depository Trust Company (processing and settlement services), Fund custodian banks (custody and fund accounting services) and administrators (blue sky and Fund administration services), and national database providers such as Choice Point, Acxiom, TransUnion or Lexis/Nexis and any replacements thereof or similar entities, provided, if DST selected such company, DST shall have exercised due care in selecting the same. Such third party vendors shall not be deemed, and are not, subcontractors for purposes of this Agreement.
26. |
Limitations on Liability. |
A. |
Notice is hereby given that this Agreement has been executed on behalf of the Fund by the undersigned duly authorized representative of the Fund in his/her capacity as such and not individually; and that the obligations of this Agreement shall only be binding upon the assets and property of the Fund and shall not be binding upon any trustee, officer or securityholder of the Fund individually. |
32
27. |
Miscellaneous . |
A. |
This Agreement shall be construed according to, and the rights and liabilities of the parties hereto shall be governed by, the laws of the State of Delaware, excluding that body of law applicable to choice of law. |
B. |
All terms and provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. |
C. |
The representations and warranties, and the indemnification extended hereunder, if any, are intended to and shall continue after and survive the expiration, termination or cancellation of this Agreement. |
D. |
No provisions of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by each party hereto. |
E. |
The captions 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. |
F. |
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. |
G. |
If any part, term or provision of this Agreement is by the courts held to be illegal, in conflict with any law or otherwise invalid, the remaining portion or portions shall be considered severable and not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Agreement did not contain the particular part, term or provision held to be illegal or invalid. |
H. |
This Agreement may not be assigned by the Fund or DST without the prior written consent of the other. DST may subcontract certain of its obligations hereunder, to any domestic or foreign affiliate of DST. |
I. |
Neither the execution nor performance of this Agreement shall be deemed to create a partnership or joint venture by and between the Fund and DST. It is understood and agreed that all services performed hereunder by DST shall be as an independent contractor and not as an employee of the Fund. This Agreement is between DST and the Fund and neither this Agreement nor the performance of services under it shall create any rights in any third parties. There are no third party beneficiaries hereto. |
33
J. |
Except as specifically provided herein, this Agreement does not in any way affect any other agreements entered into among the parties hereto and any actions taken or omitted by any party hereunder shall not affect any rights or obligations of any other party hereunder. |
K. |
The failure of either party to insist upon the performance of any terms or conditions of this Agreement or to enforce any rights resulting from any breach of any of the terms or conditions of this Agreement, including the payment of damages, shall not be construed as a continuing or permanent waiver of any such terms, conditions, rights or privileges, but the same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred. |
L. |
This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement, draft or agreement or proposal with respect to the subject matter hereof, whether oral or written, and this Agreement may not be modified except by written instrument executed by both parties. |
M. |
All notices to be given hereunder shall be deemed properly given if delivered in person or if sent by U.S. mail, first class, postage prepaid, or if sent by facsimile and thereafter confirmed by mail as follows: |
If to DST:
DST Systems, Inc.
1055 Broadway, 7 th Floor
Kansas City, Missouri 64105
Attn: Group Vice President-Full Service
Facsimile No.: 816-435-3455
With a copy of non-operational notices to:
DST Systems, Inc.
333 West 11 th Street, 5 th Floor
Kansas City, Missouri 64105
Attn: Legal Department
Facsimile No.: 816-435-8630
34
If to the Fund:
XAI Octagon Floating Rate & Alternative Income Term Trust
321 N. Clark Street
Suite 2430
Chicago, Illinois 60654
Attn: John P. McGarrity
or to such other address as shall have been specified in writing by the party to whom such notice is to be given.
N. |
DST and the Fund (including all agents of the Fund) agree that, during any term of this Agreement and for twelve (12) months after its termination, neither party will solicit (other than through a general solicitation, which may include advertising in publications or media of general circulation, including trade journals and similar media) for employment any employees of the other. |
O. |
The representations and warranties contained herein shall survive the execution of this Agreement and the performance of services hereunder and the provisions of Section 8 of this Agreement shall survive the termination of the Agreement and the performance of services hereunder until any statute of limitations applicable to the matter at issues shall have expired. |
P. |
DST will not be precluded from offering services similar to those offered to the Fund(s) to other parties, including competitors of the Fund(s). |
Q. |
WAIVER OF JURY TRIAL: THE PARTIES HEREBY EXPRESSLY WAIVE, TO THE FULL EXTENT PERMITTED BY LAW, ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY JUDICIAL PROCEEDING ARISING FOR OR RELATED TO THIS AGREEMENT. |
35
IN WITNESS WHEREOF , the parties have caused this Agreement to be executed by their respective duly authorized officers, to be effective as of the day and year first above written.
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST
By: |
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Print Name: |
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Title: |
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Date: |
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DST SYSTEMS, INC.
By: |
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Print Name: |
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Title: |
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36
Date:
37
38
39
EXHIBIT A
FEE SCHEDULE
40
EXHIBIT B
AUTHORIZED PERSONNEL
Pursuant to the terms of the Agency Agreement between XAI Octagon Floating Rate & Alternative Income Term Trust (the Fund) and DST (the Agreement), the Fund authorizes the following Fund personnel to provide instructions to DST, and receive inquiries from DST in connection with the Agreement:
Name |
Title |
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41
EXHIBIT B
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This Exhibit may be revised by the Fund by providing DST with a substitute Exhibit B. Any such substitute Exhibit B shall become effective twenty-four (24) hours after DSTs receipt of the document and shall be incorporated into the Agreement.
42
EXHIBIT C
INFORMATION PROTECTION PROGRAM
DST has a formal Information Protection Program (IPP) that was established and exists as a working roadmap for DST security. DST does Risk Assessments, Security Assessments, Security Awareness for the corporation as a whole, targeted training for specific applicable groups, and other security related activities. DST has a program and process pursuant to which DST reviews its technology and architecture and security requirements and needs.
Integral to the function of the IPP is the Global Security Council (GSC). The GSC convenes periodically during the year and is responsible for 1) identifying, measuring and rating risks, 2) approving policies, standards, and practices, and 3) assessing and reporting progress towards compliance. The GSC convenes periodically during the year and is responsible for providing executive level oversight and guidance to the Information Protection Program.
A component of the IPP is DSTs Policies, Control Standards, and Technology Baselines. DSTs Security Management Console (SMC) is an on-line system DST obtained from Archer Technologies that provides Security Policies, Control Standards, and Technical Baselines, oriented to the financial industry. The policies and standards incorporated in the SMC are designed to be consistent and evolve with ISO27001, HIPAA, Data Protection Act of 1998, IS Forum Standards, FFIEC IS Booklet, and MAS to the extent DST deems them applicable to its business.
DST has in place security log and activity monitoring, on a 24x7x365 basis. DST has an Intrusion Detection System (IDS) implemented to keep us informed on network activity. DST has an incident response process to deal with unexplainable logs and activities that are observed. This process is reviewed for validity and effectiveness for the purpose. DST also uses at least annually, third party security reviews to provide the information to support DSTs security efforts.
All of the foregoing policies and procedures are subject to regular review and modification without notice, it being agreed that (i) no change to the foregoing shall diminish the over-all level of security and protections afforded to The Fund Data as maintained on the DST Subaccounting System and the DST Facilities and (ii) DST hereby undertakes that it shall at all times have in place data security policies and standards that are reasonably designed to be consistent and evolve with ISO27001, HIPAA, Data Protection Act of 1998, IS Forum Standards, FFIEC IS Booklet, and MAS to the extent DST reasonably deems them applicable to its business.
43
ADMINISTRATION, BOOKKEEPING AND
PRICING SERVICES AGREEMENT
THIS AGREEMENT is made as of , 2017, between XAI Octagon Floating Rate & Alternative Income Term Trust, organized as a Delaware statutory trust (the Fund), and ALPS Fund Services, Inc., a Colorado corporation (ALPS).
WHEREAS, the Fund is registered under the Investment Company Act of 1940, as amended (1940 Act), as a closed-end management investment company;
WHEREAS, ALPS provides certain administrative, bookkeeping and pricing services to investment companies; and
WHEREAS, the Fund desires to appoint ALPS to perform certain administrative, bookkeeping and pricing services for the Fund, and ALPS has indicated its willingness to so act, subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter contained, the parties hereto agree as follows.
1. |
ALPS Appointment and Duties. |
(a) |
The Fund hereby appoints ALPS to provide the administrative, bookkeeping and pricing services set forth in Appendix A hereto, as amended from time to time, upon the terms and conditions hereinafter set forth. ALPS hereby accepts such appointment and agrees to furnish such specified services. ALPS shall for all purposes be deemed to be an independent contractor and shall, except as otherwise expressly authorized in this Agreement, have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund. The Fund acknowledges that ALPS does not render legal, tax or investment advice and that ALPS is not a registered broker-dealer. |
(b) |
ALPS may employ or associate itself with such person(s) or organization(s) as ALPS believes to be desirable in the performance of its duties hereunder; provided that, in such event, the compensation of such person(s) or organization(s) shall be paid by and be the sole responsibility of ALPS, and the Fund shall bear no cost or obligation with respect thereto; and provided further that ALPS shall not be relieved of any of its obligations under this Agreement in such event and shall be responsible for all acts of any such person(s) or organization(s) taken in furtherance of this Agreement to the same extent it would be for its own acts. |
2. |
ALPS Compensation; Expenses . |
(a) |
In consideration for the services to be performed hereunder by ALPS, the Fund shall pay ALPS the fees listed in Appendix B hereto. Notwithstanding anything |
to the contrary in this Agreement, fees billed for the services to be performed by ALPS under this Agreement are based on information provided by the Fund and such fees are subject to renegotiation between the parties to the extent such information is determined by ALPS to be materially different from what the Fund originally provided to ALPS. Beginning on the first anniversary date of the Agreement and on each year thereafter, the minimum fees reflected in Appendix B are subject to an annual cost of living increase based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, for the Denver-Boulder-Greeley area, as published biannually by the United States Department of Labor, Bureau of Labor Statistics, or, in the event that publication of such index is terminated, any successor or substitute index, appropriately adjusted, acceptable to all parties. ALPS will provide notice to the Fund of the amount of such cost of living increase prior to its implementation. |
(b) |
ALPS will bear all expenses in connection with the performance of its services under this Agreement, except as otherwise provided herein and in Appendix B . ALPS will not bear any of the costs of Fund personnel. Other Fund expenses incurred shall be borne by the Fund or the Funds investment adviser, including, but not limited to, initial organization and offering expenses; litigation expenses; expenses related to any requests from or as otherwise required by any regulatory body concerning the Fund or the Funds investment adviser; taxes; costs of preferred shares; listing expenses; expenses related to assistance with any repurchase offer (if applicable); transfer agency and custodial expenses; interest; Fund trustees fees; brokerage fees and commissions; state and federal registration fees; advisory fees; insurance premiums; fidelity bond premiums; Fund and investment advisory related legal expenses; costs of maintenance of Fund existence; printing and delivery of materials in connection with meetings of the Funds trustees; printing and mailing of shareholder reports, prospectuses, statements of additional information, other offering documents, supplements, proxy materials and other communications to shareholders; securities pricing data and expenses in connection with electronic filings with the U.S. Securities and Exchange Commission (the SEC); fees and expenses upon termination as provided in Section 15(e) hereof. |
3. |
Right to Receive Advice . |
(a) |
Advice of the Fund and Service Providers . If ALPS is in doubt as to any action it should or should not take, ALPS may request directions, advice or instructions from the Fund or, as applicable, the Funds investment adviser, custodian or other service providers on behalf of the Fund. |
(b) |
Advice of Counsel . If ALPS is in doubt as to any question of law pertaining to any action it should or should not take, ALPS may request advice from the Funds counsel, or, at its own expense, request advice from other counsel of its own choosing. |
2
(c) |
Conflicting Advice . In the event of a conflict between directions, advice or instructions ALPS receives from the Fund or any service provider and the advice ALPS receives from counsel, ALPS may in its sole discretion rely upon and follow the advice of counsel. ALPS will provide the Fund with prior written notice of its intent to follow advice of counsel that is materially inconsistent with directions, advice or instructions from the Fund. Upon request, ALPS will provide the Fund with a copy of such advice of counsel. |
4. |
Standard of Care; Limitation of Liability; Indemnification . |
(a) |
ALPS shall be obligated to act in good faith and to exercise commercially reasonable care and diligence in the performance of its duties under this Agreement. |
(b) |
In the absence of willful misconduct, bad faith, gross negligence or reckless disregard by ALPS in the performance of its duties, obligations or responsibilities set forth in this Agreement, ALPS and its affiliates, including their respective officers, directors, agents and employees, shall not be liable for, and the Fund agrees to indemnify, defend and hold harmless such persons from, all taxes, charges, expenses, disbursements, assessments, claims, losses, damages, penalties, actions, suits, judgments and liabilities (including, without limitation, reasonable attorneys fees and disbursements) arising directly or indirectly from the following: |
(i) |
the inaccuracy of factual information furnished to ALPS by the Fund or the Funds investment adviser, custodian or other service providers on behalf of the Fund; |
(ii) |
any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which this Agreement relates; |
(iii) |
any actions taken on advice of counsel; |
(iv) |
losses, delays, failure, errors, interruption or loss of data occurring directly or indirectly by reason of circumstances beyond its reasonable control, including without limitation, acts of God, action or inaction of civil or military authority, war, terrorism, riot, fire, flood, sabotage, labor disputes, elements of nature or non-performance by a third party; |
(v) |
ALPS reliance on any instruction, direction, notice, instrument or other information that ALPS reasonably believes to be genuine; |
(vi) |
loss of data or service interruptions caused by equipment failure (provided that in the case of equipment under ALPS control, such equipment has been maintained using reasonable care); or |
3
(vii) |
any other action or omission to act which ALPS takes in connection with the provision of services to the Fund. |
(c) |
ALPS shall indemnify and hold harmless the Fund, the Funds investment adviser and their respective officers, directors, trustees, agents, and employees from and against any and all taxes, charges, expenses, disbursements, assessments, claims, losses, damages, penalties, actions, suits, judgments and liabilities (including, without limitation, attorneys fees and disbursements and liabilities arising under applicable federal and state laws) arising directly or indirectly from any material breach of this Agreement by ALPS due to ALPS willful misconduct, bad faith, gross negligence or reckless disregard in the performance of its duties, obligations or responsibilities set forth in this Agreement. |
(d) |
Notwithstanding anything in this Agreement to the contrary, neither party shall be liable under this Agreement to the other party hereto for any punitive, consequential, special or indirect losses or damages. Any indemnification payable by a party to this Agreement shall be net of insurance maintained by the indemnified party as of the time the claim giving rise to indemnity hereunder is alleged to have arisen to the extent it covers such claim. |
(e) |
In any case in which either party (the Indemnifying Party) may be asked to indemnify or hold the other party (the Indemnified Party) harmless, the Indemnified Party will notify the Indemnifying Party promptly after identifying any situation which it believes presents or appears likely to present a claim for indemnification against the Indemnifying Party (although the failure to do so shall not prevent recovery by the Indemnified Party) and shall keep the Indemnifying Party advised with respect to all developments concerning such situation. The Indemnifying Party shall have the option to defend the Indemnified Party against any claim which may be the subject of this indemnification, and, in the event that the Indemnifying Party so elects, such defense shall be conducted by counsel chosen by the Indemnifying Party and reasonably satisfactory to the Indemnified Party, and thereupon the Indemnifying Party shall take over complete defense of the claim and the Indemnified Party shall sustain no further legal or other expenses in respect of such claim. The Indemnified Party will not confess any claim or make any compromise in any case in which the Indemnifying Party will be asked to provide indemnification, except with the Indemnifying Partys prior written consent. |
5. |
Activities of ALPS . The services of ALPS under this Agreement are not to be deemed exclusive and ALPS shall be free to render similar services to others. The Fund recognizes that, from time to time, directors, officers and employees of ALPS may serve as directors, officers and employees of other corporations or businesses (including other investment companies) and that such other corporations and businesses may include ALPS as part of their name and that ALPS or its affiliates may enter into administrative, |
4
bookkeeping, pricing agreements or other agreements with such other corporations and businesses. |
6. |
Accounts and Records . The accounts and records maintained by ALPS shall be the property of the Fund. ALPS shall prepare, maintain and preserve such accounts and records as required by the 1940 Act and other applicable securities laws, rules and regulations. ALPS shall surrender such accounts and records to the Fund , in the form in which such accounts and records have been maintained or preserved , promptly upon receipt of instructions from the Fund. The Fund shall have access to such accounts and records at all times during ALPS normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by ALPS to the Fund at the Funds expense. ALPS shall assist the Fund, the Funds independent auditors, or, upon approval of the Fund, any regulatory body, in any requested review of the Funds accounts and records and reports by ALPS or its independent accountants concerning its accounting system and internal auditing controls will be open to such entities for audit or inspection upon reasonable request. ALPS shall have in place and maintain physical, electronic and procedural safeguards reasonably designed to protect and safeguard the Funds accounts and records from loss or damage. |
7. |
Confidential and Proprietary Information . ALPS agrees that it will, on behalf of itself and its officers and employees, treat all transactions contemplated by this Agreement, and all records and information relative to the Fund and its current and former shareholders and other information germane thereto, as confidential and as proprietary information of the Fund. ALPS further agrees that it will not use, sell, transfer or divulge such information or records to any person for any purpose other than performance of its duties hereunder, except after prior notification to and approval in writing from the Fund, which approval shall not be unreasonably withheld. Approval may not be withheld where ALPS may be exposed to civil, regulatory, or criminal proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when requested by the Fund; provided that when requested to divulge such information by duly constituted authorities, ALPS shall, (i) if permitted by applicable law, as soon as reasonably practicable, notify the Fund in order to provide the Fund the opportunity to pursue such legal or other action as the Fund may desire to prevent or limit the release of such information, (ii) provide reasonable assistance to the Fund in the Funds efforts to prevent or limit the release of such information, and (iii) use reasonable commercial efforts to request confidential treatment of such information. ALPS shall have in place and maintain physical, electronic, and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of, and to prevent unauthorized access to or use of records and information relating to the Fund and its current and former shareholders, consumers and customers. |
8. |
Compliance with Rules and Regulations . ALPS shall comply (and to the extent ALPS takes or is required to take action on behalf of the Fund hereunder shall cause the Fund to comply) with all applicable requirements of the 1940 Act and other applicable laws, rules, regulations, orders and codes of ethics, as well as all investment restrictions, policies and procedures adopted by the Fund of which ALPS has knowledge (it being |
5
understood that ALPS is deemed to have knowledge of all investment restrictions, policies or procedures set out in the Funds public filings or otherwise provided to ALPS). Except as set out in this Agreement, ALPS assumes no responsibility for such compliance by the Fund. ALPS shall maintain at all times a program reasonably designed to prevent violations of the federal securities laws (as defined in Rule 38a-1 under the 1940 Act) with respect to the services provided hereunder, and shall provide to the Fund (i) a certification to such effect no less frequently than annually or as otherwise reasonably requested by the Fund and (ii) a certification no less frequently than quarterly or as otherwise reasonably requested by the Fund that there are no Material Compliance Matters (as defined in Rule 38a-1) involving ALPS that affect or could affect the Fund. ALPS shall make available to the Funds Chief Compliance Officer its compliance personnel and shall provide to the Funds Chief Compliance Officer at its own expense summaries and other relevant materials relating to such program as reasonably requested by the Fund. |
Portfolio compliance with: (i) the investment objective and certain policies and restrictions as disclosed in the Funds prospectus(es) and statement(s) of additional information and/or reports to shareholders, as applicable; and (ii) certain SEC rules and regulations (collectively, Portfolio Compliance) is required daily and is the responsibility of the Funds advisor or sub-advisor, as applicable. ALPS will perform Portfolio Compliance testing (post-trade, daily on a T+2 basis) to test the Funds Portfolio Compliance (the Portfolio Compliance Testing).
The frequency and nature of the Portfolio Compliance Testing and the methodology and process in accordance with which the Portfolio Compliance Testing are conducted, shall be mutually agreed to between ALPS and the Fund. ALPS will report violations, if any, to the Fund and the Funds Chief Compliance Officer as promptly as practicable following discovery.
ALPS independently tests Portfolio Compliance based upon information contained in the source reports received by ALPS fund accounting department and supplemental data from certain third-party sources. As such, Portfolio Compliance Testing performed by ALPS is limited by the information contained in the fund accounting source reports and supplemental data from third-party sources. The Fund agrees and acknowledges that ALPS performance of the Portfolio Compliance Testing shall not relieve the Fund or the advisor or sub-advisor, as applicable, of their primary day-to-day responsibility for assuring such Portfolio Compliance, including on a pre-trade basis, and ALPS shall not be held liable for any act or omission of the Funds advisor or sub-advisor, as applicable, with respect to Portfolio Compliance.
9. |
Representations and Warranties of ALPS . ALPS represents and warrants to the Fund that: |
(a) |
It is duly organized and existing as a corporation and in good standing under the laws of the State of Colorado. |
6
(b) |
It is empowered under applicable laws and by its Articles of Incorporation and By-laws to enter into and perform this Agreement. |
(c) |
All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. |
(d) |
The (i) execution, delivery and performance of this Agreement by ALPS does not breach, violate or cause a default under any agreement, contract or instrument to which ALPS is a party or any judgment, order or decree to which ALPS is subject; (ii) the execution, delivery and performance of this Agreement by ALPS been duly authorized and approved by all necessary action; and (iii) upon the execution and delivery of this Agreement by ALPS and Fund, this Agreement will be a valid and binding obligation of ALPS. |
(e) |
It has and will continue to have access to and maintain the necessary facilities, computer and other equipment, systems and personnel to perform its duties and obligations under this Agreement in accordance with industry standards. |
(f) |
It currently maintains and shall at all times maintain insurance coverage adequate for the nature of its operations, including directors and officers, errors and omissions and fidelity bond insurance coverage. Upon the reasonable request of the Fund, it shall provide the Fund a certificate of insurance and shall notify the Fund if there are any material adverse changes to its insurance policies or coverage. |
10. |
Representations and Warranties of the Fund. The Fund represents and warrants to ALPS that: |
(a) |
It is a statutory trust duly organized and existing and in good standing under the laws of the state of Delaware and is registered with the SEC as a closed-end management investment company. |
(b) |
It is empowered under applicable laws and by its Declaration of Trust and By-laws (collectively, the Organizational Documents) to enter into and perform this Agreement. |
(c) |
The Board of Trustees of the Fund has duly authorized it to enter into and perform this Agreement. |
(d) |
Notwithstanding anything in this Agreement to the contrary, the Fund agrees not to make any modifications to its registration statement or adopt any policies which would affect materially the obligations or responsibilities of ALPS hereunder without the prior written approval of ALPS, which approval shall not be unreasonably withheld or delayed; provided that in no event shall any |
7
modification or adoption of any investment policy, parameter or restriction be deemed to affect materially the obligations or responsibilities of ALPS hereunder. |
(e) |
The (i) execution, delivery and performance of this Agreement by Fund does not breach, violate or cause a default under any agreement, contract or instrument to which Fund is a party or any judgment, order or decree to which Fund is subject; (ii) the execution, delivery and performance of this Agreement by Fund has been duly authorized and approved by all necessary action; and (iii) upon the execution and delivery of this Agreement by ALPS and Fund, this Agreement will be a valid and binding obligation of Fund. |
(f) |
The officer position(s) filled by ALPS personnel, if any, to the extent applicable, shall be covered by the Funds Directors & Officers/Errors & Omissions Policy (the Policy), and the Fund shall use reasonable efforts to ensure that such coverage be (i) reinstated should the Policy be cancelled; (ii) continued after such officer(s) cease to serve as officer(s) of the Fund on substantially the same terms as such coverage is provided for the other persons serving as officers of the Fund after such persons are no longer officers of the Fund; or (iii) continued in the event the Fund merges or terminates, on substantially the same terms as such coverage is continued for the other Fund officers (but, in any event, for a period of no less than six years). The Fund shall provide ALPS with proof of current coverage, including a copy of the Policy, and shall notify ALPS immediately should the Policy be cancelled or terminated. |
(g) |
The Funds officer position(s) filled by ALPS personnel, if any, are named officer(s) in the Funds board resolutions and are subject to the provisions of the Funds Organizational Documents regarding indemnification of its officers. |
11. |
Documents . The Fund has furnished or will furnish, upon request, ALPS with copies of the Funds Organizational Documents, advisory agreement, sub-advisory agreement (if applicable), custodian agreement, transfer agency agreement, administration agreement, other service agreements, current prospectus, statement of additional information, periodic Fund reports and all forms relating to any plan, program or service offered by the Fund. The Fund shall furnish, within a reasonable time period, to ALPS a copy of any amendment or supplement to any of the above-mentioned documents. Upon request, the Fund shall furnish promptly to ALPS any additional documents necessary or advisable to perform its functions hereunder. As used in this Agreement the terms registration statement, prospectus and statement of additional information shall mean any registration statement, prospectus and statement of additional information filed by the Fund with the SEC and any amendments and supplements thereto that are filed with the SEC. |
12. |
Consultation Between the Parties . ALPS and the Fund shall regularly consult with each other regarding ALPS performance of its obligations under this Agreement. In connection therewith, the Fund shall submit to ALPS at a reasonable time in advance of filing with the SEC reasonably final copies of any registration statement (including |
8
exhibits) under the Securities Act of 1933, as amended, and the 1940 Act and any amendment or supplement thereto; provided, however, that nothing contained in this Agreement shall in any way limit the Funds right to file at any time any registration, prospectus or statement of additional information, or any amendment or supplement thereto, of whatever character, as the Fund may deem advisable, such right being in all respects absolute and unconditional. |
13. |
Liaison with Accountants . ALPS shall act as a liaison with the Funds independent public accountants and shall provide account analyses, fiscal year summaries, and such other audit-related schedules as may be requested by the Funds independent public accountants or the Fund with respect to the services provided by ALPS hereunder. ALPS shall take all reasonable action in the performance of its duties under this Agreement to assure that the necessary information is made available to such accountants as reasonably requested or required by the Fund. |
14. |
Business Continuation Plan . ALPS shall maintain in effect a business continuation plan, and enter into any agreements necessary with appropriate parties making reasonable provisions for emergency use of electronic data processing equipment customary in the industry. Upon the Funds reasonable request, ALPS shall provide supplemental information concerning aspects of its business continuation plan that are relevant to the services provided hereunder. In the event of equipment failures, ALPS shall, at no additional expense to the Fund, take commercially reasonable steps to minimize service interruptions. |
15. |
Duration and Termination of this Agreement . |
(a) |
Initial Term . This Agreement shall become effective as of the date first written above (the Start Date) and shall continue thereafter throughout the period that ends three (3) years after the Start Date (the Initial Term). |
(b) |
Renewal Term . This Agreement shall renew at the end of the Initial Term and shall thereafter continue for successive annual periods (Renewal Term and collectively, with the Initial Term, each a Term) until terminated by either party upon not less than sixty (60) days written notice prior to the expiration of the then current renewal term or for cause pursuant to Section 15(c) hereof. Unless the parties agree otherwise, this Agreement may only be terminated upon the end of the then applicable Term or for cause pursuant to Section 15(c) hereof. |
(c) |
Cause . Notwithstanding anything to the contrary elsewhere in this Agreement, the Fund may terminate this Agreement for cause immediately at any time, without penalty, without default and without the payment of any liquidated damages, upon notice to ALPS which shall describe the cause detailed below. For purposes of this Section 15, cause shall mean: |
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(i) |
willful misconduct, bad faith, gross negligence or reckless disregard on the part of ALPS in the performance of its duties, obligations and responsibilities set forth in this Agreement; |
(ii) |
in the event ALPS is no longer permitted to perform its duties, obligations, or responsibilities hereunder pursuant to applicable law, or regulatory, administrative or judicial proceedings against ALPS which result in a determination that ALPS has violated, or has caused the Fund to violate, in any material respect any applicable law, rule, regulation, order or code of ethics, or any material investment restriction, policy or procedure adopted by the Fund of which ALPS had knowledge (it being understood that ALPS is deemed to have knowledge of all investment restrictions, policies or procedures set out in the Funds public filings or otherwise provided to ALPS); |
(iii) |
financial difficulties on the part of ALPS which are evidenced by the authorization or commencement of, or involvement by way of pleading, answer, consent or acquiescence in, a voluntary or involuntary case under Title 11 of the United States Code, as from time to time in effect, or any applicable law other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors; |
(iv) |
a failure by ALPS to materially meet its obligations hereunder or a material breach of ALPS responsibilities and warranties hereunder, if such failure or breach goes uncured for a period of thirty (30) days after ALPS receives written notice of such failure or breach from the Fund; or |
(d) |
Deliveries Upon Termination . Upon termination of this Agreement, ALPS agrees to cooperate in the orderly transfer of administrative duties and shall deliver to the Fund or as otherwise directed by the Fund (at the expense of the Fund) all records and other documents made or accumulated in the performance of its duties for the Fund hereunder. In the event ALPS gives notice of termination under this Agreement, it will continue to provide the services contemplated hereunder after such termination at the contractual rate for up to 120 days from the notice date of the termination, provided that the Fund uses all reasonable commercial efforts to appoint such replacement on a timely basis. |
(e) |
Fees and Expenses Upon Termination . Should either party exercise its right to terminate, all reasonable out-of-pocket expenses or costs associated with the movement of records and material will be borne by the Fund. Additionally, ALPS reserves the right to charge a reasonable fee for services provided in connection with the Fund liquidating or converting to another service provider. |
16. |
Assignment . This Agreement shall extend to and shall be binding upon the parties hereto and their respective successors and permitted assigns; provided, however, that this |
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Agreement shall not be assignable by the Fund without the prior written consent of ALPS, or by ALPS without the prior written consent of the Fund. |
17. |
Governing Law; WAIVER OF JURY TRAIL . |
(a) |
The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware and the 1940 Act and the rules thereunder. To the extent that the laws of the State of Delaware conflict with the 1940 Act or such rules, the latter shall control. |
(b) |
BECAUSE DISPUTES ARISING CONNECTION WITH COMPLEX BUSINESS TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE LAWS TO APPLY, THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT OR ANY DOCUMENTS RELATED HERETO. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS RESPECTIVE LEGAL COUNSEL, AND KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. |
18. |
Trust Disclaimer . The obligations of the Fund entered into in the name or on behalf thereof by any trustee, representative, or agent thereof are made not individually, but in such capacities, and are not binding upon any of the trustees, shareholders, representatives or agents of the Fund personally, but bind only the property of the Fund, and all persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund. |
19. |
Amendments to this Agreement . This Agreement may only be amended by the parties in writing signed by each party hereto. |
20. |
Notices . All notices and other communications hereunder shall be in writing, shall be deemed to have been given when received or when sent by telex or facsimile, and shall be given to the following addresses (or such other addresses as to which notice is given): |
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To ALPS:
ALPS Fund Services, Inc.
1290 Broadway, Suite 1100
Denver, Colorado 80203
Attn: General Counsel
Fax: (303) 623-7850
To the Fund:
XAI Octagon Floating Rate Alternative Income Term Trust
321 N. Clark Street, Suite 2430
Chicago, Illinois 60654
Attention: John P. McGarrity
21. |
Counterparts . This Agreement may be executed by the parties hereto on any number of counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. |
22. |
Entire Agreement . This Agreement embodies the entire agreement and understanding among the parties and supersedes all prior agreements and understandings relating to the subject matter hereof; provided, however, that ALPS may embody in one or more separate documents its agreement, if any, with respect to delegated duties and oral instructions. |
23. |
Severability . Any covenant, provision, agreement or term contained in this Agreement that is prohibited or that is held to be void or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such prohibition or unenforceability, without in any way invalidating, effecting or impairing the other provisions hereof. |
24. |
Survival . The provisions of Sections 4, 6, 7, 10(f), 10(g), 15(e), 17, 23 and this Section 24 hereof shall survive termination of this Agreement. |
[signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST |
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By: |
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Name: |
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Title: |
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ALPS FUND SERVICES, INC. |
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By: |
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Name: |
Jeremy O. May |
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Title: |
President |
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APPENDIX A
The below services to be performed by ALPS are included in the compensation noted on Appendix B.
Fund Administration
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Prepare annual and semi-annual financial statements utilizing templates for standard layout and printing |
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Prepare Forms N-SAR, N-CSR, and N-Q |
● |
Host annual audits |
● |
Calculate monthly SEC standardized total return performance figures |
● |
Prepare required reports for quarterly Board meetings |
● |
Monitor expense ratios |
● |
Maintain budget vs. actual expenses |
● |
Manage fund invoice approval and bill payment process |
● |
Assist with placement of Fidelity Bond and E&O insurance |
● |
Coordinate reporting to outside agencies including Morningstar, etc. |
● |
Coordinate with the Funds custodian and transfer agent |
Fund Accounting
● |
Calculate daily NAVs |
● |
Transmit NAVs to NASDAQ, Transfer Agent and other third parties |
● |
Compute yields, expense ratios, portfolio turnover rates, etc. |
● |
Reconcile cash and investment balances with the Custodian |
● |
Support preparation of financial statements |
● |
Prepare and maintain required Fund Accounting records in accordance with the 1940 Act |
● |
Obtain security valuations from appropriate sources consistent with the Funds pricing and valuation policies |
● |
Support preparation of financial statements, including providing necessary representations and certifications including obtaining sub-certifications from various providers |
● |
Prepare and maintain required fund accounting records in accordance with the 1940 Act, including but not limited to the books and records described in paragraph (b) of Rule 31a-1. |
Legal Administration
● |
File Forms N-SAR, N-CSR, N-Q, and N-PX |
● |
Coordinate annual shareholder meeting proxy filing and mailing process |
● |
Coordinate EDGARization and filing of SEC documents |
● |
Prepare, compile and distribute board materials for quarterly board meetings |
● |
Attend and prepare initial draft of minutes for quarterly board meetings |
Compliance Administration
● |
Perform daily prospectus & SAI, SEC investment restriction monitoring |
● |
Provide warning/alert notification with supporting documentation |
● |
Create monthly comprehensive compliance summary reporting |
● |
Calculate section 18 derivative exposure and asset coverage reporting |
● |
Provide quarterly compliance testing certification to Board of Trustees |
Tax Administration
● |
Calculate dividend and capital gain distribution rates. |
○ |
Proposed amounts to be distributed before the end of the calendar year are reviewed by Fund and Fund auditors for their sufficiency in attempting to meet the excise requirements of the Fund. |
● |
Prepare ROCSOP and required tax designations for Annual Report |
● |
Prepare and coordinate filing of federal and state income and excise tax returns (and appropriate extensions) |
○ |
Audit firm to sign all returns as paid preparer |
● |
Calculate/monitor book-to-tax differences |
● |
Provide quarterly Subchapter M compliance monitoring and reporting |
● |
Provide tax re-allocation data for shareholder 1099 reporting |
● |
Prepare and coordinate distribution of 19a-1 filings as required |
● |
Provide periodic realized/unrealized gain/loss reports |
Additional services to the services listed above may incur additional charges as determined by ALPS, based upon ALPS then applicable hourly rates.
APPENDIX B
COMPENSATION
CHIEF COMPLIANCE OFFICER SERVICES AGREEMENT
This Chief Compliance Officer Services Agreement (this Agreement) is effective as of , 2017 (the Effective Date) by and between XAI Octagon Floating Rate & Alternative Income Term Trust (the Trust), and ALPS Fund Services, Inc. (ALPS), a Colorado corporation.
WHEREAS , to ensure the Trust is in compliance with Rule 38a-1 (the Rule) under the Investment Company Act of 1940, as amended (the 1940 Act), ALPS has agreed to render services to the Trust by entering into a formal agreement with respect thereto effective from and after the Effective Date.
ACCORDINGLY , in consideration of the foregoing premises and the mutual covenants and agreements contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Trust and ALPS hereby agree as set forth below.
SECTION 1. Term of Agreement.
The Trust hereby retains ALPS, for a period beginning on the Effective Date and ending three years from the Effective Date, subject to early termination as provided in this Agreement (the Initial Term ). After the Initial Term, this Agreement will renew automatically for additional one-year periods of time (each, a Renewal Term, and collectively with the Initial Term, the Term), unless one party hereto provides the other party with written notice of termination at least sixty (60) days prior to the expiration of the Initial Term or the then-current Renewal Term. Upon termination of this Agreement by the Trust (except under Section 8), all outstanding payments due from the Trust under this Agreement shall become immediately due and payable to ALPS, including any unpaid fees earned through the date of termination and the balance of all future fees due under the remaining Term of the Agreement.
SECTION 2. Duties.
(a) ALPS shall designate, subject to the approval of the Board of Trustees (the Board of Trustees or Trustees) of the Trust, one of its own employees to serve as Chief Compliance Officer of the Trust within the meaning of the Rule (such individual, the CCO ). The CCO shall render to the Trust such advice and services ( Services ) as are required to be performed by a CCO under the Rule and as are set forth on Exhibit A hereto, as such exhibit may be modified from time to time by written agreement of the parties hereto. Exhibit A is hereby incorporated into and made a part of this Agreement. The Trust acknowledges that other employees of ALPS will assist the CCO in the performance of his or her duties hereunder.
(b) During the Term, the CCO shall report to such individuals as may be designated from time to time by the Trust, subject to the provisions of Exhibit A .
(c) The parties agree that only employees of ALPS shall act as CCO or otherwise perform services to the Trust under this Agreement unless otherwise agreed in writing by the Trust. Notwithstanding his other duties for ALPS or any other investment company, the CCO shall perform the Services in a professional manner and shall devote appropriate time, energies and skill to the Services.
(d) The Trust acknowledges that the CCO may act as Chief Compliance Officer within the meaning of the Rule for other investment companies, and nothing herein shall be construed to prohibit the CCO from acting in such capacity; provided, however, that during the Term neither ALPS nor the CCO shall enter into any agreement, arrangement or understanding which would conflict with this Agreement or prevent ALPS or the CCO from performing its or his obligations hereunder.
(e) The Trust shall cooperate in good faith with ALPS and the CCO in order to assist in the performance of the Services. In furtherance of this agreement to cooperate, the Trust shall make those of its and its Affiliates officers, employees and outside counsel available for consultation with ALPS and the CCO and shall communicate this fact with such other service providers of the Trust (such other service providers collectively, the Service Providers), in each case as ALPS or the CCO may reasonably request. The Trust shall provide ALPS and the CCO with the names of appropriate contact people at the Service Providers and shall make introductions and otherwise assist ALPS and the CCO in obtaining the cooperation of the Service Providers. The Trust shall provide ALPS and the CCO with such books and records regarding the Trust as ALPS and the CCO may reasonably request.
SECTION 3. Fee.
(a) As compensation for the performance of the Services on behalf of the Trust, the Trust shall pay to ALPS during the Term an annual fee of $30,000, plus an additional $7,500 fee annually for each adviser (or sub-adviser) of the Trust greater than one, paid 1/12 on a monthly basis (or a pro rata portion thereof for a partial month) (the Fee). Notwithstanding anything to the contrary in this Agreement, fees billed for the services to be performed by ALPS under this Agreement are based on information provided by the Trust and such fees are subject to renegotiation between the parties to the extent such information is determined to be materially different from what the Trust originally provided to ALPS. On each anniversary date of this Agreement, the Fee is subject to an annual cost of living increase based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, for the Denver-Boulder-Greeley area, as published bimonthly by the United States Department of Labor, Bureau of Labor Statistics, or, in the event that publication of such index is terminated, any successor or substitute index, appropriately adjusted, acceptable to all parties.
(b) The Fee shall be payable by the Trust within 30 days of its receipt of an invoice from ALPS, which invoices shall include amounts for any expenses reimbursable under Section 4 hereof.
2
(c) The CCO shall not receive and shall not make any claim under this Agreement or otherwise against the Trust for compensation, workers compensation, unemployment insurance compensation, or life insurance, social security benefits, disability insurance benefits or any other benefits. ALPS is solely responsible for any such compensation or benefits to be paid to the CCO, and ALPS shall withhold on behalf of the CCO the required sums for income tax, unemployment insurance or social security pursuant to any law or requirement of any government agency including, without limitation, unemployment tax, federal, state or foreign income tax, federal social security (FICA) payments and disability insurance taxes. ALPS and the CCO shall make such tax payments as may be required by applicable law and shall indemnify and hold the Trust harmless from any liability that the Trust may incur as a consequence of ALPS or the CCOs failure to make any such tax payment(s).
(d) ALPS shall ensure that necessary information regarding the CCOs compensation is provided to the Board of Trustees in accordance with the Rule. If the Board of Trustees determines to increase the CCOs compensation or provide a bonus to the CCO, then either the fees paid to ALPS will increase proportionately or the CCO will be compensated separately for any amounts deemed due to the CCO above the amounts due to ALPS under this Agreement.
(e) ALPS and the CCO shall perform the services hereunder as independent contractors and not as employees of the Trust, although the CCO shall be an employee of ALPS. As independent contractors, neither ALPS nor the CCO is, and neither shall represent itself or himself to third parties as being, the agent or representative of the Trust, except as specifically set forth herein. Neither ALPS nor the CCO have, and shall not represent itself or himself to third parties as having, actual or apparent power or authority to do or take any action for or on behalf of the Trust, as its agent, representative or otherwise, except as specifically set forth herein.
SECTION 4. Reimbursement of Expenses.
During the Term, the Trust shall reimburse ALPS for all reasonable and necessary travel and lodging expenses and other out-of-pocket disbursements incurred by ALPS for or on behalf of the Trust in connection with the performance of ALPS or the CCOs duties hereunder upon presentation to the Trust of appropriate receipts and other reasonable documentation as the Trust may request.
SECTION 5. Disclosure of Information.
(a) From and after the date hereof, neither ALPS nor the CCO shall use or disclose to any Person (as defined below), except as required in connection with the performance of the Services and in compliance with the terms of this Agreement and as required by law, regulation or judicial process, any Confidential Information (as defined in Section 5(b)), for any reason or purpose whatsoever, nor shall ALPS or the CCO make use of any Confidential Information for ALPS or the CCOs purposes or for the benefit of any Person except the Trust or the Trusts Affiliates. For purposes of this Agreement,
3
an Affiliate is an individual or entity (collectively, Person) controlling or controlled by or under common control with the Trust.
(b) For purposes of this Agreement, Confidential Information means (i) the non-public intellectual property rights of the Trust and the Trusts Affiliates and (ii) all other information of a proprietary or confidential nature relating to the Trust or the Trusts Affiliates, or the business or assets of the Trust, or the Trusts Affiliates, including, without limitation, books, records, customer and registered user lists, vendor lists, supplier lists, customer agreements, vendor agreements, supplier agreements, incentive and commission program information, distribution channels, pricing information, cost information, business and marketing plans, strategies, forecasts, financial statements, budgets and projections and technology. Confidential Information does not include (i) information in the public domain not as a result of a breach by ALPS or the CCO of this Agreement or any other agreement with the Fund or its investment adviser(s), (ii) information lawfully received by ALPS or the CCO from a third Person who had the right to disclose such information, and (iii) information developed by ALPS or the CCOs own independent knowledge, skill and know-how.
(c) In the event that ALPS or the CCO is requested by legal process to disclose Confidential Information, ALPS shall notify the Trust thereof and shall cooperate with the Trust at the expense of the Trust in any action that such entity may desire to take to protect its Confidential Information.
SECTION 6. Assignment of Written Materials.
During the Term, ALPS and the CCO shall promptly disclose, and hereby grant and assign to the Trust for its sole use and benefit, any and all technical information, data, procedures, records, suggestions and other materials, insofar as they are reduced to writing, including without limitation the Written Compliance Program of the Trust (as that term is defined in Exhibit A), that are reasonably related to the Trust (collectively, the Materials) which ALPS or the CCO may develop or acquire during the Term (whether or not during usual working hours), together with all copyrights and reissues thereof that may at any time be granted for or with respect to the Materials. For the avoidance of doubt, the Materials shall include all records referred to in Exhibit A. The Materials shall constitute Confidential Information within the meaning of Section 5.
SECTION 7. Delivery of Materials Upon Termination of Term.
The Materials and all memoranda, notes, plans, records, reports, software and other documents and data (and copies thereof existing in any media) relating to the Confidential Information, Inventions or the business of the Trust or any of its Affiliates that it or the CCO may then possess or have under its or his control regardless of the location or form of such material, are the property of the Trust and ALPS shall deliver to the Trust at the termination of the Term, or at any time upon the Trusts request, all such materials and, if requested by the Trust, ALPS will provide the Trust with written confirmation that all such materials have been delivered to the Trust.
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SECTION 8. Termination.
(a) The Trust shall have the right to terminate this Agreement immediately in the event of:
(i) a failure by ALPS or the CCO to materially meet its or his/her obligations hereunder or a material breach of ALPS representations and warranties hereunder, if such failure or breach goes uncured for a period of thirty (30) days after ALPS receives written notice of such failure from the Trust;
(ii) the termination or dissolution of the Trust, or the deregistration of the Trust under the 1940 Act;
(iii) a change in the 1940 Act, the Rule or other applicable law or regulation, or the interpretation of any of the foregoing by the Securities and Exchange Commission or other regulatory or judicial authority with appropriate jurisdiction, that results in the arrangement created by this Agreement no longer satisfying the Trusts obligations under the Rule; or
(iv) subject to the provisions of Section 2(d), any failure of ALPS to employ a CCO for the Trust acceptable to the Board of Trustees.
(b) ALPS shall have the right to terminate this Agreement immediately in the event of:
(i) a failure by the Trust to meet its obligations hereunder or a material breach of the Trusts representations and warranties hereunder, if such failure or breach goes uncured for a period of 30 days after the Trust receives written notice of such failure from ALPS;
(ii) the termination or dissolution of the Trust, or the deregistration of the Trust under the 1940 Act; or
(iii) a change in the 1940 Act, the Rule or other applicable law or regulation, or the interpretation of any of the foregoing by the Securities and Exchange Commission or other regulatory or judicial authority with appropriate jurisdiction, that results in the arrangement created by this Agreement being deemed impermissible.
(c) Upon termination pursuant to this Section 8, ALPS shall be entitled to receive the Fee accrued but unpaid as of the date of termination paid in a lump sum within 60 days of termination.
SECTION 9. Standard of Care; Limitation of Liability; Indemnification
(a) ALPS shall be under no duty to take any action except as specifically set forth herein or as may be specifically agreed to by ALPS in writing. ALPS shall use its best judgment and efforts in rendering the services described in this Agreement. ALPS
5
shall not be liable to the Trust, or any of the Trusts shareholders for any action or inaction of ALPS relating to any event whatsoever in the absence of bad faith, reckless disregard, gross negligence or willful misconduct in the performance of ALPS duties or obligations under this Agreement. Further, ALPS shall not be liable to the Trust or any of the Trusts shareholders for any action taken or failure to act in good faith reliance upon: (i) the advice and opinion of the Trust or the Trusts counsel; and (ii) any certified copy of any resolution of the Board of Trustees; and ALPS shall not be under any duty or obligation to inquire into the validity or invalidity or authority or lack thereof of any statement, oral or written instruction, resolution, signature, request, letter of transmittal, certificate, opinion of counsel, instrument, report, notice, consent, order, or any other document or instrument which ALPS reasonably believes in good faith to be genuine.
(b) The Trust agrees to indemnify and hold harmless ALPS, its employees, agents, directors, officers and managers and any person who controls ALPS within the meaning of section 15 of the Securities Act or Section 20 of the Exchange Act (ALPS Indemnitees), against and from any and all claims, demands, actions, suites, judgments, administrative proceedings or investigations, liabilities, losses, damages, costs, charges, reasonable counsel fees and other expenses arising out of ALPS actions taken or failure to act with respect to the Trust in connection with the performance of its duties or obligations under this Agreement (an ALPS Claim); provided, however, that nothing contained herein shall entitle an ALPS Indemnitee to indemnification with respect to any ALPS Claim arising from ALPS own bad faith, reckless disregard, gross negligence or willful misconduct, or breach of this Agreement. For purposes of this Agreement, ALPS bad faith, gross negligence, willful misconduct, or reckless disregard shall not include any action taken or not taken by ALPS consistent with the last sentence of Section 9(a). Further, the Trust shall not be required to indemnify any ALPS Indemnitee if, prior to confessing any ALPS Claim against the ALPS Indemnitee, ALPS or the ALPS Indemnitee does not give the Trust written notice of and reasonable opportunity to defend against the ALPS Claim in its own name or in the name of the ALPS Indemnitee.
(c) ALPS agrees to indemnify and hold harmless the Trust and its employees, agents, trustees, officers and managers (Trust Indemnitees), against and from any and all claims, demands, actions, suits, judgments, administrative proceedings and investigations, liabilities, losses, damages, costs, charges, reasonable counsel fees and other expenses of every nature and character arising out of or in any way related to (i) ALPS actions taken or failures to act with respect to the Trust in or with bad faith, reckless disregard, gross negligence or willful misconduct in the performance of ALPS duties or obligations under this Agreement; (ii) directly to any material breach of this Agreement by ALPS; or (iii) any breach of ALPS representations set forth in Section 10 (a Trust Claim). ALPS shall not be required to indemnify any Trust Indemnitee if, prior to confession any Trust Claim against the Trust Indemnitee, the Trust, the Trust or the Trust Indemnitee does not give ALPS written notice of any reasonable opportunity to defend against the Trust Claim in its own name or in the name of the Trust Indemnitee.
(d) ALPS shall not be liable for the errors of other service providers (not retained by ALPS) to the Trust or their respective systems.
6
SECTION 10. Representations and Warranties.
(a) ALPS hereby represents and warrants to the Trust that (i) the execution, delivery and performance of this Agreement by ALPS does not breach, violate or cause a default under any agreement, contract or instrument to which ALPS is a party or any judgment, order or decree to which ALPS is subject; (ii) the execution, delivery and performance of this Agreement by ALPS has been duly authorized and approved by all necessary action; and (iii) upon the execution and delivery of this Agreement by ALPS and the Trust, this Agreement will be a valid and binding obligation of ALPS.
(b) The Trust hereby represents and warrants to ALPS that:
(i) |
the execution, delivery and performance of this Agreement by the Trust does not breach, violate or cause a default under any agreement, contract or instrument to which the Trust is a party or any judgment, order or decree to which the Trust is subject; (B) the execution, delivery and performance of this Agreement by the Trust has been duly authorized and approved by all necessary action; and (C) upon the execution and delivery of this Agreement by ALPS and the Trust, this Agreement will be a valid and binding obligation of the Trust; |
(ii) |
the CCO shall be covered by the Trusts Directors & Officers/Errors & Omissions Policy (the Policy), and the Trust shall use reasonable efforts to ensure that such coverage be (A) reinstated should the Policy be cancelled; (B) continued after such officers ceases to serve as the Trust on substantially the same terms as such coverage is provided for the Trust offices after such persons are no longer officers of the Trust; or (C) continued in the event the Trust merges or terminates, on substantially the same terms as such coverage is provided for the Trust officers (but for a period of no less than six years). The Trust shall provide ALPS with proof of current coverage, including a copy of the Policy, and shall notify ALPS immediately should the Policy be cancelled or terminated; and |
(iii) |
the CCO is a named officer in the Trusts corporate resolutions and subject to the provisions of the Trusts organizational documents regarding indemnification of its officers. |
SECTION 11. Entire Agreement; Amendment and Waiver.
This Agreement and the other writings referred to herein contain the entire agreement between the parties hereto with respect to the subject matter hereof and thereof and supersede any prior agreement between ALPS and the Trust. No waiver, amendment or modification of this Agreement shall be valid unless it is in writing and signed by each party hereto. The waiver by either party of a breach of any provision of this Agreement
7
by the other party shall not operate or be construed as a waiver of any subsequent breach by such other party.
SECTION 12. Notices.
All notices or other communications pursuant to this Agreement shall be in writing and shall be deemed to be sufficient if delivered personally, telecopied, sent by nationally-recognized, overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):
(a) if to the Trust, to:
XAI Octagon Floating Rate Alternative Income Term Trust
321 N. Clark Street, Suite 2430
Chicago, Illinois 60654
Attention: John P. McGarrity
(b) if to ALPS, to:
ALPS Fund Services, Inc.
1290 Broadway, Suite 1100
Denver, CO 80203
Attn: General Counsel
Facsimile: (303) 623-7850
All such notices and other communications shall be deemed to have been given and received (a) in the case of personal delivery or delivery by facsimile, on the date of such delivery if delivered during business hours on a business day or, if not so delivered, on the next following business day, (b) in the case of delivery by nationally-recognized, overnight courier, on the business day following dispatch, and (c) in the case of mailing, on the third business day following such mailing.
SECTION 13. Headings.
The section headings in this Agreement are for convenience only and shall not control or affect the meaning of any provision of this Agreement.
SECTION 14. Severability.
In the event that any provision of this Agreement is determined to be partially or wholly invalid, illegal or unenforceable in any jurisdiction, then such provision shall, as to such jurisdiction, be modified or restricted to the extent necessary to make such provision valid, binding and enforceable, or if such provision cannot be modified or restricted, then such provision shall, as to such jurisdiction, be deemed to be excised from this Agreement; provided , however , that the binding effect and enforceability of the remaining provisions of this Agreement, to the extent the economic benefits conferred
8
upon the parties by virtue of this Agreement remain substantially unimpaired, shall not be affected or impaired in any manner, and any such invalidity, illegality or unenforceability with respect to such provisions shall not invalidate or render unenforceable such provision in any other jurisdiction.
SECTION 15. Remedies.
Each of the parties hereto acknowledges and understands that certain provisions of this Agreement are of a special and unique nature, the loss of which cannot be adequately compensated for in damages by an action at law, and thus, the breach or threatened breach of the provisions of this Agreement would cause the non-breaching party irreparable harm. Each of the parties hereto further acknowledges that, in the event of a breach of any of the covenants contained in this Agreement, the non-breaching party shall be entitled to immediate relief enjoining such violations in any court or before any judicial body having jurisdiction over such a claim. All remedies hereunder are cumulative, are in addition to any other remedies provided for by law or in equity and may, to the extent permitted by law, be exercised concurrently or separately, and the exercise of any one remedy shall not be deemed to be an election of such remedy or to preclude the exercise of any other remedy.
SECTION 16. Benefits of Agreement; Assignment.
The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, representatives, heirs and estate, as applicable. This Agreement shall not be assignable by ALPS without the express written consent of the Trust. Any purported assignment in violation of the immediately preceding sentence shall be void and of no effect.
SECTION 17. Survival.
Anything to the contrary contained in this Agreement notwithstanding, the provisions of Sections 5 through 7 and 11 through 21 of this Agreement shall survive the termination of the Term.
SECTION 18. Counterparts and Facsimile Execution.
This Agreement may be executed in multiple counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered (by facsimile or otherwise) to the other party, it being understood that all parties need not sign the same counterpart. Any counterpart or other signature hereupon delivered by facsimile shall be deemed for all purposes as constituting good and valid execution and delivery of this Agreement by the party delivering it.
SECTION 19. Governing Law; Mutual Waiver of Jury Trial.
(a) All questions concerning the construction, interpretation and validity of this Agreement shall be governed by and construed and enforced in accordance with the
9
domestic laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether in the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware. In furtherance of the foregoing, the law of the State of Delaware will control the interpretation and construction of this Agreement, even if under such jurisdictions choice of law of conflict of law analysis, the substantive law of some other jurisdiction would ordinarily or necessarily apply.
(b) BECAUSE DISPUTES ARISING CONNECTION WITH COMPLEX BUSINESS TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE LAWS TO APPLY, THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT OR ANY DOCUMENTS RELATED HERETO. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS RESPECTIVE LEGAL COUNSEL, AND KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
SECTION 20. Force Majeure.
ALPS shall not be responsible or liable for any failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control including, without limitation, acts of civil or military authority, national emergencies, fire, mechanical breakdowns (provided that in the case of a mechanical breakdown of equipment under ALPS control, such equipment has been properly maintained using reasonable care), flood or catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication system or power supply. In addition, to the extent ALPS obligations hereunder are to oversee or monitor the activities of third parties not chosen by ALPS, ALPS shall not be liable for any failure or delay in the performance of ALPS duties caused, directly or indirectly, by the failure or delay of such third parties in performing their respective duties or cooperating reasonably and in a timely manner with ALPS.
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SECTION 21. Mutual Contribution.
The parties to this Agreement and their counsel have mutually contributed to its drafting. Consequently, no provision of this Agreement shall be construed against any party on the ground that a party drafted the provision or caused it to be drafted.
[signature page follows]
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IN WITNESS WHEREOF, each of the undersigned has executed this Chief Compliance Officer Services Agreement as of the date first above written.
XAI Octagon Floating Rate & Alternative Income Term Trust |
By: |
Name: |
Title: |
ALPS Fund Services, Inc. |
By: |
Name: Jeremy O. May |
Title: President |
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Exhibit A
Duties of Chief Compliance Officer
The Services shall include, but not be limited to, the following. Terms used in this Exhibit A shall have the meanings assigned thereto in the Chief Compliance Officer Services Agreement to which this Exhibit A is attached.
I. |
Review of Compliance Program . No later than the effective date, the CCO shall, with the assistance of the Trust, review and revise, where necessary, the written compliance policies and procedures (the Compliance Program ) of the Trust, which shall address compliance with, and be reasonably designed to prevent violation of, Federal Securities Laws . 1 In addition to provisions of Federal Securities Laws that apply to the Trust, the Compliance Program will be revised, where necessary, to address compliance with, and ensure that it is reasonably designed to prevent violation of, the Trusts charter and by-laws and all exemptive orders, no-action letters and other regulatory relief received by the Trust from the Securities and Exchange Commission (the SEC), the Financial Industry Regulatory Association, Inc. (the FINRA) and the rules of any stock exchange on which shares of the Fund are listed (all such items collectively, Regulatory Relief ); provided, however, that the Compliance Program shall address only that Regulatory Relief afforded the Service Providers or the Trust or relevant to compliance by the Service Providers or the Trust, and shall not address the terms by which other parties may receive the benefits of any Regulatory Relief. |
II. |
Administration of Compliance Program . The CCO shall administer and enforce the Trusts Compliance Program. |
III. |
Oversight of Service Providers . The CCO is responsible for overseeing, on behalf of the Trust, adherence to the written compliance policies and procedures of the Trusts service providers, including the Trust, the investment advisor, the investment sub-advisor, the administrator, and the transfer agent (the Service Providers ). In furtherance of this duty, |
A. |
No later than the effective date, the CCO shall obtain and review the written compliance policies and procedures of the Service Providers or summaries of such policies that have been drafted by someone familiar with them. |
1 Federal Securities Laws are defined by the Rule as the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Investment Company Act of 1940, the Investment Advisers Act of 1940, Title V of the Gramm-Leach-Bliley Act, any SEC rules adopted under any of the foregoing laws, the Bank Secrecy Act, as it applies to registered investment companies, and any rules adopted thereunder by the SEC or the Department of Treasury.
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B. |
The CCO shall monitor the Service Providers compliance with their own written compliance policies and procedures, Federal Securities Laws and the Trusts Indenture and Regulatory Relief. In so doing, the CCO shall interact with representatives of the Service Providers as appropriate. |
C. |
The CCO shall attempt to obtain the following representations from each Service Provider and, if it fails to obtain such representations, shall report this fact to the Trust: |
1. |
In connection with the documentation of its written policies and procedures governing the provision of its services to the relevant Trust, the Service Provider has prepared and delivered to the Trust a summary of core services that it provides to the Trust or, if no such summary is available, that it has delivered to the Trust copies of the relevant policies and procedures. |
2. |
The Service Provider will provide to the Trust and the CCO any revisions to its written compliance policies and procedures on at least an annual basis, or more frequently in the event of a material revision. |
3. |
The Service Providers written compliance policies and procedures have been reasonably designed to prevent, detect and correct violations of the applicable Federal Securities Laws and critical functions related to the services performed by the Service Provider pursuant to the applicable agreement between the Service Provider and the Trust. |
4. |
The Service Provider has established monitoring procedures, and shall review, no less frequently than annually, the adequacy and effectiveness of its written compliance policies and procedures to check that they are reasonably designed to prevent, detect and correct violations of those applicable Federal Securities Laws and critical functions related to the services performed by the Service Provider pursuant to the applicable agreement between the Service Provider and the Trust. |
IV. |
Annual Review . The Rule requires that, at least annually, the Trust review its Compliance Program and that of its Service Providers and the effectiveness of their respective implementations (the Annual Review ). The CCO shall perform the Annual Review for the Trust. The first Annual Review shall be completed no later than the regularly scheduled Board meeting following one year after the effective date of registration of the Trust. |
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V. |
Reports to the Board of Trustees; Escalation |
A. |
The CCO shall make regular reports to the Board of Trustees regarding its administration and enforcement of the Compliance Program. These regular reports shall address compliance by the Trust and the Service Providers and such other matters as the Board of Trustees may reasonably request. |
B. |
In addition, at least annually, the CCO shall submit a written report to the Board of Trustees addressing the following issues: |
1. |
the operation of the Compliance Program, and the written compliance policies and procedures of the Service Providers; |
2. |
any material changes made to the Compliance Program since the date of the last report; |
3. |
any material changes to the Compliance Program recommended as a result of the Annual Review; and |
4. |
each Material Compliance Matter that occurred since the date of the last report. 2 |
This written report shall be based on the Annual Review. The first written report shall be presented to the Board of Trustees no later than 60 days after the date of the first Annual Review.
C. |
The CCO shall report a Material Compliance Matter to the Board of Trustees at least quarterly. |
VI. |
Recordkeeping . The CCO expects to rely on the Trusts service providers, as applicable, to maintain and preserve records. The CCO will determine that the service provider has policies and procedures that are reasonably designed to ensure that the Trust records will be maintained in accordance with the Trusts recordkeeping policy and applicable law, including provisions requiring that any material violation of the Trusts recordkeeping policy and/or applicable law by the service provider be promptly reported to the CCO. |
2 Material Compliance Matter is defined as any compliance matter about which the Trusts board would reasonably need to know to oversee fund compliance, which involves any of the following (without limitation): (i) a violation of Federal Securities Laws by the Trust or its service providers (or officers, directors, employees or agents thereof) (ii) a violation of the Compliance Program of the Trust, or the written compliance policies and procedures of its service providers; or (iii) a weakness in the design or implementation of the Compliance Program policies and procedures of the Trust, or the written compliance policies and procedures of the service providers to the Funds.
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VII. |
Meeting with Regulators . The CCO shall meet with, and reply to inquiries from, the SEC, the Trust and other legal and regulatory authorities with responsibility for administering Federal Securities Laws as necessary or as reasonably requested by the Trust or the Board of Trustees. |
VIII. |
Amendments to the Compliance Program . The CCO shall consult with the Board of Trustees and the Trusts officers as necessary to amend, update and revise the Compliance Program as necessary, but no less frequently than annually. |
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INVESTOR SUPPORT SERVICES AND
SECONDARY MARKET SERVICES AGREEMENT
This Agreement is made as of September , 2017 by and between the XAI Octagon Floating Rate & Alternative Income Term Trust, a Delaware statutory trust (the Trust), and XA Investments, LLC, a Delaware limited liability company (XAI), relating to certain services to be provided by XAI to the Trust.
WHEREAS, the Trust is a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act);
WHEREAS, the Trust wishes to retain XAI to provide the services set forth herein under the terms and conditions stated below following the closing of the Trusts initial public offering of common shares of beneficial interest (the Shares) (excluding any Green Shoe period) (the Closing), and XAI is willing to provide such services for the compensation set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties hereby agree as follows:
1. APPOINTMENT. The Trust hereby retains XAI to furnish, and XAI hereby agrees to furnish the services set forth in Section 2 below with respect to the Trust (the Services ).
2. SERVICES AND DUTIES OF XAI.
(a) |
From the Closing until termination of this Agreement, XAI shall assist the Trust by: |
(i) Responding to questions about the Trust from financial intermediaries (including, without limitation, banks, trust companies, broker-dealers and registered investment advisers) regarding the Trust;
(ii) Assisting in drafting and editing mailings to financial intermediaries;
(iii) Distributing mailings to professional financial intermediaries;
(iv) Scheduling, organizing and preparing for conference calls and meetings with financial intermediaries, which may include scripting conference calls, distributing materials in advance and subsequent to meetings, conducting calls on behalf of the Trust, moderating calls and meetings, and other related services;
(v) Communicating with the stock exchange specialist for the Trusts Shares, and with the closed-end fund analyst community regarding the Trust on a periodic basis;
(vi) Communicating with analysts, ratings and information organizations and other service providers that cover investment funds similar to the Trust;
(vii) Assisting in producing communications targeted to current Trust shareholders and the investment community generally, including press releases, shareholder reports, regulatory filings, informational conference calls and other communications regarding the Fund, but excluding marketing materials targeted to prospective investors or prepared for use in an offering of Shares;
(viii) Assisting in the formatting, development and maintenance of the Trusts website;
(ix) Assisting with administrative and accounting issues with respect to the Trust (such services may include, but are not limited to, providing administrative and accounting assistance with respect to dividend policies, leverage policies, general disclosures and reviewing press releases);
(x) Reporting to the Board of Trustees of the Trust periodically with respect to the Services;
(xi) Providing such additional on-going secondary market services with respect to the Fund and such other services as the parties may mutually agree from time to time.
(b) XAI acknowledges and agrees that it is not authorized to provide any information or make any representation regarding the Trust or its shares other than as contained in the Trusts filings with the Securities and Exchange Commission (SEC) or as specifically approved by the Trust for use by XAI in connection with the performance of the Services.
(c) XAI may subcontract with any entity or person to assist in the provision of the services contemplated by this Agreement; provided, however, that XAI shall not be relieved of any of its duties and obligations under this Agreement by the retention of such subcontractor and provided further, that XAI shall be responsible, to the extent provided herein, for all acts of such subcontractor as if such acts were its own.
3. REPRESENTATIONS AND WARRANTIES.
(a) XAI represents and warrants to the Trust as follows:
(i) XAI is duly organized and validly existing under the laws of the State of Delaware.
(ii) The execution, delivery and performance by XAI of this Agreement are within XAIs powers and have been duly authorized by all necessary action, and no action by or in respect of, or filing with, any
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governmental body, agency or official is required on the part of XAI for the execution, delivery and performance of this Agreement by the parties to this Agreement, and the execution, delivery and performance of this Agreement by the parties to this Agreement do not contravene or constitute a default under (i) any provision of applicable law, rule or regulation, (ii) XAIs governing instruments, or (iii) any agreement, judgment, injunction, order, decree or other instruments binding upon XAI.
(iii) XAI has obtained all necessary registrations, licenses and approvals in order to perform the Services contemplated by this Agreement and will maintain in effect during the term of this Agreement all registrations, licenses and approvals necessary to perform the Services.
(b) The Trust represents and warrants to XAI as follows:
(i) The Trust is duly organized and validly existing under the laws of the State of Delaware with the power to own and possess its assets.
(ii) The execution, delivery and performance by the Trust of this Agreement are within the Trusts powers and have been duly authorized by all necessary actions of the Board of Trustees, and the execution, delivery and performance of this Agreement by the parties to this Agreement do not contravene or constitute a default under (i) any provision of applicable law, rule or regulation, (ii) the Trusts governing instruments, or (iii) any agreement, judgment, injunction, order, decree or other instruments binding upon the Trust.
(iii) The Trust is, or will be prior to commencing operations, registered as a closed-end management investment company under the 1940 Act and the Trusts shares are, or will be prior to commencing operations, registered under the Securities Act of 1933, as amended, and under any applicable state securities laws, or exempt from such registration.
4. COVENANTS.
(a) XAI will promptly notify the Trust: (i) in the event that the SEC or any other authority (including any state authority) has censured XAIs activities, functions or operations, suspended or revoked any registration, license or approval, or has commenced proceedings or an investigation that may result in any of these actions; and (ii) of any change to XAI that may be reasonably expected to adversely affect its ability to perform the Services.
(b) XAI will act as an independent contractor in providing the Services.
(c) XAI will not share its fees with any third party, without the prior written consent of the Trust, provided that XAI may pay reasonable and customary fees and other compensation to subcontractors retained by XAI pursuant to Section 2(c) hereof.
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(d) XAI will perform, or contract and coordinate with others to perform, the Services: (i) using sound, commercial practices and in a competent and professional manner by personnel who are knowledgeable, qualified and trained in performing each of the Services; and (ii) in accordance with any written direction by the Trust. XAI will make any sub-contracting or coordinating party aware of the covenants set forth in this paragraph 4(d) and obtain the partys agreement to abide by them as if the party were subject to this Agreement.
(e) XAI will cooperate with the authorized officers, employees, subcontractors and agents of the Trust in performing Services as reasonably requested by the Trust.
(f) XAI will not, and will cause its affiliates not to, provide any information or make any representation regarding the Trust or the Shares other than: (i) information contained in the Trusts public statements or filings with the SEC; (ii) marketing materials provided prepared, or approved, by the Trust; and (iii) any other information approved by the Trust for use by XAI in connection with the performance of the Services by XAI.
5. COMPENSATION.
(a) The Trust agrees to pay to XAI and XAI agrees to accept as full compensation for all services rendered by XAI hereunder, a monthly fee in arrears at an annual rate equal to 0.20% of the Trusts average daily Managed Assets. For any period less than a month during which this Agreement is in effect, the fee shall be prorated according to the proportion which such period bears to a full month of 28, 29, 30 or 31 days, as the case may be.
(b) Managed Assets means the total assets of the Trust, including the assets attributable to the proceeds from financial leverage (including through the issuance of preferred shares or the issuance senior securities representing indebtedness), minus liabilities, other than liabilities related to any financial leverage.
(c) For purposes of this Agreement, the total assets of the Trust shall be calculated pursuant to the procedures adopted by resolutions of the Trustees of the Trust for calculating the value of the Trusts assets, and on days on which the value of the Trusts assets are not so determined, the asset value computation to be used will be as determined on the immediately preceding day on which the value of the Trusts assets was determined.
(d) XAI may elect from time to time, in its sole discretion, to waive its right to reimbursement or its receipt of the fee hereunder.
6. COMPLIANCE WITH THE TRUSTS GOVERNING DOCUMENTS AND APPLICABLE LAW. In all matters pertaining to the performance of this Agreement, XAI will act in accordance with the written disclosures of the Trust in its filings with the SEC or any
4
written materials as specifically approved in writing by the Trust for use by XAI in connection with the performance of the Services. In providing the Services, XAI will conform to, and comply with, the requirements of the 1940 Act and the rules and regulations thereunder and all other applicable federal, state and foreign laws and regulations.
7. EXCLUSIVITY. The services of XAI hereunder are not deemed to be exclusive, and XAI and its directors, officers, employees and affiliates may, without the prior written consent of the Trust, render such services to others.
8. LIMITATION OF LIABILITY AND INDEMNIFICATION OF XAI.
(a) XAI will not be liable for any error of judgment or mistake of law or for any loss suffered by XAI or by the Trust in connection with the performance of this Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its duties and obligations under this Agreement.
(b) The Trust shall indemnify, defend and protect XAI, its members and their respective officers, managers, partners, agents, employees, controlling persons, members and any other person affiliated with any of them, including XMS Capital Partners, LLC (collectively, the Indemnified Parties ) (each of whom shall be deemed a third party beneficiary hereof) and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) incurred by the Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Trust or its security holders) arising out of or otherwise based upon the performance of any of XAIs duties or obligations under this Agreement. Notwithstanding the foregoing provisions of this Section 8 to the contrary, nothing contained herein shall protect or be deemed to protect the Indemnified Parties against or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect of, any liability to the Trust or its security holders to which the Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any Indemnified Partys duties or by reason of the reckless disregard of XAIs duties and obligations under this Agreement.
(c) The foregoing agreements of indemnity shall be in addition to, and shall in no respect limit or restrict, any other remedies which may be available to an indemnified party.
9. DURATION AND TERMINATION.
(a) This Agreement shall become effective as of the date hereof and, unless sooner terminated as provided herein, shall continue in effect for a period of two years. Thereafter, if not terminated, this Agreement shall continue in effect with respect to the Trust for successive periods of 12 months, provided such continuance is specifically approved at least annually by both:
5
(i) the vote of a majority of the Trusts Board of Trustees or the vote of a majority of the outstanding voting securities of the Trust at the time outstanding and entitled to vote, and
(ii) the vote of a majority of the Trustees who are not parties to this Agreement or interested persons of any party to this Agreement, cast in person at a meeting called for the purpose of voting on such approval.
(b) Notwithstanding the foregoing, this Agreement may be terminated by the Trust at any time, without the payment of any penalty, upon giving XAI 60 days notice (which notice may be waived by XAI), provided that such termination by the Trust shall be directed or approved by the vote of a majority of the Trustees of the Trust in office at the time or by the vote of the holders of a majority of the voting securities of the Trust at the time outstanding and entitled to vote, or by XAI on 60 days written notice to the Trust (which notice may be waived by the Trust).
(c) This Agreement will immediately terminate in the event of its assignment.
(d) As used in this Agreement, the terms majority of the outstanding voting securities, interested person and assignment shall have the same meanings of such terms in the 1940 Act.
(e) Sections 8 and 11 through 19 shall survive any termination of this Agreement.
10. AMENDMENT OF THIS AGREEMENT . No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought.
11. CONFIDENTIALITY . Each of the Trust and XAI acknowledge and agree that pursuant to this Agreement, either party may have access to the other partys confidential and proprietary information and materials concerning or pertaining to the others business. Each party will receive and hold such information in the strictest confidence, and acknowledge, represent, and warrant that it will use its best efforts to protect the confidentiality of this information. Each party agrees that, without the prior written consent of the other party, which approval shall not be unreasonably withheld, they will not use, copy, or divulge to third parties or otherwise use, except in accordance with the terms of this Agreement, any information obtained from or through the other party in connection with this Agreement; provided, however, this covenant shall not apply to information (i) which is in the public domain now or when it becomes in the public domain in the future, other than by reason of a breach of this Agreement, (ii) which has come to either party from a lawful source not bound to maintain the confidentiality of such information, other than from the other party or an affiliate or representative of that party, (iii) disclosures which are required by law, regulatory authority, regulation or legal process or are made to any regulatory agency in the normal course of an examination, audit or investigation
6
involving such party, or (iv) disclosure as reasonably necessary in the course of business to third parties subject to a duty to maintain the confidentiality of the information.
12. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware for contracts to be performed entirely therein without reference to choice of law principles thereof and in accordance with the applicable provisions of the 1940 Act.
13. BOOKS AND RECORDS.
(a) In compliance with the requirements of the 1940 Act, XAI hereby agrees that all records which it may maintain for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust any of such records upon request.
(b) Each party to this Agreement hereby agrees that the parties may furnish to legal and regulatory authorities having the requisite authority any information or reports in connection with Services that any such authority may request. Subject to the proviso below, if the disclosing party is required or requested to provide any information or reports to regulatory authorities, the disclosing party shall immediately notify the other party in order to provide the other party the opportunity to pursue such legal or other action as it may desire to prevent the release of the information or reports; provided , that such notification by the disclosing party need not be made if prohibited by applicable law.
14. THIRD-PARTY BENEFICIARIES . This Agreement shall be binding on, and shall inure to the benefit of the parties hereto and their respective successors. The understandings contained in this Agreement are for the sole benefit of the parties hereto and their respective successors and assigns and, except as specifically contemplated herein with respect to Indemnified Parties, shall not be construed as conferring, and are not intended to confer, any rights on any other persons.
15. EXECUTION IN COUNTERPARTS . This Agreement may be executed in counterparts by the parties hereto, each of which shall constitute an original counterpart, and all of which, together, shall constitute one Agreement.
16. ENTIRE AGREEMENT . This Agreement contains the entire understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing.
17. WAIVERS . Neither the failure nor any delay on the part of any party to this Agreement to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power
7
or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and signed by the party asserted to have granted such waiver.
18. CONSTRUCTION . The captions of 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.
19. SEVERABILITY . If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
20. NOTICES . Any notice under this Agreement shall be in writing to the other party at such address as the other party may designate from time to time for the receipt of such notice and shall be deemed to be received on the earlier of the date actually received or on the fourth day after the postmark if such notice is mailed first class postage prepaid.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.
XAI OCTAGON FLOATING RATE & ALTERNATIVE INCOME TERM TRUST |
By: |
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Name: |
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Title: |
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XA INVESTMENTS LLC |
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By: |
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Name: |
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Title: |
XA Investments LLC
321 North Clark Street
Chicago, IL 60654
September , 2017
XAI Octagon Floating Rate & Alternative Income Term Trust
321 North Clark Street
Chicago, Illinois 60654
Ladies and Gentlemen:
Reference is made to the Investment Advisory Agreement between XAI Octagon Floating Rate & Alternative Income Term Trust (the Trust) and XA Investments LLC (XAI or the Adviser), dated as of September , 2017 (the Advisory Agreement). This letter agreement (the Agreement) confirms the contractual expense reimbursement agreement by Adviser. Capitalized terms used but not defined herein have the meanings ascribed to them in the Advisory Agreement.
1. Expense Cap .
(a) The Adviser waive a portion of its advisory fee or reimburse the Trust for certain operating expenses so that the annual operating expenses of the Trust (exclusive of any Excluded Expenses (as defined below) do not exceed 0.30% of the Trusts Managed Assets (the Operating Expense Limitation).
(b) Excluded Expenses are (i) investment advisory fees, (ii) investor support and secondary market services fees, (iii) taxes, (iv) expenses incurred directly or indirectly by the Trust as a result of an investment in a permitted investment (including, without limitation, acquired fund fees and expenses), (v) expenses associated with the acquisition or disposition of portfolio investments (including, without limitation, brokerage commissions and other trading or transaction expenses), (vi) leverage expenses (including, without limitation, costs associated with the issuance or incurrence of leverage, commitment fees, interest expense or dividends on preferred shares), (vii) expenses incurred in connection with issuances and sales of shares of the Trust (including, without limitation, fees, commissions and offering costs), (viii) dividends on short sales, if any, (ix) securities lending costs, if any, (x) expenses of holding, and soliciting proxies for, meetings of shareholders of the Trust (except to the extent relating to routine items such as the election of trustees), (xi) expenses of a reorganization, restructuring, redomiciling or merger of the Trust or the acquisition of all or substantially all of the assets of another fund, or (xii) any extraordinary expenses not incurred in the ordinary course of the Trusts business (including, without limitation, expenses related to litigation, derivative actions, demands related to litigation, regulatory or other government investigations and proceeding).
2. Recoupment . In consideration of the Advisers agreement to limit the Trusts expenses, the Adviser may recoup amounts reimbursed pursuant to this Agreement for a period not to exceed three years following the date of such waiver or reimbursement. Recoupment will be made only to the extent it does not cause the Trusts operating expenses to exceed (a) the
Operating Expense Limitation in effect at the time the expense was paid or absorbed, and (b) the Operating Expense Limitation in effect at the time of such recoupment.
3. Term and Termination; Amendment .
(a) This Agreement shall become effective upon the commencement of operations by the Trust. This Agreement will remain in effect for two years from the date of commencement of operations by the Trust, unless sooner terminated with the written consent of the Board of Trustees of the Trust. This Agreement will terminate automatically upon the termination of the Advisory Agreement unless a new Advisory Agreement with the Adviser (or an affiliate of the Adviser) to replace the terminated agreement becomes effective upon such termination.
(b) No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought.
4. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware for contracts to be performed entirely therein without reference to choice of law principles thereof and in accordance with the applicable provisions of the 1940 Act.
5. Miscellaneous .
(a) This Agreement constitutes the entire agreement of the parties with respect to its subject matter.
(b) The captions 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.
(c) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
(d) This Agreement shall be binding on, and shall inure to the benefit of the parties hereto and their respective successors.
(e) This Agreement may be executed in counterparts by the parties hereto, each of which shall constitute an original counterpart, and all of which, together, shall constitute one Agreement.
[ Remainder of Page Intentionally Left Blank ]
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Very truly yours, |
XA INVESTMENTS LLC |
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Name: |
Title |
Accepted and Agreed: |
XAI OCTAGON FLOATING RATE &
ALTERNATIVE INCOME TERM TRUST |
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Name: |
Title: |
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Organizational and Offering Expenses Agreement
September , 2017
To: XAI Octagon Floating Rate & Alternative Income Term Trust
Reference is made to the underwriting agreement dated September , 2017 (the Underwriting Agreement) among XAI Octagon Floating Rate & Alternative Income Term Trust, a Delaware statutory trust (the Fund), UBS Securities LLC, as representative of a group of underwriters (the Underwriters), XA Investments LLC (the Adviser) and Octagon Credit Investors, LLC (the Sub-Adviser), relating to a proposed underwritten public offering of common shares of beneficial interest, par value $0.01 per share (the Common Shares) of the Fund.
Pursuant to the Underwriting Agreement, the parties have agreed that the Fund shall pay all of its offering costs; provided, however, that to the extent that offering expenses of the Fund exceed $0.02 per Common Share, the Investment Adviser and the Sub-Adviser will bear any offering expenses above that amount.
In furtherance thereof, the parties hereby agree as follows:
(i) | In connection with the organization of the Fund, the Adviser and the Sub-Adviser agree to pay all of the Funds organizational costs. The Adviser will pay 40% of such costs and the Sub-Adviser will pay 60% of such costs. |
(ii) | In connection with the initial public offering of the Funds Common Shares, the Adviser and the Sub-Adviser agree to pay offering expenses of the Fund (other than sales load) that exceed $0.02 per Common Share sold in the offering (including pursuant to the overallotment option). The Adviser will pay 40% of such expenses and the Sub-Adviser will pay 60% of such expenses. |
The instrument shall be governed by and construed in accordance with the laws of the State of Delaware for contracts to be performed entirely therein without reference to choice of law principles thereof.
Very truly yours, | ||||||||
XA INVESTMENTS LLC |
OCTAGON CREDIT INVESTORS, LLC | |||||||
By: |
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By: |
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Name: | Name: | |||||||
Title: | Title: | |||||||
ACCEPTED AND AGREED TO ON BEHALF OF THE FUND: |
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[Letterhead of Skadden, Arps, Slate, Meagher & Flom LLP]
September 25, 2017
XAI Octagon Floating Rate & Alternative Income Term Trust
321 North Clark Street, Suite 2430
Chicago, Illinois 60654
Re: | XAI Octagon Floating Rate & Alternative Income Term Trust |
Registration Statement on Form N-2
Ladies and Gentlemen:
We have acted as special counsel to XAI Octagon Floating Rate & Alternative Income Term Trust, a statutory trust (the Trust) created under the Delaware Statutory Trust Act (the DSTA), in connection with the issuance and sale by the Trust of up to 9,500,000 shares (the Shares) (including shares subject to an over-allotment option) of the Trusts common shares of beneficial interest, par value $0.01 per share (the Shares).
This opinion is being furnished to you in accordance with the requirements of sub-paragraph (l) of Item 25 of Part C of Form N-2 Registration Statement under the Securities Act of 1933, as amended (the Securities Act), and the Investment Company Act of 1940, as amended (the 1940 Act).
In rendering the opinions stated herein, we have examined and relied upon the following:
(i) the notification of registration on Form N-8A (File No. 811-23247) of the Trust filed with the Securities and Exchange Commission (the Commission) under the 1940 Act on April 7, 2017;
(ii) the registration statement on Form N-2 (File Nos. 333-217196 and 811-23247) of the Trust relating to the Shares filed with the Commission on April 7, 2017 under the Securities Act and the 1940 Act, and as amended by Pre-Effective Amendment No. 1 on July 18, 2017, Pre-Effective Amendment No. 2 on August 28, 2017, Pre-Effective Amendment No. 3 on September 1, 2017, and as proposed to be amended by Pre-Effective Amendment No. 4 on the date hereof (such registration statement, as so amended and proposed to be amended, being hereinafter referred to as the Registration Statement);
XAI Octagon Floating Rate & Alternative Income Term Trust
September 25, 2017
Page 2
(iii) the form of Underwriting Agreement (the Underwriting Agreement) proposed to be entered into among the Trust, as issuer, XA Investments LLC, as investment adviser to the Trust, Octagon Credit Investors, LLC, as sub-adviser to the Trust, and the representative of the several Underwriters named therein (the Underwriters), filed as an exhibit to the Registration Statement;
(iv) an executed copy of a certificate of John P. McGarrity, Secretary of the Company, dated the date hereof (the Secretary Certificate);
(v) a copy of the Trusts Certificate of Trust, as amended through the date hereof, as certified by the Secretary of State of the State of Delaware as of September 25, 2017, and certified pursuant to the Secretarys Certificate;
(vi) a copy of the Trusts Second Amended and Restated Agreement and Declaration of Trust, by the trustees of the Trust, dated July 13, 2017, as amended on August 31, 2017, certified pursuant to the Secretarys Certificate;
(vii) a copy of the Trusts Amended and Restated By-Laws, as amended and in effect as of the date hereof, certified pursuant to the Secretarys Certificate;
(viii) certain resolutions of the Board of Trustees of the Trust adopted on May 5, 2017, July 13, 2017 and August 31, 2017 each certified pursuant to the Secretarys Certificate; and
(ix) a form of certain resolutions proposed to be adopted by the offering committee established by the Board of Trustees of the Trust relating to the issuance and sale of the Shares (the Resolutions), certified pursuant to the Secretarys Certificate.
We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Trust and such agreements, certificates and receipts of public officials, certificates of officers or other representatives of the Trust and others, and such other documents as we have deemed necessary or appropriate as a basis for the opinion set forth below.
In our examination, we have assumed the genuineness of all signatures, including endorsements, the legal capacity and competency of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as facsimile, electronic, certified, or photostatic copies, and the authenticity of the originals of such copies. As to any facts relevant to the opinion stated herein that we did not independently establish or verify, we have relied upon statements and representations of officers and other representatives of the Trust and others and of public officials, including the facts and conclusions set forth in the Secretarys Certificate and the factual representations and warranties contained in the Underwriting Agreement.
XAI Octagon Floating Rate & Alternative Income Term Trust
September 25, 2017
Page 3
In making our examination of documents, we have assumed that the parties thereto, other than the Trust, had or will have the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect thereof on such parties. We have also assumed that the Resolutions will be adopted by the Board of Trustees of the Trust in substantially the form reviewed by us. We have also assumed that the Underwriting Agreement will be executed and delivered in substantially the form reviewed by us.
We do not express any opinion as to any laws other than the DSTA.
Based upon the foregoing and subject to the qualifications and assumptions stated herein, we are of the opinion that when (i) the Registration Statement, as finally amended (including all necessary post-effective amendments), becomes effective under the Securities Act; (ii) the Board of Trustees, including any appropriate committee appointed thereby, has taken all necessary statutory trust action to approve the issuance and sale of the Shares and related matters, including the price per share of the Shares; (iii) the Underwriting Agreement has been duly executed and delivered by the Trust and the other parties thereto; and (iv) the Shares have been duly entered into the share record books of the Trust and delivered to the Underwriters as contemplated by the Underwriting Agreement upon payment of the consideration determined by the Board of Trustees, the Shares, when issued and sold, will be duly authorized by all requisite statutory trust action on the part of the Trust under the DSTA, and the Shares will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We also consent to the reference to our firm under the captions Legal Matters in the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
KTH
Consent of Independent Registered Public Accounting Firm
The Board of Trustees of
XAI Octagon Floating Rate & Alternative Income Term Trust:
We consent to the use of our report dated August 31, 2017, with respect to the financial statement of XAI Octagon Floating Rate & Alternative Income Term Trust, included herein, and to the references to our firm under the heading Independent Registered Public Accounting Firm in the Prospectus and Independent Registered Public Accounting Firm in the Statement of Additional Information filed on Form N-2.
/s/ KPMG LLP
Chicago, Illinois
September 25, 2017
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT is entered into as of the 29 th day of August, 2017, between XAI Octagon Floating Rate Alternative Income Term Trust, a statutory trust organized and existing under the laws of Delaware (the Trust), and XA Investments LLC (the Purchaser).
The parties hereby agree as follows:
1. Purchase and Sale of the Shares . Subject to the terms and conditions of this Agreement, the Trust agrees to sell to the Purchaser, and the Purchaser agrees to purchase from the Trust, 10,205 common shares of beneficial interest, par value $0.01 (the Shares) at a price per Share of $9.80 for an aggregate purchase price of $100,009.00, all such Shares to be validly issued, fully paid and non-assessable upon issuance of such Shares and receipt by the Trust of such payment therefor.
2. Representations, Warranties and Covenants of the Purchaser . The Purchaser hereby represents and warrants to, and covenants for the benefit of, the Trust that:
(a) |
Purchase Entirely for Own Account . This Agreement is made by the Trust with the Purchaser in reliance upon the Purchasers representation to the Trust, which by the Purchasers execution of this Agreement the Purchaser hereby confirms, that the Shares are being acquired for investment for the Purchasers own account, and not as a nominee or agent and not with a view to the resale or distribution by the Purchaser of any of the Shares, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the Shares, in either case in violation of any securities registration requirement under applicable law, but subject nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control. By executing this Agreement, the Purchaser further represents that the Purchaser does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the Shares. |
(b) |
Investment Experience . The Purchaser acknowledges that it can bear the economic risk of the investment for an indefinite period of time and has such knowledge and experience in financial and business matters (and particularly in the business in which the Trust operates) as to be capable of evaluating the merits and risks of the investment in the Shares. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D under the Securities Act of 1933 (the 1933 Act). |
(c) |
Restricted Securities . The Purchaser understands that the Shares are characterized as restricted securities under the United States securities laws inasmuch as they are being acquired from the Trust in a transaction not involving a public offering and that under such laws and applicable |
regulations such Shares may be resold without registration under the 1933 Act only in certain circumstances. In this connection, the Purchaser represents that it understands the resale limitations imposed by the 1933 Act and is generally familiar with the existing resale limitations imposed by Rule 144. |
(d) |
Legends . It is understood that the certificate, if any, evidencing the Shares may bear either or both of the following legends: |
(i) |
These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the Shares under such Act or an opinion of counsel reasonably satisfactory to the Trustees of XAI Octagon Floating Rate Alternative Income Term Trust that such registration is not required. |
(ii) |
Any legend required by the laws of any other applicable jurisdiction. |
The Purchaser and the Trust agree that any such legend shall be removed at a holders request when they are no longer necessary to ensure compliance with federal securities laws.
3. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware for contracts to be performed entirely therein without reference to choice of law principles thereof and in accordance with the applicable provisions of the Investment Company Act of 1940, as amended.
4. Counterparts . This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
5. Miscellaneous .
(a) |
The captions 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. |
(b) |
If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. |
[ signature page follows ]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
XAI OCTAGON FLOATING RATE ALTERNATIVE INCOME TERM TRUST |
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By: |
/s/ Theodore J. Brombach |
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Name: Theodore J. Brombach |
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Title: |
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XA INVESTMENTS LLC |
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By: |
/s/ John F. Spence |
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Name: John F. Spence |
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Title: Co-CEO |
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XAI Octagon Floating Rate Income & Credit Alternative Trust
Code of Ethics
I. | Purpose of the Code of Ethics |
This code is based on the principle that, you as an access person of the XAI Octagon Floating Rate Income & Credit Alternative Trust (the Trust or the Fund), and will conduct your personal investment activities in accordance with:
● | the duty at all times to place the interests of the Trusts shareholders first; |
● | the requirement that all personal securities transactions be conducted consistent with this Code of Ethics and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individuals position of trust and responsibility; and |
● | the fundamental standard that Trust personnel should not take inappropriate advantage of their positions. |
In view of the foregoing, the Trust has adopted this Code of Ethics (the Code) to specify a code of conduct for certain types of personal securities transactions which may involve conflicts of interest or an appearance of impropriety and to establish reporting requirements and enforcement procedures.
II. | Legal Requirement |
Pursuant to Rule 17j-1(b) of the Investment Company Act of 1940 (the 1940 Act), it is unlawful for any Access Person to:
● | employ any device, scheme or artifice to defraud the Trust; |
● | make any untrue statement of a material fact to the Trust or fail to state a material fact necessary in order to make the statements made to the Trust, in light of the circumstances under which they were made, not misleading; |
● | engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the Trust; or |
● | engage in any manipulative practice with respect to the Trust, in connection with the purchase or sale (directly or indirectly) by such Access Person of a security held or to be acquired by the Trust. |
III. | Definitions - All definitions shall have the same meaning as explained in Rule 17j-1 or Section 2(a) of the 1940 Act and are summarized below. |
Access Person means - Any director, officer, general partner, or Advisory Person of the Trust or of a Trusts investment adviser/Sub-Adviser (or of any entity in a control relationship to the Trust or investment adviser/Sub-Adviser) who, in connection with his/her regular functions or duties, makes participates in, or obtains information regarding the purchase or sale of Covered Securities by the Trust, or whose functions relate to the making of any recommendations with respect to such purchases or sales.
For purposes of this Code of Ethics, an Access Person does not include any person who is subject to the securities pre-clearance requirements and securities transaction reporting requirements of the Code of Ethics adopted by the Trusts investment adviser/Sub-Adviser or principal underwriter in compliance with rule 17j-1 under the 1940 Act and rule 204A-2 of the Investment Advisers Act of 1940 of Section 15(f) of the Securities Exchange Act of 1934(the Securities Act of 1934), as applicable.
Automatic Investment Plan 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.
Advisory Person of the Trust or of a Trusts investment adviser/Sub-Adviser shall have the same meaning as that set forth in Rule 17j-1 of the Act.
Beneficial ownership shall have the same meaning as that set forth in Rule 16a-1(a)(2) of the Securities Exchange Act.
Control shall have the same meaning as that set forth in Section 2(a)(9) of the Act.
Covered Security shall be any security except that it does not include:
(i) | Direct obligations of the Government of the United States; |
(ii) | Bankers acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and |
(iii) | Shares issued by open-end funds (excluding open-end exchange traded funds). |
Exchange Traded Fund means an open-end registered investment company that is not a unit investment trust, and that operates pursuant to an order from the SEC exempting it from certain provisions of the 1940 Act permitting it to issue securities that trade on the secondary market. Examples of open-end exchange-traded funds include, but are not limited to: Select Sector SPDRS; iShares; PowerShares; etc.
Fund means an investment company registered under the 1940 Act.
An Initial Public Offering means an offering of securities registered under the Securities Act of 1933 (the Securities Act), the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Act.
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Limited Offering means an offering that is exempt from registration pursuant to Section 4(2) or Section 4(6) or pursuant to Rule 504, Rule 505, or Rule 506 under the Securities Act.
Purchase or Sale of a Covered Security includes, among other things, the writing of an option to purchase or sell a Covered Security.
Security held or to be Acquired by the Trust means:
(i) | Any Covered Security which, within the most recent 15 days: |
(A) | Is or has been held by the Trust; or |
(B) | Is being or has been considered by the Trust or its investment advisor/Sub-Adviser for purchase by the Trust; and |
(ii) | Any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security. |
IV. | Policies of the Trust Regarding Personal Securities Transactions |
General
No Access Person of the Trust shall engage in any act, practice or course of business that would violate the provisions of Rule 17j-1 as set forth above, or in connection with any personal investment activity, engage in conduct inconsistent with this Code.
Specific Policies
No Access Person shall purchase or sell, directly or indirectly, any security in which he/she has, or by reason of such transaction acquires, any direct or indirect beneficial ownership and which he/she knows or should have known at the time of such purchase or sale:
● | is being considered for purchase or sale by the Trust; or |
● | is being purchased or sold by the Trust. |
Pre-approval of Investments in IPOs and Limited Offerings
Access Persons must obtain approval from the Trusts Chief Compliance Officer before directly or indirectly acquiring beneficial ownership in any covered securities in an initial public offering or in a private placement or other limited offering.
V. | Reporting Procedures |
The Trust shall notify each person (annually in January of each year), considered to be an Access Person of the Trust that he/she is subject to the reporting requirements detailed in Sections (a), (b) and (c) below and shall deliver a copy of this Code to such Access Person.
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In order to provide the Trust with information to enable it to determine with reasonable assurance whether the provisions of this Code are being observed, every Access Person of the Trust must report the following:
a) Initial Holdings Reports . Every Access Person must report on Exhibit A, attached hereto, no later than 10 days after becoming an Access Person, the following information:
● | The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person; |
● | 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 the Access Person as of the date the person became an Access Person; and |
● | The date that the report is submitted by the Access Person. |
This information must be current as of a date no more than 45 days prior to the date the person becomes an access person.
b) Quarterly Transaction Reports . Every Access Person must report on Exhibit B, attached hereto, no later than 30 days after the end of a calendar quarter, the following information with respect to any transaction during the quarter in a Covered Security in which the Access Person had any direct or indirect beneficial ownership:
● | The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares, and the principal amount of each Covered Security involved; |
● | The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); |
● | The price of the Covered Security at which the transaction was effected; |
● | The name of the broker, dealer or bank with or through whom the transaction was effected; and |
● | The date that the report is submitted by the Access Person. |
Furthermore, an Access Person need not make a quarterly transaction report under section V.b of this Code with respect to transactions effected pursuant to an Automatic Investment Plan.
With respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person, each Access Person
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must report on Exhibit B, attached hereto, no later than 30 days after the end of a calendar quarter the following information:
● | The name of the broker, dealer or bank with whom the Access Person established the account; |
● | The date the account was established; and |
● | The date that the report is submitted by the Access Person. |
c) Annual Holdings Reports . Every Access Person must report on Exhibit C, attached hereto, annually, the following information (which information must be current as of a date no more than 45 days before the report is submitted):
● | The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership; |
● | The name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person; and |
● | The date that the report is submitted by the Access Person. |
d) Exceptions from Reporting Requirements. Each trustee who is not an interested person of the Trust need not make an initial or annual holdings report but shall submit the same quarterly report as required under paragraph V.b. to the administrator, but only for a transaction in a Covered Security where he or she knew at the time of the transaction or, in the ordinary course of fulfilling his or her official duties as a trustee or officer, should have known that during the 15-day period immediately preceding or after the date of the transaction, such Covered Security is or was purchased or sold, or considered for purchase or sale, by the Trust.
These exceptions do not exclude the Trustee from reporting any holdings or transactions in shares of the trust in the reports under sections V.a, V.b, or V.c of this Code of Ethics.
VI. | Review of Reports |
The CCO of the Trust, or his/her delegate, shall be responsible for reviewing the reports received, maintaining a record of the names of the persons responsible for reviewing these reports, and as appropriate, comparing the reports with this Code, and reporting to the board of trustees:
● | any transaction that appears to evidence a possible violation of this Code; and |
● | apparent violations of the reporting requirements stated herein. |
The CCO of the Trust shall review the reports made to them hereunder and shall determine whether the policies established in Sections IV and V of this Code have been violated, and what sanctions, if any, should be imposed on the violator. Sanctions include but are not limited to a letter
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of censure, suspension or termination of the employment of the violator, or the unwinding of the transaction and the disgorgement of any profits.
The CCO of the Trust and the board of trustees of the Trust shall review the operation of this Code at least annually. All material violations of this Code and any sanctions imposed with respect thereto shall periodically be reported to the board of trustees of the Trust.
VII. | Certification |
Each Access Person will be required to certify annually that he/she has read and understood the provisions of this Code and will abide by them. Each Access Person will further certify that he/she has disclosed or reported all personal securities transactions required to be reported under the Code. A form of such certification is attached hereto as Exhibit D.
Before the Board of Trustees of the Trust may approve the code of ethics, the Trust must certify to the Board that the Trust has adopted procedures reasonably necessary to prevent Access Persons from violating this Code. Such certification shall be submitted to the Board of Trustees at least annually.
Sources:
Section 17j-1 (as amended) of the Investment Company Act of 1940;
Section 16 (as amended) of the Securities Exchange Act of 1934;
The Report of the Advisory Group on Personal Investing issued by the Investment Company Institute on May 9, 1994; and,
The Securities and Exchange Commissions September 1994 Report on Personal Investment Activities of Investment Company Personnel.
Adopted: May 5 th , 2017
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Code of Ethics
XA Investments LLC
May 2017
I INTRODUCTION
XA Investments LLC (the Firm ) has adopted this Code of Ethics (the Code ) to set forth the ethical and professional standards required of the Firm and its officers and employees, as will apply to the Firm and its personnel on and after the effective date of the Firms registration with the U.S. Securities and Exchange Commission ( SEC ) as an investment adviser under the Investment Advisers Act of 1940 (the Advisers Act ). The policies and procedures set forth in this Code are intended to further the commitment of the Firm and its management to maintaining the trust and confidence of its clients 1 , to satisfying the Firms fiduciary obligations, and to complying with legal and regulatory requirements and with the Firms own internal policies and procedures. As a fiduciary, the Firm has the responsibility to render professional and unbiased investment advice, owes its clients a duty of honesty, good faith and fair dealing, must act at all times in the best interests of its clients and, in its dealings with its clients, must avoid or disclose conflicts of interest.
A. |
Applicable to all Personnel |
Subject to such waivers or exemptions as are discussed below, once effective the Code will cover all personnel of the Firm, including members, officers, directors (and other persons occupying a similar status or performing similar functions), and employees. This Code also covers individuals associated with the Firm in any manner that provide investment advice and are subject to the Firms supervision and control. All such persons as are covered by this Code are collectively, hereinafter, Firm Personnel or Personnel .
Temporary employees and consultants that, in each case, are engaged by the Firm to provide clerical, administrative or professional services that are not directly investment related will not be considered to be Personnel subject to this Code except to the extent the Chief Compliance Officer ( CCO ) notifies them to the contrary.
Action Required to be Taken by the CCO: As to each temporary employee or consultant engaged by the Firm, the CCO is responsible for determining whether such individual shall be required to comply with the Code. The CCO is also responsible for documenting such determination and maintaining such documentation for a minimum of five years from the end of the fiscal year in which the temporary employees or consultants association with the Firm is terminated, provided that for all but the final two years of such document maintenance period such document shall be maintained in an appropriate office of the Firm and, thereafter, in an easily accessible place.
Notwithstanding the foregoing, the CCO may exempt any person from all or any portion of the Code upon a finding that such person is neither an Access Person, as defined at Rule 17j-1(a)(1) under the Investment Company Act of 1940 (the 1940 Act ) or Rule 204A-1 of the Advisers Act nor a supervised person , as defined at Section 202(a)(25) of the Advisers Act, and that, such persons duties and responsibilities are such that application of all or any particular portion of this Code to such person is not reasonably necessary. Accordingly, all persons subject to the Code shall be considered to be Access Persons, regardless of whether they meet any
1 The Firms clients consist of persons to whom the Firm provides investment advice. The Firms current business model contemplates that clients will be limited to funds registered with the U.S. SEC.
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particular definition thereof while persons that have been exempted from all or any particular portion of the Code shall not be considered to be Access Persons to the extent of that exemption. The CCO also may waive provisions of the Code on a case-by-case basis, after reviewing the circumstances surrounding the request for a waiver.
Action Required to be Taken by the CCO: The CCO shall keep a written record of all exemptions or such waivers and the basis therefore and shall maintain such documentation for a minimum of five years from the end of the fiscal year in which the individual to whom it relates terminates his or her association with the Firm, provided that for all but the final three years of such document maintenance period such document shall be maintained in an appropriate office of the Firm and, thereafter, in an easily accessible place.
B. |
Requests by Clients for Copies of the Code of Ethics |
The Firm is required to provide a copy of this Code to any client or prospective client upon request. Any person receiving such a request shall either provide a copy directly or request that the Firms CCO provide a copy and shall document the action taken.
Action Required to be Taken by all Firm Personnel: Any individual that receives a request from a client or prospective client for a copy of the Code shall either provide a copy thereof or request that the Firms CCO provide a copy. The individual shall document such action by sending an email confirming the action to the client or prospective client or the CCO, as applicable.
C. |
Regulatory Requirements |
The Code has been adopted in connection with the Firms compliance with Rule 204A-1 under the Advisers Act and Rule 17j-1(c) under the 1940 Act, as applicable.
As a registered investment adviser, the Firm, pursuant to Rule 204A-1, is required to establish, maintain and enforce a written code of ethics that, at a minimum:
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Sets forth the general standard of conduct required of all supervised persons, which standard reflects the fiduciary duties that the Firm and all such individuals owe to the Firms clients. |
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Requires compliance by all supervised persons with applicable federal securities laws. |
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Requires certain supervised persons to report, and for the Firm to review, their personal securities transactions and holdings periodically. |
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Requires prompt reporting by all supervised persons of any violations of this Code. |
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Requires distribution by the Firm of the Code and of any amendments to all supervised persons and for the Firm to obtain written acknowledgements from all such individuals as to their receipt of the Code. |
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As an adviser to a registered investment company (a Fund ), the Firm, pursuant to Rule 17j-1(c) under the 1940 Act, will be required to adopt a written code of ethics containing provisions reasonably necessary to prevent the Firms Access Persons from engaging in the following unlawful activity:
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To employ any device, scheme or artifice to defraud the Fund; |
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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; |
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To engage in any act, practice or course of business that operates or would operate as a fraud or deceit on the Fund; or |
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To engage in any manipulative practice with respect to the Fund. |
D. |
Other Topics Covered In the Code |
In addition to the minimum requirements set forth above, the Code also addresses the Firms policies and procedures regarding:
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Duty to report violations of the code and sanctions |
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Safeguarding and maintaining confidential information |
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Handling of nonpublic information and prohibitions against insider trading |
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Investment activities |
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Outside business activities |
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Giving and receiving of gifts and entertainment |
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Political activities |
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Client complaints |
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Reporting by Firm Personnel |
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Annual compliance reports |
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Recordkeeping requirements |
E. |
Code May be Supplemented by Other Applicable Policies |
The Code has been drafted in a manner that allows it to apply equally to all Personnel regardless of their specific functions or responsibilities. As a result of this one size fits all approach, the Firm may, from time-to-time, supplement the Code as it applies to Personnel that perform certain functions or that have particular responsibilities by the adoption of separate, more specialized
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policies and procedures. Where this is the case, Personal to whom these separate policies and procedures apply must comply with both the Code and these additional policies or the more restrictive of the two. More generally, the existence of the Code should not be understood as relieving Personnel, in any manner, from their continuing responsibility to familiarize themselves, and to comply, with all applicable policies and procedures of the Firm.
F. |
Best Judgment and Further Advice |
It is not reasonable to expect this Code or other applicable policies or procedures of the Firm to cover all of the possible situations that Personnel may encounter. For this reason, nothing in this Code removes the need for all Personnel to use their best judgment in order to maintain high professional standards and to consult with their supervisor s as well as the CCO, as needed.
Personnel that are unsure how to handle a particular situation should consult with their supervisor or the CCO for advice.
G. |
Receipt and Acknowledgement of the Code |
The CCO is responsible for providing all Personnel with a copy of the Code and of all amendments or other updates thereto. Access may be provided in hard copy or electronically through the Firms internal electronic systems.
Unless exempt, all Personnel must read, understand and adhere fully to this Code as well as any amendments to the Code. All such Personnel are also required to sign an Acknowledgement that they have read the entire Code, and from time-to-time, any amendments, and have had an opportunity to review any portions with their supervisor and the CCO.
By signing the Acknowledgement, each signatory agrees to perform fully all applicable responsibilities and to comply with all applicable restrictions, limitations, and requirements set forth in the Code and acknowledge that any such failure may result in disciplinary action, up to and including termination. Failure to comply with the terms of this Code can also subject the Firm and responsible supervisors and involved individuals to fines, penalties and potentially even criminal proceedings in addition to significant reputational harm and regulatory sanctions. From time-to-time, the Firm may ask any recipient of this Code to certify his or her continued compliance with the applicable terms and/or with any other applicable restrictions, limitations or requirements and to sign an Acknowledgement with respect to any amendments hereto.
A copy of the Acknowledgement can be found at the end of this Code. Each recipient is required to deliver the completed Acknowledgement to the CCO.
Action Required to be Taken by all Firm Personnel: All Firm Personnel are required to complete an Acknowledgment and deliver the completed Acknowledgement to the CCO.
The CCO is responsible for confirming that each individual subject to this Code has completed an Acknowledgment and delivered the same to the CCO and maintaining copies of the completed Acknowledgments.
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Action Required to be Taken by the CCO: The CCO shall verify that each individual subject to this Code has acknowledged receipt of the Code and of each amendment thereto. The CCO is also responsible for the Firms maintenance of copies of each completed Acknowledgement for a minimum of five years from the end of the fiscal year in which the applicable individual ceased to be subject to this Code, such documents to be retained in an appropriate office of the Firm except that during the last three years of the retention period such documents may be maintained in an easily accessible place.
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II DUTY TO REPORT VIOLATIONS OF THIS CODE AND SANCTIONS
A. |
Duty to Report Violations of this Code |
Firm Personnel are required to report promptly any violation or potential violation of the Code to the Firms CCO. Any such report shall be maintained in confidence and no retaliation shall be made against the individual making such report and, indeed, any retaliation for the reporting of a violation of the Code shall itself constitute a violation of the Code.
Protection of Whistleblower Rights
Notwithstanding anything herein to the contrary, the foregoing reporting obligations should not be understood (i) as in any way limiting any individual from initiating communications directly with, responding to any inquiry from, volunteering information to, or providing testimony before, the SEC, the Department of Justice, or any other governmental, law enforcement, or regulatory authority, regarding any possible securities law violation; or (ii) requiring any individual to advise or seek permission from the Firm before engaging in any such activity. No retaliation shall be made against any individual by the Firm or any Firm Personnel on account of an individual exercising the above rights.
Action Required to be Taken by all Firm Personnel: Any individual that becomes aware of a violation of this Code must promptly report such violation to the CCO or, where the individual believes the CCO is implicated in the violation being reported, to a member of the Firms senior management.
B. |
Review and Investigation |
The CCO shall be responsible for the prompt review and investigation of any violations of the Code reported to, or independently discovered by, the CCO. As part of such review, the CCO shall consider whether any substantiated material violation of the Code that is brought to the CCOs attention indicates a need (i) for heightened supervisory procedures, and, if so, the means by which such need should be addressed, and (ii) any change in the Firms procedures or policies or applicable controls. The CCO shall also consider whether a substantiated material violation, or any sanction imposed as a result thereof, requires disclosure or reporting, to any regulatory, law enforcement or other outside party or disclosure in the Firms Form ADV or otherwise. The CCO shall also be responsible for reporting any substantiated material violations of the Code to appropriate senior management within the Firm and, if relevant, to the CCO of any Fund advised by the Firm. The CCO shall also be responsible for appropriately documenting such review and investigation, the reporting thereof to senior management and the CCO of any Fund, and any responsive action taken as a result thereof.
Action Required to be Taken by the CCO: The CCO shall keep a written record of all received reports of violations of this Code and of any independently discovered violations and shall document the CCOs prompt review and investigation thereof, the reporting of any substantiated material violations of the Code to appropriate senior management within the Firm and of any responsive action taken as a result thereof. The CCO shall
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maintain such documentation for a minimum of five years from the end of the fiscal year in which such document was made, such document to be retained for the first two years in an appropriate office of the Firm and, thereafter, in an easily accessible place.
1. |
Involvement of Legal Counsel |
Notwithstanding the assignment of responsibility to the CCO with respect to the review and investigation and reporting of violations, where it is determined that sufficient reasons exist for any such review, investigation, or reporting to be conducted under the direction of legal counsel, such counsel shall have the ultimate responsibility for the conduct of such review, investigation, and the reporting and documentation thereof.
C. |
Sanctions |
1. |
Possible Sanctions |
Possible sanctions for violation of this Code may include, but need not be limited to, reprimands, monetary fines, suspensions, reduction in responsibilities, grade or title, or termination. Sanctions are imposed by the Firms senior executive officers with the advice and involvement of the Firms CCO.
2. |
Requirement that CCO be Informed of all Internal Discipline |
No internal discipline shall be imposed on any Firm Personnel for violation of this Code without the underlying matter and the sanction to be imposed being first being brought to the attention of the CCO.
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III GENERAL STANDARD OF CONDUCT
The Firm is committed to maintaining the trust and confidence of its clients, to upholding high standards of integrity and business ethics and professionalism, and to compliance with legal and regulatory requirements and its own internal policies and procedures.
The Firms continued success is dependent upon its reputation. Compliance with these standards is crucial to the Firms reputation and, therefore, its long-term success.
The general standard of conduct required by all Personnel reflects a number of underlying requirements including:
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The fiduciary duty owed by the Firm and its Personnel to its clients; |
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The Firms intent to adhere to good business practices; |
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Applicable legal and regulatory requirements; |
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The Firms own internal policies and procedures; and |
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Representations that the Firm has made to its clients. |
A. |
Fiduciary Duty |
The Firm and all Personnel owe a fiduciary duty to the Firms clients. This means that the Firm and its Personnel must always place the interests of the clients first and may not put their own interests ahead of their clients interests or otherwise abuse their position of trust and responsibility. More specifically, the Firms fiduciary duty to the Firms clients requires that Personnel must, fully and fairly, disclose all conflicts of interests and all facts that may be material to the clients economic interest or decision-making.
B. |
Adherence to Good Business Practices |
The Firm expects all Personnel to adhere to the principles of good business practice. At a minimum, this requires Personnel to engage in fair and honest conduct in all their dealings and to perform their functions and meet their responsibilities with a degree of professionalism reasonable to the circumstances.
C. |
Compliance with Applicable Federal Securities Laws and Other Requirements |
The Firm and all Personnel are required to comply at all times with all applicable securities laws as well as the Firms own internal policies and procedures.
While many applicable legal and regulatory requirements are reflected in this Code or the Firms other policies and procedures, Personnel should not assume that this is true of every relevant securities law or regulation. As a result, Personnel must take the responsibility to inform themselves of, and understand, the legal and regulatory requirements applicable to their
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activities. For this same reason, the Firm expect all Personnel to stay current with respect to applicable regulatory and legislative developments.
D. |
General Antifraud Prohibitions |
Without limiting the foregoing, Firm Personnel are prohibited from:
|
Employing any device, scheme, or artifice to defraud a client or prospective client; |
|
Engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon a client or prospective client; |
|
Making any untrue statement of a material fact to a client or omitting to state a material fact necessary to make a statement made not misleading; or |
|
Engaging in any act, practice or course of business that is fraudulent, deceptive, or manipulative. |
E. |
Client Representations |
The Firm and all Personnel are also expected to comply with any representations that the Firm has made to its clients, including, but not limited to, representations that are made in formal agreements or client offering documents (where applicable to the Firm).
III-2
IV CONFLICTS OF INTEREST
A. |
General Statement of Policy |
The fiduciary duties imposed on the Firm and its Personnel require all Personnel to be sensitive to the possibility of conflicts of interest, whether real or apparent, in transactions with clients. This includes conflicts between the interest of the Firm or Firm Personnel and Firm clients as well as conflicts between two clients. As a general matter, conflicts should be avoided. Where they cannot be avoided, it will generally be the case that they should be disclosed and specific consent obtained from the client with respect thereto. When in doubt, Personnel should contact their supervisor or the CCO for advice.
B. |
General Description of Conflicts |
While it is impossible to describe all conflicts that may arise, in general, conflicts will include various practices in which the Firm or any Personnel have a pecuniary or other interest in recommending or undertaking a transaction for a client. It is important to understand that a conflict does not require that the client suffer any actual harm. It also does not require that the improper interest in question be tangible or otherwise quantifiable or even certain. It is enough if the improper interest is, or could be viewed as, a motivating factor in the Firm or Personnel recommending or undertaking the transaction.
An improper interest may be economic, personal or otherwise. In the case of an economic interest, the interest may be a positive benefit or the avoidance, or minimization of, a negative economic result, e.g. , the avoidance of an expense or a loss, or loss minimization.
Improper interests can include a wide variety of situations, including situations where:
|
The transaction allows the Firm or Personnel to generate fees or profits, or avoid losses or expenses, from another relationship as, for example, is the case with respect to the receipt of finders fees, outside commissions or bonuses; |
|
The Firm or Personnel are directly interested in the transaction as, for example, is the case with respect to principal transactions; |
|
The transaction benefits a third party in which the Firm or any Personnel has an ownership or other economic interest; or |
|
The transaction provides a benefit to a third party, rather than to the Firm or any Personnel directly, for an improper purpose as, for example, one that: |
|
involves any quid pro quo, e.g., where the benefit is returned to the Firm or Personnel in some manner; |
|
is done to benefit a spouse or child or other person for personal reasons; or |
|
is done to repay a favor or out of gratitude or for the purpose of obtaining or continuing to receive lavish gifts or entertainment. |
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Without limiting the generality of the foregoing, all Personnel should avoid any investment, interest, association or other relationship that interferes, might interfere, or even might be perceived as interfering with the independent exercise by the individual of good judgment in the best interest of the Firms clients.
C. |
Particular Conflicts |
1. |
Conflicts Related to the Provision of Disinterested and Impartial Advice or Undertaking a Transaction on Behalf of a Client |
Any advice or recommendation, or transaction undertaken on behalf of a client, must be disinterested and impartial. An interest in a security or issuer, whether direct or indirect, or a relationship with an issuer, may support an inference that advice or a recommendation or the undertaking concerning such security or the securities of an issuer was not disinterested and impartial.
Accordingly, to minimize the possibility of such conflicts the Firm have adopted policies discussed elsewhere herein with respect to:
|
The investment activities of Firm Personnel (see Sections VII and VIII hereof); |
|
The holding of any position ( e.g. , as a director or trustee) with an issuer or its affiliates (see Section IX hereof); or |
|
Any present or proposed business relationship with an issuer or its affiliates (see Section IX hereof). |
2. |
Appropriation of Client Information for Personal Benefit |
Firm Personnel may not trade or recommend trading in securities on the basis of client information, including information related to client positions, trades, or strategies. This means that trades and recommended trades by Personnel should always be based upon an investment assessment that is independent of any nonpublic client information.
3. |
Selecting Suppliers and Service Providers |
The acceptance of any compensation or other benefit from a supplier or service provider to the Firm, especially one involving expenses that are, directly or indirectly, borne by the Firms clients, may also be perceived as a conflict in that it may lead to a perception that the providers selection may not be in the clients best interest. Accordingly, the Firms use of any brokerage firm or other vendor or service provider may be subject to separate policies and procedures subjecting such use to a pre-approval process and other requirements for the purpose of minimizing the possibility of such conflicts. Moreover, Personnel may not accept compensation, whether in the form of cash or otherwise, for their own benefit from a service provider except in accordance with the provisions of Subsection B of Section IX hereof, which relates to receipt or payment of third party compensation, and Section X hereof, which relates to gifts and entertainment.
IV-2
V CONFIDENTIALITY/PRIVACY
A. |
General Statement of Policy Confidentiality |
All Firm Personnel have a duty to safeguard and treat as confidential all nonpublic information concerning the Firm, its clients, investors in Funds advised by the Firm, and all transactions in which the Firm or its clients are involved. This includes all information concerning a clients financial circumstances and holdings, and advice furnished to the client. Moreover, employees may only use the Firm or client information within the scope of their employment and, accordingly, may not appropriate such information for their own use or benefit or the use or benefit of any third party.
B. |
Sharing of Information Within the Firm |
Firm Personnel should only share confidential client or proprietary information within the Firm with individuals that have a legitimate business need for knowing the particular information. In addition, Personnel should not share information in violation of any information barrier implemented by the Firm as a means of isolating certain kinds of sensitive information so that it is not available to Personnel that perform public functions, such as the making of recommendations or giving of advice with respect to trading. Employees should bring to the attention of the CCO any attempt by other Personnel to solicit or obtain client or proprietary information for which they do not have a legitimate business need.
Action Required to be Taken by all Firm Personnel: All Firm Personnel are required to bring to the attention of the CCO any attempt by other Personnel to solicit or obtain confidential client or proprietary information for which they do not have a legitimate business need.
C. |
Sharing of Information Outside the Firm |
Firm Personnel should not discuss or share confidential client or proprietary information with individuals outside the Firm, other than with parties that both have a legitimate need to know such information and have either provided a confidentially agreement that covers such information, which, in accordance with the Firms policies, has been reviewed and approved by the Firm, or are themselves under a separate duty to maintain the confidentiality of the information, such as, for example, the Firms outside counsel or accounting firm, or employees of regulated entities such as broker/dealers, clearing firms or transfer agents. When any doubt exists as to the need for a confidentially agreement, employees should contact the CCO.
D. |
Reasonable Safeguards |
Firm Personnel should use special care to limit the possibility of inadvertent disclosure of client or proprietary information. In particular, Personnel should:
|
Keep their desk and work areas clear of all confidential information when they are not present; |
|
Secure all laptops, mobile phones, iPads, and other such devices when unattended; |
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|
Dispose of confidential documents by shredding them or placing them in confidential document waste bins or otherwise complying with proper document destruction procedures; |
|
Keep sensitive information removed from the office out of public view; |
|
Limit discussions of such information within the Firm to individuals who have a legitimate business need for knowing the particular information; and |
|
Consider whether the use of a code name in place of an issuers name may be advisable. |
Personnel should not:
|
Leave confidential information in the open, including in a conference room, once a meeting is over; |
|
Discuss confidential information in places where it may be inadvertently overheard by unauthorized persons, such as in elevators, public transportation, restaurants or the like; |
|
Discuss confidential information while using a speaker-phone that is turned up loud enough to be overhead by visitors or unauthorized Personnel; or |
|
Discuss confidential information with individuals outside the Firm except in accordance with the policy set forth above. |
E. |
Reporting of Possible Confidentiality Breach |
Personnel should promptly bring to the attention of the CCO any reasonable suspicion that an unauthorized person has obtained confidential information.
Action Required to be Taken by all Firm Personnel: All Firm Personnel are required to bring to the attention of the CCO any reasonable suspicion that an unauthorized person has obtained confidential information.
F. |
Review and Investigation |
The CCO shall be responsible for the review and investigation of any report of a possible confidentiality breach or of any improper attempt to solicit or obtain confidential client or proprietary information. The CCO shall also be responsible for reporting any substantiated, material breach to appropriate senior management within the Firm. The CCO shall also be responsible for appropriately documenting such review and investigation, the reporting thereof to senior management, and any responsive action taken as a result thereof.
Action Required to be Taken by the CCO: The CCO shall keep a written record of all received reports of a possible confidentiality breach or of any improper attempt to solicit or obtain confidential client or proprietary information. The CCO shall document the
V-2
CCOs review and investigation thereof, the reporting of any substantiated material violations of the Code to appropriate senior management within the Firm and of any responsive action taken as a result thereof. The CCO shall maintain such documentation for a minimum of five years from the end of the fiscal year in which such document was made, such document to be retained for the first two years in an appropriate office of the Firm and, thereafter, in an easily accessible place.
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VI PROHIBITION AGAINST INSIDER TRADING
A. |
Firm Policy Insider Trading |
It is unlawful for any person to trade on ones own behalf or on behalf of others, or to tip or recommend trading in securities on the basis of material nonpublic (i.e., inside) information concerning an issuer or to pass such information to others improperly. Violations of the foregoing can result in severe civil and criminal penalties for the individuals involved and can result in the imposition of significant penalties on the Firm.
The possession of material nonpublic information by any employee or other Personnel may be attributed to the Firm generally unless the information is effectively isolated by the use of information barriers so that it is not available to employees that perform public functions, including trading and the making of recommendations or giving of advice with respect to trading. A breach of the Firms information barriers so that nonpublic information is not confined to Personnel that do not perform public functions, can result in the Firm being required to suspend activities involving trading and the making of recommendations in whole or in part for some indefinite period of time in certain circumstances.
As a result, strict compliance with all applicable procedures that the Firm institutes to contain the flow of material nonpublic information is required of all Personnel. Moreover, and as described more fully below, Personnel that become aware of information that is, or maybe, nonpublic must promptly contact the CCO and otherwise comply with the requirements of Subsection D below. This obligation to contact the CCO applies not only to information that originates from outside the Firm but also applies to information originating with the Firm, i.e., when Firm Personnel are contacted by another employee for the purpose of communicating material nonpublic information as to which the employee was previously unaware
Upon being informed of any such matter, the CCO will, in accordance with Subsection E below, make a determination of whether informational barriers, trading (as a firm or for personal trades or both) or other restrictions or controls should be put in place to minimize any conflicts of interest that may result or lead to any improper use or dissemination of material nonpublic information by the Firm or its Personnel.
Personnel that have questions concerning the requirements of the policies set forth in this Section are required to consult with their supervisor or the CCO.
Action Required to be Taken by all Firm Personnel: Any individual that comes into possession of information that is or may be nonpublic is required to immediately notify the CCO and comply with the requirements of Subsection D below.
1. |
Annual Attestation |
Personnel will be required to attest annually to their compliance with the Firms policies on insider-trading.
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B. |
Recognizing Material Nonpublic Information |
1. |
Nonpublic Information |
Typically, for purposes of the U.S. securities laws, information is considered nonpublic if the information has not been broadly disseminated to investors in the marketplace, such as by releasing the information over the news wires, disclosing it in public filings (e.g., Forms 10-K or 10-Q) or otherwise disseminating it in a manner that makes it fully available to investors and a reasonable time has elapsed to allow such dissemination.
2. |
Materiality |
Information is considered material if: (1) there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision; or (2) a reasonable investor would consider it as having significantly altered the total mix of information relating to the issuers securities. Generally, this includes any information the disclosure of which would have a meaningful effect on the price of an outstanding security.
Determining materiality is a fact-specific inquiry, requiring a careful assessment of the inferences a reasonable person would draw from a given set of facts. By way of guidance, the SEC has indicated the following as examples of the types of information or events that may be considered material:
|
Impending or potential mergers, acquisitions, tender offers, joint ventures, or changes in assets, such as a large disposal of the same; |
|
Earnings or revenue information and changes in previously disclosed financial information; |
|
Events regarding the issuers securities, e.g. , advance knowledge of a ratings downgrade, defaults on securities, calls of securities for redemption, public or private sales of additional securities, stock splits or changes in dividends, repurchase plans or changes to the rights of security holders; |
|
New products or discoveries, or developments regarding clients or suppliers ( e.g. , the acquisition or loss of a major contract); |
|
Significant changes in control or management; |
|
Changes in auditors or auditor notification that the issuer may no longer rely on an auditors report; |
|
Impending bankruptcies or receiverships; |
|
Information relating to the market for an issuers securities, such as a large order to purchase or sell securities; and |
|
Prepublication information regarding reports in the financial press. |
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Because assessments of materiality are necessarily highly fact specific, when in doubt Firm Personnel should err on the side of caution and treat the matter in question as material and bring such matter to the attention of the CCO for further consideration.
3. |
Breach of Fiduciary Duty or Duty of Trust or Confidence |
Generally, except in the case of tender offers (as described in the immediately following subparagraph), the legal prohibitions on the use of material nonpublic information are dependent upon such information being obtained in breach of a fiduciary duty or a duty of trust or confidence (or, directly or indirectly, from someone who has such a duty). Firm Personnel should assume that this standard has been met whenever information is obtained from a board member, officer or employee of a public company, from a person in a relationship of trust or confidence to a public company, e.g., the companys counsel or accountants, any person that holds information relating to a public company under a confidentiality or non-disclosure agreement as well as officers and employees of such persons, e.g., suppliers and service providers to public companies, or whenever information is given to you in confidence (regardless of whether a formal confidentiality agreement exist). Nevertheless, even where information is obtained outside of a fiduciary relationship or relationship of trust or confidence, the use of material nonpublic information may still trigger regulatory investigations and reputational concerns. For this reason, as a general policy, the Firm prohibits obtaining any material nonpublic information by all Personnel, regardless of whether the information is obtained pursuant to a fiduciary duty or a duty of trust or confidence, except to the extent explicit written approval is obtained from the CCO.
(i) |
Special Situations Tender Offers |
Rule 14e-3 under the Securities Exchange Act of 1934 (the Exchange Act ) specifically prohibits trading or tipping, e.g. , providing information to third parties, while in the possession of material nonpublic information regarding a tender offer received from the tender offeror, the target company or anyone acting on behalf of either irrespective of whether the information was obtained in breach of a fiduciary duty or similar duty of trust and confidence. Personnel that become aware of nonpublic information relating to a tender offer must promptly contact the CCO and otherwise comply with the requirements of Subsection D below.
C. |
Avoiding the Inadvertent Receipt and Misuse of Material Nonpublic Information |
Nonpublic information may come to the attention of Firm Personnel in a variety of ways. Personnel should be aware of the most likely situations so that they can either avoid being inadvertently tainted with such information, which as discussed above may impact their ability to perform their usual functions for the Firm as well as the Firms ability to engage in business as usual, or take such actions as are described below to minimize the impact such information may have on the Firm and the affected employee.
1. |
Intentional Receipt of Material Non Public Information |
All Firm Personnel that intend to receive any material non-public information related to a company with a class of publicly traded securities (whether domestic or foreign), must contact the CCO in advance of its receipt. The CCO will determine whether to receive the information
VI-3
and whether to implement informational barriers, trading restrictions and/or other procedures, as appropriate.
Action Required to be Taken by Firm Personnel: Any individual that intends to receive any material non-public information related to a company with a class of publicly traded securities (whether domestic or foreign), must contact the CCO in advance of its receipt.
Action Required to be Taken by CCO: The CCO shall keep a written record of all notifications received regarding the intentional receipt of material nonpublic information and shall document the CCOs review thereof and any responsive action taken as a result thereof. The CCO shall maintain such documentation for a minimum of five years from the end of the fiscal year in which such document was made, such document to be retained for the first two years in an appropriate office of the Firm and, thereafter, in an easily accessible place.
2. |
Board Seats and Creditor Committees |
Firm Personnel may sometimes be asked to sit or act as board members for an issuer of publicly held securities or serve on creditor committees related to publicly held securities. Any such arrangements must be pre-approved under the Firms outside business activities procedures and, in connection therewith, the CCO will make a determination of whether trading or other restrictions or controls should be put in place to minimize any conflicts of interest that may result therefrom or prevent the improper use or dissemination of material nonpublic information by the Firm or its employees and as is required to comply with any restrictions imposed by the issuer on its directors.
In addition, Board members of public issuers may also be exposed to material nonpublic information concerning other publicly-held companies that may have dealings with the company on whose board they sit. Personnel sitting on the board of a company or a creditor committee who receive material nonpublic information concerning other publicly held companies must immediately contact the CCO and otherwise comply with the requirements of Subsection D below.
Action Required to be Taken by Firm Personnel: Any individual that is considering acting as a board member for an issuer of publicly held securities must obtain the CCOs pre-approval pursuant to Section IX A hereof.
Action Required to be Taken by CCO: The CCO shall keep a written record of all received notifications concerning any individual acting a board member of an issuer of publicly held securities and of any responsive action taken as a result thereof. In making any such determination, the CCO shall consider such matters from the perspective of both this Section as well as Section IX A hereof. The CCO shall maintain such documentation for a minimum of five years from the end of the fiscal year in which such document was made or, if later, the end of the fiscal year in which any such approved board position ceases, such document to be retained for the first two years in an appropriate office of the Firm and, thereafter, in an easily accessible place.
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D. |
Required Steps to Take If Exposed to Material Nonpublic Information |
Personnel who believe they have been exposed to or may possess material nonpublic information should cease any further actions in any way related to such information or any issuer to which it relates and immediately take the following steps:
|
Contact the CCO ; |
|
Refrain from disclosing the information internally (other than with, or at the direction of, the CCO) or externally; |
|
Refrain from recommending or purchasing or selling the subject securities or related securities (whether for a personal account or an account of a client) or otherwise attempting to take advantage of the information whether for ones own benefit, that of the Firm, a client or any other person; and |
|
Comply with any restrictions or controls that are put in place by the Firm in response to such exposure or possession. |
Persons having permission to access material non-public information shall review such information in a private office.
No material non-public information may be stored on any network drives to which others (other than the CCO or other approved personnel) have permission to access.
1. |
Restrictions on Communication and Information Barriers |
Individuals subject to information barriers are prohibited from discussing the information that gave rise to the information barrier except:
|
Among other individuals who are part of the same walled off group; or |
|
With the Firm legal counsel, CCO or such other persons as the CCO shall specifically direct. |
E. |
Responsibilities of the CCO Upon Receipt of Notification of Possible Receipt of Material, Nonpublic Information/Imposition of Information Barriers |
Upon the receipt of any notification with respect to the receipt by Personnel of possible material, nonpublic information, the CCO, in conjunction with legal counsel if deemed necessary, shall be responsible for making a determination of whether the information is material and nonpublic and whether any actions or precautions should be taken, including restricting the Firm activities in any way or placing an information barrier around the individual involved in such matter together with any other relevant individuals from the public portions of the Firm. The CCO shall also be responsible for appropriately documenting such review and determinations and any responsive action taken as a result thereof.
VI-5
Action Required to be Taken by the CCO: The CCO shall keep a written record of all received notifications concerning the possible receipt of material, nonpublic information and of any responsive action taken as a result thereof. The CCO shall maintain such documentation for a minimum of five years from the end of the fiscal year in which such document was made or, if later, the end of the fiscal year in which such information was made public or no longer considered to be material, such document to be retained for the first two years in an appropriate office of the Firm and, thereafter, in an easily accessible place.
F. |
Maintenance of Restricted and Watch Lists |
The CCO is responsible for maintaining the Firm Restricted and Watch Lists. The Restricted List is generally disclosed to Firm Personnel and consists of a list of issuers in which Personnel are prohibited from trading, absent an exemption from such restriction. The Watch List is not generally disclosed to Personnel and consists of a list of issuers as to which a limited or select group of Personnel may be in possession of material nonpublic information or other sensitive information. The Watch List facilitates monitoring of trading in such issuer without tipping a wider group of Personnel as to the status of the issuer. As a general matter, the CCO shall be responsible for the determination to add or remove an issuer from either list.
Action Required to be Taken by the CCO: The CCO shall maintain the Firms Restricted and Watch Lists and shall keep a written record of all changes thereto, which shall also document the reason for such change. The CCO shall maintain such documentation for a minimum of five years from the end of the fiscal year in which such change was made or, if later, the end of the fiscal year in which any security was removed from the Firms Restricted or Watch Lists, such document to be retained for the first two years in an appropriate office of the Firm and, thereafter, in an easily accessible place.
VI-6
VII REPORTING OF ACCOUNTS AND TRANSACTIONS INVOLVING
SECURITIES AND OTHER FINANCIAL PRODUCTS
A. |
General Statement of Firm Policy With Respect to Accounts and Notification |
As provided further below, all Firm Personnel are required to provide timely notices to the Firm with respect to outside accounts for a Covered Person or Immediate Family Member , each as hereinafter defined, for the purchase, holding or disposition of any financial product, e.g. , a security, future, commodity, or any derivative thereon, provided that no individual shall be required to provide a notice with respect to an account of an Immediate Family Member to the extent the individual has provided the Firm a written certificate to the effect that such individual has no direct or indirect influence or control over such account.
The term Covered Person shall mean any account that is beneficially owned by (i) an individual who is subject to these procedures; (ii) such individuals spouse or domestic partner; (iii) such individuals child or a child of the individuals spouse or domestic partner, provided, in each case, the child resides in the same household with, or is financially dependent upon, the individual; and (iv) any account as to which the individual has discretionary authority or direct influence or control, including any account for which an individual acts as trustee, executor or custodian, but excluding any account for a Firm client to the extent the discretion is exercised on behalf of the Firm.
The term Immediate Family Member shall mean, any grandchild, parent, stepparent, grandparent, sibling, mother-in-law, father-in-law, son-in law, brother-in law, or sister-in-law, but only to the extent such family member shares a household with the individual.
B. |
Initial and Annual Holdings Notifications Report |
All Firm Personal are required to submit to the CCO a Holdings Notification Report , as hereinafter described, with respect to each outside account for a Covered Person or Immediate Family Member (collectively, a Covered Account ) within ten (10) days of first becoming subjected to the requirements of this Code and, annually thereafter, within 45 days following January 1 st of each year. A Holdings Notification Report shall be provided using a copy of the form (or its substantial equivalent) attached hereto as Exhibit VII B, shall be current as of January 1 st or in the case of an initial Holding Notification a date no more than 45 days prior to the date of submission, and shall include the following information:
|
The title, number of shares and principal amount of each security or financial product, other than an Excluded Product, as hereinafter defined, in which the individual has any direct or indirect beneficial ownership; |
|
The name of any broker, dealer, bank or other party through whom an account is held for the direct or indirect benefit of the individual; and |
|
The date of the Holding Notifications Report. |
Action Required to be Taken by Firm Personnel: Firm Personnel are required to provide a Holdings Notification Report to the CCO within ten days of first being subject to the
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requirements of this Code and, annually thereafter, within 45 days following January 1 st of each year.
For purposes hereof, the term Excluded Products means the following:
|
Direct obligations of the government of the United States (Note: this does not include obligations of any state, including obligations of any municipality or state agency). |
|
Bankers acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements. |
|
Shares issued by money market funds. |
|
Shares in open-end investment companies (Note: this does not include open-end investment companies that are advised or sub-advised by the Firm or any affiliate). |
|
Exchange traded funds ( ETFs ). |
|
Shares issued by unit investment trusts that are invested exclusively in one or more mutual funds not advised by the Firm or any affiliate. |
|
Nonfinancial commodities ( e.g ., pork belly contracts). |
|
Investments in 529 plans not managed, distributed, marketed or underwritten by the Firm or any of its affiliates. 2 |
C. |
Disclosure and Furnishing of Quarterly Transaction Reports Regarding Financial Products |
No later than thirty days after the end of each calendar quarter, all Personnel must provide the CCO with a Quarterly Holdings Notification Report , as hereinafter describe, for all transaction during the covered quarter relating to any Covered Person or Immediate Family Member for the purchase, holding or disposition of any financial product, provided no Quarterly Holdings Notification Report need be submitted if it would duplicate information contained in broker trade confirmations or account statements that have been provided to the Firm no later than 30 days after the end of the applicable calendar quarter. A Quarterly Holdings Notification Report shall be provided using a copy of the form (or its substantial equivalent) attached hereto as Exhibit VII C. A Quarterly Holdings Notification Report shall be current as of the end of the quarter to which the report relates and, with respect to all transactions, other than Excluded Transactions , as hereinafter defined, shall include the following information:
|
The date of the transaction, the type of product and, as applicable, the exchange ticker symbol or CUSIP, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each security or financial product involved; |
2 See SEC no-action letter, WilmerHale, July 28, 2010.
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The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); |
|
The price of the security or financial product at which the transaction was effected; |
|
The name of the broker, dealer, bank or other party with or through which the transaction was effected; and |
|
The date of the Reports submission. |
In the event any account in which financial products were held for any Covered Person or Immediate Family Member was established during the covered quarter, the Quarterly Holdings Notification Report shall also include the following information:
|
The name of the broker, dealer, bank, or other party with or through which the account was established; |
|
The date that the account was established; and |
|
The date of the Reports submission. |
Action Required to be Taken by Firm Personnel: Firm Personnel are required to provide a Quarterly Holdings Notification Report to the CCO within thirty days of the end of each calendar quarter.
Action Required to be Taken by Firm Personnel: Firm Personnel are required to provide a Quarterly Holdings Notification Report to the CCO within thirty days of the end of each calendar quarter.
For purposes hereof, the term Excluded Transaction means any of the following:
|
A transaction involving an Excluded Product or a Non -Volitional Transaction, as hereinafter defined; |
|
A transaction as to which all of the information required to be reported is contained in a broker trade confirmation or account statement that has been previously provided to the Firm; |
|
A transaction pursuant to an Automatic Investment Plan , which, in accordance with Investment Company Act Rule 17j-1(a)(11), 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 and which includes a dividend reinvestment plan. |
For purposes hereof, the term Non -Volitional Transaction means any transaction effected for any account over which the applicable Personnel had no direct or indirect influence or control, including transactions such as demutualization, stock splits, stock from mergers or spin-offs, automatic tender offers or stock dividends.
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D. |
Miscellaneous Provisions |
Notwithstanding the foregoing, the Firm reserve the right to:
|
Limit the particular firms at which financial accounts may be opened and carried, provided that the CCO may grant exceptions to such policy in the case of hardship or for other good cause; |
|
Condition use of a particular broker or other firm that carries any financial account on such firm agreeing to provide copies of account statements and confirmations to the Firm; and |
|
Require such additional information regarding any holding of, or transactions in, financial products as the CCO shall require. |
E. |
Timely Receipt and Review of Reports By CCO |
The CCO shall be responsible for confirming the timely receipt of all required Holdings Notification Reports and Quarterly Reports and the review, on a regular basis, of any Holdings Notification Reports and Quarterly Transaction Reports received by the Firm. The CCO shall maintain copies of such Reports together with documents reflecting the CCOs review thereof and of any responsive action taken as a result thereof and shall maintain such Reports and documents for a minimum of five years from the end of the fiscal year in which such Report was received, such document to be retained for the first two years in an appropriate office of the Firm and, thereafter, in an easily accessible place.
Action Required to be Taken by the CCO: The CCO is required to confirm the time receipt of all required Holdings Notification Reports and Quarterly Reports and maintain copies of any such Reports together with documents reflecting the CCOs review thereof and any responsive action taken as a result thereof and shall maintain such documents for a minimum of five years from the end of the fiscal year in which such request was received, such document to be retained for the first two years in an appropriate office of the Firm and, thereafter, in an easily accessible place.
F. |
Annual Attestation |
Personnel will be required to attest annually to their continued compliance with the foregoing requirements.
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VIII INVESTMENT ACTIVITIES
A. |
Overview |
The Firm impose a number of restrictions on trading and investment activities by Firm Personnel. These restrictions are designed to assist the Firm in complying with applicable legal and regulatory requirements; to help avoid conflicts of interest, including apparent conflicts; and, ultimately, to protect the Firm reputation.
B. |
Provisions of General Applicability |
1. |
Prohibition on Doing Indirectly What Cannot Be Done Directly |
Firm Personnel are expected to comply with both the letter and the spirit of the restrictions and prohibitions set forth in this Code. Accordingly, to the extent any transaction would put an individual in an economic position that would be substantially equivalent to a prohibited or restricted transaction, such transaction is similarly prohibited or restricted. By way of illustration, where a long position in an underlying equity would be prohibited, it would be prohibited for an individual to establish a derivative or synthetic position that achieves similar economics.
2. |
When in Doubt |
When in doubt as to the applicability of these restrictions and prohibitions to any transaction, Personnel should either refrain from entering into the transaction or discuss the matter with their supervisor or the CCO.
3. |
Breaking Trades |
As all or part of a sanction imposed, the Firm may require that Personnel break or unwind any transaction entered into by any Personnel in violation of these provisions. In such case, the Firm shall not have any obligation to reimburse the individual for any loss suffered as a result thereof and any realized profits shall be disgorged and provided to a charitable organization chosen by the Firm.
4. |
Hardship |
The CCO may grant exceptions to certain restrictions or prohibitions set forth herein in the case of hardship or for other good cause, provided that any such exemption shall be documented and otherwise in compliance with any applicable legal requirements.
C. |
Prohibitions and Pre-Approval Requirements of General Applicability |
1. |
Prohibited Transactions |
Nonpublic Information . All Firm Personnel are strictly prohibited from trading or participating in any investment activity, including without limitation the making of any recommendation, whether on their own behalf or on behalf of a client of the Firm or other third party, on the basis
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of material nonpublic information or nonpublic client information, including client securities information.
Manipulative Conduct . Personnel are strictly prohibited from engaging in any trading or investment activity that constitutes manipulative conduct. This would include trades that do not have a bona fide purpose, e.g ., that are done to influence market price or convey a false appearance of price movement or volume.
Fraud . Personnel are strictly prohibited from participating in any investment activity that is known to any such individual to involve fraudulent activities such as forgery, non-disclosure or misstatement of material facts or the taking of any action that is meant to conceal or misrepresent the actual facts of a matter. This would include, for example, knowingly backdating a document or recording a trade as occurring at an incorrect time.
Restricted List . Absent an exception specifically granted by the CCO, Personnel are prohibited from trading or participating in any investment activity in any security on the Firm Restricted List.
Uncovered Short Trade . Personnel are prohibited from entering into an uncovered short trade.
Uncovered Option . Personnel are prohibited from writing an uncovered option.
2. |
Transactions Requiring Pre-Approval |
All Firm Personnel are prohibited from engaging in any Restricted Transaction (as defined below) without first obtaining prior approval by the CCO. In considering any such trade, Personnel should understand that the CCO will be under no obligation to respond to any request for approval within any stated time and once any such matter is considered may withhold approval for any reason or for no reason at all and, in any event, will withhold approval where it is determined that any such transaction may be legally uncertain, may give the appearance of a conflict of interest, or may expose the Firm to reputational risk, risk of regulatory inquiry or other harm, no matter how remote. Pre-approval shall be obtained using the form provided as Exhibit VIII C (or its equivalent as determined in the judgment of the CCO).
For purposes hereof, a Restricted Transaction shall mean:
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Acquiring ownership, directly or indirectly, in any security issued in an initial public offering or a limited offering or private placement (each as defined below), including any interest in a hedge fund; |
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Transfers of interest in private placements sponsored by the Firm, other than transfers for estate planning purposes or that are court-mandated; and |
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Transactions involving securities issued by a client of the Firm. |
Requests for approval must be submitted directly to the CCO. When considering approval of any request, the CCO will take into consideration whether the investment opportunity is one that
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should have been reserved for clients and whether the opportunity is being offered by virtue of the individuals position with the Firm.
(i) |
Initial Public Offering Defined |
For purposes of the foregoing, the term initial public offering shall mean an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration was not subject to the reporting requirements of section 13 or 15(d) of the Exchange Act.
(ii) |
Limited Offering and Private Placement Defined |
For purposes of the foregoing, the terms limited offering or private placement shall each mean an offering of securities that is exempt from registration under the Securities Act of 1933 pursuant to Section 4(2), which provides an exemption for transactions by an issuer not involving any public offering, or Section 4(6), which involve offers or sales by an issuer solely to one or more accredited investors, or pursuant to Rule 504, Rule 505, or Rule 506 of Regulation D, which allow offerings for a limited dollar amount and/or to a limited number of investors.
Action Required to be Taken by Firm Personnel: All Firm Personnel are responsible for obtaining pre-approval of all Restricted Transactions.
3. |
Requirements Relating to Pre-approval |
Pre-approval requests must be made directly to the CCO. Individuals that make a pre-approval request may be required to supply certain key information and to make certain certifications, such as that they have no knowledge that the financial product is under active consideration for purchase or sale by the Firm for their clients. Pre-approval shall be obtained using the form provided as Exhibit VIII C (or its equivalent in the judgment of the CCO).
Any transaction as to which pre-approval has been obtained must be completed within the two business days following the day pre-approval is obtained. Transactions, or portions thereof, not completed within these times constraints must be immediately canceled and, thereafter, may only be completed following the obtaining of a new pre-approval. The CCO may waive the two-day requirement in the CCOs sole judgment.
Limit orders, once approved, are not subject to further pre-approval, unless the limit or other factors is changed.
NOTE: Post-approval is not permitted. Any trade completed before pre-approval is obtained or after the approval window has terminated may be broken or unwound as provided at Section VIII. B. 4 and may result in disciplinary action.
(i) Pre-approval is not required for the following types of transactions:
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Purchase or sales involving an Excluded Product; |
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Purchase or sales pursuant to an Automated Investment Plan; |
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Assignment of options or exercise of an option at expiration; |
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Purchase or sales of shares issued by unit investment trusts that are invested exclusively in one or more mutual funds not advised by an Adviser or any affiliate. |
(ii) De minimis exception
Preclearance also is not required for any trade of (i) any equity security that results in an aggregate beneficial ownership of 1,000 shares or $50,000, whichever is less in dollar terms, or (ii) any debt security that results in an aggregate beneficial ownership of debt having a market value of $50,000, except for trades involving:
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An initial public offering; |
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A limited offering or private placement, including any interest in a hedge fund; |
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Any transactions involving securities issued by a client of the Firm; or |
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Any transaction involving a security for which pre-approval has been denied within the past fifteen days. |
D. |
CCO Review of Reports |
The CCO shall be responsible for confirming the timely receipt of all required Holdings Notification Reports and Quarterly Reports and the review, on a regular basis, of any Holdings Notification Reports and Quarterly Transaction Reports received by the Firm. The CCO shall maintain copies of such Reports together with documents reflecting the CCOs review thereof and of any responsive action taken as a result thereof and shall maintain such Reports and documents for a minimum of five years from the end of the fiscal year in which such Report was received, such document to be retained for the first two years in an appropriate office of the Firm and, thereafter, in an easily accessible place.
Action Required to be Taken by the CCO: The CCO is required to maintain copies of any pre-approval requests together with documents reflecting the CCOs review thereof and shall maintain such documents for a minimum of five years from the end of the fiscal year in which such request was received, such document to be retained for the first two years in an appropriate office of the Firm and, thereafter, in an easily accessible place.
E. |
Annual Attestation |
Personnel will be required to attest annually to their continued compliance with the foregoing requirements.
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[Omitted]
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XIII ADMINISTRATION AND ENFORCEMENT OF THIS CODE
A. |
Training and Education |
The CCO is responsible for training and educating Firm Personnel regarding this Code. Such training will occur periodically and all Personnel are required to attend training sessions deemed mandatory by the CCO.
B. |
Annual Attestations |
The CCO shall be responsible for obtaining an annual attestation and disclosure from all Firm Personnel on Exhibit XIII B or (or its equivalent as determined in the judgment of the CCO).
C. |
Fund Board Approval |
Rule 17j-1 under the 1940 Act requires the Firm to have this Code approved by each Funds board of trustees (Fund Board). Any material amendments to this Code must also be approved by a Fund Board. The CCO is responsible for all material amendments being presented to each Fund for approval.
D. |
Annual Review |
At least annually, the CCO will review the adequacy of this Code and the Firms procedures more generally and the effectiveness of their implementation. This review will include specific consideration of the following:
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Any compliance matters that arose during the previous year; |
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Any changes in the business activities of the Firm (or any affiliated entities); and |
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Any changes to applicable laws, rules or regulations that might suggest a need to revise this Manual. |
The CCO will provide a written report to senior management regarding the annual review. The report will identify any material violations of this Code and the Firms procedures more generally and of any applicable laws, rules and regulations identified during the preceding fiscal year and any actions taken or recommendations for actions to rectify such violations, including adoption of additional policies and procedures or modifications to existing policies and procedures. The CCO will be primarily responsible for the implementation of such additional or modified policies and procedures.
E. |
Annual Report to Fund Boards |
As required by Rule 17j-1 under the 1940 Act, no less frequently than annually, the CCO and other senior management shall furnish a written report to each Fund Board, which shall describe any issues arising under the Code of Ethics or material compliance matter, as such term is defined at Rule 38a-1(e)(2) of the 1940 Act, not previously reported to the board, including any information regarding sanctions and remedial actions taken in response thereto. The report will:
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List all waivers given by quantity and type and describe any waivers that might be considered material or important by the board; |
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List all approvals of investments in IPOs and Limited Offerings that were granted; and |
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Certify that the CCO has reviewed the Code and the compliance and supervisory policies and procedures of the Firm and has found that they are reasonably designed to prevent violations of the Federal Securities Laws and of the Code itself. |
F. |
Document Retention Requirements |
In addition to any recordkeeping responsibilities set forth elsewhere herein, the CCO is responsible for maintain the following records pertaining to this Code:
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A copy of each Code and all amendments thereto that has been in effect at any time during the past five years; |
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A record of any violation of this Code and any action taken as a result of such violation for five (5) years from the end of the fiscal year in which the violation occurred; |
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A record of all acknowledgements of receipt of this Code and amendments for each person who is currently, or within the past five years was, subject to this Code (these records must be kept for five years after the individual ceases to be subject to this Code); |
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Holdings and Transactions Reports made pursuant to this Code, including any brokerage confirmation and account statements provided in lieu of these reports; |
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A list of the names of persons who are currently, or within the past five (5) years were, Access Persons; |
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A record of any decision and supporting reasons for approving the acquisition of securities by Access Persons in Restricted Securities and limited offerings for at least five years after the end of the fiscal year in which approval was granted. |
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A record of persons responsible for reviewing Access Persons reports currently or during the last five (5) years; and |
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A copy of reports provided to the Firms senior management or to the Fund Board regarding this Code. |
Unless specified otherwise, the above records must be maintained for the past five (5) years with at least the prior two years maintained at the Firms main office and, thereafter, in a readily accessible place.
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A-3
OCTAGON CREDIT INVESTORS, LLC
CODE OF ETHICS PURSUANT TO RULE 17J-1 OF THE 1940 ACT
I. |
INTRODUCTION |
This Code of Ethics (this Code ) has been adopted by Octagon Credit Investors, LLC ( Octagon ) in connection with Octagons services as adviser or sub-adviser to one or more registered investment companies (the Trusts ), in accordance with Rule 17j-1 under the Investment Company Act of 1940, as amended (the 1940 Act ).
The Trusts and Octagon recognize the importance of high ethical standards in conducting their business and require all Access Persons (as defined in Section III below) to comply with the ethical standards set forth in the Code. The Statement of Purpose and Applicability in this Code summarize certain principles set forth in Octagons Investment Adviser Compliance Manual (including its Investment Adviser Code of Ethics), which generally apply to all Octagon officers and employees. This Code supplements, and does not replace, Octagons Investment Adviser Code of Ethics.
The Code serves to guide decisions in a variety of circumstances; however, no rulebook can anticipate every situation. It is the intention of this Code to establish the fundamental standard to be followed with regard to personal securities transactions of the Trusts Access Persons. This Code is designed to ensure that all personal securities transactions by individuals with access to information regarding actual or potential investments of the Trusts are conducted in such a manner as to avoid any actual or potential conflict of interest between the Access Persons interest and the interests of the Trusts or abuse of the Access Persons position of trust and responsibility. Further, this Code contains certain exclusions from its requirements which may apply to certain Access Persons.
Under no circumstances may an Access Person trade securities, either personally or on behalf of the Trusts, on the basis of material nonpublic information or communicate material nonpublic information to others in violation of law.
II. |
STATEMENT OF PURPOSE AND APPLICABILITY |
A. |
Statement of Purpose |
It is the policy of Octagon that no affiliated person of the Trusts shall, in connection with the purchase or sale, directly or indirectly, by such person of any Covered Security held or to be acquired by the Trusts:
● |
Employ any device, scheme or artifice to defraud the Trusts; |
● |
Make any untrue statement of a material fact to the Trusts or omit to state a material fact necessary in order to make the statement made to the Trusts, in light of the circumstances under which it is made, not misleading; |
● |
Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the Trusts; or |
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● |
Engage in any manipulative practice with respect to the Trusts. |
B. |
Scope of the Code |
In order to prevent Access Persons from engaging in any of these prohibited acts, practices or courses of business, Octagon has adopted this Code.
III. |
DEFINITIONS |
As used in this Code, the terms below have the following meanings:
(i) |
Access Person means any director, officer, general partner or employee of Octagon who, in connection with his or her regular functions or duties, participates in the selection of the Covered Securities or who has access to information regarding the Trusts future purchases or sales of Covered Securities. |
(ii) |
Beneficial Ownership shall be interpreted in the same manner as it would be under Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the 1934 Act ), in determining whether a person is the beneficial owner of a security for purposes of Section 16 of the 1934 Act and the rules and regulations thereunder. |
(iii) |
Compliance shall mean the Compliance Department of Octagon. |
(iv) |
Control shall have the same meaning as that set forth in Section 2(a)(9) of the 1940 Act. Control generally means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. |
(v) |
Covered Security means a security as defined in Section 2(a)(36) of the 1940 Act, including any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing; provided that none of the following shall be a Covered Security: |
● |
Direct obligations of the Government of the United States; |
● |
Bankers acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and |
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● |
Shares issued by non-proprietary open-end investment companies registered under the 1940 Act. |
(vi) |
Initial Public Offering means an offering of securities registered under the Securities Act of 1933, as amended (the 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. |
(vii) |
Limited Offering means an offering that is exempt from registration under the 1933 Act pursuant to Section 4(2) or Section 4(5) or pursuant to Rule 504, Rule 505, or Rule 506 under the 1933 Act. |
IV. |
RESTRICTION ON PERSONAL SECURITIES TRANSACTIONS |
Access Persons must obtain approval from Compliance prior to directly or indirectly acquiring Beneficial Ownership in any securities in an Initial Public Offering or in a Limited Offering.
V. |
REPORTING REQUIREMENTS FOR 17J-1 ACCESS PERSONS |
A. |
Initial Holdings Reports |
No later than 10 days after becoming an Access Person, every Access Person shall report the following information to Compliance (which must be current as of a date no more than 45 days prior to the date of becoming an access person):
● | The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect Beneficial Ownership when the person became an Access Person; |
● | 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 the Access Person as of the date the person became an Access Person; and |
● | The date that the report is submitted by the Access Person. |
B. | Quarterly transaction reports. |
No later than 30 days after the end of a calendar quarter, every Access Person shall report the following information to Compliance:
● | With respect to any transaction during the quarter in a Covered Security in which the Access Person had any direct or indirect Beneficial Ownership: |
a. | The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Covered Security involved; |
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b. | The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); |
c. | The price of the Covered Security at which the transaction was effected; |
d. | The name of the broker, dealer or bank with or through which the transaction was effected; and |
e. | The date that the report is submitted by the Access Person. |
● | With respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person: |
a. | The name of the broker, dealer or bank with whom the Access Person established the account; |
b. | The date the account was established; and |
c. | The date that the report is submitted by the Access Person. |
C. |
Annual Holdings Reports. |
Annually, every Access Person shall report to Compliance the following information (which information must be current as of a date no more than 45 days before the report is submitted):
● | The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect Beneficial Ownership; |
● | The name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person; and |
● | The date that the report is submitted by the Access Person. |
D. |
Exceptions from reporting requirements. |
An Access Person need not separately make a report under this Code to the extent the information in the report would duplicate information provided to Compliance pursuant to Octagons Personal Securities Policy and Procedures (within the Investment Adviser Compliance Manual and Code of Ethics).
An Access Person need not make a report under this Code with respect to transactions effected for, and Covered Securities held in, any account over which the person has no direct or indirect influence or Control, subject to prior review and determination by Compliance that the person does not have influence or Control.
VI. |
ADMINISTRATION OF THE CODE |
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Octagon will use reasonable diligence and institute procedures reasonably necessary to prevent violations of this Code. Compliance will review all reports provided pursuant to this Code.
No less frequently than annually, Compliance will furnish to the Board of Trustees of the Trusts a written report that:
● |
Describes any issues arising under this Code or related procedures since the last report to the Board of Trustees, including, but not limited to, information about material violations of this Code or procedures and sanctions imposed in response to material violations; and |
● |
Certifies that Octagon has adopted procedures reasonably necessary to prevent Access Persons from violating this Code. |
VII. |
RECORDKEEPING REQUIREMENTS |
Octagon will maintain books and records in accordance with the recordkeeping requirements in Rule 17j-1.
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